Earnings Call Transcript - BTMD Q4 2023

Simon Serowiecki, IR Representative

Thank you for joining us today. This evening, biote published financial results for the quarter and full year ended December 31, 2023. 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 would 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, manufacturing and commercialization activities, business operations, the impact of macroeconomic conditions on its business, results of operations, financial conditions and other matters. These statements are not guarantees of future performance. They are 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 statements. These statements are subject to risks and 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 representing the company's views as of any subsequent date. For a 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 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. A reconciliation of the non-GAAP to GAAP measures is provided in our earnings release, with the primary differences being stock-based compensation, fair value adjustments of certain liabilities, transaction-related expenses and other non-operating expenses. Please refer to our fourth quarter and full year 2023 earnings release for a reconciliation of adjusted EBITDA to net income, the closest comparable GAAP measure.

Terry Weber, CEO

Thank you, Simon, and thank you all for joining us. On the call with me today is Bob Peterson, our Chief Financial Officer, who will review our financial results and discuss our outlook for 2024. Mark Beer, our Executive Chairman, is also on today's call to help you answer your questions during the Q&A session following our prepared remarks. 2023 was a pivotal year for biote, in which we achieved significant strategic progress and built a solid foundation for continued growth in the years ahead. Among our accomplishments this year, we added new talent to our leadership team and made key investments to strengthen our capabilities at the corporate level. We also optimized our sales territories to more efficiently manage our growing nationwide practitioner network. We remain focused on our core hormone optimization business, leveraging our strengths in training and education to further expand our practitioner network. As we continue to evolve to meet patient and customer needs, we substantially broadened our addressable market opportunity with the launch of two strategic initiatives. First, to address the large and underserved opportunity in men's health, we began working in close partnership with certain biote providers to expand their treatment programs for men. We also partnered with key opinion leaders to promote awareness of the benefits of hormone optimization in men. Additionally, we've expanded and enhanced our hormone optimization practice to encompass evidence-based wellness therapeutics. Over the past six months, we successfully trialed a range of complementary wellness therapies delivered via our proprietary technology platforms. By providing complementary wellness therapies, biote is further enhancing patient health while expanding and monetizing our existing hormone practice. We're also enhancing the value that we provide to our growing network of practitioners. Fourth quarter 2023 adjusted EBITDA increased by approximately 3% compared to the fourth quarter of 2022. Similar to our performance in the third quarter of 2023, fourth quarter procedure revenue increased by 6.6%, reflecting a consistent demand for our core hormone therapies. I'm pleased with the initial success of our sales optimization strategy, which is helping to drive more consistent rates of procedure revenue growth among our top-tier providers. We are also working to more rapidly onboard new biote certified practitioners by offering a variety of training modalities, including both in-person and online options. Consistent with our expectations, fourth quarter nutraceuticals revenue decreased, primarily driven by one of our larger distributors exiting the business during the quarter. As we transition the products previously sold by this distributor to our own online storefront, we anticipate our nutraceuticals business will resume year-over-year revenue growth starting in the second half of 2024. In 2023, biote reported consolidated revenue growth of 12.4%, which included procedure revenue growth of 9.3%. Throughout the year, we maintained strong profit margins, enabling us to achieve double-digit growth in adjusted EBITDA for the year. Further underscoring our focus on driving profitable growth, we generated approximately $27 million in operating cash flow for 2023. Following our successful commercial trial of complementary wellness therapies, I'm pleased to report that in February, we launched BioteRx, our new hormone and therapeutic wellness offerings. We believe BioteRx is a game changer for biote, significantly strengthening our competitive position. With the launch of BioteRx, we're transforming into a single-source provider of evidence-based hormone and therapeutic wellness products. We are now addressing both our patients and our practitioners' needs across a range of wellness categories, including weight loss, body composition, sexual health and preventive wellness. We are taking a phased approach to the rollout of BioteRx, ensuring that we provide our practitioners with consistent access to an expanded range of wellness therapeutics. To start, we've introduced approximately 10 new wellness therapeutic products. Our sales force is excited and energized to offer these products, which are among the most requested therapies by both our patients and our practitioners. In January, we announced the purchase of Asteria Health, a manufacturer of compounded bio-identical hormones. We expect to close this acquisition by the end of March. We also recently announced a settlement agreement with Dr. Gary Donovitz, biote's founder, to repurchase all 18.4 million of his outstanding shares and paired interest at an average price of $4.17 per share. We believe these repurchases will be accretive to shareholder value. The settlement with Dr. Donovitz also resolved legal claims between Dr. Donovitz and biote, eliminating the cost and distraction of protracted litigation. Before I turn the call to Bob, I'd like to express my gratitude to the entire biote team for their dedication over the past year. biote has achieved significant progress against our strategic objectives, and we enter 2024 with a solid foundation to grow upon. I'm proud of what we've accomplished and look forward to updating you on our continued progress throughout the year. I will now turn the call over to Bob to discuss our financial results and provide our outlook for 2024.

Bob Peterson, CFO

Thank you, Terry. It is great to be here, and I look forward to meeting all of you in the months ahead. biote generated full year 2023 revenue of $185.4 million and adjusted EBITDA of $55.3 million, representing growth of 12.4% and 10.2%, respectively, from 2022. The increases were driven by growth in both procedure revenue and nutraceutical revenue. Fourth quarter revenue increased 2.7% year-over-year to $45.7 million. Procedure revenue grew 6.6%, but was partially offset by a 14.6% decline in nutraceutical revenue. The decline in nutraceutical revenue was primarily driven by one of biote's larger distributors opting to exit the nutraceutical business during the fourth quarter. We expect to begin direct-to-patient distribution of the products previously delivered by this distributor by the end of the second quarter 2024. Fourth quarter gross profit margin expanded 403 basis points to 69.4% due to product mix and effective cost management. Selling, general and administrative costs were $26.2 million compared to $21.8 million in the fourth quarter of 2022. Excluding the impact of share-based compensation, litigation expenses and settlements unrelated to ongoing business, transactions and M&A-related expenses and other, SG&A expenses would have been $19.6 million in the fourth quarter of 2023. Operating income was $5.5 million compared to $7.3 million in the prior year quarter as higher revenue and gross profit were more than offset by higher expenses, primarily for professional services. Net income in the quarter was $12.1 million, inclusive of a $5.4 million gain due to a change in the fair value of the earn-out liability. This compares to net income of $12.8 million in the fourth quarter of 2022, which includes a $6.9 million net change in the fair value of the earn-out liability. Adjusted EBITDA was $13.6 million, with an adjusted EBITDA margin of 29.7%. This compares to adjusted EBITDA of $13.1 million, with an adjusted EBITDA margin of 29.5% in the prior year period. Adjusted EBITDA and adjusted EBITDA margins increased primarily due to higher sales, product mix and improved profitability compared to the fourth quarter of 2022. Fourth quarter operating cash flow was approximately $7.0 million and totaled $26.9 million for the full year. As Terry noted, this past month, we reached a settlement agreement with biote's founder to resolve outstanding litigation and repurchase all of his shares and paired interest. Supported by our solid balance sheet and cash flow, we are well-positioned to execute on this share repurchase, which will occur over a period of 3 years on fixed terms. We believe this is an effective use of our cash and will be accretive to shareholder value. Separately, we recently announced a $20 million share repurchase program, further reflecting our commitment to enhancing long-term shareholder value. We began to execute against this program early in February. Turning to our financial outlook for fiscal 2024. We expect to achieve 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 in the first half of 2024 is expected to be impacted by the transition in the nutraceutical distribution channel and timing of seasonal promotions.

Terry Weber, CEO

Thank you, Bob. biote remains committed to enhancing patient health while delivering profitable growth for our stakeholders. As we look ahead to 2024 and beyond, we are confident biote remains well-positioned to become the leading single-source provider of evidence-based therapeutic wellness solutions. Our addressable market is substantial, and we have only just begun to tap into the growth opportunity in front of us. With that, I'd like to open the call for questions. Operator, please begin the question-and-answer session.

Operator, Operator

Our first question today comes from Les Sulewski of Truist. Please go ahead.

Les Sulewski, Analyst

Good evening. Thank you for taking my questions. I'll start here on the guidance. Can you just walk us through some of the puts and takes around the guidance that you narrowed down? And how comfortable are you on that range? And then separately, what would you say is the right size of the sales force, and how has been the geographic expansion and international expansion trending?

Terry Weber, CEO

So I'll have Bob answer the first half of the question, Les, and then I'll take the second half.

Bob Peterson, CFO

Hey Les, how are you? As we consider the guidance, we've assessed the business plan and believe we're in a strong position for both our core procedure business and nutraceuticals to contribute to revenue growth in the second half. I feel confident about these plans, which are incorporated into our guidance. Looking at 2024 procedure revenue growth, we anticipate it will reflect the first half's performance, as mentioned earlier in the prepared remarks. Regarding the nutraceutical guidance, our main goal is to take control of the Amazon distribution channel by the end of the first half, which will help us potentially return to growth in the second half. Transitioning from wholesale to retail sales will also benefit the business. For our core operations, we see that our core providers remain robust and steady. We expect to see some margin improvement in the latter half due to the Asteria integration and anticipate ongoing growth in our practitioner network.

Terry Weber, CEO

I will address our sales force optimization. We have made progress in this area as we expand into what we're now calling green space. We're seeing strong advancements as we bring doctors into our training more quickly, and both our new and existing teams are accelerating the ramp-up of these clinics. Our focus on sales optimization appears to be effective. We have also brought in key talent and upgraded our data systems to provide actionable insights for individual territories. Domestically, we are very pleased and will share further updates on our achievements in the new green space sectors, including the Mid-Atlantic, Midwest, and West Coast. We will also provide more information on the key talent we've brought in. Things are looking positive. Internationally, we are observing significant progress in our current domestic operations, especially in our focus on domestic and Puerto Rican business. We've also broadened our offerings with BioteRx, and that sales force will be implementing its rollout this year. We believe that our domestic focus this year is critical. As we look to the latter half of the year, we expect to begin seeing the impact of new practitioners and the ramp-up of new clinics.

Les Sulewski, Analyst

Very helpful. I appreciate that. One more, if I may. So when we look at the economics and the revenue split that you've shared before, how has the new wellness product offerings changed the dynamics of the economics, if at all?

Terry Weber, CEO

This would not be the year 2024. It will have a marginal impact. What it really allows us to be is more competitive in our core hormone business. So I would not look for financial, I would look for competitive strength as we offer that wellness therapeutics. We rolled out that program in February. We're calling it BioteRx. So we've rolled it out to 100 clinics. We'll be looking to roll it through the remainder of '24 in a very methodological fashion, ensuring access and that the program works very well through our tech platforms, but look to impact in 2025 on that program.

Les Sulewski, Analyst

Excellent. Thank you.

Jonna Kim, Analyst

Thanks for taking my question. Just expanding a little bit on those BioteRx, and also you mentioned expanding treatment in men's health, how large do you think those new initiatives can become over time and sort of the incremental benefits that can bring to the business? And then just one more question on gross margins. How should we think about gross margins for the year? What are some key puts and takes we should consider? Thank you.

Terry Weber, CEO

I will discuss the male market and its expansion. As previously mentioned, this is a significant market with over 45 million men over the age of 40 affected, indicating a large total addressable market. This segment is also undertreated, with only 10% to 12% of men seeking any treatment. Our focus on this area will greatly enhance Biote's value by expanding our consumer base. Additionally, we anticipate growth in male procedures over time, particularly as we engage urologists and other practitioners. The BioteRx and wellness therapeutics sector has a substantial total addressable market, which will continue to grow. The wellness market is valued in the billions, and we aim to delve deeper into its impact on our business. We will provide more details about this impact later in the year as we implement our initiatives. This will strengthen our competitive stance in hormone treatments, as these are the services both providers and patients are requesting. Being the sole provider of both therapeutic wellness products and hormone treatments establishes our one-stop shop as a significant competitive advantage.

Bob Peterson, CFO

Regarding your question about margin, I don’t expect any significant changes in our sales-to-margin ratio. With the Asteria acquisition, we anticipate that as we vertically integrate the pellet manufacturer, we will see margin improvements over time, especially as we begin to increase volume to Asteria in the latter half of the year. I believe that most of the margin benefits, along with some EBITDA gains, will be evident by the second half of 2024 as we fully integrate by the end of that year. That’s the best guidance I can provide at this time.

Jonna Kim, Analyst

Thank you so much.

George Kelly, Analyst

Hey, everybody. Thanks for taking my questions. So maybe to start, Terry, you said in your prepared remarks that you’re planning to provide training both in-person and online. And I’m just curious, do you offer any online training or have you historically offered in the online training? And if it's new, how much of an acceleration do you think? Like is it a big deal, and could it really create an acceleration to onboardings?

Terry Weber, CEO

Good question, George. Yes, we have offered it. We became quite proficient during 2020 when we trained on these therapeutic products and other hormone products that we are rolling out. So we know it works well, and we have done it before. Throughout 2023, we have explored optimizing a hybrid method of online training and in-person proctoring, because this is a complex area. We have achieved real success with what I would describe as a hybrid training method, as well as complete digital training. We have been analyzing the results and evaluating how clinics and providers perform, their depth of knowledge, their execution of procedures, and the growth of their clinics. We have observed very positive results from adding the online component, particularly the hybrid method, and we will be expanding that. While we haven't quantified the impact yet, it will facilitate acceleration in the second half of the year in terms of the number of practitioners we can train using this efficient blended approach.

George Kelly, Analyst

Okay. That's helpful. I have a couple of questions regarding guidance. First, in the press release and your prepared remarks, you mentioned an acceleration in procedure revenue growth for the second half. I'm curious if this is due to any benefits from your new products or if it's primarily driven by the hormone segment of the business. Second, concerning Asteria, how much of your production do you anticipate shifting to Asteria by year-end? Looking beyond year-end, do you expect to produce the majority or a vast majority of pellets?

Terry Weber, CEO

I'll address the first question regarding the acceleration of BioteRx. We anticipate that BioteRx will significantly enhance our core hormone business in 2024, particularly in the latter half of the year as we add more clinics to the platform. This integration will provide a single source for the hormone segment, which we expect to positively influence that area of the business, though the effects on our overall guidance will be modest. In 2024, we foresee a modest impact, but we believe it will have a very favorable effect on both the hormone and the combined therapeutic business in the latter half of the year, with continued expansion into 2025 once fully implemented. For the Asteria updates, I'll turn it over to Bob, who has been closely involved with the details.

Bob Peterson, CFO

Sure. As we wait for the closing date, which we expect will be by the end of the month, we're progressing with our planning. This will enable us to start effectively when the closing occurs. We recognize that vertical integration is crucial to our business and anticipate being fully integrated by the end of 2024. The significant next step involves onboarding all the licenses, and we do not foresee any manufacturing challenges. We expect to have everything fully integrated and all licenses established by the end of the year for complete integration. Given how this phases out, we'll boost our volume in the second half of the year. That's our perspective on the situation.

George Kelly, Analyst

Understood. Thank you.

Richard Magnusen, Analyst

This is Richard Magnusen. I'm calling in for Jeff Van Sinderen. Thank you for taking our call. My first question here is regarding the products you're introducing, I believe you said they're being rolled out to 100 clinics. Are they all being offered at this point? And if not, what is the cadence there? And also, how is the doctor training being managed to accommodate all these new products?

Terry Weber, CEO

So for those clinics, it will be the first 100 being offered to the 100. So that just began in February. So these are being on-boarded through our sales staff as well as our Chief Science Officer, who's providing the product training on those 10 products. These are 10 products that we've educated on before, actually starting in 2020. So many of our providers are very comfortable. Some of the products are products that we have taught for all 12 years. So that's where we're comfortable with that training on that product. We're providing the guidelines, and then we're rolling out in a very measured way. So we've made all 10 products available to all 100. And that just began in February, so you'll need to stay tuned as we roll that piece out and grow the number of providers. But we are very comfortable, we are actually monetizing these products for the first time, and we are pleased about that.

Richard Magnusen, Analyst

Okay. And then sort of related to that, besides the GLP-1s, what are the most significant new products right now in terms of how they're being applied, application by practitioners? And are there any standouts in terms of demand by patients?

Terry Weber, CEO

We are not providing individual discussions on those products right now because it's a brand-new program. We will address that at later dates, but we have observed provider acceptance for all the products, and we are eager to see how their ordering patterns develop. Since we just started this in February, we will be able to discuss it in more detail in the future. Many of these products are prescribed to almost all female patients with specific attributes, such as those related to progesterone. We will provide more information soon. The categories include hormones, sexual wellness, weight loss, GLP-1s, and body compositions. We will discuss these in greater detail as we gather more findings from early providers.

Kaumil Gajrawala, Analyst

Hey, everybody. Can you provide a six-month progress report on what you learned from the first group of franchises that joined the BioteRx wellness plan starting in February? Additionally, could you explain how the economics will change as more clinics become involved?

Terry Weber, CEO

February was just last month, so our observations so far are very preliminary. We won't delve too deeply into that right now because these are initial orders and products. It's too soon to make any comprehensive comments. We'll provide more updates later as we gather further details. There has been positive feedback and strong interest in the initial rollout. As we mentioned, we expect a modest contribution in 2024, with a more significant impact in 2025. This allows practitioners to utilize our technology platform for products they previously had to source from various places. Essentially, we're becoming a single-source provider for those clinics, helping them realize the efficiency of our platforms and our service. This focus enhances our competitive position in the core hormone business, and it genuinely assists providers who are experiencing increased interest in weight management and related areas, enabling them to manage their operations more effectively. However, to reiterate, these are just initial orders that went in less than four weeks ago.

Kaumil Gajrawala, Analyst

Got it. Okay. And then Bob, you made some commentary on Amazon and some shifts in distribution. Could you just maybe explain in a little more detail what that meant?

Bob Peterson, CFO

Well, yes. As mentioned earlier, we faced some challenges with our third-party managing our Amazon relationship in Q4. One of the main areas we're focusing on now is bringing that in-house to improve our retail sales compared to wholesale. This approach will give us more control and potentially enhance our management. The key point is that we plan to transition by the end of the first half and aim to scale this in the second half of the year.

Kaumil Gajrawala, Analyst

Okay, great. Thank you.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Terry Weber for any closing remarks.

Terry Weber, CEO

Thank you for joining us on this call this afternoon. We're looking forward to updating you on our progress in the months to come. Have a good evening.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.