Q1 2024 Biote Corp Earnings Call

Participants

Simon Serowiecki; IR; Advisory Partners

Terry Weber; Chief Executive Officer; Biote Corp

Robert Peterson; Chief Financial Officer; Biote Corp

Les Sulewski; Analyst; Truist Securities

Jonna Kim; Analyst; TD Cowen

Connell Glauber Jarlath; Analyst; Jefferies

George Kelly; Analyst; Roth MKM

Presentation

Operator

Good day, and welcome to the Biote first-quarter 2024 earnings conference call. (Operator Instructions)
Please note this event is being recorded. I would now like to turn the conference over to Simon Serowiecki, IR Representative from Advisory Partners. Please go ahead.

Simon Serowiecki

Thank you for joining us today. This afternoon, Biote published financial results for the quarter ended March 31, 2024. This news release is available on the Investor Relations section of the company's website. Terry Weber, Chief Executive Officer; and Bob Peterson, Chief Financial Officer, will host today's call.
Before we get started, I'd like to remind everyone that management will make statements during this call that include forward-looking statements regarding, among other things, the company's financial results, future performance and growth opportunities, business outlook, strategies, goals, research and development, manufacturing and commercialization activities, regulatory process operations, the impact of macroeconomic conditions to business, results of operations, financial conditions, and other matters. These statements are not guarantees of future performance. They're subject to a variety of risks and uncertainties, some of which are beyond the company's control. Actual results could differ materially from expectations reflected in any forward-looking statement. These statements are subject to risks, uncertainties, and assumptions that are based on management's current expectations as of today. Biote undertakes no obligation to update them in the future. Therefore, these statements should not be relied upon as representative of the company's views as of any subsequent date. For discussion of risks and other important factors that could affect our actual results, please refer to our SEC filings available on the SEC's website and in the Investor Relations section of our website, as well as risks and other important factors discussed in the earnings release.
Management will also refer to adjusted EBITDA, which is a non-GAAP financial measure, to provide additional information to investors. Reconciliation of the non-GAAP to GAAP measure is provided in earnings release, with the primary differences being stock-based compensation, fair value adjustment of certain liabilities, transaction-related expenses, and other non-operating expenses. Please refer to our first-quarter 2024 earnings release for reconciliation of adjusted EBITDA to net income, the closest comparable GAAP measure.
I'll now turn the call over to Terry Weber.

Terry Weber

Thank you, Simon, and thank you all for joining us on the call. With me today is Bob Pearson, our Chief Financial Officer, who will review our financial results and discuss our outlook for 2020 for Marc Beer, our Executive Chairman, is also on today's call to help you answer questions during the Q&A session following our prepared remarks, Biotie generated solid financial performance in the first quarter, delivering results consistent with our expectations. We successfully launched Biotie Rx, our new suite of complementary hormone and evidence-based wellness products greatly expanding our long-term growth opportunities. We also closed our acquisition of hysteria Health, a strategic transaction that enhances our efficiency and strengthens our manufacturing capabilities shortly after the first quarter closed. We were pleased to reach a definitive settlement agreement with Biotie founder. This settlement is costly litigation and we believe will prove accretive to shareholder value through the planned repurchase of more than 18 million shares held by Dr. Dan Hurwitz at an average repurchase price of $4.17 per share. Bob will provide more information on the expected financial impact of this agreement in his remarks.
Now let's turn to our first quarter results. Revenue increased 4.4%, reflecting procedure revenue growth of 6.6%, partially offset by a decrease in dietary supplement revenue of 11.3% due to an expected decline in nutraceutical sales as we transition our e-commerce business, consistent with our expectations, procedure revenue growth remained stable compared to that of the fourth quarter of 2023. Procedure revenue was driven primarily from our top tier clinics and included the contribution from new clinics we have added in the past 12 months, adjusted EBITDA increased 8%, outpacing revenue growth, and we generated an adjusted EBITDA margin in excess of 30% following the exit of one of our larger nutraceutical distributors from the market in the fourth quarter of 2023, we continue to transition a portion of our nutraceutical sales to our own online storefronts as part of this transition, we are eliminating unauthorized third party resellers, which we anticipate will enhance the overall margin profile of our Nutraceuticals business. In the long run, we expect our Nutraceuticals business will resume year-over-year revenue growth starting in the second half of 2024 as the existing inventory is clear from the distribution channel in February, we successfully launched Biotie Rx, our new suite of hormones and wellness therapies. Biotie Rx represents a milestone in our evolution as we build on our leadership to become the foremost provider of evidence-based healthy aging and therapeutic wellness solutions. Biotie Rx addresses patient and practitioner needs in key areas, including preventative wellness, sexual health and weight loss. It also further separates Biotie from our competitors by providing practitioners with a complete solution to promote positive health outcomes for patients. As we continue the phased rollout of Biotie Rx, we're focused on ensuring practitioners have consistent access to our expanded range of hormone and wellness therapeutics. To date, we've introduced 10 new products, including hormone formulations that provide efficacious alternatives to pellet therapy. We plan to further expand our formulary with additional hormone and therapeutic wellness products later in the year. Patient and practitioner response to our new offerings has been positive, highlighting what we believe is an attractive market opportunity for Biotie in the years ahead for practitioners, Biotie Rx will be offering valuable tools and resources, including a proprietary clinical decision support system that provides treatment recommendations formulated to individual patient's unique needs for patients. Our expanded bio TRX formulary enables them to conveniently receive hormone and wellness treatments from a single medical provider. In addition to our successful launch of Biotie Rx, we also closed our acquisition of Steria health, the manufacture of compounded bio-identical hormones in the first quarter. The integration of Steria is already underway, and we remain focused on expanding exterior health licenses to additional states. We believe Ostarine health advances our strategic objectives in the following key aspects. First, we are strengthening control over our supply chain, enabling us to generate product enhancements through the vertical integration of our manufacturing as we work towards achieving full vertical integration, we are also focused on driving productivity gains in our pellet manufacturing. Second, we are gaining expertise in the manufacturing of fiber 3D products, enabling us to provide a wide range of high-quality compounded medications. Later this year, we plan to open the Biotie lab and innovation processing center where we will develop innovative hormone and therapeutic wellness formulations backed by our own pharmacokinetic research studies. This is an exciting initiative for Biotie, which we believe will strengthen our competitive position and keep us on the forefront of innovation. Our commitment to training and continuing education remains integral to the Biotage method and serves as a key competitive differentiator, especially as we evolve into a single source provider of formal and therapeutic wellness solutions to optimize our growth and enhance the start-up experience for our new practitioners. We recently introduced a QuickStart program designed to streamline the onboarding process. At the same time, we are laying groundwork for more immersive and interactive diagnostic and advanced training for both new and existing practitioners. Through these enhancements, we aim to accelerate the revenue ramp from new clinics, improve our cost efficiency and extend our leadership position in both training and education.
I'll now turn the call over to Bob to discuss our financial results and provide our outlook for 2024.

Robert Peterson

Thank you, Terry, and good afternoon, everyone. First-quarter revenue increased 4.4% year over year to $46.8 million when compared to the same quarter in 2023. Procedure revenue grew 6.6% from the prior year period. A growth rate consistent with our performance in the fourth quarter of 2023. Nutraceuticals revenue decreased by 11.3% as we expected, primarily as a result of one of the Company's larger distributors exiting Nutraceuticals business during the fourth quarter of 2023. As I noted in last quarter's call, we expect to begin managing distribution of the products previously delivered by this distributor by the end of the second quarter of 2024. First quarter gross profit margin expanded by approximately 240 basis points, 71.4% due to product mix and effective cost management. I would note that this quarter's increase in gross profit margin was favorably impacted by lower nutraceutical sales, as mentioned earlier, as nutraceutical sales resume growth in the second half. As we expect, we anticipate consolidated gross profit margins should revert to historical levels.
Selling, general and administrative costs were $23.0 million compared to 23.1 million in the first quarter of 2023, excluding the impact of share-based compensation, litigation expenses and settlements unrelated to ongoing business transaction and M&A related expenses and other SG&A expenses would have been $20.0 million in the first quarter of 2024. Operating income was 10.4 million compared to $7.9 million in the prior year quarter, driven by revenue growth, improved gross profit margin and effective management of operating expenses. Net loss in the quarter was $5.8 million, inclusive of a $12.1 million loss due to a change in the fair value of the earnout liability. This compares to a net loss of $21.4 million in the first quarter of 2023, which included a $25.4 million loss due to the net change in the fair value of the earn-out liability. Adjusted EBITDA was $14.2 million with an adjusted EBITDA margin of 30.2%. This compares to adjusted EBITDA of $13.1 million with an adjusted EBITDA margin of 29.2% in the prior year period. Adjusted EBITDA and margins increased primarily due to higher sales, product mix and improved profitability compared to the first quarter of 2023. First quarter operating cash flow was approximately $7.4 million for positive cash flow and Q1 of 2024 was primarily related to better margins as Terry noted on April 23rd, 2020 for Biotie reached a definitive settlement in the company's litigation with Dr. Gary as Dan Hurwitz, BIO-key's founder, under the terms of the settlement Biotie has agreed to repurchase all of the 18.4 million shares beneficially owned by Dr. Dan Hurwitz at the time of the settlement at an average price of $4.17 per share, with the first tranche of shares being repurchased for $32.2 million on April 26th, 2024. The remaining shares will be repurchased over the next three years. Also pursuant to the settlement, the Company is canceling all 3.9 million unvested earn-out shares that were beneficially owned by DR documents at the time of the settlement.
Turning to our financial outlook for fiscal 2024, we reaffirm previously reported guidance with revenue of 200 million to $204 million and adjusted EBITDA of 60 million to $63 million.
As we look at the cadence of revenue and adjusted EBITDA for the year, we expect our financial performance to be weighted towards the second half of the year. Total revenue growth for the first half of 2024 is expected to be impacted by the transition in the nutraceuticals distribution channel and timing of seasonal promotions.
Now I'll turn the call back to Terry for closing comments.

Terry Weber

Thank you, Bob. Biote generated solid financial performance in the first quarter and achieved substantial progress against our strategic objectives. With the successful launch of Biotie Rx and the closure of the Listeria Health acquisition, we are strengthening and expanding our capabilities. We remain focused on providing a comprehensive approach to aging by delivering evidence-based, healthy aging and therapeutic wellness solutions to both practitioners and they're patients.
Now I'd like to open the call for questions. Operator, please begin the question-and-answer session.

Question and Answer Session

Operator

(Operator Instructions) Les Sulewski, Truist Sec.

Les Sulewski

Hi, good evening. Thank you for taking my questions. And can you perhaps give us a bit more color on the 6.6 procedure growth in Q1 on, can you comment essentially how much of that growth has contributed to new providers versus the top existing clinics?
And then second question would be on the five months of data that you now have with your 10 new products that you've rolled out to your first 100 clinics, perhaps give us some feedback on that and then what stage would you expect to roll out to the additional on clinics? And then I guess the third one would be on the eStara acquisition and just give us a little bit of a sense of your integration there. What sort of investments capital investments would you expect to and when you're looking to create new products from that? And is this based on preliminary feedback that you're getting from demand? Or are you looking to create a new market in that space?

Terry Weber

Great. So I'll start with the first question. Talking about the procedure growth year over year. That's 6.6%. As we had talked about, the first half of 2024 was going to reflect the back half of 2023. So we were pleased with that stable on growth or our ability to continue to grow. And the percentage, as it usually is is from existing clinics, the majority is moving those top tier clinics in-country continuing to grow their practices and then looking at indexing to grow that second tier of clinics into the top tier. And then we did have us as we've talked about before, we're very encouraged by those new clinics. We've continued to onboard them at a higher rate. We have high qualified well index practitioners that are coming to that training and that QuickStart program I referred to in my remarks, is performing better than it has on since I've been here since 219 to give really give us a quick start to those practitioners as they end up giving hormone optimization as they go back from training. So solid performance this quarter, and we're pleased to have it on balance and consistent with our expectations.
The second question that you had was on bio TRx. So those 10 new products were launched in February, mid February with those 100 initial providers. And the response has been very positive from both the providers and the patients. They really like the fact that they can have both the hormone products from us, not just the Colony, but other the additional products and have access with quick delivery and very consistent results so that that first hundred onboarded well with good response on the products we had a large provider leading well over 600 plus people in attendance to really look at then the launching of the second phase of bio TRx at this training meeting. So that we then ended up focusing on 500 new providers that will roll out in this second phase looking at those 10 new products and they're being very positively responded to. So as you know, we've got over 71 hundred providers. So this rollout will be systematic to 24, ensuring that we have consistent access, especially for those really popular products like GLP ones.
And then I will give the on a series of questions over to Bob.

Robert Peterson

Bailey on looking at Steria and thinking about the investments that we put in, I don't see where capital light operation. And I don't see us spending a significant amount of capital to get this this operation up and running. And then when we look at the strategic nature of the of the operation, I think expanding a little bit of capabilities from a machinery and a design perspective is going to be the primary primary investments that we take so I think that's really the focus that we have it better stereo.

Les Sulewski

Great.

Operator

John Kim, TD Cowen.

Jonna Kim

Thank you for taking my question. Just curious if you see a lot of expansion outside of your core markets at this point? And also any color around new product pipeline and how long it typically takes to get new products in the market? That would be helpful. Thank you so much.

Terry Weber

So I missed the first part of your question. Could you repeat that because it gapped out?

Jonna Kim

Yes, I'm just asking about how the pace of expansion outside of your core markets at this point? And how fast should we expect that on an annual basis? And then you had a second question was on around R&D and innovation video.

Terry Weber

On the first question, our geographic expansion is going very well. So we're seeing real pockets of good, good uptake on the new providers that we're bringing to training and their ability to really go into those new markets and start a practice. So you know, we've got a highly experienced sales force, the best on the hormone optimization certainly in the US, and they've really been able to index those providers that would be capable of having very successful hormone practices. So the expansion geographically is going well, and we expect it to go well through the rest of the year, and you'll be able to see those results second half of 24 and into 25 as those new markets develop. And I've tried to give some more color as we go on in the year on some of those new markets.
And then the second question, you had was on innovation products. So I think we have a real need in this country for these therapeutic wellness and wellness products on healthy aging. So we are developing those products. We've got a wonderful doctor. Doreen sat here, a very excellent functional medicine, doctor and formulator, and we are looking at providing those new products in those categories I discussed. And I think that innovation process is going well. What we have to ensure is that we have access to those products in all 50 states and certainly we're all aware available. Some states like California more limited, but getting that access and consistent delivery on those new products. So we're encouraged and it's moving effectively, it's not overnight.

Jonna Kim

Thank you.

Operator

Connell Glauber Jarlath, Jefferies.

Connell Glauber Jarlath

I think you have maybe follow up on one other one of the earlier questions on procedure growth, just to make sure that I heard was the is the primary driver of the growth, the existing clinics or have you ever broken out? Or could you give you a sense of how much of the growth has come from new ones.

Terry Weber

So the primary growth in that procedure, that 6.6 year-over-year procedure growth is in our existing clinics. And I would say there are two categories. One is that top tier clinic, we're continuing to expand our business and their increased amount of hormone optimization. The second is targeting that second tier clinics to move them into a top tier. And then always, as we've said, those new clinics provide on I don't give the exact numbers, but they provide that base to build over the next 18 months. So we are bringing more clinics to training quicker. And you'll see that acceleration in the second half of the year as that QuickStart program really gets them engaged in increasing their procedures in that first 90 days. So you'll see but three quarters or you know, and the greater one is from our existing clinics and really working with them to grow their business. And then on to a lesser degree on those new clinics, but they're performing well.

Connell Glauber Jarlath

Okay. How is the new clinic adds this quarter versus in the past?

Robert Peterson

I don't think you give a number, but you have better worse on the same pace that we typically as you know, we typically don't give specifics on your new customer adds, but one thing I can tell you as we look at the new customer growth, as Terry said, a little bit earlier, no one's better than biotech and bring in new customers into the online business.
And I can say that as we start to see, we're seeing a higher quality, new customer coming in the door. And I can tell you that we've never been more focused on who we're targeting and how we're how we're indexing. So I can tell you we're coming off of one of our best years since 2018 from an onboarding perspective of new customers. And as Terry said a big contributor to that is our is our QuickStart program, which is proving to be pretty effective.

Connell Glauber Jarlath

Okay, great. And maybe longer term, the as your business is evolving with Biotie Rx and such, which would be is there a different margin structure? How should we think about how the business might look?
Actually, there's two big kind of vertical integration and with the addition of new products, how should we just be thinking about what the P&L will look like over time below that revenue?

Terry Weber

But yes, the new products and then I'll pass it to Bob to talk about the margins in our stereo. I think if you look at 2024, I would look at it at a very nominal contribution on those new products in that we're getting a transaction fee. We're not actually manufacturing on those products yet. So we have acquired five O3b that will be in our future. But at this point, it's a transaction fee. So what it does though, it gives us that one-stop shop. Our providers are doing GLP ones and they are doing hormone optimization as a matter fact that a new training last Friday, 100 providers, I asked how many were doing GLP ones. Well, over a third were already doing GLP ones. So how testosterone in our core business works. With that side effect of the GLP ones and the loss of lean muscle mass. We really believe testosterone will be core to that conversation over the next few years. So that bio TRx becomes critical in what we educate on how we teach those providers to use both sets of products, right? So I think this therapeutic wellness category is only going to expand and you're not going to see the same type of a provider issue did two years ago your family practice providers and all of the OB GYNs everyone's expected to understand how to navigate these products and their side effects. And that's where Biotie really comes in. And then I'll let Bob comment on the integration.

Robert Peterson

Yes, I think Terry, you hit on it. I think right now when we look at the transaction fee and the it isn't going to be material to a year when you think longer term it would be great at some point to have to do what we're doing with the with the Steria to be fully integrated. But at this point, we don't really have line of sight into into executing that plan as of yet.

Connell Glauber Jarlath

Got it. Thank you.

Operator

George Kelly, Roth MKM.

George Kelly

Everybody. Thanks for taking my questions. So maybe to start with Steria.
Just to follow up on some of the questions that have already been asked, but I'm curious how quickly you expect to shift your core on core mine pellet production to that facility?

Robert Peterson

No, it's a really good question. Yes, when you see when we executed the closing date, obviously, we've been working quite quite diligently to get all of the strategic parts up and running. And I would just tell you we are we may be seeing a little bit slower uptake in the Q2 range as we have talked about in the past, we really want to hit the ground going against the ground running. I still think we are on a strong pace to deliver in the second half and I think everything is starting to line up in place. I think just the late start for based on the closing has caused a little bit of a slowdown in the beginning of Q2.
Does that answer your question, George?

George Kelly

Is it is it fair to say by year end, the vast majority of your pellet business will be produced internally?

Terry Weber

Yes, I think what we're talking about one-time, Bob, is trying to say is that we're looking at state licenses?
Yes, I'd say the vast majority by the end of the year, George, but the only thing we don't control is the state license from California or some of the other states that mandate their own timing and schedule as you convert licenses and Okay, and another thing just to keep Sarcom.

George Kelly

No, go ahead, but I Panera.

Robert Peterson

No, no. The only other thing I would say is as we start to convert and conversion process, there will be a little bit of a lag also due to the bleed down of inventory, existing inventory within clinics. So as Terry mentioned, very clear on how we obtain state licensure, but there could be that slight delay for people who maybe have are over-indexed on inventory as they bleed down when they start to take on new inventory. That will be another factor.
We'll have to watch closely.

George Kelly

Okay. That's helpful. And then next topic I wanted to cover is, relates to your on your guidance and commentary about your sort of 1.5 versus two have expectations on procedure revenue growth. I'm curious the 6.6% growth now that you've reported for two consecutive quarters, do you think that's the bottom? And then as you look to the acceleration that you've talked to in the back half? And is that mostly driven by new products? Or is it really just the core business kind of starting to find its momentum again, and new products are more of a 25 and beyond kind of story, I think we can kind of answer that multiple ways, George.

Terry Weber

So definitely that that two on one performance was consistent with our expectations. And we feel is that we understand our providers and we understand the competitive market. And I feel that we're very confident in where those are procedure revenue growth is going to come from in Q2 as well as Q2 three and four. So although we point you to Q2 three and four and we've got on solid Bob plans in place and really looking at that formulas and very comfortable with them for that Q3 and q. four. And I'll have Bob talk a little bit about some of the individual programs.

George Kelly

Yes, sure.

Robert Peterson

And George, good question. And we factored the following kind of piece parts into our guidance. I would say that the two big pieces. One is on the procedure side, and I'll just hit the high points and I can dive into any of them in more depth. But you heard from Terry you heard from me earlier, the heightened focus on our top tier growth. It is absolutely mission critical for us. We are seeing these performing well and we expect to have that play through in the second half.
Additionally, as I just mentioned, and I won't go into this too much because I've already commented, but we need to be growing new customers and we've seen with the quick starts and the other items that we've mentioned, a pretty solid uptick there. One that I think is we didn't dive into too much, but it's how do we drive those existing customers that may be newer or in the middle of their journey of their lifecycle with us, how do we start to drive them and leveraging our sales force and internal data to drive opportunities to really expand within our portfolio. And I think that's a that's a real key for us because the more people we can get into our top tiers, the better will perform. And Terry mentioned it earlier, and I guess I would just echo it the we do have a really great sales force that's really battle-tested in this area. And I think that's a that's key to mention. And the only other side of the equation that I would bring up is as we looked at neutrals we need to continue to expand new-to-cruise into our existing customer base, continue to make good penetrations, especially in those newer customers and even some of the older customers that may not be acclimated to neutrals, and that's a real focus of our sales force, and we're seeing good, good uptake there.
And then finally, as you know, and we've talked about on the prior call is that conversion from Amazon and from our prior distributor and seeing that growth because that should if we can get that up and running, which we're on pace to do in the second half that will be a very accretive.

George Kelly

Okay. That was all helpful. Thank you.

Robert Peterson

Thank you.

Operator

It's a question-and-answer session, and I'd like to turn the conference over back for any closing remarks.

Terry Weber

I'd like to say thank you to all of you for joining us. We look forward to updating you as the year goes on and on our therapeutic wellness and the real positive impact we're seeing on hormone optimization and the interest throughout the US. So looking forward to our next call. Thank you.

Robert Peterson

Thank you.