Alliqua Biomedical: An Attractive Opportunity In The Wound Care Space
Feb. 9, 2015 11:19 AM ET
Alliqua Biomedical this week announced the acquisition of privately held Celleration.
Alliqua’s offer values Celleration at 3.5x sales, which is in-line with the valuation of other privately held companies acquired in recent years.
Listed companies in the wound care space though trade at 10x sales.
Alliqua’s multiple based on FY2015 sales estimate is just 4x.
As Alliqua grows in size through accretive acquisitions like Celleration, its multiple will move in-line with the average.
Alliqua Biomedical (NASDAQ:ALQA) is a Langhorne, Pennsylvania-based company providing advanced wound care solutions. This week, ALQA was in the news after announcing that it will acquire Celleration Inc., a Minnesota-based privately held medical device company providing advanced wound care products.
The acquisition is part of ALQA's strategy to boost its top line. At the same time, the company is looking to take advantage of the opportunity that is currently on offer in the wound care space, which includes public and private companies.
So what is the opportunity here? Acquisitions in the wound care space in recent years have shown that privately held companies can fetch between 2-4x sales. However, listed companies like MiMedx (NASDAQ:MDXG) and Osiris Therapeutics Inc. (NASDAQ:OSIR) are valued at around 10x sales. ALQA itself is valued at 27x sales. However, the company's sales this year will be significantly boosted by the acquisition of Celleration. Based on the FY2015 sales estimate of roughly $30 million and 20 million shares outstanding, ALQA is valued at just 4x sales, which is well below the average for other players in the wound care treatment market. By continuing to acquire privately held wound care companies at a multiple of between 2x and 4x sales, ALQA could significantly boost its revenue. And as the company grows in size, its multiple should also move in-line with those of its bigger rivals. This means that the stock could generate significant returns in the medium term.
Recent Transactions that highlight the discount
In the last few years, the $21 billion wound care market has seen a number of acquisitions. The interesting thing about these acquisitions is that they have involved a public and a private company.
In December 2010, MDXG acquired Surgical Biologics for $7.25 million. In FY2010, Surgical Biologics had $2.2 million in sales, which means that MDXG's offer valued Surgical Biologics at 3.3x sales. Interestingly, MDXG expected the acquisition to accrete over $7 million to the top line in 2011.
In 2012, Derma Sciences (NASDAQ:DSCI) acquired MedEfficiency for $14.5 million. DSCI's offer valued MedEfficiency at 2.7x sales.
Last year in May, Alliqua itself acquired Choice Therapeutics for $4 million in a cash and stock deal. The transaction valued Choice Therapeutics at 2.2x sales. The latest acquisition from ALQA this week continues the trend seen in the wound care market in terms of valuation. ALQA has offered to acquire Celleration for an initial purchase price of approximately $30.4 million in cash and stock. Celleration's sales during the fiscal year ended December 31, 2014, were approximately $8.7 million, which translates to a valuation of roughly 3.5x sales.
Brief on the regenerative wound care market
The Wound Care products market has three major divisions: Traditional (sutures, bandages, tape, etc.), Advanced (antimicrobial, alginate, foam, hydrogel, hydrocolloid dressings) and Regenerative (bioengineered skin, skin substitutes). The total wound care market is worth about $21 billion in 2015, and is projected to grow to $67.5 billion in 2020. "Four major companies, including Smith & Nephew (NYSE:SNN), Kinetic Concepts (KC), Molnlycke, and ConvaTec comprise more than 55% of the $5 billion advanced wound care market, according to Justin Smith, analyst at Societe Generale," which is according to a Forbes article.
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Source: Allied Market Research
The acquisition and the opportunity for ALQA
Alliqua signed a definitive agreement to acquire Eden Prairie-based Celleration for $30.4 million in a cash and stock deal. The cash part of the transaction will be financed by a Senior Secured Term Loan from Perceptive Advisors. The loan amount is $15.5 million. In addition, ALQA will issue 3.2 million shares to fund the remaining roughly $15 million. At the close of the transaction, ALQA would have roughly 19.3 million shares outstanding.
The agreement also includes possibility for additional contingent payments in stock and cash if certain milestones are reached by the end of December 31, 2016. However, at the moment, ALQA is valuing Celleration at 3.5x 2014 sales of $8.7 million, which is in-line with the recent transactions involving public and private wound care companies.
Interestingly, Celleration is developing an ultrasound platform that could be the next generation in wound healing. According to research that has been ongoing for many years, certain kinds of physical waves - PRFE, galvanic currents, ultrasound - can stimulate the underlying cells below a dermal wound to develop their healing properties. Ultrasound wound healing is a disruptive technology that can potentially alter the market dynamics of wound healing, reducing pain and quickening the healing process. So, this technology will nicely complement ALQA's existing range of healing technologies.
In a conference call after the deal was announced, David Johnson, CEO of Alliqua, noted that Celleration has 500 clients in the U.S. and is continuing to place devices actively. In addition, the company has 5 of the 8 MACs, which account for 84% of the market and 44 states, reimbursing for their MIST wound care device, according to Johnson. Further, they sell a disposable to all centers, which includes Mayo Clinic, at a gross margin of 80%. Johnson further noted in the conference call that the device sales are also high margin. Disposables though account for the bulk of Celleration's sales at 80% of the total.
In 2014, Celleration saw its sales slip slightly; however, this was due to capital constraints. In fact, this is the opportunity ALQA has in front of it. If ALQA continues to find targets like Celleration in the wound care market that have innovative and attractively reimbursed products but face capital constraints it can significantly boost its top line. ALQA with its backing from a powerful investor base that includes names such as Celgene has the capacity to fund such small transactions. In fact, CEO Johnson noted that this will be the company's strategy in 2015. He noted the company will focus on three things in 2015 during his conference call. This includes driving adoption of current products with existing salesforce, continuing to look for M&A deals, and continue to seek regional reimbursement for their internal products.
Coming back to the Celleration acquisition and its impact, Johnson said in FY2014, Celleration had revenue per salesperson of $400,000. The average for the devices companies though is around $1 million per salesperson, Johnson noted. Based on this alone, Celleration could achieve organic growth of 150% without even adding any sales personnel.
The acquisition would double ALQA's own salesforce. With the acquisition, Johnson expects ALQA revenue to reach $20 million; however, this is a conservative estimate if the transaction is closed on time. You see ALQA has said that it expects FY2015 revenue to be between $11 million and $13 million. However, this was before the Celleration acquisition as well as before the company received a favorable reimbursement for its products with a Q-code. It may be recalled that this is the same reimbursement that boosted MDXG's sales. MDXG received additional Medicare reimbursement coverage for EpiFix® in December 2013. In 2013, the company's sales totaled $59.18 million. Following the reimbursement in December 2013, the company's sales in the first nine months of 2014 were nearly $79 million.
OSIR also followed a similar trajectory after receiving Medicare reimbursement codes for Grafix in May 2012. In 2011, OSIR's sales totaled $1.26 million. In 2012, sales jumped to $7.85 million and in 2013, the first full year after the receipt of reimbursement, sales climbed to more than $24 million. Based on this trend, I expect ALQA sales to see a positive impact from the Medicare reimbursement. Therefore, I expect sales to be between at least $15 million and $20 million, well above the company's own guidance of $11 million to $13 million. Celleration had sales of $8.7 million. Assuming a 30% growth rate for Celleration sales, this translates to $11 million. So my estimate for ALQA sales this year is around $26 million to $31 million.
Based on this sales estimate and 19.3 million outstanding shares following the close of the Celleration transaction, ALQA shares currently trade at a multiple of 4x. If the stock moves closer to the multiple of MDXG and OSIR, which is around 10x sales, this would give ALQA price per share of $15. Currently, ALQA is not valued like its peers because the company is significantly smaller than its rivals. However, with the acquisition of Celleration, the receipt of favorable reimbursement for its products with a Q-code and possible future accretive acquisitions, ALQA's sales will close the gap between itself and its rivals in terms of sales. This means that its multiple should also move in-line with those for MDXG and OSIR. In fact, given ALQA's strategy of focusing on inorganic growth, a slightly higher multiple would be also justified.
ALQA Could Be An Acquisition Target Itself
Indeed, if you look at Johnson's background this could be a possibility. ALQA's valuation also makes it very attractive right now. Johnson came to ALQA about two years ago from ConvaTec, a leading wound care company. Johnson took ConvaTec to around $1.7 billion in revenue and in 2008 sold it for $4 billion. Interestingly, the sales growth at ConvaTec was driven to a large extent by acquisitions, and this was in just a few years. I would not be surprised if Johnson follows a similar strategy at ALQA. While private companies fetch a lower multiple, for ALQA, I expect a multiple of at least 8x sales if it is ever taken out.
Risk
ALQA had $19.89 million in cash on its balance sheet at the end of September 30, 2014, which given the current burn rate of around $4 million per quarter will last at least until the end of this year. However, if the company will continue to focus on acquisitions, it will have to raise more money or issue more shares (if it is using stock for takeover). In either case, there is a dilution risk. Having said that if the acquisitions are like Celleration i.e. significantly accretive to top and bottom line, the dilution risk will be more than offset.
Another risk is integrating acquired companies. But these are small acquisitions and Johnson has experience in the area, given the success he had at ConvaTec implementing a similar strategy of focusing on inorganic growth.
To sum up, ALQA offers an excellent opportunity for significant upside in the medium term, while the downside risk looks to be minimal.
