Description

Sanara Medtech (SMTI-$42.10, $370 million market cap, website)

Sanara’s stated goal is to improve patient clinical outcomes and lower the overall cost of healthcare in the surgical and chronic wound care markets through the deployment of evidence-based healing products and technologies.  The company is focused on developing and commercializing products and technologies to achieve this objective.   

SMTI has an exceptional management team led by Chairman Ron Nixon and CEO Zach Fleming.  Mr. Nixon is the architect behind Sanara’s vision to provide highly efficacious products and technologies for the treatment of surgical and chronic wounds.  Through the combination of high organic growth and successful strategic partnerships/M&A, we believe Mr. Nixon is well on his way to building a large company in the wound care market. 

Mr. Nixon is Founder of private equity firm Catalyst Group which owns 40% of Sanara.  Over its 32 years of existence, Catalyst Group has had several highly successful exits, including LHC Group (in process of being acquired by United Healthcare) and SportClips.  Interestingly, Catalyst’s interest in wound care was an outgrowth of its investment in LHC twenty-two years ago.  LHC is the largest home healthcare company in the US.   

Mr. Nixon has assembled a strong management team with deep management experience in the wound care industry.  Sanara’s management is composed of many former Smith & Nephew / Healthpoint executives, including CEO Fleming.  Healthpoint was acquired by Smith & Nephew in 2013 for $782 million (roughly 4x revenue)  and was based in Ft. Worth, Texas (like Sanara).  Smith & Nephew operates the second largest wound care company in the world and generated $1.5 billion in 2021 revenue at a 32% operating margin. 

Sanara revenues have grown organically at 40% to 50% since Catalyst Group took ownership in the company and, pro forma for the recent acquisition of Scendia, SMTI generated $51 million in estimated revenue in 2022, with 80%+ gross margins.  We believe SMTI can sustain organic growth rates of 40% for the next couple of years and expect the company’s evolving product portfolio, rapidly expanding distribution, and attractive strategic positioning to allow Sanara to grow to many multiples of its current size over the next five years. 

PRODUCTS

Surgical

Sanara’s lead surgical product CellerateRX (hydrolyzed collagen) accounts for the vast majority of revenue and shows no sign of slowing down.     

CellerateRX (Cellerate) surgical powder is composed of hydrolyzed fragments of Type I Bovine Collagen peptides that are approximately 1/100th the size of native collagen.  Cellerate is applied to the wound bed after surgery.  Cellerate penetrates the wound much faster than native collagens.  The small size of the collagen fragments allows the full benefits of the collagen to be incorporated into body.  Cellerate is indicated for the management of surgical wounds, traumatic wounds, partial- and full-thickness wounds, and first- and second-degree burns.  The manufacturing process for producing Cellerate is proprietary to the company. 

Sanara distributes Cellerate and HYCOL (non-surgical equivalent product) under a worldwide sublicense agreement that continues through 2050 with automatic yearly renewals thereafter.  The annual license fees are 3% to 5% of net sales.  We have conducted several due diligence calls with former employees of Sanara’s predecessor company; all individuals spoke enthusiastically about the healing properties of Cellerate.  

SMTI also has a portfolio of advanced biological surgical products which was meaningfully enhanced through the recent acquisition of Scendia.  Moreover, in 2023, upon expected FDA 510(k) approval, Sanara will introduce surgical cleansing product, BIASURGE, a highly anticipated companion offering to Cellerate, which should help further differentiate SMTI’s surgical product portfolio from the competition.  On the 3Q:22 conference call on November 15th, CEO Fleming noted the following, “…We believe that the product (BIASURGE) could have a significant impact, both on the surgical wound care market and our sales when commercially available.”

BIASURGE will be used to irrigate the surgical cavity pre-surgery and to cleanse the area post-surgery, allowing for a cleaner procedure, thereby reducing the chance of infection.      

Chronic Wound Care

Sanara R&D subsidiary Rochal developed FDA 510(k) approved BIAKŌS Antimicrobial WoundGel and BIAKŌS Antimicrobial Skin and Wound Cleanser.  These products cleanse and remove microbes; eliminate biofilm; attack bacteria; and create a safe environment conducive to wound healing.  Sanara also has a hydrolyzed collagen product for chronic wound care; the product is known as HYCOL.  The company’s recent partnership with Infusystem, which includes distribution of Cork Medical’s Negative Pressure Wound Therapy (NPWT) devices and supplies, will further expand the company’s offerings.

Platform

In addition to its surgical and chronic wound care products, Sanara has developed a platform of technologies that enable physicians to better diagnose, treat and track patients throughout the continuum of care and predict wound healing trajectory (this skin and wound care technology ecosystem is called WounDerm).  These products include: (1) a proprietary handheld diagnostic imaging tool (and smartpad) to measure and collect data on wounds; and (2) a wound and skin electronic medical record (EMR) system.  We expect WounDerm to be commercially available at some point in 2023. 

To date, Sanara has not aggressively marketed its products in the chronic wound care market.  The current standard of care reimburses wound care companies based on a fee-per-service basis and perversely incentivizes doctors and wound care companies to choose volume of treatments over outcome.  Management’s vision for chronic wound care is to leverage the treatment data collected through its WounDerm technology platform to develop clinical practice guidelines.  Using an evidence-based clinical treatment approach, Sanara expects to be able drive materially improved results for patients.  Trials are underway with more than one payor, and we expect a commercial agreement with one or more entities at some point in 2023.

SMTI’s vision for chronic wound care is captured in the slide below. 

RECENT DEVELOPMENTS: ACQUISITION OF SCENDIA AND DISTRIBUTION PARTNERSHIP WITH INFUSYSTEM

Scendia.  In July 2022, Sanara acquired Scendia Biologics for $7.3 million, not including a potential earnout of up to $10 million.  Scendia brought SMTI added horizontal distribution along with a full line of regenerative and orthobiologic products, including: (a) TEXAGEN Amniotic Membrane Allograft; (b) BiFORM Bioactive Moldable Matrix; (c) AMPLIFY Verified Inductive Bone Matrix; and (d) ALLOCYTE AdvancedCellular Bone Matrix.  We estimate that Scendia was acquired for 0.6x revenue, excluding the earnout.  The upfront consideration was $1.3 million in cash with the balance in stock.  Scendia management has joined SMTI.       

Infusystem.  On November 3, 2022, Infusystem and Sanara announced the formation of a partnership, SI Woundcare, LLC, targeted at improving patient outcomes.  The initial focus on the partnership is the distribution of Cork Medical LLC’s negative pressure wound therapy devices and supplies in combination with Sanara’s advanced wound care products to new customers.

NPWT is the largest segment of the wound care market.  3M, the largest global player in wound care, has a $1.2 billion+ franchise in NPWT (based on 2019 data), which it inherited from its acquisition of Acelity/KCI in 2019.    

SMTI management believes there is a large opportunity to capture market share in NPWT, by marrying Sanara’s wound care offering with Cork’s NPWT portfolio and leveraging INFU’s assets: a NPWT sales force; seven distribution centers; and complex billing capabilities.  Sanara has already transitioned a few of its employees to the JV.

DISTRIBUTION

SMTI currently has 36 sales reps targeting the surgical market.  In the trailing 12 months, Cellerate was sold into 662 hospitals and ambulatory surgical centers (ASCs), and it is now approved for sale in 1,712 hospitals/ASCs.  Management estimates the total market at 12,000 hospitals/ASCs.  The growth runway for Sanara is vast.  Not considering the recent acquisition of Scendia, SMTI has been selling only one product into 1/3 of its approved hospital footprint; this footprint is expected to continue to rapidly expand.  Layering in Scendia’s advanced biologics products and BIASURGE (expected commercial approval in 2023) into this rapidly growing distribution system should allow the surgical segment to deliver many years of robust growth. 

This does not consider the growth potential of the chronic wound care segment which is less than a $1 million business for Sanara today.

RECENT OPERATING RESULTS AND OUTLOOK

In the first half of 2022, revenues increased 55% with a 90% gross margin.  Due in part to easier comps, growth accelerated during the third quarter to over 70% on a pro forma basis.  Gross margin for the third quarter was 82%, reflecting the lower gross margin of Scendia’s product portfolio.  We estimate pro forma 2022 revenue of $51 million, approaching $74 million in 2023 and $110 million in 2024.  We assume $5 million of total contributions from chronic wound care and new products / BIASURGE in 2023, growing to $25 million in 2024.

Due to investments in R&D and in the technology ecosystem in advance of commercial introduction of the WounDerm platform, Sanara is not yet cash flow positive.  We expect the company to turn the corner and reach free cash flow breakeven in the first or second quarter of calendar 2023, consistent with management’s comments.   

With its rapid growth and a product portfolio characterized by robust gross margins, we look for Sanara to reach 30% operating margins in the long term.  This economic model has been proven by the likes of Smith & Nephew.  We expect to see operating leverage in the business in 2024 and 2025, in particular.  Given the attractive financial model of the business and its growth trajectory, we believe SMTI can trade at 5x 2024 revenue at the end of 2023, suggesting a price target of $61 in 12 months.  Applying the same math to our 2025 estimates yields an $85 target in 24 months, 100%+ upside from here.

RISKS

Revenue concentration.  Today Cellerate accounts for over 75% of total company revenue.  This is mitigated by our view that the product has a long runway of growth ahead.  Moreover, Sanara’s broadening suite of products and services (biologics, BIASURGE, Infusystem NPWT JV, chronic wound care platform) are expected to make meaningful contributions to revenue in 2023 and beyond.

Competition.  The wound care market is highly competitive with the largest players in the industry, 3M and Smith & Nephew, generating over $3 billion in combined revenue compared with SMTI’s tiny $51 million in pro forma 2022E revenue.  This presents an opportunity as well as a risk to Sanara.

Catalyst

CATALYSTS. 

1) Additional M&A.  We believe Mr. Nixon is highly skilled in capital allocation and will continue to identify partnerships and acquisitions which will contribute to the company’s growth;

2) Organic growth from existing + new products.  We expect Cellerate, BIASURGE, Scendia’s recently acquired biologics products, the Infusystem NPWT JV, and the company’s yet to launched chronic wound care platform to be material growth drivers over the next 24 months;

3) Inflection to FCF positive in first half of 2023.