Description

There are clear lines of sight for this smallcap to become a midcap. Some may quibble that it’s a growth name, but I deem this firmly in the value camp for three reasons 1) Strong sales of its key initial product, which could justify the whole market cap  2) A bullpen pipeline of six additional emerging products launching near-term and 3) A management team that has done it before, having built and monetized larger companies, with a bench depth and experience that isn’t often found in smallcaps of this size.

It’s a heathcare/med-tech in the Wound Care vertical.  This sector is historically characterized by fragmented coordination of care for patients, low product innovation, and lack of early and accurate diagnosis for chronic wound and dermatologic conditions.  The company is a disruptor introducing unique products and services, direct to providers and patients, to improve outcomes and lower overall costs throughout the continuum of care. 

Grouped by topic, here’s the bullet points:

Key initial product – CellerateRX
(Surgical Activated Collagen – prevents surgical complications/infections):

• ·        A $20m sales run-rate at Q1, at 90% gross margins, and growing fast under rapid commercial adoption.

• ·         At year-end 2020, sold in 291 Hospitals & Ambulatory Surgical Centers (ASC).

o   At March 31^st facilities who had approved CellerateRX to be sold was up to 850. 

o   By now, it’s much higher.

• ·         Utilization/penetration rate in hospital expands in year 2, as use expands among more surgeons.

• ·        Good news on efficacy is spreading among surgeons organically, and via medical conferences, leading to signups of larger hospital & ASC chains, and Integrated Delivery Networks (IDNs).

• ·         In the US only, the TAM is ~12,000 facilities, with 6,090 hospitals, and over 5,700 ASC. 

• ·        Penetration will ultimately be very high… may take a few years.   Rear looking to 2020 they’re at approximately 77 CellerateRX uses per hospital which is less than 1.5x per week.  Room to grow.

• ·       Over $28B total annual treatment costs for surgical and chronic wounds.  15.3m surgeries in the US annually, with $11.7B of medicare spend on surgical wounds including complications.

• ·         High efficacy:  In gel and powder forms, this product protects surgical wounds from infection… leading to better patient outcomes with lower costs of treatment.  A 2017 study of 100+ consecutive neurosurgical patients in a row treated with CellerateRX show zero infection rate.  Small sample size, but powerful results…  

• ·         It catalyzes growth of hydrolyzed collagen which the body naturally creates to heal a wound… a different type of approach.

• ·        Current industry data shows 2-4% average infection complications across all surgery types. Subsectors have much higher rates of complications such as 6-7% for spine & neck surgeries, and rates of 25%+ for brain tumors.

• ·        Surgical wounds becoming seriously infected is a major cause of patient mortality, and leads to a 61% higher rate of re-admission, and $40,000+ in additional hospital charges for re-operations, and extended rehab or hospital stays.   With great dangers to patients such complications account for a tremendous portion of overall costs, which are paid per capita/wound (not by level of complication/complexity).  

• ·        Some sad math from the National Brain Tumor Society:  In 2021 an estimated 84,170 people will receive a primary brain tumor diagnosis.  Statistically, over 59,040 will be non-malignant, but the survival rate for this group is only 91.7%... So 8.3% (4900 people) are dying from the surgical procedure to have it checked out.  For malignant tumors, the survival rate is sadly only 36%.  This brain tumor population alone should be a $60m per year business for CellerateRX, that will save a great many lives.

• ·        Fast growing areas, such as hip and knee replacement surgeries (1m+ per year in US), have high incidence of revision surgery (when initial implantation must be redone). 

• ·       Improved patient outcomes with minimized post-acute care costs.

• ·       The high margins allow material operating leverage as this grows into a bigger product, with meaningful drop-down to the bottom line at relatively small sales levels, into which we have clear near-term visibility...  Growth MedTech comps trade at very rich valuations of EV/Sales. 
  
  
•      Five years out with 15%+ market share on 15.3m annual surgeries in the US implies $1.6B+ of sales... SNN (with wound care their highest margin business line, and single digit overall rev growth for a decade) trades at 3.5x sales overall, and 24x EPS.  That would put SMTI firmly in mid cap land with a $5.6B value. ...one can dream, but there is blue chip potential.  Hope it gets acquired on those terms.  

Pipeline of near-term products:

• ·       Precision Healing (Diagnostics) – A handheld diagnostic tool & smartpad for accurate diagnosis with appropriate treatments, has abilities to address wound bacteria & host response.  Continuum of care from Hospitals to Elderly Care facilities to home use.

• ·       WounDerm (Virtual Care) – A wound and skin electronic medical record (EMR) system/app, designed to connect wound and skin care providers across the continuum of care.

• ·      Mgroup & DirectDerm (Telemedicine) - Physician led virtual wound care (ie Tele-visits via internet), Synergistic and utilizing tools from the above technologies (often operated by a local nurse or tech), offers prompt, scalable, low-cost physician involvement in post-acute monitoring.

• ·      BIAKOS Antimicrobial – Skin & Wound Cleanser, Wound Gel, Irrigation Solution.  HYCOL powder and gel.  Generally speaking, these clean, seal, and create barriers to infection.

• ·       Emerging Tele-Dermatology market expected to grow to over $45B by 2027.

• ·       With nearly nothing in the stock for these pipeline products, a hit with any one of them would be material.  Multiple successes would be a game changer.

• ·       Introductions beginning summer 2021 through year-end.

• ·       Second gen products planned for 2023.

• ·       Sold by Company Reps supplemented by major medical-surgical distributors, independent distributors, & DME companies into post-acute care settings including Long-Term Care facilities, Home Health, Wound Care Centers, and medical offices.
  
  

Management Team:

• ·      Ron Nixon of PE firm Catalyst Group is Chairman.  Catalyst has nurtured several healthcare companies from startup to mid/late stages and or public listing, including:

o   LHR Group (LHCG - $6.5B mkt cap) a leader in home health

o   Rochal (private) a leader in outsourced R&D for regenerative medicine & transdermal drug delivery.  It helps create synthetic polymers, antimicrobials, and biological systems.

• ·       Partnerships:  Rochal is a partner handling SMTI’s outsourced R&D at advantaged pricing.  LHR has synergies for post-acute continuity of care.  Cook Biotech is a supply partner for Sanara to purchase, market and distribute three additional advanced biologics products launching this year (Fortify – Tissue Repair Graft, Fortify Flowable – Extracellular Matrix, VIM Amnion Matrix).

• ·       Team:

• ·       From the Smith & Nephew wound care division:

o   Vice Chair Michael Carmona

o   Surgical division Pres & COO Shawn Bowman

o   Wound Care division Pres & COO Zach Fleming

o   CFO Mike McNeil

o   Clinical Director Sue Dieter (HealthPoint)

o   Key execs all come from HealthPoint, which upon acquisition in 2012 became the wound care division of Smith & Nephew (SNN – $19B mkt cap, - Wound Care division $1.3B revenue (28%)).

o   Several other execs have backgrounds with Catalyst backed companies (LHC, Rochal), or at Healogics, which has 600 wound care centers in the US.

• ·       It is uncommon to see a team like this… long-term collaborators with deep experience and previous monetization history, pre-assembled at a small cap…  A harbinger of bigger plans.

• ·       SMTI’s HQ in Fort Worth, TX is located proximate to Smith & Nephew’s wound care HQ.
  
  

Disruption:
Current…

• ·         An antiquated per capita fee-for-service model puts emphasis on payment “codes” to maximize revenue.

• ·         Efficacy and outcomes are NOT aligned with reimbursement, nor with costs of complications.

• ·         No continuity of wound care follows the patient, inconsistent care throughout the continuum:

o   Hospital > Long-Term Acute Care > Skilled Nursing Facilities > Senior Care/Home Health

• ·         Little industry innovation past 20 years.

Future…

• ·       Value-based purchasing of evidence-based healing.

• ·       New diagnostic tools for better/faster/earlier/more accurate treatment.

• ·       Consistent care throughout the continuum, with Physician & Clinician continually involved, using telemedicine / virtual consult technology combined with EMR & ‘Smart’ tools.

Other:

• ·      $29m raised in Feb at $25 per share… an in the hole offering apparently to “Friends of the Firm”.

• ·      Cantor Fitz did the offering, and is the only current coverage.  More will come.

• ·      There is high insider ownership with approximately 64% held by: Insiders (19.9%), Catalyst Rochal (32.2%), and insider affiliates (12.6%).

• ·      Good shareholder alignment among all parties: Catalyst, Mgmt, Partners. minority holders
  
  
•     Some future offerings might be needed but I'd expect the share count to stay well under 10m outstanding (currently 7.6m). If they sold another 2ms shares at $40-50 per share it brings in $80-100m which is enough to launch all their pipeline without taking on debt or using internal cash flows. 

• ·      For CellerateRX, they charge ~$700 per use.  This is quite a bargain when you consider the cost of complications for even just one additional night of hospital stay, let alone re-surgery or extended rehab costs which can be extreme.

• ·      There are 15.3m US surgeries per year.  If they picked up just 10% or 1.5m of the patients at higher risk of complications (Brain, Spine, Hip & Knee alone is ~1.7m people), CellerateRX would have sales over $1B.  If it got high penetration for many other types of surgery, this product alone would make SMTI a very blue chip company.  …So there’s some potential here.

Catalyst

• ·         Currently deserves a growth Medtech multiple of 12x-15x sales versus current ~10x.  5 year in future possibilities at modest market share penetrations imply 10 bagger+ to valuations of current comps. 

• ·         News on sales, patient outcomes, etc.

• ·         Traction from pipeline products.

• ·         Further penetration with Hospitals/ASCs.

• ·         Greater quantity of surgeon penetration within individual hospitals/ASCs

• ·         Further efficacy data.

Risks:

• ·         Reimbursement rates, govt price controls, medicare revamp, etc.

• ·         Key partner relationships fostered by Catalyst Group backed companies, could potentially squeeze terms, instead of providing friendly terms. 

• ·         Theoretical new competitive products.

• ·         The unknown / sinkhole risks