After a twenty-year history, AorTech has started to live up to its rich asset base in medical devices. A management restructuring, reduced cost base and business alignment was complemented by a fund raising in June 2018. The progress made since the fund raising has been noted by investors and the share price has nearly tripled in 20 months. Investors may worry that they have missed the opportunity in AorTech, but we think the alignment and maximisation of assets has probably only just begun.
The AorTech of 2020 is quite different to that of 15 years ago and the company starts the new decade in a good position. AorTech has royalties from Elast-Eon – its biostable family of co-polymers for medical devices – plus two other product divisions that now comprise AorTech. AorTech Vascular and AorTech Heart Valve are the two productfocussed division of AorTech where the collaboration with RUA Medical or their long development heritage respectively, are generating medical devices that are expected to have improved outcomes for patients and payers. The three divisions within AorTech demonstrate a diversified portfolio of businesses. The royalties in AorTech Royalty is a low risk, growing business. The Elast-Eon-coated graft and surgical patch products are medium-risk and near-term when compared to the AorTech Heart Valve which we view as having the highest risk and the highest potential value.
We use a sum of the parts methodology to value AorTech. That means taking an average comparable service company multiple to value AorTech Royalty at a 9.8X multiple of 2019 revenues (without any growth component). This is despite revenues increasing 27% in the six months to the end of September 2019. This implies a valuation of £4.5m for AorTech Royalty alone. For AorTech Vascular and AorTech Heart Valve, we have used the average value of acquisitions of similar companies in Lerner’s venture capital method, discounted by the number of years we expect for a transaction to occur, and then risk-adjusted by 40% and 30%, respectively.
After many years in the making, AorTech is now in the right place at the right time – as demonstrated by the many historical transactions that have taken place in the heart valve and graft space – for the company to generate significant value. Our sum of the parts valuation for AorTech suggests that there could be much further to run than in the share price appreciation in the last year as this value becomes recognised. We value AorTech at £99.2m or 676p per share.