Top Story, BioPharma

5 takeaways from Bioventus IPO move

Bioventus develops orthopedic products designed to treat conditions affecting muscles, bones and joints. Its top sellers include a therapy for fractures and osteoarthritis,

249069951_53c168e77e_zThe medical technology company Bioventus jumped deeper into biotech’s tumultuous waters on Thursday by registering a $150 million initial public stock offering.

Headquartered in Durham, North Carolina, Bioventus develops orthopedic products designed to treat conditions affecting muscles, bones and joints. Its top sellers include a therapy for fractures and osteoarthritis, and a bone graft product used in spinal and orthopedic fusion procedures.

Bioventus counts 660 employees worldwide and $250 million dollars in annual revenue. The industry its swims in, called orthobiologics, which uses the body’s own biology to aid the healing of spinal and other orthopedic injuries, was valued at about $4 billion in 2015. Bioventus and other analysts expect growth to continue ( a compound annual growth rate of 7 percent between 2016 and 2020) with the aging of the U.S. baby boomer population, one of the biggest markets.

What’s it for?

Bioventus only provided a $150 million estimate for how much it intends to raise through the proposed IPO. But according to the offering documents, the money would be used to pay down debt some of the company’s $60 million debt including a $23.5 million promissory note. Bioventus needs to bring down that amount in order to be nimble and invest in new products.

The company’s shares would trade on Nasdaq under “BIOV.”

Tax Receivable Agreement

This paper explains the methods and reasoning behind TRAs but the bottom line is that Bioventus Inc. will be making debt payments to its pre-IPO self and owners, who would be entitled to 85 percent of tax benefits. That will reduce the cash flow to the post-IPO company and its shareholders. By just how much is unknown because the $150 million figure is an estimate. It could be more once the IPO is for real.

Profitability

Bioventus began in 2012 as a strategic partnership between Essex Woodlands, a global healthcare growth equity and venture capital firm, and the largest UK-based medical device company, Smith & Nephew. Since then the limited liability company has suffered significant net losses and, the company reported, may not be able to achieve or sustain profitability.  For the years ended December 31, 2013, 2014 and 2015 losses totaled $22 million, $13 million, $34 million, respectively. As a result the company has accumulated a deficit of $98 million as of April 2, 2016.

Weak financial reporting controls

“We have identified material weaknesses in our internal control over financial reporting,”

An audit of the company’s financial statements for three fiscal years between 2013 and 2015 found that Bioventus turned up several problems with their accounting. Among other issues, the company failed to  accurately disclose sales commissions, cash flows, bad debt expenses. Bioventus has tried to improve financial oversight by beefing up accounting staff, including hiring a chief accounting officer in April 2016, and bringing in a consultant to tighten accounting policies and internal controls. But If the company goes public, management won’t have to provide details to outside overseers about its financial reporting until after Dec. 31, 2017. That’s a long time to wait.

Competition

Bioventus currently markets and sells its products in the United States and 29 other countries. The company’s biggest sellers are the Exogen system and Supartz FX, which accounted for the majority of revenue for the fiscal year ending on Dec. 31, 2015. They have regulatory approvals to be marketed and sold in the United States. But that’s a lot riding on only a few products. Bioventus has plans to expand but they’ll face several hurdles in an already highly competitive industry with high research and development budgets — theirs shot up by 56 percent to $15 million between 2014 and 2015 — including government regulation and third-party reimbursement policies for starters.

Photo: Flickr user Rodrigo Domico