Bioventus: Thoughts After An Active First Year (NASDAQ:BVS)

When Bioventus (NASDAQ:BVS) went public in February of last year, I was interested, yet I had questions at the same time on the prospects for this medical device company. The company was set up in an interesting manner, yet the organic business has been transformed in a huge way as Bioventus has been very active on the dealmaking front.

The Business – The Opportunity

Bioventus focuses on so-called minimally invasive treatments, in an effort to enhance the natural healing process, focusing on healing and elimination of pain induced by orthopedic conditions and problems.

The company operates in a $6 billion osteoarthritic addressable market, including joint pain treatment point preservation, spinal fusion surgery and bone fractures. An aging population, rising obesity rates and greater sport participation have been drivers behind growth in these markets.

The company went public at $13 per share, with pricing set quite a bit below a preliminary offering range between $16 and $18 per share. The 54 million shares outstanding valued the company at some $700 million, as that valuation included a net cash position of around $150 million. The resulting $550 million operating asset valuation was applied to a business which generated an impressive $319 million revenue number in 2018, as revenues rose 6% to $340 million in 2019. Operating profits rose from $25 million to $31 million over the same time frame.

Amidst the pandemic, which resulted in a big pullback in the number of procedures being performed, sales were down 8% in the first nine months of 2020. Sales were reported at $222 million, as operating profits came in at $15 million, as the company guided for year-over-year growth again in the fourth quarter. With revenues trending at $350 million a year, margins coming in around 10%, I pegged net earnings potential at $26 million after interest charges and tax rates. This resulted in a reasonable 21 times earnings multiple.

With shares trading up to $17 in the first day of trading, the $775 million operating asset valuation translated into 2.2 times sales multiple and 30 times earnings. While the earnings multiples were high, margins were a bit soft given the industry in which the company operates, with many medtech players typically posting much higher margins.

Despite this observation, I noted that the company looks quite an established business to me, as limited R&D should not put up the hopes for a big R&D breakthrough in all likelihood. Amidst all of this, I concluded to hold a constructive stance on the shares, yet did not initiate a position just yet.

What Happened?

Since the IPO last year, shares of Bioventus have traded in a $12-$18 range ever since, currently trading towards the lower end of the range as shares now trade at $13 and change, resulting in zero returns in the first year after the IPO. Given the returns posted by many other recent IPOs, that is actually quite a good result.

In March of last year, Bioventus posted full year sales which were down 6% to $321 million, albeit that fourth quarter revenues were up a percent on the year before. The company posted adjusted EBITDA of around $72 million, albeit that GAAP operating profits fell from $31 million in 2019 to $21 million in 2020. The company guided for 2021 sales to rise 12-16% to $360-$372 million, with EBITDA set to rise to a midpoint of $81 million.

That outlook changed quite a bit later that month as Bioventus announced the acquisition of Bioness, a leader in neuromodulation and rehabilitation medical devices in a $45 million upfront deal, albeit that the deal furthermore includes $65 million in contingent considerations. The deal looks relatively compelling as the company is set to add $40 million in revenues (based on 2020 results), yet operating losses were steep at $14 million, killing basically the pro forma profitability. The company updated the full year sales guidance to $390-$402 million, with the deal set to close soon.

Over the summer the company announced two smaller deals to invest in other promising companies and technologies as well, and in July a massive deal was announced as Bioventus announced the $518 million purchase of Misonix, a deal roughly equal to the valuation of Bioventus at the time. The deal is set to add $80 million in 2021 revenues, but of course the deal was only announced later in the year. Synergies are pegged at $20 million, while pro forma leverage comes in at 3.6 times.

In August, the company posted second quarter sales of $110 million which looks very strong as the full year sales guidance has been hiked to $405-$415 million, with both the Bioventus and Bioness activities doing better than expected. Dealmaking resulted in a net debt load of $45 million ahead of the Misonix deal, as there are many moving parts to the thesis of course.

The deal with Misonix closed toward the end of October, as the company updated the full year sales guidance to $425-$430 million, reflective of the performance of the core business and the purchase of Misonix.

What Now?

It has been rather quiet on the corporate front in 2022, as in March the full year results were reported. Fourth quarter revenues of $130 million were up 32% year-over-year, driven by 5% organic growth. Adjusted EBITDA came in flat at $28 million, as a small GAAP loss of $2 million was reported for the quarter.

The outlook for 2022 is quite convincing with revenues seen in a range between $545 and $565 million on which EBITDA is set to come in between $94 and $107 million. Net debt has already come down to $314 million, resulting in reasonable and manageable leverage ratios as the real question is how distorted the earnings numbers are, what realistic earnings will become, and how quick leverage could come down.

With 55 million shares trading at $13 here, the enterprise valuation just tops a billion, still resulting in compelling sales multiples and defendable EBITDA multiples, but the numbers are quite distorted here by the heightened M&A activity.

Truth be told is that I am somewhat surprised by the lack of coverage of Bioventus here, as the company is making quite some moves, is profitable and is rapidly building a nice medtech business. The market however is not convinced yet of this observation.

Given all of this, I see appeal based on the sales multiple and EBITDA valuation multiples, yet real (significant) earnings are still not reported just yet. Nonetheless, the set-up is interesting, but some real execution is required here although the low expectations and set-up are compelling enough to keep Bioventus on the watchlist, yet I see no reason to get involved here just yet.