Description

Bioventus Inc.

NasdaqGS: BVS | $13.13/shr | $1,021m MV* | $1,300m EV* | HQ: Durham, NC

*Includes shares and cash issued in the Misonix acquisition

Summary Thesis

Bioventus is a recently IPOed medical device company that we think can double its revenues, double its EBITDA margins, and quadruple its share price over the next five years. The company is not well-known to the investment community, and is currently undergoing turnover in its shareholder base after paying for a large acquisition with stock. In our opinion the current scenario offers an extremely attractive entry point for what we think will evolve into a defensible, high-margin business with a strong organic growth profile.

Bioventus IPOed in February of 2021. At IPO, the company had three primary product lines: knee injections for osteoarthritis (sold to orthopedists, #2 market share with the lead position in its sights), a bone healing device (sold to podiatrists and foot & ankle specialists, with dominant share of its market), and bone graft substitutes (sold to spine and neuro surgeons, with the fastest growth rate in the market).

Since coming public, Bioventus has made two important acquisitions: Misonix, which added surgical and wound care products, and Bioness, which brings exciting peripheral nerve stimulation (“PNS”) technology for the treatment of chronic pain. These deals have set up Bioventus for sustained long-term success by expanding the product portfolio and deepening the sales coverage. The company now has a diverse line of market-leading products, as well as a big salesforce with expansive reach across the entire lower extremity care space. We think Bioventus has laid the foundation upon which to build the next Globus Medical, if not a mini-Stryker.

Bioventus also has an exciting development pipeline. Next year the company is likely to release the world’s first implantable PNS device for post-surgical pain, which will help spur growth in the medium term. Bioventus also owns the rights to Agili-C, an innovative implant for damaged knee cartilage, an injury that currently has no good treatment options. Agili-C has shown early evidence of being a breakthrough therapy that would be clearly superior to the existing standard of care. FDA approval and commercialization of Agili-C are still a few years away, but if the product is successful it could end up dominating a $1B+ TAM and being worth more than $1B by itself.

The Bioventus team consists of a number of very talented people who share the long-term vision of what this company can become. The Chairman, Bill Hawkins, was formerly the Chairman and CEO of Medtronic. The Bioventus CEO, Ken Reali, was previously the CEO of Clinical Innovations, a PE-owned medtech company that he helped turn around and sell for $525 million in 2019, earning the company’s owners an IRR above 50%. The head of Business Development, Chris Yamamoto, is also very impressive, with a background in Biz Dev at Becton Dickinson, and M&A at Blackstone before that. 

In addition, Stavros Virzigianakis, the Chairman and CEO of Misonix (one of the two companies Bioventus acquired since the IPO) is joining the Bioventus board and taking his entire deal consideration in stock, which will make him one of the largest Bioventus shareholders. We have been long-time owners of Misonix and we know Stavros very well. He is one of the most talented executives we have ever worked with. At Misonix he quintupled the share price in five years despite a global pandemic that literally shut the company’s end markets overnight. His continuing involvement with Bioventus is a huge positive.

With a number of growth drivers set to kick in over the coming years, Bioventus has a clear path to $1 billion of revenue by 2026 via 10%+ organic growth and tuck-in M&A. And with ample opportunities for improved efficiency, we would expect $250-300 million of EBITDA by that time. A peer multiple (SYK and GMED are the only diversified medtech companies generating above-GDP organic growth, and they trade at ~20x LTM EBITDA) would equate to a $50 stock without any contribution from Agili-C. The stock closed yesterday at just $13.

Corporate History

Bioventus was created in 2012 when Smith & Nephew spun out its Biologics and Clinical Therapies division into a newly created joint venture with PE firm Essex Woodland, which took 51% ownership while Smith & Nephew retained the other 49%. Essex Woodlands placed one of its partners, Bill Hawkins, in the Chairman’s seat, where he remains today. From 2007 to 2011 Mr. Hawkins was Chairman and CEO of Medtronic.

At the formation of the JV, the business consisted of two product lines: hyaluronic acid (“HA)” knee injections, and a non-invasive bone healing device (trade name Exogen). Essex Woodlands later added a third leg to the stool by acquiring a suite of bone graft substitutes used in surgeries. It also brought on additional PE investors, although it remains the single largest shareholder of Bioventus.

Bioventus IPOed in February of 2021. The IPO was solely to raise funds for Bioventus; none of the private owners sold in the offering. The proceeds were quickly used to fund the Bioness and Misonix acquisitions.

Business Overview

Before we get into the products themselves, we want to talk about one of Bioventus’ most valuable assets, its sales force. For such a small company, Bioventus has a huge sales force: more than 500 people. And behind this big team of reps there is also a strong commercial organization, with 150 people in Memphis working solely on billing, and 140 contracts with integrated delivery networks (“IDNs” -- regional networks of hospitals and clinics that team up to form buying groups). 

The giants of medtech aren’t built on single revolutionary products, they’re built on broad product portfolios that are then leveraged effectively via big sales forces. Bioventus is perfectly positioned to become one of those companies. It has huge commercial muscle that is ready to be flexed. Any product it acquires or develops in the orthopedic space can immediately be plugged into the massive sales force.

With that out of the way, let’s turn to the business lines, which we’ll discuss one by one. This is how the divisions looked before the Misonix acquisition…

And after…

Pain Treatment and Joint Preservation (f/k/a OA Joint Pain Treatment and Joint Preservation)

This division sells hyaluronic acid (“HA”) knee injections for the treatment of osteoarthritis, which is cartilage damage inside the knee joint, whether chronic or acute. HA injections are the first line of treatment for osteoarthritis. They are relatively inexpensive and tend to be fairly effective for a few years. The prescribing physician is an orthopedist or someone practising in sports medicine.

The HA market is $2 billion in size. HA injection treatments typically come in 5-, 3-, or 1-injection formulations. Historically 3-injection formulations have led the HA market due to efficacy, but single-injection products are gaining steam, as we’ll touch on in a moment.

In 2020 Sanofi was the global leader in HA, with its SynVisc franchise generating $219 million of revenue. Bioventus was a close second at $171 million. The next largest competitor in the market was Johnson & Johnson, which licenses its MONOVISC and ORTHOVISC products from another public company, Anika Therapeutics. 

Bioventus’ HA products have been growing faster than the HA market in recent years, and the company is set to overtake Sanofi as the market leader. Sanofi’s SynVisc is an old product that has been bleeding share to rivals with newer, better products, the chief among which is Bioventus’ DUROLANE. DUROLANE is a single-injection treatment that was introduced in 2018 and has demonstrated superior clinical efficacy to market leader SynVisc due to longer its half-life in the knee, as shown here:

The American Academy of Orthopedic Surgeons recently released updated clinical practice guidelines stating high molecular weight treatments showed significant improvement over non-high weight HA treatments; DUROLANE has 15x the molecular weight of SynVisc.

Driven by DUROLANE (which grew 81% in Q2 2021), Bioventus’ overall HA business has been growing between the low teens and low 20%s, while the overall market is growing just 3-5%. As DUROLANE penetration increases, the company’s HA growth rate will slowly converge toward the market rate, but we still expect the HA business to grow to approximately $300 million by 2026, compared to approximately $200 million today.

This division also sells a product called the StimRouter, which Bioventus got when it acquired Bioness in early 2021. We discuss the Bioness deal in more detail below, but here is a quick summary:

The StimRouter is a peripheral nerve stimulation (“PNS”) device used to treat post-operative pain in the leg, and is sold to the same base of orthopedists and sports medicine doctors as HA. The StimRouter only generates $6 million of revenue, but in 2022 Bioventus expects to introduce (pending FDA approval) an implantable, remote-controlled PNS device called TalisMann. TalisMann will be the only implantable PNS on the market, as well as the only PNS device of any type backed by a randomized clinical trial.

TalisMann could generate revenue that is many multiples of StimRouter. It will garner higher reimbursement (as a full implant, it will be reimbursed at 2-3x StimRouter), and it will benefit from dramatically increased sales coverage (StimRouter had just 10 reps at Bioness; Bioventus has 300 lower extremity reps). The Bioness acquisition agreement requires TalisMann revenue of $40 million by 2025 to trigger milestone payments.

Restorative Therapies (f/k/a Minimally Invasive Fracture Treatment)

This division sells Exogen, a bone healing device that uses ultrasound to stimulate regeneration in non-healing fractures. The most common use case is a stress fracture in the foot. 

Exogen is the market leader in long bone stimulation, having 30-35% share of the ~$300M market. Market growth is in the low-single digits, as payors put increasing scrutiny on the category over the last five years or so. This business showed revenue declines in 2018 and 2019 because the company found overbilling errors that it self-disclosed to Medicare and CMS, which reduced revenues. Then in 2020 COVID-19 lockdowns reduced trauma incidence and doctor visits. Both of these issues are now in the rearview mirror and we expect revenue to stabilize at current levels.

Exogen is a high-margin cash cow, and also a beachhead from which to sell additional products into the podiatric portion of the lower extremity market. We assume flat-ish revenues of approximately $90 million going forward. Bioventus is pursuing a treatment indication for fresh fractures in addition to the already-approved non-healing fracture indication, but we haven’t modeled any benefit from this.

When Bioventus bought Bioness, this division (Restorative Therapies) got Bioness’ portfolio of advanced rehabilitation devices, which are used to restore gait and movement in victims of strokes and brain injuries. The Bioness advanced rehab products generate about $35 million in revenue. The market is growing LSD to MSD, but this business could end up growing faster because the advanced rehab products will now be sold by a much larger sales force.

Surgical Solutions (f/k/a Bone Graft Substitutes)

This division sells primarily to spine surgeons for use in spinal decompressions and fusions. Bioventus built this division through acquisitions in 2014 and 2015. Revenue will be approximately $80 million in 2021 (at 5% of the market), growing 20% annually. Historically the bone graft substitute market was dominated by the big spinal surgery hardware players (Stryker, et al), with surgeons treating grafts as “throw-ins” along with everything else they were buying. However, as use of bone grafts has grown, buyers have started to apply more scrutiny to the price and efficacy of the grafts, which has driven share gains for independent suppliers such as Bioventus. 

Notably, bone grafts are the only Bioventus product line that is currently sold through third-party channels rather than an in-house sales force. However, this will change with the acquisition of Misonix, which has a dedicated spine and neurosurgery sales force.

The Bioventus bone graft business and the Misonix spine and neuro business will combine to form the “Surgical Solutions” segment for Bioventus. We’ll discuss the business combination with Misonix in much more detail below, but we expect bone grafts to continue growing at ~20%, or potentially more as the grafts are transitioned from third-party sales agents over to the in-house Misonix spinal salesforce. The bone graft business generates approximately $80 million today; we think this will grow to close to $200 million by 2026 as Bioventus continues to take share via superior products. Margins should also improve (from ~80% gross today to the high 80%s) as distributor commissions are replaced by compensation to the sales force.

Misonix Acquisition

Misonix is an $80 million revenue business that has been driving 20%+ organic growth (pre-pandemic) on the back of a franchise of ultrasonic surgical products and an extensive direct sales force.

Misonix has two divisions: an ultrasonic surgical platform in spine & neuro (~$44 million of revenue), and a wound care suite that includes an ultrasonic wound debridement tool as well as an array of regenerative skin grafts (~$36 million of revenue).

The Misonix deal is a core component of our thesis. We were longtime Misonix shareholders and we think the combination will be a huge win. The two businesses are beautifully complementary: their respective sales forces and product lines have no overlap, yet perfectly fill the gaps in one another’s coverage.

The Misonix surgery platform (which is based on the leading ultrasonic spine & neuro surgical tool on the market) pairs perfectly with Bioventus’ bone graft suite, since both products are used in the same two procedures: spinal decompressions and spinal fusions. Moreover, spine & neuro is the one area where Bioventus did not have a dedicated sales force; Misonix brings this capability.

The Misonix spine and neuro platform is a compelling technology that is still in the early stages of penetrating its market. The business was growing in excess of 20% prior to COVID. The Bioventus bone graft products have been growing at a similar rate and also have low market share. We think there is a lot of room to run for both products.

The wound care side of Misonix pairs well with Bioventus’ Restorative Therapies division. The Misonix wound care platform, which consists of an ultrasonic wound debridement device and an array of regenerative skin grafts, is used primarily for the treatment of diabetic foot ulcers, and is sold in wound care centers and hospitals. Bioventus’ Restorative Therapies division sells the Exogen bone healing device for foot stress fractures, and these fracture patients are often diabetic. And once again, the sales forces fit together perfectly: Bioventus has strong coverage in clinics and physican’s offices, whereas the Misonix wound sales team focuses on wound care centers and hospitals. The combined team will have blanket coverage of the podiatric market.

Bioness Acquisition

In March of 2021, prior to the Misonix deal, Bioventus made a smaller acquisition of a company called Bioness. The deal was for $45 million up-front as well as additional potential milestone payments maxing out at $65 million. Bioness has two business lines: advanced rehabilitation equipment for gait restoration in stroke and brain injury patients (about 85% of 2020 revenue, or $34 million), and peripheral nerve stimulation (“PNS”) devices mostly used to treat post-surgical pain in the extremities (about $6 million in 2020).

Bioness will do about $45 million of revenue in 2021, implying an EV/NTM sales of 1.0-2.4x. This low multiple might seem to suggest that the Bioness assets are substandard, but we think this deal is actually very exciting:

1. Although Bioness’ current PNS product, called the StimRouter, is only generating ~$6 million of revenue today, the underlying IP is great. Bioness is the only PNS in the market supported by an RCT, and it is also the only PNS technology based on electrical field conduction rather than RF, which has serious issues with signal attenuation in moving extremities.

This tech will be featured in Bioness’ upcoming TalisMann implantable peripheral nerve stimulation (“PNS”) device, which is seeking FDA approval in 2022. The TalisMann has the potential to be a hit product. It will be the first and only implantable PNS device on the market, and will be controllable by the patient with their cell phone. And since it is a full implant, it will be reimbursed at 2-3x the StimRouter reimbursement, with margins in the 80%s or better. Opioids are the current alternative treatment for post-surgical pain, providing another tailwind for adoption.

The terms of the Bioness acquisition reflect excitement about the TalisMann: 100% of the $65 million of milestone payments are related to the TalisMann, even though PNS is only 15% of the Bioness business today and the TalisMann isn’t FDA approved yet. For Bioness to hit the revenue milestones laid out in the acquisition agreement, the Bioness business will need to at least double by 2025, with revenue perhaps looking something like this:

2. The core Bioness Advanced Rehab business, while less exciting (the advanced rehab market grows low to mid-single digits), will benefit from the Bioventus sales force. Approximately 80% of orthopedic offices in the US are affiliated with rehab centers, and as we’ve already covered, Bioventus has extremely strong sales coverage in orthopedic offices, meaning it has pre-existing relationships with rehab centers throughout the country. The Bioness Advanced Rehab business will also benefit from Bioventus’ pre-existing expertise in billing for high-ticket DME products via Exogen.

3. There are significant cost synergies to be had. Bioventus has already removed Bioness’ entire reimbursement team. Moreover, Bioness’ founder (Alfred Mann, passed away 2016) was a successful serial entrepreneur focused on revenue, not costs. The business was run in Los Angeles and there was an executive office in Beverly Hills. 

This inattention to cost was why Bioventus was able to acquire Bioness so cheaply: Bioness was in financial trouble and needed funds quickly, and Bioventus was small and nimble enough to sign a deal quickly, going from NDA to LOI in just 2 weeks. This M&A prowess enabled Bioventus to secure a phenomenal deal for Bioness, and this prowess should continue to be an advantage as the company pursues other acquisitions to further leverage its huge salesforce.

Development Pipeline

In addition to the TalisMann, Bioventus has another potentially groundbreaking (and potentially much bigger) product in its development pipeline: Agili-C.

Agili-C is a coral-derived implant treatment for knee cartilage defects (also called osteochondral lesions) developed by an Israeli company called CartiHeal. In October of 2020, Agili-C was granted “breakthrough device” status by the FDA, and in August of 2021, CartiHeal reported a 2-year Pivotal IDE Study showing clinical superiority to the current standard of care, which is microfracture surgery.

Bioventus has been an ongoing venture funder of CartiHeal, and based on the Agili-C IDE study Bioventus chose to exercise its option to acquire Cartiheal in full, contingent upon FDA approval of Agili-C.

There are currently no good treatment options for osteochondral defects, which can be debilitating for patients who are too young for knee replacement. Microfracture is a ghastly procedure that involves intentionally fracturing the femoral condyles in hopes that marrow will seep out of the bone and fill the defect(s) in the cartilage. The recovery time for microfracture is long at 9-12 months for return to sport, and patients often function at a permanently reduced capacity: just witness the long list of NBA players whose careers have been ended by microfracture surgery.

Much worse, two thirds of microfracture surgeries fail an average of four years after the surgery. The failure rate is high because microfracture does not heal the original cartilage (which is called hyaline, and is supple), but rather replaces it with something called fibrocartilage, which lacks collagen and therefore tends to break down under chronic use. Nonetheless, microfracture remains the standard of care for osteochondral lesions because of its relatively low cost of ~$5,000 per procedure and the lack of better reasonably-priced options.

There is a newer treatment option, called MACI, which is owned by a public company called Vericel. MACI involves harvesting healthy cartilage from elsewhere in the patient’s knee, growing that cartilage sample in a lab, and then gluing it back into the original knee cartilage defect. MACI has much better long-term outcomes than microfracture, but it requires a very long recovery time (9-24 months), two surgeries, and a very high cost of $30,000 to $40,000 per procedure. Nonetheless, Vericel has built a $100 million business selling MACI, which is responsible for about two thirds of its consolidated revenue.  Vericel’s EV as of this writing was $1.7 billion, which is 11x consolidated sales.

Agili-C has a number of benefits in comparison to microfracture and MACI. First, it is a relatively simple procedure allowing the implant to be placed in a matter of minutes. Second, recovery times are no worse than microfracture at 9-12 months for return to sport. Third, the cost of the implant is TBD but is likely to be somewhere between $5,000 and $10,000; a fraction of what MACI costs. Fourth, the early clinical data suggests Agili-C will be applicable for a wide range of patients, from young people with single, small defects suffered through acute trauma, to middle-aged and older patients who have multiple larger defects caused by chronic degradation.

Finally, Agili-C appears to actually heal the original hyaline cartilage. As one study about Agili-C put it: “Sequential radiography suggested the entire implant degraded and was substituted for cartilage and bone by creeping substitution.” The patient data gets better over time: pain scores improve at 24 months compared to 12, and so on. This is fantastic data, and if it proves out in subsequent studies and trials, it will put Agili-C in a class by itself for treating cartilage injuries in the knee.

How big is the market for Agili-C? 

1) Microfracture procedures have been reported at 78,000 annually in the US, which at $5,000 per procedure would make a $400 million market.

2) Vericel’s MACI revenue is about $100 million, on less than 2,500 procedures.

3) In addition to microfracture and MACI, there is another cartilage lesion procedure called chondroplasty, which is an arthroscopic smoothing of the cartilage surface, and is purely palliative. There are more than 200,000 of these annually at $3,200 a pop, or a $650 million market.

All of this suggests that the total addressable market is at least $1.1 billion. However, there is a lot of untapped additional TAM from injured people who are scared off of surgical treatment by microfracture and MACI (this author is one such person). How much bigger would the market be if there were actually an effective and affordable treatment option? It’s hard to say, but for context, the US knee replacement market is $7 billion in size. 

Agili-C’s penetration of this TAM remains to be seen, but the acquisition includes a $150M milestone payment that is triggered when Agili-C’s trailing revenues exceed $100M. Agili-C will need years to get regulatory approval and full commercialization via reimbursement and further supporting clinical data, but once those things are done Bioventus has the commercial infrastructure to sell Agili-C effectively on a very wide scale, and Agili-C fits perfectly into the existing orthopedic business: for patients who’ve already had HA injections, Agili-C would be the logical next step.

The potential for Agili-C is vast. What would it be worth as a standalone company? That’s up for debate, but if you took the 2/3rds of Vericel’s market value (so $1.2B) that is presumably derived from the $100M MACI business, that would be a decent start at least from a relative valuation perspective. If any knowledgeable VIC members have thoughts on this question, we’d love to hear them.

But the really attractive feature of this investment is that Bioventus is an extremely attractive stock even if Agili-C never gets approved: our $50 five-year price target includes no contribution from Agili-C.

Forecasts and Valuation

Bioventus now has a queue of growth drivers in place for the coming years: continued market share gains with DUROLANE, then TalisMann PNS release in the latter half of 2022, then the full integration of Misonix in 2023 and 2024, and then the commercial release of Agili-C around 2025. Thanks to all these growth drivers, Bioventus is likely to have one of the highest organic growth rates amongst the diversified medical device companies. Here is a rough sketch of our revenue estimates:

As for margins, Bioventus’ EBITDA profitability is currently in the low-teens, while larger peers Globus, Stryker, and Medtronic sit at 32%, 29%, and 29% respectively. And Globus, at $930M of revenue, isn’t even much larger than Bioventus. Bioventus’ gross margin % is in the low 70s and is likely to improve toward the mid-70s in the coming years. The potential for EBITDA margin expansion is huge, with improvement coming via leveraging the existing cost base as well as eliminating duplicate costs at Misonix and Bioness. We see 28-30% EBITDA margins for Bioventus by 2026.

At scale, Bioventus will be a prodigious FCF generator. Capex and distribution rights acquisitions together average only 5% of revenue. The interest rate on BIoventus’ corporate debt should be in the low single digits. And working capital needs are minimal due to the high-margin nature of the products. Scale peers (MDT, SYK, GMED) convert 15-20% of revenue and 50-65% of EBITDA to unlevered FCF; there is no reason Bioventus can’t hit these same numbers as it gets bigger.

Diversified medical device companies with category-leading products command premium valuations because their businesses are extraordinarily stable, can usually grow well above GDP through pricing power and favorable demographic trends, and convert a high portion of their EBITDA to free cash flow. Bioventus isn’t currently valued as though it is one of these companies, but we think it should be. 

The peer group currently trades at 19x trailing EBITDA, and has averaged ~16x in less frothy times. Based on our 2026 estimates of ~$880M in revenue (no M&A assumed) and $250M of EBITDA (29% margin), this would equate to a valuation range of $44 to $56 per share using 1% annual share dilution, good for a 30% IRR over 5.25 years. 

(Footnote: we assume no contribution from Agili-C here, but don’t penalize BVS for the acquisition cost either.)

Catalyst

Integration of Misonix.

FDA approval of TalisMann implantable PNS.

FDA approval of Agili-C.

Double-digit organic growth.

Significant EBITDA margin improvement.