7 Fascinating Points you need to know about Collagen Solutions

Introduction

Collagen Solutions help to supply, develop and manufacture collagen and tissue-based materials and medical devices. Their products are used in the following markets: cardiovascular, orthopaedics, dental, wound healing, research and other applications.

Before you make the investment, here are seven points investors should know before making any sort of investment.

 

Point No. 1: Market Size + Opportunity

Collagen Solutions is developing several proprietary products it intends to commercialise through out-licensing to distribution partners. These proprietary products and the market size are: –

1). Cartilage Repair; – Collagen Solutions has a patent-protected ChondroMimetic® Osteochondral Scaffold, developed in partnership with the University of Cambridge and MIT. The potential market is to carry out over 450,000 procedures per year with approx. value of $500m to $1bn+.

2). Wound Treatment; – the company wants to address wound care and burns with the potential of taking 40% of the $1bn market. But, the product is currently under development.

3). Bone regeneration; the product is also under development with the potential of addressing approximately 30% of a $1.7 billion orthopaedic bone graft market.

So, the total potential market size is $1.66bn or £1.23bn. Currently, Collagen Solution has sales of £3.7m.

 

 

Point No. 2: The ability to secure funding

Funding is important for any start-up, especially in the healthcare/treatment industry. Collagen Solutions (despite being founded in 2013) has managed to raise net proceeds of £3.4m in 2014 and £5.4m in 2015.

In March 2017, it secured up to £10.8m via way of a placing and open offer of £6.8m and a venture debt facility of up to £4m.

And since 2013, the total financing raised amounts to £19.6m.

 

Point No. 3: Sales won’t be accelerating anytime soon

With funding secured, management expects it to last for five years. In that time their target is to increase revenue by fivefold. That means revenue will rise to £20m by 2021.

I would want to know if the company will become cash neutral or will it require further financing.

 

Point No. 4: Watch out for share dilution

The latest funding saw it did a placing for 5 pence per share, a 17% discount to the current March 2017 share price.

Though this isn’t too bad of a discount, investors must pay close attention any businesses that issue a placing price below current share price. Also, pay close attention to the amounts being raised vs. MKT. CAP.

 

The bigger the discount placing price on current share price, the more the shares will fall.

 

Another thing investors need to keep in mind is share issuance growth, the more share issue the lower the share price will become unless it becomes profitable and cash generative.

Collagen Solution share price

Point No. 5: Pay attention to Goodwill

Be aware the company has £10m in goodwill or 40% of total assets. Right now, Collagen Solutions says the funding could last for five years. (Hopefully) the company is moving in the right direction. If not, deduct goodwill out of asset and re-calculate whatever is left after deducting all liabilities.

 

Point No. 6: Cash is vital

Although the company reported a cash balance of £6.74m, they didn’t mention that borrowing was rising and net funds fell from £7m to £3.8m. This will spark funding concerns because the cash burn for the first six months is £3.2m vs. £800k, last year.

Also, the higher cash burn is down to a £1m deferred payment to NZ based Southern Lights Biomaterials (an acquisition made in 2014).

That £1m deferred payments took funded by a £1m bond issue with an interest rate of 10%.

 

Point No. 7: Will Collagen Solutions be profitability by 2020?

One broker projects that Collagen Solution will earn a pre-tax profit of £0.9m by 2020.

 

Thoughts

Placing a market value on Collagen Solution is like playing the lottery.

It could be a hit or a miss. Right now, the company sales have slowed.

That means the share price is likely to drift lower rather than move higher, due to these uncertainties.

Also, I don’t like how management isn’t two steps ahead and didn’t fully understand why “anticipated sales” have not materialised or being delayed.

However, I don’t see the company’s share price rising anytime soon. Maybe in 2019, if we get concrete evidence sales are ramping up from commercial deals, then I will revisit this investment.