Bioventus Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter ended September 30, 2023; year-to-date figures cover the nine months ended September 30, 2023. Amounts below are in U.S. dollars; financial statement amounts are converted to millions unless stated otherwise.
Business context
Bioventus develops and sells medical-device treatments across Pain Treatments, Restorative Therapies and Surgical Solutions. It reports U.S. and International segments. In May 2023, it sold certain Wound Business assets, including TheraSkin and TheraGenesis. In February 2023, it transferred CartiHeal to former securityholders and accounted for it as a discontinued operation.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $120.8m | $128.7m | $376.9m | $386.3m |
| Gross profit / margin | $78.9m / 65.3% | $84.5m / 65.7% | $241.9m / 64.2% | $256.9m / 66.5% |
| Operating income (loss) | $2.4m | $(126.8)m | $(82.9)m | $(151.6)m |
| Net loss | $(8.8)m | $(145.7)m | $(188.0)m | $(168.5)m |
| Adjusted EBITDA | $21.7m | $21.9m | $66.8m | $51.4m |
| Class A diluted loss per share | $(0.12) | $(1.76) | $(2.40) | $(2.07) |
Cash flow and liquidity: For the first nine months, operating cash from continuing operations was $7.1m, compared with cash used of $17.9m in the prior-year period. Investing activities provided $27.9m, mainly reflecting $34.9m received at closing for the Wound Business sale; financing activities used $26.6m. Cash and cash equivalents were $26.8m at September 30, 2023, down from $30.2m at year-end 2022.
Debt: At September 30, 2023, term loans were $382.4m and revolver borrowings were $15.0m; reported long-term debt, net of discounts and issuance costs, was $394.6m, including $19.6m current. The Wound sale proceeds funded a $30.0m term-loan prepayment. The amended credit agreement carries a 9.88% stated rate at quarter-end and includes financial covenants and a minimum-liquidity requirement during the specified covenant period.
Material changes versus the prior comparable period
- Q3 sales declined 6.1%; nine-month sales declined 2.4%. U.S. sales fell, while International sales grew 17.7% in Q3 and 15.8% year to date.
- Q3 U.S. Restorative Therapies sales decreased 34.8%, primarily due to the Wound Business divestiture and lower Advanced Rehabilitation volume. U.S. Pain Treatments and Surgical Solutions grew in the quarter; management cited lower Pain Treatments selling prices and reimbursement levels as a headwind.
- Gross margin was down 0.4 percentage points in Q3 and 2.3 points year to date. Management attributed pressure to product mix, lower selling prices and, for the U.S., lower Restorative Therapies volume.
- Q3 SG&A decreased 11.6% and R&D decreased 34.7%; management cited cost reductions, lower equity compensation and reduced consulting costs. Nine-month Adjusted EBITDA increased despite lower sales, while Q3 Adjusted EBITDA was broadly flat.
- Interest expense rose to $30.4m for the first nine months from $4.6m, reflecting higher interest and margin rates, the prior-year interest-rate-swap gain, and additional debt-related costs.
- Comparisons of reported losses are affected by unusual items: 2022 included a $124.7m goodwill impairment in continuing operations; 2023 included a $78.6m impairment of Wound Business intangible assets and a $60.6m CartiHeal deconsolidation loss in discontinued operations.
Outlook, risks and unusual items
- Going concern and covenants: Management states that substantial doubt exists about the Company’s ability to continue as a going concern. It is at substantial risk of failing certain financial covenants in 2024 if mitigating steps are unsuccessful; a breach could accelerate repayment. Management is pursuing further cost reductions, possible asset sales, and debt amendment or refinancing, but says these plans do not alleviate the substantial doubt.
- Cost actions: Restructuring initiatives are expected to generate $9m–$10m of annualized savings upon completion. The 2022 restructuring plan was expected to incur $5m–$6m in pretax costs. The filing provides no clear revenue or earnings guidance for the coming period.
- Internal controls: Disclosure controls were concluded to be ineffective as of September 30, 2023 because material weaknesses in internal control over financial reporting remained unremediated. The filing describes prior immaterial financial statement misstatements and ongoing remediation efforts.
- Legal and regulatory: A securities class action’s Securities Act claims were dismissed in November 2023, while Exchange Act claims were allowed to proceed to discovery; a related derivative suit was also disclosed. The filing says potential losses are not presently estimable. A separate product-liability complaint concerns alleged infection following use of Exogen coupling gel subject to a 2020 voluntary recall.
- Israel exposure: The company has a manufacturing facility in Israel producing certain rehabilitation products, which represented less than 10% of sales in the reported periods. The filing warns conflict-related disruption could affect production, employees, suppliers, exports and product certifications.
- Product development: The company withdrew its Exogen metatarsal-fracture PMA supplement and was preparing a scaphoid-indication supplement; FDA acceptance or approval is uncertain. MOTYS development was discontinued, with up to $0.5m of remaining expenditures expected.
Most important facts for investors to verify
- Whether Bioventus can maintain covenant compliance and meet the credit agreement’s liquidity requirements, and whether refinancing or other mitigation is achieved.
- Cash generation, debt balances, borrowing costs and the timing and terms of any additional asset sales or financing.
- Whether sales and margins stabilize, especially in U.S. Restorative Therapies and Pain Treatments, and how the Wound Business divestiture affects comparisons.
- Progress and effectiveness of internal-control remediation, including whether management can conclude the material weaknesses are resolved.
- Developments in the securities and product-liability litigation, Israel-related operational exposure, and FDA review of the Exogen indication supplements.
- Potential realization of the Wound Business’s deferred proceeds and earn-outs, which depend on contractual conditions and future revenue thresholds.