Collagen Solutions is a biomaterials company developing and manufacturing medical grade collagen components for use in medical devices, regenerative medicine, and in vitro diagnostic products. It supplies value-added bio-functional collagen, provides R&D and contract manufacturing services to a broad range of clients, ranging from research organisations to multi-national corporates and, with this acquisition, now has the option of selling a regenerative medical product into the orthobiologics market, thereby capturing a greater share of the end-product margin. The addressable market for this product is in excess of $500m.
First product acquisition: Assets and an exclusive licence for the associated IP to Chondromimetic, a product for use in sports medicine, orthobiologics and regenerative medicine; satisfied by c.0.9m Ordinary shares (50% on completion, 50% deferred), a modest cash payment and future low single digit royalties.
Strategic relevance: Chondromimetic provides COS with an entry level collagenbased medical device at relatively low cost but with previous sales traction and, Key Opinion Leader endorsement. Also, the associated IP is complementary to existing IP, potentially generating future products with broad commercial use.
Valuation: Our DCF valuation remains unchanged at £73m or 39p per share. There is insufficient information with respect to execution of Chondromimetic’s commercialisation strategy to warrant a change. Greater clarity and visibility of potential sales and EBITDA will likely increase forecasts and valuation.
Risks: Integration of SLB appears to be well in hand. Exact timing of development and manufacturing contracts and supply agreements remains uncertain, but recurring revenues do exist. Regulatory delays for client products remain risks. Route to Chondromimetic commercialisation is currently in early stage planning.
Investment summary: The Board’s objective is to create a £100m business by 2020. This acquisition provides another building block to achieving this goal at minimal entry cost. It propels the company further up the value chain, enabling the capture of a more significant share of the end product sales and creating a vertically integrated business that should command a higher valuation.