Bioventus Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended October 1, 2022; comparative periods ended October 2, 2021. Amounts below are in millions unless stated otherwise. The company develops and commercializes minimally invasive medical treatments and reports U.S. and International segments. The quarter includes the CartiHeal acquisition, completed July 12, 2022.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $128.7 | $108.9 | $386.3 | $300.5 |
| Gross profit / margin | $84.5 / 65.7% | $79.1 / 72.6% | $256.9 / 66.5% | $214.9 / 71.5% |
| Operating income (loss) | $(200.9) | $(1.0) | $(225.6) | $15.2 |
| Net income (loss) | $(145.7) | $(2.3) | $(168.5) | $11.5 |
| Adjusted EBITDA | $21.0 | $21.3 | $51.1 | $52.3 |
| Class A loss per share | $(1.76) | $(0.03) | $(2.07) | $(0.15) |
- Revenue and segments: Q3 sales rose 18.2%. U.S. sales increased 17.3% to $116.3 million and International sales increased 27.2% to $12.4 million. Acquisitions contributed $17.3 million to U.S. and $3.0 million to International Q3 sales. U.S. Pain Treatments declined 16.0%, reflecting insurer-contract pricing and market competition; Restorative Therapies and Surgical Solutions grew, primarily from acquisitions and volume.
- Margins and expenses: Q3 gross margin fell 6.9 percentage points, with management citing acquired-product mix. Nine-month margin also declined, including a 1.0 percentage-point impact from acquisition-related inventory step-up amortization. Q3 SG&A was $79.2 million, up 13.7%; nine-month SG&A was $254.9 million, up 47.0%. Acquisition-related costs, compensation, consulting, travel and other expenses contributed to the increase.
- Loss drivers and unusual items: The company recorded a preliminary, non-cash $189.2 million goodwill impairment in Q3 after a decline in its stock price and market capitalization. Nine-month results also include a $23.7 million non-cash gain from remeasuring the previously held CartiHeal investment. Q3 net loss attributable to Bioventus Inc. was $108.2 million; nine-month attributable loss was $126.8 million.
- Cash flow and liquidity: Operating cash flow was $(18.8) million for the first nine months, versus $9.9 million provided in the prior-year period. Investing cash flow was $(113.0) million, including $104.8 million for CartiHeal; financing cash flow provided $67.5 million. Cash and restricted cash totaled $34.4 million at October 1, down from $99.2 million at year-end 2021. Current assets were $271.1 million and current liabilities $288.4 million.
- Debt and obligations: Long-term debt principal was $427.2 million, with a $424.4 million net carrying amount including current debt and unamortized costs/discounts; the term loan matures in October 2026. The company reported covenant compliance at October 1 and no revolver borrowings. CartiHeal consideration includes $215 million deferred, bearing 8% annual interest, with the first two $50 million payments due no later than July and September 2023, and up to $135 million additional consideration if trailing twelve-month sales reach $75 million.
Material changes and management commentary
- Sales growth largely reflects acquired businesses, including Misonix and Bioness, as well as CartiHeal in the current-year period; comparisons are affected by different acquisition dates. CartiHeal had no reported net sales in the nine months since acquisition.
- Management disclosed substantial doubt about the company’s ability to continue as a going concern. Available liquidity and forecast cash flows may not be sufficient to fund the initial CartiHeal deferred payments. A payment failure could trigger a cross-default under the credit agreement; the company says it could not repay all debt in that event.
- Management is considering cost reductions, non-core asset divestitures, covenant waivers, renegotiating CartiHeal payment timing, or potentially exiting the CartiHeal transaction. It cautions there is no assurance these actions will be implemented or resolve the uncertainty; they do not alleviate the substantial doubt.
- The company identified a material weakness in rebate accrual controls and concluded disclosure controls were ineffective. A late, unusually large third-party payer invoice prompted a revised estimate and an $8.4 million reduction in revenue, recorded after the earnings release but before filing. Remediation actions are underway but had not operated long enough to establish remediation.
- The company discontinued MOTYS development and expected a further $4–$6 million of costs to fulfill remaining Phase 2 regulatory obligations. It withdrew its metatarsal-fracture EXOGEN FDA submission in October 2022 and was preparing a scaphoid submission, with no assurance of approval.
- The filing provides no quantified financial guidance. Management cited uncertainty from COVID-19, inflation, supply-chain costs, pricing and reimbursement pressure, regulatory changes, and dependence on a limited number of products. The CartiHeal Agili-C clinical paper was being revised for resubmission; publication timing was uncertain.
Investor verification priorities
- Assess near-term liquidity and the company’s plans and capacity to meet CartiHeal payments, interest, and debt covenants; verify any subsequent lender waivers or revised payment terms.
- Review the $8.4 million rebate accrual adjustment, its effects on reported revenue and covenant forecasts, and whether the material weakness has been remediated.
- Evaluate sales growth excluding acquisitions, the durability of acquired-product performance, and the drivers of declining gross margins and Pain Treatments sales.
- Track CartiHeal milestones, Agili-C commercialization and reimbursement progress, contingent consideration, and the status of the recorded goodwill impairment.
- Monitor regulatory and legal developments, including EXOGEN submissions, product reimbursement and pricing changes, and pending litigation.