BVS - Bioventus: Return Of The King

2023-06-28 14:18:00 ET

Summary

• Shares of medical device concern Bioventus Inc. have more than tripled off their May 4th intraday low as a decent Q1 2023 report and the return of its ex-CEO have provided confidence.
• That said, Bioventus stock is still off over 80% from its all-time high after an aggressive acquisition spree put the company in breach of certain covenants in its credit agreement.
• With one divestment in process, a just-completed restructuring, and continuing headwinds in its hyaluronic acid business, the recent insider buying merited a deeper dive into this busted IPO.
• An investment analysis follows in the paragraphs below.

It's amazing how a little tomorrow can make up for a whole lot of yesterday .”? John Guare.

Today, we take a deeper look at a small medical device concern, whose stock has seen a huge recent surge. However, even after the recent rally the shares are deep in Busted IPO territory. More upside ahead? An analysis follows below.

Company Overview:

Bioventus Inc. ( BVS ) is a Durham, North Carolina-based commercial-stage medical device concern focused on the development of minimally invasive treatments and solutions that engage and enhance the body’s natural healing process. Having grown through acquisition, the company currently markets 22 products covering three categories with ~90% of its sales derived domestically. Bioventus was established in 2012 and went public in February 2021, raising net proceeds of $111.2 million at $13 per share. The stock trades around three bucks a share, translating to an approximate market cap of $230 million.

Voting power is distributed through two classes of stock. The 62.5 million shares of Class A common stock confer economic interest and one vote per share. The 15.8 shares of Class B common stock bestow one vote per share but not economic interest or convertibility.

Commercial Products

Bioventus’ products are filed into three categories: Pain Treatments; Surgical Solutions; and Restorative Therapies.

Pain Treatments include non-surgical pain injection therapies and peripheral nerve stimulation products, which does not include the company’s recently abandoned acquisition of CartiHeal implant device portfolio – more on that later. Specifically, Bioventus markets three hyaluronic acid [HA] injections primarily for knee osteoarthritis, as well as its StimRouter device, which after implementation delivers gentle electrical pulses to target peripheral nerve pain at its source. The latter device came via a March 2021 acquisition of Bioness, for which Bioventus paid $48.9 million. These products generated FY22 revenue of $216.3 million, down 2% from FY21 – accounting for 42% of the company’s total.

Surgical Solutions are comprised of 12 products, consisting primarily of bone graft substitutes and other related products to fuse and grow bones, as well as ultrasonic bone cutting and sculpting systems. A meaningful amount of the contribution to this category came from Bioventus’ October 2021 purchase of Misonix for a total consideration of $525.3 million. Surgical Solutions accounted for FY22 revenue of $141.2 million – up 60% from FY21 – while representing 28% of the company’s total.

Restorative Therapies consists of an ultrasonic bone healing system (Exogen) and a series of advanced rehabilitation devices targeting the regaining of hand or leg function lost to trauma or disease, as well as Bioness’ BITS solution for vision, motor, and balance training. Until recently, this category also housed Bioventus’ wound healing products (skin allografts), which were sold on May 23, 2023 in a deal that provided $35 million upfront, $5 million in 18 months, and potential earnouts totaling $45 million. Restorative Therapies was responsible for FY22 revenue of $154.6 million – up 27% from FY21 – or 30% of total.

A Very Bizarre Prior Twelve Months

Shortly after going public, the management team embarked on an ill-timed acquisition spree, seeking to accelerate revenue growth by leveraging its sales infrastructure. Front and center was Misonix. Even though the company issued 18.3 million shares of stock at $14.97 per to acquire the minimally invasive surgical device manufacturer (as well as cash of $314.7 million), it can be established that Bioventus still overreached, considering it paid 7.1 times FY21 revenue for an entity whose top line had grown less than 20% over FY20 and produced Adj. EBITDA of negative $3.2 million. Its overpayment for Misonix was further compounded by the subsequent high interest rate environment, which revalued unprofitable businesses significantly lower. After reaching an all-time intraday high of $19.94 in June 2021, shares of BVS have not traded above $10 since June 2022.

On July 12, 2022, Bioventus announced the completion of its acquisition of CartiHeal, exercising an option to buy the balance of the Israeli knee implant device maker it didn’t already own for a potential consideration of $450 million ($315 million guaranteed). As part of the arrangement, the company paid $100 million upfront and was scheduled to make a $50 million milestone payment in February 2023.

However, on November 8, 2022, Bioventus (initially) reported that its 3Q22 missed consensus by $0.04 a share (non-GAAP) at the bottom line and $4.5 million at the top line. Blamed on “ temporary reimbursement related volatility” that drove weakness across multiple segments, management was still compelled to lower its FY22 outlook substantially: from $0.52 a share (non-GAAP) and Adj. EBITDA of $99 million on revenue of $555 million to $0.23 a share (non-GAAP) and Adj. EBITDA of $77 million on revenue of $529.5 million – all based on range midpoints. Understandably, the market crushed shares of BVS 58% to $3.00 in the subsequent trading session.

Then, in a somewhat peculiar development for a publicly traded concern, Bioventus restated its 3Q22 to $0.06 a share (non-GAAP – from $0.08) and Adj. EBITDA of $21.0 million (from $22.7 million) on revenue of $128.7 million ($137.1 million) on November 21, 2022. A non-cash impairment charge was needed as the company’s market cap (at the end of 3Q22) fell below the intangible value of recent acquisitions on its balance sheet . Furthermore, Bioventus discovered it had received unearned elevated payments on its HA products from an insurer for at least one year. As such, management lowered its forecasted FY22 revenue outlook again (to $519.5 million) without adjusting its range midpoints on its bottom or EBITDA lines.

Both of these developments triggered a loss of confidence in management amongst Street analysts, who downgraded shares of BVS and lowered price targets.

Bioventus followed with a restructuring announcement in December 2022, which was completed in 2Q23, saving the company $9 to $10 million annually.

Then, on February 28, 2023, the company revealed that it was walking away from its acquisition of CartiHeal – a deal it declared “completed” back in July 2022 – meaning that it was forfeiting the $100 million upfront payment and was adding another $10.15 million to settle with CartiHeal shareholders in return for backing out of potential additional payments of $350 million. In essence, CartiHeal received a $110.15 million donation from Bioventus.

This exceedingly bizarre development was applauded by shareholders, who realized that Bioventus was careening down a path towards bankruptcy if it didn’t put the brakes on its acquisition spree. However, its 4Q22 was another disappointment from a financial standpoint as weakness in the company’s pain business contributed to an $0.11 a share (non-GAPP) miss at its bottom line and a $4.9 million shortfall at its top line (versus Street consensus). Additionally, the company provided no outlook for FY23. Shares of BVS bottomed at $0.80 (intraday) on the date of that release (March 31, 2023).

Finally, on April 4, 2023, CEO Kenneth Reali resigned , and an interim replacement (former CEO Anthony P. Bihl III) was announced. With much uncertainty regarding FY23 and leverage at 5.8 times, confidence in Bioventus continued to wane with its stock still trading below $1 as late as May 9, 2023. The following day, the company announced an agreement to divest the aforementioned wound business.

Q1 2023 Results

On May 16, 2023, Bioventus posted a loss of $0.26 a share (non-GAAP) from continuing operations and Adj. EBITDA of $17.0 million on net sales of $119.1 million versus a gain of $0.05 a share (non-GAAP) and Adj. EBITDA of $7.2 million on net sales of $117.3 million in 1Q22. Although the bottom line was $0.11 a share worse than expectations, its top line registered a beat of $2.5 million. Adj. gross margin was 190 basis points lower at 74.1% as a greater percentage of HA revenue went through private payers – along with an overall decline in average selling price in the HA portfolio – and an unfavorable product mix due to higher revenue from the company’s advanced rehab portfolio. That said, Adj. EBITDA improved due to cost cutting measures.

In addition to the disappointment resulting from paying too much for Misonix, another headwind took center stage: pricing pressure in the company’s market-leading HA business. The origin of the problem occurred in July 2022, when CMS began utilizing new pricing information pursuant to newly adopted reporting obligations (by Bioventus), which resulted in lower payments from Medicare for its Durolane and Gelsyn-3 HA products. Now, a greater percentage of private payers are to blame for lower ASPs.

Interim CEO Bihl hinted that the HA pricing issue would be with the company for the balance of the year. He also intimated that there will be more divestitures of non-core assets to improve liquidity.

No FY23 outlook was provided, except that management was comfortable in achieving FY23 Adj. EBITDA of $68 million – even without its wound business – necessary to achieve compliance with its revised credit agreement covenants.

Balance Sheet & Analyst Commentary:

Those recently negotiated revisions – necessary due to the combination of acquisition related-debt and a dismal FY22 – provide Bioventus some flexibility while the new CEO attempts to straighten out the company’s operations. It currently holds cash of $47.1 million against debt of $445.6 million for net leverage of 5.2. The cash figure does not include the $35 million incoming from the wound business divestment.

With many reporting delays and the 3Q22 restatement, it is not surprising to see the Street turn negative on Bioventus. Of the four who have made commentary since the initial 3Q22 miss, JP Morgan rates the stock an underperform while Craig-Hallum and Canaccord rate it a hold, leaving Morgan Stanley’s outperform the only bullish recommendation. Canaccord has the highest price objective at $6. On average, they expect Bioventus to lose $0.34 a share (non-GAAP) on net sales of $493.1 million in FY23, followed by a gain of $0.18 a share (non-GAAP) on net sales of $514.4 million in FY24.

Since its 1Q23 financial report, Bioventus’ stock has rallied towards $3. CEO Bihl added to his position on the way up, purchasing 125,000 shares at an average price of $2.33 on May 23, 2023. He was beaten to the punch by Director John Bartholdson, who represents the interests of Juniper Funds. The board member added over 1.31 million shares at an average price of $1.96 on May 19th and 22nd and nearly $400,000 worth of shares on June 15th.

Verdict:

After rallying 240% from its May 4th intraday low, it can be posited that the " easy" money has been made in Bioventus. That said, the stock currently trades at an EV/TTM Adj. EBITDA of 7.7, a price-to-FY24E sales of 0.45, and a P/E ratio on FY24E EPS of 16.6. Considering the turmoil of the past twelve months, these seem like fair but not compelling valuations. A pullback into the low $2s would represent a buying opportunity in Bioventus Inc. Until then, I plan to sit on the sidelines with this name.

Hope is a force of nature. Don't let anyone tell you different .”? Jim Butcher.

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