Bioventus Inc. annual report, FY2022

Bioventus Inc. — FY2022 Form 10-K

Reporting period: Fiscal year ended December 31, 2022; comparisons are primarily with FY2021. This is an annual filing, not a standalone fourth-quarter report. Bioventus is a medical-device company organized around Pain Treatments, Surgical Solutions and Restorative Therapies. The U.S. segment generated 89% of FY2022 sales.

Financial performance and liquidity

Metric	FY2022	FY2021
Net sales	$512.1 million	$430.9 million
Gross profit / gross margin	$331.1 million / 64.6%	$302.7 million / 70.3%
Net income (loss)	$(213.4) million	$9.6 million
Adjusted EBITDA (non-GAAP)	$66.3 million	$80.8 million
Cash from operating activities	$(13.5) million	$23.0 million

• Sales grew 18.8%. U.S. sales increased 17.5% to $455.3 million; International sales rose 31.2% to $56.9 million. Acquisitions contributed substantially to both increases.
• Gross margin declined 5.6 percentage points, reflecting product mix that included acquired products. Selling, general and administrative expense increased 30.8% to $332.6 million, and research and development expense rose 36.3% to $25.9 million.
• The net loss included a $189.2 million non-cash goodwill impairment, which eliminated goodwill assigned to the U.S. reporting unit. Other notable items included $10.3 million of impairment on the Trice investment and $25.8 million of net interest expense.
• Cash, cash equivalents and restricted cash totaled $31.8 million at year-end, compared with $99.2 million a year earlier. Current assets were $272.6 million and current liabilities were $304.0 million.
• Year-end term-loan principal was $420.7 million; the balance-sheet carrying amount of long-term debt, net of unamortized costs, was $418.1 million. The $50 million revolver had no year-end borrowings. The filing reports a 7.72% effective weighted-average rate on outstanding debt.
• HA viscosupplementation products accounted for 42% of revenue, down from 51% in FY2021. Durolane and Gelsyn-3 Medicare payment rates were reduced after CMS began using newly reported pricing information.

Material changes and unusual items

• FY2022 included acquisitions of CartiHeal in July 2022; acquired businesses also contributed to the comparison with FY2021, when Bioness and Misonix were acquired. CartiHeal recorded $69.4 million of net losses after acquisition and no FY2022 sales.
• In February 2023, Bioventus agreed to return its CartiHeal shares to the former securityholders after it could not secure financing on acceptable terms for the deferred acquisition obligations. The company relinquished control and deconsolidated CartiHeal; it estimated a $60.6 million disposal loss. The filing describes a $10 million settlement payment and release of further claims. Bioventus said it may explore reacquiring CartiHeal but gave no assurance it can do so.
• Management discontinued development of MOTYS in 2022 before receiving Phase 2 results, citing other priorities. It reported $4.3 million of 2022 costs and expected a further $5–$6 million for remaining regulatory obligations.
• The company withdrew its EXOGEN metatarsal-fracture PMA supplement in October 2022 after FDA identified deficiencies; it was preparing a supplement for a scaphoid indication. Approval and timing remain uncertain.

Outlook, risks and contingencies

• The filing provides no formal FY2023 revenue or earnings guidance. Management expected restructuring actions to produce $9–$10 million of annualized savings upon completion and said it may pursue non-core asset divestitures or additional financing. It cautioned that financing may not be available on acceptable terms.
• Management and the auditor identified substantial doubt about the company’s ability to continue as a going concern. Bioventus breached its maximum leverage covenant at December 31, 2022; a March 31, 2023 credit amendment waived that breach, revised covenants and increased applicable interest margins by one percentage point. The company said covenant compliance could again be at substantial risk in 2024 if mitigating actions fail.
• The amended credit agreement imposes financial and operating restrictions, including a minimum liquidity requirement of $10 million during the specified covenant period. The company borrowed $49 million on its revolver in January and February 2023 and repaid $20 million at the March amendment closing.
• Internal controls over financial reporting and disclosure controls were not effective at year-end because of material weaknesses involving the control environment, acquisitions and IT changes, staffing and monitoring, as well as rebate accrual controls. A rebate accrual revision reduced revenue by $8.4 million in the third quarter of 2022. Remediation was underway but not complete. The auditor did not attest to internal control effectiveness.
• A securities class action filed in January 2023 alleges failures to disclose information about rebates, business prospects and internal controls; the company disputes the claims. The filing states that any loss was not then probable or reasonably estimable.
• Other key risks include reimbursement and pricing pressure, dependence on HA products and concentrated suppliers, product and regulatory risks, acquisition integration, and exposure to variable interest rates. A voluntary Class II recall of certain EXOGEN ultrasound-gel vials due to microbial particulates was ongoing; the company said it had replaced the supplier’s gel and notified affected patients.

Most important facts for investors to verify

• Whether operating cash flow and liquidity improve, and whether Bioventus meets the amended debt covenants and minimum-liquidity requirements.
• Progress on internal-control remediation, particularly rebate accrual completeness, financial reporting processes and acquisition integration.
• The effect of rebates, payer contracts and CMS pricing changes on HA revenue, margins and cash requirements.
• The final accounting and cash impact of the CartiHeal deconsolidation, and whether any reacquisition is feasible without worsening liquidity.
• Whether restructuring savings materialize and acquired businesses contribute sustainable earnings; review Adjusted EBITDA alongside GAAP results and its reconciliation.
• Developments in the securities litigation, EXOGEN regulatory submissions and recall, and any resulting financial or operational consequences.