Operating leverage

Tissue Regenix (TRX) is focused on the development and commercialisation of two proprietary processing technologies for the repair of soft tissue (dCELL) and bone (BioRinse). It has a broad portfolio of regenerative medicine products for the biosurgery, orthopaedics and dental markets. 1H’22 results provided further evidence of the benefits of TRX’s strategic activities over the past two years, with the combination of sales growth and operating efficiencies driving the company rapidly towards EBITDA- and cashflow-breakeven. Additional efficiencies identified in San Antonio’s capacity expansion give greater flexibility to the start of Phase 2.

• Strategy: TRX is building an international regenerative medicine business around its proprietary technology platforms, underpinned by compelling clinical outcomes. Phase 1 of its manufacturing capacity expansion programme came on stream in July 2021 to satisfy demand from distribution partners for its innovative products.
• Interim results: 1H’22 results were marginally better than forecast, which benefited from the trading update provided in July. Underlying sales rose 27%, to $11.84m ($9.43m), and the EDITDA loss was reduced greatly, by 59%, to $0.65m ($1.61m). Gross cash at the period-end was $6.17m.
• Outlook: Strong sales growth was seen in all three divisions, and is expected to continue through 2H’22. With increased operating efficiencies and close control of corporate costs, the sales growth is providing leverage towards profitability, and TRX is now expected to become EBITDA-positive during 4Q’22.
• Risks: To some degree, forecasts are dependent on the continued recovery in elective surgeries in the US – so we are mindful of a potential outbreak of winter COVID. Also, in the current economic climate, labour shortages within partners and healthcare institutions, and supply chain challenges, may constrain growth.
• Investment summary: TRX has a broad portfolio of innovative regenerative products that are in demand from surgeons. Completion of Phase 1 of its capacity expansion programme and reorganisation of the whole facility have led to operating efficiencies and comfort of supply to distribution partners. In our opinion, TRX is well-positioned to deliver persistently strong sales growth, which will drive margin expansion and highlight the low rating of the shares. An EV/sales multiple of 4x 2023E sales generates a valuation of $122m/£110m.