Description

Summary: Biote is effectively a consumer healthcare franchising company. It trains MDs how to treat age-related medical conditions (e.g. menopause, male sex hormone deficiency etc) and collects a fee every time a procedure is administered. It is an asset -light company (~$30mm in total assets, ex Cash), as its recommended treatment products are manufactured by certified third parties. Biote provides only the training, certification, and marketing for doctors that use their treatment methods, just like a franchisor does, and it collects a fee off the top. Biote has grown rapidly at 19-21% Sales and EBITDA CAGRs over the last 5 years and has a large growth potential ahead, given it is present in only 10 states so far. International expansion is in the plans for 2024. It is profitable (29% EBITDA margins) and has been so for a few years. Its large size (12x larger than the next competitor), its high gross margins (69%) and its high retention rate (90%) argue for a strong competitive position. Its balance sheet is solid (0.6x Net Debt to EBITDA) supported by a robust 25% FCF margin. Despite all that, it currently trades at 7x 2024 EBITDA, a multiple which relative to other franchise / high growth consumer health companies appears to be at a 50-60% discount. (PLEASE SEE DISCLAIMER AT THE END)

Description:

Biote (BTMD) is effectively a consumer healthcare franchising company. BTMD trains, certifies, provides all necessary back-office infrastructure, and helps source products to Medical Doctors / Nurses treating conditions related to hormonal deficiencies. The BTMD-trained medical professionals use Hormone Replacement Therapy (HRT) to treat aging population patients, e.g, women’s menopause, and male sex hormone deficiency. The company has created and branded the Biote Method, which is a comprehensive, end-to-end practice building platform that provides Biote-certified practitioners with the following components specifically developed for practitioners in the HRT space:

·        Biote Method education, training, and certification,

·        practice management software, inventory management software,

·        information regarding available hormone replacement therapy (HRT) products,

·        as well as digital and point-of-care marketing support.

BTMD also sells a complementary Biote-branded line of dietary supplements (vitamins, nutraceuticals etc.). It makes money by charging the Biote-partnered clinics fees associated with the support Biote provides for HRT (i.e. every time there is a HRT procedure using their method, they take a fee) and from the sale of Biote-branded dietary supplements.

BTMD is an asset light company. It has only ~$30mm of Total Assets, ex Cash. It is a training and marketing machine. The HRT products used to treat patients (pellets, gels, creams, injections) are manufactured by certified third party manufacturers. BTMD helps doctors source the necessary materials and as such they are accounted for as 100% pass-through revenues at BTMD and the temporary inventory does sit on BTMD’s balance sheet until it is used (~$11mm of total inventories). It is a company that uses very little CapEx -<$2-3mm per year and 25% of that is for capitalized software.

What Consumer Needs BTMD Addresses and Does it Work?

The company provides a lot of data in its 10K and Investor Presentation on the size of the TAM and the benefits of their HRT treatments. Below is a summary of that data.

According to BTMD, Hormone Deficiency affects 200M Americans with ~80% still untreated.  As women age, their estradiol levels decline 67% from the mid-40s to the mid-50s, as they approach / enter menopause. Per available data, 47M women are affected with menopausal symptoms (75% of women over age 50), and only 28% undergo HRT (13M), 31% of those undergo the Biote Method Treatment - bHRT (4M). Men face similar problems. Men experience a 44% reduction of testosterone between ages 30 and 74. As per available data, 20M men over age 45 are affected by hypogonadism and 10- 12% of those affected undergo testosterone treatment. Men HRT has taken a somewhat of a priority focus as per comments on the recent conference call.

People with hormone deficiency are at increased risk of Low energy, Insomnia, Decreased libido, Brain fog, Irritability, Depression, Hot flashes, Sweats, Bladder problems, Heart disease, Breast cancer, Osteoporosis Neurodegenerative disease (Alzheimer’s, Parkinson’s, Huntington’s). The table below shows data collected by the company on its treatments’ benefits.

In addition to what the company cites in its materials, there is a lot of independent medical research on the Pros and Cons of HRT. In summary, all the materials that I have seen indicate that HRT has proven to work for a good number of patients but not for everyone. The main issue is dosing. The FDA has actually approved the use of replacement estrogen and testosterone hormones, however it has allowed for standard doses only (i.e., one size fits all). BTMD’s argument is that the hormonal deficiency in every patient is different and hence there should be customization. Where issues can arise is in under or over-dosing of the hormonal compounds. BTMD does focus a big part of its training on testing patients’ saliva, blood and urine to ensure optimal dosing. That is why, in some cases, BTMD refers to its treatment method not so much as hormone replacement but as hormone optimization. We should note that customized HRT is not approved by FDA (just the standard dosing is).

The preferred method used by BTMD’s doctors is to insert a small pellet into the body (in the upper buttocks). The pellet is a small capsule the releases medicine over the course of 3-5 months and optimizes hormonal production. It is inserted inside the skin (easy procedure with local anesthesia, a small incision, and a closing band-aid on top). The pellet is completely absorbed in the body and the patient must return to repeat the procedure thereafter in 3-5 months.

Competitive Landscape:

As with all products, it is impossible to have 100% satisfaction, however the general reviews on BTMD are mostly positive. Its dietary supplements on Amazon get 4.7 stars and an Amazon Choice designation. It is not surprising that as a result, BTMD has grown at a 19% Sales CAGR over the last 5 years. Despite many competitors, BTMD is 12x larger than its second closest peer (Evexipel). See table below.

What makes BTMD stand out:  1) early entry and 2) scale. BTMD has been around for 11 years, ahead of most of its competitors, and, as result, has built an established brand. Their name is known in academia with a number of co-authored papers by the BTMD’s medical staff. Further scale helps a lot. This is a marketing business, and you need to reach out to as many doctors as you can. The target universe includes General Practitioners, Urologists, OB-GYNs with BTMD targeting the top 30% of those (the total size of this targeted tier is 78,000 MDs in the US vs. 6,400 currently in the BTMD system, i.e. very low penetration so far). BTMD has 186 employees, 150 of which are in sales, most of which were hired in the last year or two (the company grew its salesforce by 50% in 2022). Doctors need to be educated, supported, trained, and continuously provided with better products and tools (BTMD invests heavily in software– BioTrackers, Inventory Management, CRM etc.). As a result of its scale and higher investment, it can outspend and out-market the competition.

The Business model – A Win – Win?

The company has disclosed the following details regarding how much the average Biote-Certified MD Practice collects per a HRT procedure annually. It is an attractive proposition, a two-day HRT training at BTMD can yield an extra $100K of revenue per year per practice, for a relatively simple procedure with 1-2 cases per day (6-7 per week). We have estimated that BTMD probably takes $50-70 of that revenue as fees. It also makes additional margin on the dietary supplements its sell. Despite the payment of this “franchise” fee to BTMD, the certified practitioner still makes a lot of money. A treatment helps for a period of 3-5 months, so a patient may be coming 3-4x a year to the office to get a procedure, offering recurring revenues.

BTMD is making some great returns on its products and services, it has 69% gross margins, despite 1/3 of revenues being pass-through (Cost of Product). Its biggest cost is Sales & Marketing, which amounts to about 30-35% of sales.

BTMD has achieved great results so far: Sales and EBITDA have grown at ~20% 5-year CAGR and retention rates have been in the 90% range.

Consensus is projecting similar top – line growth at ~18% over the coming years but slower EBITDA growth at 16% as the company will be investing in growth. The H1’23 trends have been positive so far and supportive of the projections. However, the company indicated on the last call that 2H may be a tad slower so perhaps the lower end of the guidance is more likely as target. The reduction in activity is due to slower salesforce training/ramp up and according to the company not due to slower end demand.

Where is the growth going to come from? 1) Geographic Expansion and 2) Salesforce productivity as it seasons. So far BTMD is in 10 core states – AL, AK, CO, FL, GA, LA, MS, NM, OK and TX, which generate 64% of revenues as of end of 2022. The company is expanding into Mid-Atlantic, North-East, and North-West. Progress has been a bit slower, as each state has its own regulatory framework. We should note that a year ago, the 10 core states generated 70% of revenues (vs. 64% in 2022), so there has been progress. The management is planning to expand internationally as well (Canada, Caribbean and LatAm) with launch efforts scheduled for 2024.

The key impediment to growth is the salesforce. This is the main area of investment – BTMD expanded its marketing team by 50% last year and is hiring more. As highlighted, 150 out of the 186 employees are in Sales and Marketing and another 15 are dedicated to training. BTMD does use its top MD practitioners as mentors/trainers for its incoming doctors and pays them a commissions for this work (0.6% of sales as of 2022). The salesforce is mostly new and as a result less experienced. Hence, as they ramp up coverage, there should be further efficiencies achieved.

The Challenges / Issues to the Story:

There are few challenges to the story:

1)      There is no significant IP to the business. There are trade secrets but few patents or proprietary, unique tools. The success of the business is due to persistence, scale, early entry and always looking to go the extra step and provide more to customers vs. competitors. Can someone come up with a better IP/Product?

2)      This is a rather regulated business, and each State / Country has its own framework – this provides hurdles and potential delays to the growth. The FDA oversees not only BTMD but also the 3-rd party manufacturing facilities it uses and hence, if the latter don’t perform as per the rules, there could be issues for BTMD (the company did in fact get reprimanded for one of their outsourced facilities in 2017 but the issues was resolved a year later). So far, the company has only 3 outsourced facilities and is looking to expand that.

3)      Bad Data Risk? Every bit of negative news on the products or health benefits could be devastating to the business (although the procedures have been administered over 4mm times already by BTMD and they claim only 1% has complained of adverse side effects).

4)      Lack of education and still a good dose of skepticism on the use of HRT as a possible treatment (their data quoted earlier does show that less then 30% of women and men use it even though HRT has existed and used for over a century).

5)      Lawsuit Company vs. Founder. The Founder appears to be somewhat of a litigious / argumentative person. He is not longer at the company (after the SPAC merger) and has sued the company and the sponsor for not sticking to a verbal arrangements they had regarding some training / consulting fees (he does get $300K consulting fees and other perqs). The lawsuits is still no resolved but it doesn’t appear to be very onerous ($1mm+ of damages claimed).

6)      Founder & Wife in a divorce and the Wife (25% owner) wants out and selling shares. There is an overhang and she sold shares as low as $3 in early 2023.

7)      Despite two recent offerings, three analyst covering the stock, and a warrant exchange the float is still pretty low

8)      Growing pains – the company has disclosed accounting systems deficiencies in the process of being rectified. There was short flirt with Nadaq delisting due to low float.

Valuation:

This is a very cheap stock. In comparison to other franchisor models (MCD, YUM, WEN) or consumer health companies (HIMS, KVUE etc.) they all trade at 15-20x EV/EBITDA and 20x-30x P/Es. The table below summarizes BTMD’s valuation at various prices. The multiples are at least 50-60% below peers. The stock is trading at the range of $5.00-$6.00 and is most likely worth in the low-to-mid teens. The company has low leverage (0.6x Net Debt/EBITDA) and ~$40mm Annualized FCF/ ~20% FCF margin. We see upside to $7-8 / share at current prices to double digit P/E which we still think is low.

DISCLAIMER:  This is not Financial Advice. Do NOT rely on this analysis for investment decisions. Please do your own work as I may have made errors and omissions in this write-up. I do not own securities in the company, however that may change at any time without additional notice. 

Catalyst

Removal of stock overhang; expanded investor following and analyst coverage; geographical expansion