SMTI - Sanara MedTech: A High Growth Micro Cap Disrupting The Wound And Skin Care Space

Summary

• A micro cap health tech company following a path to large cap potential.
• A management team with vision, ownership, operational expertise, domain knowledge and that trust each other.
• They have a strong pipeline of 23 products and services with growing sales (124% year over year growth).
• They are disrupting a $10-100B addressable market currently without a clear leader.

Sanara MedTech Deal Memo

Sanara MedTech ( SMTI ) is a fast growing micro-cap building out a platform of products and services that plan to disrupt an antiquated skin and wound care space. This space has been plagued with fragmented coordination of care, low product innovation, and lack of early and accurate diagnosis. Sanara MedTech solves these problems by providing their cutting edge products and services directly to providers and patients with a goal of improving their outcomes and lowering overall costs throughout the continuum of care.

The timing for such a push by Sanara MedTech is ripening due to our healthcare system moving from an unsustainable procedures based reimbursement model to an evidence and value based model emphasizing high quality and preventative care.

Why Sanara MedTech?

Sanara MedTech has an experienced team and a pipeline of products with traction in a large and growing market.

1. Team - The management team has a vision, skin in the game, operational expertise, domain knowledge and they trust each other.

2. Products - Strong product pipeline and initial sales traction

   1. CellerateRX (45% compounded annual sales growth rate since 2020)

   2. A pipeline of new and symbiotic products:

      1. 15 products launched in the past 3 years

      2. 8 more products and services to be launched through 2024

3. Market is large (+$10B) and growing (+10%YOY) and is up for the taking as payers begin to incentivize beneficial outcomes and preventative care.

Team

The smaller the company the more weight I give the people in the potential success of our investment, thus the fairly detailed writeup on Ron and his team below.

Ron Nixon

Sanara MedTech’s Chairman and visionary is Ron Nixon who owns 45% of the company. Ron was laying the groundwork for Sanara MedTech while he was leading Catalyst Private Equity Group. There he nurtured several healthcare companies from startup to late stage or IPO of which are now benefiting Sanara MedTech.

LHC Group (LHCG - $5B mkt cap) is a leader in home health (hospice, home care, facility based care) and Ron is currently their director. LHC may be the first large user of Sanara’s WounDerm virtual consult and electronic medical records technology. If you check the Apple app store there is a new app called “WounDerm LHC”

Rochal (Ron became a majority owner) is a small team specializing in outsourced research and development for regenerative medicine & transdermal drug delivery. They focus on synthetic polymers, antimicrobials, and biological systems. Rochal developed the liquid bandage now sold by 3M, and an oxygen permeable contact lens sold to Bausch & Lomb. Rochal is now part of Sanara MedTech as Ron acquired the IP, licenses, and research team in 2021.

Wound Management Technologies - Ron bought a controlling stake in the fledgling micro-cap and soon turned it into Sanara MedTech. Wound Management Technologies sold CellerateRx, various biotech products and an eHealth technology.

James W. Stuckert is the second largest stock holder (12.1%) and the only other insider owning more than 1%. James was the ceo of Hilliard Lyons, a full-service investment firm from 1995-2004 and a director and successful investor in Royal Gold.

Remainder of The Team

The majority of the rest of the team has been recruited and built out with folks who have deep operational and domain expertise.

• Vice Chair Michael Carmona (Smith & Nephew, Health Point)

• Surgical division Pres & COO Shawn Bowman (Smith & Nephew, Health Point)

• Wound Care division Pres & COO Zach Fleming (Smith & Nephew, Health Point)

• CFO Mike McNeil (Smith & Nephew, Health Point)

• Clinical Director Sue Dieter (HealthPoint)

• Smith and Nephew claim to be the leaders in Sanara MedTech’s space “2021 annual report states S&N hold leadership positions in Advanced Wound Bioactives”

• HealthPoint was acquired by Smith and Nephew and became their wound care division (SNN – $11B market cap, - wound care division $1.5B revenue)

Alongside convincing experts like Zach Fleming from Smith and Nephew to join and lead Sanara MedTech, Ron is throwing his full network behind this venture with key execs coming from Catalyst, LHC and Rochal as well. This many colleagues coming to Sanara MedTech without extravagant compensation displays the trust, confidence and Ron’s ability to attract and form high potential teams.

Sanara MedTech is unique in having long-term collaborators, deep experience, previous acquisition and divestiture success, organic value creation know-how and operational successes pre-assembled at such an early stage. I do not think this is by chance, for example Sanara MedTech set up its headquarters next to Smith and Nephew to make the transition of their best employees as smooth as possible.

Products

Sanara MedTech has penetrated about 6% of the available surgical market thus far (9/30/2022) and are working to break into the full continuum of care with their complimentary suite of skin and wound care products. Sanara MedTech’s strongest product signals (that I can understand) is the recruitment of an experienced sales team and increasing sales revenue. In their last quarterly report (Q3 2022) sales grew by 124% year over year.

Going back to 2020 Sanara MedTech sales have a CAGR of 45% when adjusted for acquisitions and capital raised (share count).

Sanara MedTech currently has 23 products in their pipeline: 9 surgical, 10 wound care, and 4 services. 15 of the products are on the market and 8 are waiting for 510k approval and or in a later stage of development. In the past few years SanaraMedTech has attracted, acquired and partnered with 6 or more research, development, and medical service companies in order to create the current pipeline of products and this type of collaboration doesn’t look to be slowing down (see WounDerm App that appears to be in partnership with LHC Group).

Their lineup of products are split up into 3 categories: Surgical, Wound Care, and Services with the surgical product CellerateRX accounting for the majority of their current sales.

Surgical Products

CellerateRX is a surgical powder used to prevent infections. It is a hydrolyzed collagen that provides a moist environment for surgical sites and wounds and is composed of hydrolyzed fragments of Type I Bovine Collagen that are approximately 1/100th the size of native collagen. Because of its small size it penetrates much faster into the wound than native collagens, which need to be broken down by the body to become effective. A 2017 study by SciMedCentral showed 102 consecutive neurosurgery cases treated with CellerateRX to have a zero infection rate. This compares to infection rates ranging from 6.3% in spine patients to 24% in cranioplasty surgery.

The problem of infections that CellerateRX solves is a well known issue by the surgeons they are selling it to. Surgical site infections cost $3.5-10B (according to an article published by the American College of surgeons and Surgical Infection Society) as there is a 2-4% average infection complication across all surgery types. Subsectors have much higher rates of complications such as 6-7% for spine & neck surgeries, and rates of 25%+ for brain tumors according to Patient Safety Network Surgical wounds becoming seriously infected is a cause of patient mortality 3% of the time , and surgical site infections accounted for the largest proportion of overall re-admissions .

The knowledge of the infection problem is important as management sees the primary competition to CellerateRX is the status quo of doctors doing nothing. According to management there are few products out there that work as well as Cellerate and none of them are as cheap.

CellerateRX’s patent has expired but they believe it is protected by manufacturing trade secrets now and by brand awareness in the future. In the meantime Sanara is developing a 2nd generation Cellerate that may come out as soon as 2023.

Cellerate’s market size is large, ranging from $650M to $11B in the USA and is growing. I’ll discuss more about Sanara MedTech’s TAM in the Market discussion below.

The rest of Sanara’s pipeline of products and services are below, of which are not yet known by the market.

FORTIFY TRG - Tissue repair graft is a 100% porcine small intestinal submucosa (SIS) ECM intended for implantation to reinforce soft tissue.

FORTIFY FLOWABLE - Extracellular Matrix is porcine small intestinal submucosa (SIS) and provides micronized ECM for surgical wounds.

TEXAGEN - Amniotic Membrane Allograft is a multilayer amniotic membrane that may be used as a soft tissue barrier and wound covering in numerous applications.

ALLOCYTE - Advanced Cellular Bone Matrix is a next generation cellular bone matrix ((CBM)) containing bone-derived progenitor cells and conformable bone fibers.

BiFORM - Bioactive Moldable Matrix is a bioactive and osteoconductive bone graft that can be hydrated and used as a strip or molded into a putty to fill a bone defect.

AMPLIFY - Verified Inductive Bone Matrix

Under Development

BIASURGE - A BIAKOS product specifically designed for surgical settings. The FDA 510k was recently filed.

CellerateRX II - 2nd generation hydrolyzed collagen to update CellerateRX I of which is currently off patent and only protected through trade secrets.

Wound Care Products

BIAKOS Antimicrobial Skin & Wound Cleanser, Wound Gel, Irrigation Solution. It works synergistically to cleanse and remove microbes from the wound bed to help eliminate planktonic, immature and mature biofilms.

HYCOL hydrolyzed collagen powder and gel. Generally speaking, these clean, seal, and create barriers to infection. They provide the benefit of hydrolyzed collagen fragments that are approximately 1/100th the size of native collagen

BIAK?S Antimicrobial skin and wound cleanser, wound gel, and irrigation solution. The gel synergistically disrupts extracellular polymeric substances to help eliminate biofilm microbes to aid in wound healing.

PULSAR II Advanced wound irrigation debridement system is a portable, safe, no-touch debridement system for patients in a variety of care settings.

VIM Amnion Matrix Single layer sheet of amnion tissue that is minimally processed to decellularize the material while maintaining the structure and components of the cellular matrix. Intended for homologous use as a wound covering or barrier in surgical, orthopedic, ophthalmic, and wound applications

Cork NPWT Negative pressure wound treatment applies subatmospheric pressure, promoting healing by removing inhibitors, increasing blood flow, and stimulating angiogenesis and granulation tissue and causing mechanical stress in the wound bed. Sanara MedTech’s revenue is estimated at 50% on this product due to it coming through the InfuSystem partnership.

Under Development

BIAKOS over the counter antimicrobial skin and wound cleanser that looks to be currently under development.

Debrider autolytic debrider wound dressing under development

CuraShield Anti-microbial barrier film intended for application on minor wounds and damaged skin that is currently under development.

HYCOL II Updated version of current Hycol product that is currently under development.

Services

The services that Sanara MedTech are rolling out will, over time, connect the continuum of care throughout the wound and skin care space. Sanara MedTech is creating the platform and tools needed to allow medical professionals and payers to make data driven decisions that will ultimately lower costs and improve outcomes. These tools and services will give Sanara MedTech further insights into their own and competitor products and give them a competitive advantage over time.

Precision Healing (Diagnostics) – A handheld diagnostic tool & smartpad for accurate diagnosis with appropriate treatments, has abilities to address wound bacteria & host response. Continuum of care from Hospitals to Elderly Care facilities to home use.

WounDerm (Virtual Care/EMR) – A wound and skin electronic medical record ((EMR)) system/app, designed to connect wound and skin care providers across the continuum of care.

Mgroup (Telemedicine) - Physician led virtual wound care (ie Tele-visits via internet), Synergistic and utilizing tools from the above technologies (often operated by a local nurse or tech), offers prompt, scalable, low-cost physician involvement in post-acute monitoring.

DirectDerm (Telemedicine) - A wound and skin electronic medical record ((EMR)) system/app, designed to connect wound and skin care providers across the continuum of care. This could be the application that integrates all of their products and services thus changing Sanara MedTech into a wound and skin care platform.

Recent Product Signals

InfuSystem Combines Sanara’s product line and deep expertise in wound care with InfuSystem’s distribution and complex billing system, existing sales team, and national footprint.

LHC Group may be partnering with WounDerm to expand wound care services to Hospice, Home Care, and Facilities across the continuum of care.

Market

The wound and skin care market Sanara MedTech is operating in is big, estimated to be at over $100B by 2028. The tele-dermatology market alone which Precision Healing, WoundDerm, Mgroup, and DirectDerm target is expected to be +$68B in 2028 according to Fortune Business Insights and the USA wound management market size currently ranges from $10-28B today and is predicted to grow 11% year according to Smith & Nelson 2021 Annual Report , and American College of Surgeons and Surgical Infection Society

Sanara MedTech is expanding in a growing market with their own CAGR of 45-124% (see product section above) and is poised to accelerate growth in the next couple years as they gain market share with CellerateRX, incorporate new products and launch products in development. CellerateRX is their primary product and has an estimated market size of $667M when I use their current $40M of sales associated with 6% USA penetration rate.

• $667M potential USA market size when estimating $40M of sales at 6% of facilities.

  • Est. $40M in sales from 2022 Q3 financials

  • Sold in 662 facilities (5.6% penetration), 28 states and approved in 1593 hospitals and ambulatory surgical centers (9/30/2022)

  • US market size 6090 hospitals, 5700 Ambulatory Surgery Centers

  • Utilization/penetration rate in hospitals expands in year 2, as use expands among more surgeons.

When calculating the total addressable market of using Collagen based products on all surgeries in the USA it comes out to $11B. If you use Brain Tumors alone, of which have a significant risk for infection the US market size comes out to $64M.

• $11.09B = 15.3M *$ 725 (Does not include subset of patients with burns that are also users of CellerateRX )

  • Average Selling Price of $725 - Cantor Report 5/20/2022

  • About 15.3M annual surgeries in the USA ( 2014 Healthcare Cost and Utilization Project )

  • Efficacy is spreading among Sanara’s sales force, surgeons and medical conferences, leading to signups of more hospitals, ambulatory surgery centers, and integrated delivery networks.

• $64M potential USA market size for brain tumors

  • In 2022 an estimated 700,000 people are living with a brain tumor in the USA, 88,970 will receive a brain tumor diagnosis, 71% will be non-malignant, only 91.8% will survive the next 5 years. For malignant tumors, the survival rate is 36%. - National Brain Tumor Society .

  • The brain tumor population could be a 88,970 * $725 = $64M per year business for CellerateRX.

These market sizes align with the estimated $3.5-10B of costs caused just by USA surgical site infections (according to an article published by the American College of surgeons and Surgical Infection Society)

Valuation

If we use Sanara MedTech’s past three year CAGR (adjusted for share count) of 45% we get to $0.5M in sales by the end of 2028. If we use Smith and Nephew’s P/S ratio of 2.19 (who’s employees chose Sanara MedTech) we come to a valuation of $1B. If we use the average health products P/S ratio of 6.67 we get to a valuation of $3.2B.

Another way to value the company is if we estimate Sanara MedTech to capture 10% of the surgeries in the space, implying sales of $1.1B (15,300,000 * .10 * $725) and corresponding valuations of $2.4B and $7.3B.

Sanara MedTech is on a potential path to becoming a mid cap company on the back of their primary product CellerateRX. If one or two of their other 22 products are successful they could become a +$10B business. That doesn’t include if they win the space and see global adoption of their wound and skin care services and platform. You get the point, the opportunity is large.

Risks

Sanara MedTech is still a small and unprofitable company. If Sanara MedTech does not turn profitable in 2023 as management indicates they will need to raise capital or risk bankruptcy. Alongside their financial risk there is high product risk as CellerateRX is not patent protected and is their primary source of revenue.

If sales growth does not continue as planned we could experience a significant share price drop due to the current price coming in at a 7x price to sales ratio.

A few of the company's strengths I alluded to previously could be turned into weaknesses and risks. Ron Nixon owns enough of the company (45%) to avoid listening to shareholders and he has ownership in companies partnering with Sanara MedTech allowing for conflicts of interest.

Sanara MedTech’s vision of providing high quality and lower cost products across the continuum of care does not align with the historical way the healthcare system paid for services. For example CellerateRX is not typically reimbursable and could be viewed by some doctors as an added expense. This could be a hurdle they find too large to overcome.

In Conclusion

Sanara MedTech’s grand vision, strong team, product pipeline, traction and large addressble market is why I like SMTI as an investment in a diversified portfolio and ultimately why I overcame the expensive 7x P/S pricing. What started as a momentum play has since turned into a long term bet on Sanara MedTech disrupting and winning the wound and skin care space.

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