Collagen Solutions (LON:COS) is the marriage of three companies with significant experience in the supply development and manufacture of added value biomaterial products and is aiming to be more than simply the sum of these component parts.
The merger of Collbio and Collagen Solutions LLC in the UK and US, respectively, created a business with manufacturing, research, sales and marketing capabilities.
The addition of New Zealand’s Southern Lights Biomaterials last December gave it processing capacity as well as a customer base in Asia, meaning the business is operating in three major continents.
Collectively the markets it operates in are worth around £10bn annually – which makes its target of becoming a £100mln market cap business by 2020 achievable. That said it has some way to go with a valuation of £16mln currently.
Most commonly found in the skin, collagen is the structural protein that supports various connective tissues.
Versions of collagen can be human derived, but more commonly, for medical applications, they are taken from animals such as cows, pigs, chicken and even fish.
Collagen tends to be used in wound care – so burns and skin grafts – prosthetic veins and arteries, bone grafts and skin regeneration.
The company itself provides products in a number of different forms from raw tissue and tissue scaffolds to soluble and powdered collagen.
It splits its business into three distinct streams: material supply, development services and contract manufacturing.
The supply and manufacturing provides the bread and butter. The jam on top is helping larger partners create new products; in other words, embedding its technology in the new wave of collagen derived advancements.
Its collagen expertise is embedded in a diabetic food ulcer treatment developed by San Diego-based Taxus Cardium, while its powdered product is used for a bone graft developed by Globus Medical, which also has US regulatory sign off.
Its IP and material have also been used in a scaffold product being designed to treat burns victims.
“Given its development and manufacturing expertise as well as intellectual property, it is not inconceivable that in the longer term the company could develop its own products, thereby capturing greater margin and generating incremental shareholder value, although this has not been articulated by management,” said analyst Mark Brewer at the research firm Hardman & Co.
At the moment, at least, Collagen Solutions will remain solely a supplier of products, services and IP, according to chief executive Stewart White.
“We know what we are and what we are not,” he told Proactive Investors.
“We are not a [medical devices giant] like Medtronic, Zimmer or Baxter. However, we would like to be in terms of revenues. But we don’t aspire to have the sales and marketing that comes with being a scaled down version of these three, nor the costs that such things incur.”
“What we do have is an excellent range of customers and global network in the medical devices market that we can offer our know-how and IP to.”
With cash on the balance sheet of £3.4mln, White is confident the company has a financial runway long enough to get it to break-even, which is forecast to occur at some point next year.
In his latest note, Hardman’s Brewer is predicting Collagen Solutions will turn over £1mln this passed financial year, rising to £3.7mln, then £6.5mln and £10.5mln in 2018. By that time the group is expected to generate underlying EBITDA of £4.1mln.
Achieving that £100mln market capitalisation means getting sales to £15-£20mln by 2020, analysts reckon.
“That’s the sort of valuation we think we can get if we attack the markets where we already have locations, that is, the US, Asia and Europe,” said White.
“We don’t have to put everything on black or red. We have enough opportunities, products and IP to create multiple revenue streams.
“In terms of reaching that £100mln valuation it could very well be a combination of organic growth and significant progress in also monetising our IP.”