The Medical Devices Market:
As of May 26, 2023, a total of 46 Medical Device deals have been announced this year, and 28 of those deals were announced during Q1:23. The Q1:23 deal total is comparable to the 27 deals announced during Q1:22, yet an 18% drop from the 56 deals announced between January 1, 2022, and May 26, 2022. M&A activity is also 25% down compared to the 35 Medical Device deals announced during Q1:21, and 6% lower than the 49 deals announced between January 1, 2021, and May 26, 2021. While M&A is down compared to recent Q1’s, considering we just had a few years of unprecedented upheaval, the market is still at a better place than it was before the COVID-19 pandemic.
It’s worth noting that prior to the pandemic, the Medical Devices sector was experiencing lower M&A numbers, typically ranging in the low-20s to the teens during the first quarter of the year. After the original slowdown in the M&A market at the start of COVID-19, deal totals spiked significantly, reaching a high point in 2022. However, the most recent drop in M&A has been seen pretty much across the board in all healthcare sectors, as the pandemic naturally affected the entire healthcare ecosystem, and shifted the focus of many investors and operators to patient care, vaccine development, addressing the immediate healthcare needs arising from the pandemic, health care’s shortfalls exposed by the pandemic and the opportunities in health care brought on by a widespread embrace of new technologies. It’s not so much a decline, as it is a return to a sense of normalcy, with a new direction. With the ongoing advancements in technology and the increasing demand for innovative healthcare solutions, the Medical Devices sector is poised to continue to thrive.
The Medical Devices M&A market only tells one side of the story. To paint a full picture of the Medical Devices sector, it could be fruitful to look at the financial performance of a key player in the Medical Devices industry, Bioventus Inc. (NASDAQ: BVS). And with its Q1:23 reports just released, there’s no time like the present!
Bioventus Inc.
Bioventus, a leading innovator in the field of orthobiologics, reported a modest increase in net sales for Q1:23, totaling $119.1 million, indicating 1.5% growth compared to Q1:22. This growth was primarily driven by increased volume and sales in specific product categories, including double digit growth within its Surgical Solutions and International verticals. Revenue for the first quarter was $119 million, which was 2% higher compared to Q1:22.
However, Bioventus also reported a net loss from continuing operations of $100.0 million for the quarter, compared to a net loss of $14.4 million in the prior-year period. The loss can be attributed to the establishment of a non-cash valuation allowance against deferred tax assets resulting from the impairment of intangible assets associated with its wound business and the deconsolidation of CartiHeal.
CartiHeal, a privately-held medical device company with headquarters in Israel, develops proprietary implants for the treatment of cartilage and osteochondral defects in traumatic and osteoarthritic joints.
CartiHeal and Bioventus had initially signed a partnership agreement in mid-2020, which included an acquisition option that would come into play later. Not long after CartiHeal received FDA approval for its Agili-C cartilage repair implant in March 2022, Bioventus stepped forward with a significant offer of $450 million to acquire CartiHeal. After reworking the purchase plan as it dealt with some financial issues, Bioventus ultimately agreed to pay $100 million upfront to acquire CartiHeal, then to dole out another $350 million across about five years as CartiHeal hit certain milestones.
The acquisition was finalized in July 2022, with Bioventus paying the agreed-upon $100 million upfront. However, in late February 2023, Bioventus announced that, due to being unable to secure terms that met its criteria, it had entered into a settlement agreement with CartiHeal’s former shareholders which would relieve Bioventus from the obligation of paying the remaining $350 million. Bioventus had a month to explore other funding options in a last-ditch attempt to retain ownership of CartiHeal. But in its annual report published in late March, Bioventus confirmed that it was unable to secure an alternative funding source. As a result, ownership of CartiHeal was transferred back to its original owners.
“We can give no assurance that we will be able to obtain the necessary financing or negotiate acceptable terms to reacquire CartiHeal and its assets,” Bioventus concluded in the March report.
Despite financial challenges, or rather in spite of, Bioventus has taken proactive measures to stabilize its operations and improve its financial position. One significant step was the execution of a settlement agreement, successfully eliminating $350 million of liabilities and future claims linked to the CartiHeal acquisition, which was originally announced in April 2022. This strategic move aims to alleviate financial burdens and provide a more favorable environment for the company’s growth.
Moreover, Bioventus made amendments to its 2019 Credit Agreement, which allowed the company to obtain covenant relief and additional flexibility. These adjustments have strengthened Bioventus’ position and provided a more stable foundation for its operations through the first quarter of 2024.
Another area of focus for Bioventus is the exploration of opportunities for further divestiture of non core assets, aiming to strengthen its balance sheet. Bioventus announced on May 10 its strategic decision to divest its wound business in a move that the company expects will bolster liquidity and allow for a greater focus on its core business segments.
Given the recent developments, including the divestiture of its wound business and the appointment of Tony Bihl as Interim CEO, Bioventus announced a delay in its 2023 sales and earnings guidance. However, the company still expects to achieve at least $68 million in EBITDA for the year and maintain compliance with debt covenants, indicating a return to financial stability and performance.
Even with all these hurdles (a new CEO joining the company, having to obtain debt covenant relief, issues with the CartiHeal acquisition and a large loss on top of that), investors don’t seem to be too deterred. Prior to the earnings call on May 16, 2023, the company was trading at $1.20. On Wednesday 17, the company’s stock price gained 9.17%, rising to $1.31.
Mr. Bihl, commenting on the company’s progress, stated, “Our improved execution and results, combined with the divestiture of our wound business, position us to deliver meaningful improvement in Adjusted EBITDA and enhance liquidity as we progress throughout the year.” Mr. Bihl’s statement reflects Bioventus’ determination to overcome its financial challenges and drive positive growth in the future.
Bioventus’ performance in Q1:23 presents a mixed picture for the Medical Device sector. It highlights growth potential, particularly in specific product categories and international markets, while also emphasizing the importance of financial stability and decision-making to overcome challenges and achieve sustained success in a competitive market.
The eHealth Market:
Like the Medical Devices M&A market, the eHealth sector also experienced a decline in deal totals during Q1:23. There were 74 eHealth transactions announced during the quarter, a 62% decrease from the 120 eHealth deals announced during Q1:22, and a 39% decrease from 103 deals announced during Q1:21. However, Q1:23 still overshadowed the performance seen in the eHealth market during Q1:20 and in the previous decade, when an average first quarter would have yielded approximately 40-50 deals in the eHealth sector.
Despite the decline in deals, eHealth still was the third busiest sector of the quarter, according to LevinPro HC, behind Physician Medical Groups and Other Services, cementing its position as one of the most active healthcare sectors in M&A.
As healthcare systems worldwide prioritize digital transformation to improve accessibility, efficiency and patient outcomes (and often to abide by government mandates), the eHealth sector is well-positioned for continued growth and innovation. Companies like NextGen Healthcare (NASDAQ: NXGN) and LifeMD (NASDAQ: LFMD) have demonstrated their ability to adapt and thrive in the evolving healthcare landscape, with positive financials announced during Q1:23.
Luckily for them, the demand for telemedicine, remote patient monitoring, health data analytics and other digital health solutions remains strong, especially in a world that’s moving more and more online.
NextGen Healthcare
NextGen Healthcare has reported impressive quarterly earnings, showcasing positive financial performance. The company’s EPS stood at $0.31, surpassing the figure of $0.19 from a year ago, after adjusting for non-recurring items. Moreover, the company’s quarterly earnings beat the Zacks Consensus Estimate of $0.29 per share. In the previous quarter, analysts had anticipated earnings of $0.27 per share, but NextGen Healthcare exceeded expectations by delivering earnings of $0.31 per share during Q4:22, as well. Over the past four quarters, the company has surpassed consensus EPS estimates three times.
NextGen Healthcare generated $178.55 million in revenue for Q1:23, signifying notable growth compared to revenues of $151.26 million during Q1:22.
“Fiscal first quarter results reflect continued solid execution and strong overall demand, as reflected in both bookings growth and subscription services revenue growth,” said David Sides, President and CEO of NextGen Healthcare, during the Q1:23 earnings call on May 17, 2023. “We continue to invest prudently in each of our three domains; Enterprise, Office and Insights, and are on track with our long-term goals. In addition, our focused efforts in corporate development and portfolio management are moving forward as we recently sold certain, non-strategic, dental-related assets. NextGen Healthcare has started off the fiscal year with positive momentum and is well positioned to execute on our growth agenda.”
During the Q&A section analysts seem to be more concerned with the company’s commercial strategy execution and the factors that could impact its performance. There were also questions raised about the key swing factors and macro assumptions embedded in NextGen’s guidance, including the impact of macroeconomic conditions and software performance on the company’s financials.
Analysts also sought updates on NextGen’s segment growth rates, particularly for Enterprise, Office, Data and Insights. NextGen answered by indicating that “It’s on track and going well” with its growth expectations for these segments, with the potential for stronger growth in the Enterprise segment following the acquisition of TSI Healthcare, announced in December 2022.
TSI Healthcare focuses on the sales and support of customized NextGen practice management electronic health records solutions. TSI Healthcare was purchased for an upfront cash payment of $68 million and potentially another $22 million, depending on the achievement of certain financial targets through March 2025. NextGen expected the TSI Healthcare deal to contribute about $10 million to $12 million of revenue.
Additionally, the company highlighted the growth potential of its Insights segment and the acceleration of resources and investments in organic product solutions.
Throughout the call, NextGen reiterated its focus on behavioral health and its technological advantages in delivering virtual solutions. The company also discussed its Upgrades Center of Excellence, which aims to complete software upgrades by September 30 and subsequently utilize the software resources in other value-added areas.
NextGen addressed the impact staff shortages have had on the business and outlined its strategies for improving productivity and efficiency in light of rising costs. These strategies focus on several key areas, including automation and technology, process optimization, training and skill development, workforce planning, employee engagement and recognition and collaboration and communication.
It is worth noting that NextGen Healthcare’s stock has experienced a decline of about 10.6% since the beginning of the year, while the S&P 500 index has shown a gain of 7.7%.
LifeMD
Another eHealth company, LifeMD Inc, has delivered better-than-expected results during Q1:23, exceeding the projected EPS loss of $0.16 by an impressive 138% with a positive EPS of $0.06, well above estimates. This positive surprise of $0.22 per share is certainly better than reporting another loss, since in the same quarter of the previous year, the company reported an EPS loss of $0.25 per share.
The company’s revenue performance was healthy, with Q1:23 revenues reaching $33.1 million. This represents a 14.1% increase compared to the previous year’s Q1 report, surpassing consensus estimates set at $30.8 million by 7.55%.
However, despite the overall increase in revenues, the slight decline in EPS signifies a decrease in profit margins and raises important considerations regarding the company’s profitability and cost structure. This particular aspect might have influenced investor sentiment, leading to a 2.73% decline in the company’s stock, which traded at $1.75 per share on the next trading day (Monday, May 15) after the release of the earnings report on May 12.
One area of interest for analysts during the Q&A portion of the earnings call was the recently announced partnership between NextGen and HealthWarehouse, an online pharmacy with a patient population of one million. NextGen sees this partnership as an opportunity to generate a significant number of new patients for their medical group.
Analysts also inquired about the company’s telehealth subscriber growth, which increased to 180,000 from 169,000 in Q4:22, as well as the 11% decrease in telehealth revenue, to which NextGen explained that they have been prioritizing profitable growth.
“We stripped out a lot of the types of customers and subscribers that were not as profitable and focused obviously on the ones that were and the product areas that were most profitable,” said Marc Benathen, CFO of LifeMD, in response to analysts. “So the real way that you have to look at it is off of the sequential base since we’re a recurring subscription business. And the revenue did grow 23% sequentially off of the Q4 base.”
NextGen highlighted the rapid growth of their virtual primary care business and their plans to accept insurance, including Medicare, which they see as a significant opportunity. The company also discussed their weight management platform and the potential of the semaglutide/tirzepatide market. Ozempic cannot take all the attention in that space.
Going forward, NextGen expressed optimism about their Q2 guidance, citing strong momentum and better-than-expected gross margins and retention. It will be interesting to see how the company addresses the decline in earnings, adjusts its profit margins and positions itself for continued success in the dynamic and competitive landscape of the eHealth/telehealth industry.
