Exciting growth

Collagen Solutions (COS) is a biomaterials company developing and manufacturing biomaterials for use in medical devices, research, and regenerative medicine. A number of investment initiatives have been introduced to accelerate the rate of growth, including global commercial infrastructure and the development of a pipeline of proprietary finished medical devices, the first of which will be ChondroMimetic for repair of small cartilage lesions. Benefits of the investment in marketing were very apparent in the results for 1H’19, with like-for-like sales up 55% and a large reduction (48%) in EBITDA losses.

• Strategy: Management has embarked on a series of initiatives to increase the growth opportunities. This strategy is moving COS from solely a collagen supplier to one that also develops OEM and proprietary products to reach profitability sooner, as evidenced from the sales mix in recent 1H’19 results.
• ChondroMimetic: COS has re-submitted ChondroMimetic to its Notified Body for CE marking, supported by excellent eight-year clinical data. Timing is difficult to predict, given the external regulatory process. Several initial commercial distribution partners have already been announced for Europe and Asia.
• Trading update: Reported product sales in 1H’19 were up 13% despite the known expiration of a supply contract in Korea. On a like-for-like basis, sales increased 55%, with an improved mix. Additionally, restructuring and a greater focus of resources resulted in a 48% reduction in EBITDA losses to -£0.62m.
• Risks: All companies focused on leading-edge technology carry risk. However, there are a limited number of suppliers of medical-grade collagen and tissues which, once-embedded in a customer product, is difficult to replace. Also, COS will soon have ChondroMimetic de-risked through CE marking in the EU.
• Investment summary: ChondroMimetic fulfils COS’s stated strategy to move further up the value chain. The imminent re-validation of ChondroMimetic via CE marking will represent an important milestone and allow management to conclude further commercial deals with a de-risked proposition. COS commands an EV of just £13.4m, which means that it is trading on a prospective EV/sales of only 2.7x, which does not reflect properly the growth opportunity.