2023-11-29 23:34:58 ET
Summary
- biote Corp. returned to profitability in Q3 2023 and is expected to continue to be profitable in the future.
- The company's growth is driven by the sale of hormone replacement therapy products and its expansion into complementary wellness products.
- BTMD is considered undervalued and has an aggressive price target for the end of next year.
Thesis
biote Corp. ( BTMD ) returned to profitability in the third quarter, after getting past the significant costs involved in going public last year. I consider it undervalued and expect it to deliver attractive capital gains next year and beyond.
About
On its website, biote says its story began in 2012, "after Gary Donovitz, MD, a board-certified obstetrician-gynecologist, witnessed how bioidentical hormone replacement therapy, or BHRT, transformed one of his female patients."
Donovitz went on to train other medical doctors to use BHRT. According to the 10-K for 2022 , MDs receive very little education or training in hormone issues. This training also is the first building block in the biote business model, as illustrated in this slide from its April 2023 Investor Presentation :
BTMD Business Model (April 2023 Investor Presentation)
While the training of doctors and nurse practitioners is the core of its business, the retail sale of hormone products dominates its revenue flow. For the three months and nine months ending on September 30, it was reported that roughly 98% of revenue came from hormone replacement therapy or HRT products. So, there is a sense the company is more of a retailer than a biotech company, a sense buttressed by its franchise-like business model.
Following a 'Business Combination' with Haymaker Acquisition Corp. III, a Special Purpose Acquisition Company or SPAC, it began trading on the Nasdaq exchange on May 27, 2022.
A note on spellings: The official name, as set out in the 10-K and other official filings, begins with a lowercase 'b'. However, it uses an uppercase 'B' to start the name in all its other materials, including its website, press releases, and the internal parts of its SEC filings.
Competitors
In its 10-K, the company listed seven competitors, each of which is significantly smaller than biote, and none of them trade publicly: Evexipel Health Solutions, Sottopell Hormone Replacement, BodyLogicMD, Pellecome LLC, HTCA or Hormone Therapy Center of America, and Pro-Pell.
While biote had 3,600 practice locations at the end of 2022, the next largest was Evexipel with 300.
Still, the company must work to maintain its competitive advantage because, as it spells out in the annual filing, the dietary supplement space is fragmented and highly competitive. These products are sold through multiple channels, including practitioners' offices, direct to consumers online, and through brick-and-mortar retailers and department stores.
I consider biote to be a growth stock, and as a result, will assess its growth, margins, management and strategy, and valuation.
Growth
This slide from the Investor Presentation shows how revenue has grown rapidly over the past four years and is expected to continue this year. At the same time, adjusted EBITDA, its preferred profitability metric, is growing just as quickly:
BTMD Performance chart (biote investor presentation)
As noted, its bread-and-butter business is selling hormone products through its practitioner partners as well as through traditional retailing channels.
Of course, as it adds practitioners, the number of prescriptions and recommendations will go up as well. Why would these doctors and nurse practitioners sign up? According to biote's 'Annual Certified Clinic Financials', an average clinic can increase its annual revenue by $99,615 per year by performing roughly six to seven procedures per week).
The company reports a high retention rate, 90%, among its clinical partners.
Demographics is on its side as the American population ages, meaning the total addressable market is large and mostly untapped:
biote total addressable market chart (BTMD investor presentation)
While hormone health has traditionally been associated with women, men's health is also a rising issue. biote responded to this underserved market by establishing a Men's Health Division in June of this year.
This is part of an expansion in its scope. As CEO Terry Weber explained in the second-quarter press release , "To more effectively address the growing opportunities in today's dynamic preventative health market, we continue to expand our strategic approach, encompassing a broader range of hormone and wellness therapies.
By the third quarter's press release , the company had begun calling this expansion 'Complementary Wellness Therapeutics'. It reported that it had made progress in its commercial trials for sexual health, weight loss, and preventive wellness products.
Geography also offers potential growth, as shown by this slide from the presentation:
biote geographic growth potential (biote investor presentation)
Note that it also intends to expand beyond the domestic market in 2024.
Next year, revenue is expected to rise from $190 million to $220 million, a 15.78% increase. As this Seeking Alpha chart and table show, earnings also are expected to grow, by 84%, from $0.25 per share to $0.46 per share:
biote earnings (Seeking Alpha)
Based on this information, I am reasonably confident that biote will continue to deliver double-digit growth in the coming years.
Margins
The company's positive take is backed up by Seeking Alpha's profitability metrics. It gives biote an A- rating because the company beats the healthcare sector on 12 of 13 ratios. They include Gross ((TTM)) and EBITDA ((TTM)) margins, as well as Return on Total Assets ((TTM)) and Total Capital ((TTM)).
The third quarter's income statement shows the company returning to profitability. In part, that's because the cost of going public and scaling up is mostly behind it; specifically; selling, general, and administrative costs dropped from $149.3 million in the first nine months of last year to $72.6 million this year.
In the Q3 report, biote explained how its gross margin had improved, "Gross profit margin for the third quarter of 2023 was 68.9% compared to 68.2% for the third quarter of 2022. The increase in gross profit margin reflected continued effective cost management."
And, "Net income for the third quarter of 2023 was $19.6 million, representing a margin of 43.1%, and $0.25 per basic share, compared to net income of $0.5 million, representing a margin of 1.2%, and $0.00 per share, for the third quarter of 2022. Net income and net income margin for the third quarter of 2023 primarily reflected a $17.5 million gain due to a change in the fair value of the earnout liability." An earnout is additional compensation that a seller of a business receives when the firm achieves specific milestones.
Again, I am confident that margins are more than adequate to provide free cash flow for future capital expenditures.
Management and strategy
Regarding management experience and expertise, both CEO Weber and CFO Samar Kamdar have extensive business experience and graduate degrees. Weber has been at the helm since the firm went public a year and a half ago.
On the negative side, company founder Dr. Gary Donovitz is no longer on the board or in an executive position and has started legal action against Haymaker and some of its executives and directors. The company argued in its 10-K that the outcome is not expected to have a material adverse effect.
Executive management enjoys the support of a seven-person medical advisory board; all members are MDs or the equivalent.
biote's strategy, as explained in the 10-K, has three prongs:
- More biote-certified practitioners; it targets specific physicians through provider referrals, a dedicated sales force, and digital and traditional marketing channels.
- Grow the practices of those practitioners by providing them with best optimization practices, high-quality biote-branded dietary supplements, and connections to consumers seeking information.
- Increase the sales of branded dietary supplements through its ecommerce site and direct-to-patient platform.
Based on the data and information, I believe the company has the management and strategy it needs to continue its double-digit growth.
Valuation
Because it has a limited history of public trading, biote does not have a full slate of valuation ratios. However, two important ratios are available, and they indicate that the stock trades below fair value for the healthcare sector.
biote valuation ratios (Seeking Alpha)
The first column shows biote's sector-relative grade, the second shows the biote ratio, the third shows the sector median ratio, and the fourth shows the difference in the sector.
Price/sales is a useful ratio for companies that are not profitable, or have not been consistently profitable (the latter is the case for biote). Generally, a P/S below 1.0 indicates an undervalued stock (for either good or bad reasons) and market-wide, a ratio between 1.0 and 2.0 is often considered fairly valued.
The healthcare sector has a price/sales ratio of 3.65 on a forward basis. This indicates investors are willing to pay more for a dollar of sales in healthcare than they are for many other sectors. biote's forward price/sales of 0.95 is well below the sector median, but closer to the fair-value range.
Although biote is listed as a healthcare company, it gets about 98% of its revenue from the sale of supplements, through both wholesale and retail channels. To look at biote's valuation from that perspective, consider the forward P/S forward of 1.11 for the consumer staples sector.
The difference between biote's 0.95 P/S and the consumer staples median of 1.11 implies an undervaluation of 16.8%. Alternatively, we could say that $5.04 is only 83.2% of its fair value. In absolute terms, that would equate to $6.06.
The second ratio of interest, and available, is price-to-cash-flow, another alternative to the traditional price/earnings ratio. It measures how much investors are willing to pay for each dollar of biote cash flow. On a TTM basis, it is 6.97, well below the sector median of 16.86.
Again, we have an indication of undervaluation. If biote's share price rises to the healthcare sector median, and that's speculation at this point, it would more than double.
Neither of these ratios involves earnings, but as we saw above, it has had strong gross and EBITDA margins.
What do other analysts think? biote receives a high, A- rating for valuation from the quants . They give it high marks for eight of the nine ratios listed, and a hold rating.
Two of three Wall Street analysts covering the stock give it a strong buy, and one gives it a buy. These analysts have a target price of $8.33 for the end of 2024, which would be 65% above the current price of $5.04:
BTMD Price Target (Seeking Alpha)
Before now, there have been no Seeking Alpha analyst ratings. I believe biote is undervalued by $1.02, and, with an aggressive but reasonable price target, is a strong buy.
Risks
biote has adopted a 'poison pill' that could work against potential buyouts or management changes. Such actions could affect stock prices negatively.
Although it is larger than its competitors, the company is still relatively small, a microcap of $327 million, based on the November 24 closing price of $5.26.
Expecting a stock to perform as well in the future as it has in the past can mislead investors. Although revenue and EBITDA are expected to keep growing through the end of this year, and throughout 2024, that could change.
The company operates in the healthcare sector and is subject to rules and regulations from many authorities. If it expands into other states and countries, it may encounter unexpected problems. At the same time, the rules raise barriers to entry for prospective competitors.
Other risks arise as it expands internationally, and they include the possibilities of unfavorable currency exchange rates, geopolitical turmoil, and high establishment costs.
Conclusion
The ratios available to investors suggest it is deeply undervalued when compared with the healthcare sector. However, I believe the consumer staples sector provides a more realistic scenario, which suggests a fair value of $6.06, which is $1.02 above the November 28 closing price. It also suggests there is a modest margin of safety.
Further, if the price goes up by 65%, as projected by Wall Street analysts, then it would be a home run for investors. But even if it only achieves a third of that, investors would still be looking at a gain of more than 20%. Remember, though, this is a microcap with a relatively short history, so this must be a case of caveat emptor, or buyer beware.
All these issues considered, I will join the Wall Street analysts in rating biote as a strong buy.
For further details see:
biote Should Keep Delivering Strong Growth