Investment #11: Sanara Medtech
An opportunity to heal
Before we get to the investment, given a few recent subscriber additions I thought it would be worth reminding everyone, that these investments are almost exclusively plundered from other (cited) sources. I always own the stock but I was nowhere near “discovering” the idea. This is an investment journal not a recommendation.
To compare my investment style to the great Mohnish Pabrai would be immodest, inaccurate and… in all honesty extremely unfair on Mohnish! However, he is a great inspiration for any individual investor - I’d thoroughly recommend his book (The Dhandho Investor). While I can’t claim to have anything like his courage and portfolio concentration - Mohnish managed to de-stigmatise the concept of “cloning”. Monish unashamedly celebrates his idea generation process: almost exclusively taken from other investor’s portfolios.
My first screen is not going A-to-Z or running a financial metrics filter but simply other people’s ideas: e.g. investment letters/13Fs/Substack/Microcap club/Twitter/sell-side research/podcasts/Investors Chronicle. The amount of resources available to a curious investor has never been greater, which has its advantages and draw-backs.
The term “cloning” implies copying an investor’s portfolio wholesale without any due diligence. I would emphasise this is not the case. For me, it is merely a first screen, a shortcut to uncovering potential asymmetric opportunities. Those first hard yards are done by a curated network of investors far smarter, more devoted and more successful than me.
From there I need to run my own filters, these tend to rule out the vast majority - e.g. too hard, risk-reward not sufficient, don’t like sector etc. Then I need to understand the investment thesis and in particular the risks. Once I’m there, I do some of my own due diligence before coming to a decision. The advantages if this approach (for me) are numerous: it is a huge time saver (shamefully I am still a full-time corporate slave), it lessens the risk of making a basic error (e.g. backing a fraudulent management team), it leverages some of the smartest investors in the world and most of all its cheap - the majority of the resources quoted above are free or low-cost.
The most obvious criticisms of this approach are as follows:
Late entry - you are late to the party, this is a simple fact of being exclusively derivative. Sometimes the majority of returns can be concentrated in an initial period that pre-dates your awareness or execution of the trade. While this is a factor to consider, it also one quite easy to mitigate: entry levels are often public and valuation work can be done vs. the current market price. It simply requires an understanding of the trade.
Volatility fragility - the main problem with outright replication of other people’s trades is your inability to stomach volatility. Imagine trading apples without understanding what moved the intrinsic value of the apples. Every move would be petrifying - is this a buying opportunity or has the investment case changed? This is a recurrent problem when friends or family ask for “stock tips”. Don’t do it. Again, from my perspective, it can be mitigated by understanding the investment case and remaining on top of it.
Pump & dumps - grifters are a fact of life. It did occur to me that perhaps the most unheralded benefit of crypto is that it draws the charlatans out of traditional financial markets! Strangely enough I haven’t heard that pitch much. Nevertheless they exist and will always offer the opportunity for you to invest in the “the next big thing”. Again, I’d argue this can be mostly discounted with some basic due diligence on your sources.
Of course, this is simply my style, at this moment in time. Will it work? I’ve no idea. Are there better approaches? Yes.
Sanara Medtech (SMTI) is healthcare company specialising in the surgical and non-surgical wound care markets. SMTI has market leading products focussed on liquid bandages and cleansers with proven ability to quicken post surgical recovery and reduce risk of infection. The CEO/founder Ron Nixon has a track-record of success and is aligned with a 40% stake. The stock has been on a ride, down ~40% from the 2022 highs after post-covid disruption, supply chain issues, a sales force reboot and the departure of the previous CEO. Valuation-wise SMTI trades at 3.7x LTM revenue, having traded at more than 7x just last year. This may prove an attractive entry point given accelerating revenue growth in 2024 and stand-alone earnings inflecting towards profitability. Furthermore, following several years of investment, a partnership to commercialise Tissue Health Plus could catalyse additional value creation.
Sanara is almost a one-trick-pony (for now) with Cellerate accounting for ~80% of revenues. However its not a bad trick - Cellerate is sold for around $200, has gross margins approaching 90%, first mover advantage and a long runway for growth.
As a reminder this is primarily an investment journal, this is not financial advice or a recommendation. All of the ideas are plundered from other (cited) sources. I simply own the stock at the time of writing. Please refer to the disclaimer at the bottom or my introductory post for further details.
Ticker: SMTI
Average entry price: ~$32
Current price: $32 (26-Jul-24)
Upside scenario: ~$65+ (+2x, 2 year horizon)
Position size: ~$10k
Sanara Medtech IR Presentation
Investment thesis and catalysts
A market leading product: SMTI owns the licensing agreement to sell CellerateRX. Cellerate contains a form of “hydrolysed collagen” - collagen 100x smaller than than natural human collagen. When applied post surgery it helps accelerate wound healing. Surgeons and hospitals love this. At low cost it minimises the risks of post-surgical infections and complications. This is a huge problem for patients and healthcare providers both in terms of cost and, more importantly, health outcomes. SMTI has highlighted large-scale studies which show Cellerate reducing post-operative infections by nearly 70%. Sanara is almost a one-trick-pony (for now) with Cellerate accounting for ~80% of revenues. However its not a bad trick - Cellerate is sold for around $200, has gross margins approaching 90%, first mover advantage and a long runway for growth. Surgical sales are approved in only 3k hospitals, but it is currently selling in just 1k, the market opportunity in the US is 5k+.
Growth and earnings inflection approaching: 1. Growth stalled in 2023 as another product Allocyte (an “advanced viable bone matrix” used by surgeons to enhance bone healing) - suffered from supply chain issues, in spite of strong demand. This has now been resolved, which should boost growth again in 2024. 2. A partnership to sell Sanara’s products with Infusystem was announced in 2022 and will begin to yield first results in late-24. Infusystem has a complementary wound care solution and an entrenched base of over 5k locations. 3. Biasurge is a surgical solution used to irrigate wounds and prevents infections from a broad range of pathogenic microorganisms - it prevents “biofilms” (ask chat GPT, I did!) and is even effective against the deadly and infamous MRSA. Biasurge studies show a 100% kill-rate after 5 mins and still no survivors after 24hrs, suggesting long-lasting effectiveness. The product significantly outperforms competitors (e.g. <50% for biofilms) and is synergistic with the existing portfolio - sales can quickly be made to existing clients. Biasurge has only just begun its launch in 2024 and management believe the opportunity should be as large as Cellerate. 4. Tissue Health Plus (THP) division has been a significant drag on earnings and FCF over recent years and has yet to contribute to revenue. THP is the call option you basically get for free. It aims to expand the company’s product offering into non-surgical arenas such as dermatology clinics and general practitioners. An acquisition has provided some high qaulity diagnostic tools and a mobile app. THP aims to integrate all of these products as a one-stop-shop to analyse, diagnose and treat non-surgical wounds. The time-line for the commercialisation of this business is not yet clear, however finding a partner on this front would be a material positive catalyst.
Aligned and high quality management: Ron Nixon has a sterling track-record. Originally Ron cut his teeth as a director and investor in LCH group (a “home health provider”), he took this to an IPO (at <$100mn) and eventually to a take-out for $5.5bn by United Health Group. Ron is the founder and managing partner of private equity firm The Catalyst Group. He was instrumental in building SMTI into the business it is today and he brings to the table in-depth healthcare expertise and an extensive network. Furthermore he is complemented by an all-star BoD which is hard to match in microcap world. Products are a dime-a-dozen, top quality management teams are not. A huge part of the thesis relies on Ron’s ability to drive shareholder value.
Valuation still reasonable: as a cash flow focussed credit monkey, starting the valuation discussion using revenue multiples makes me feel physically sick. Nonetheless, given the trajectory of the business, and the lack of earnings…, it’s really the only option. SMTI trades at 4x sales. As per above, I think the revenue trajectory will meaningfully inflect in 2024. For context SMTI has a $270mn market cap. Back of the envelope:
I think sales growth of 20% is a relatively conservative assumption (1Q24 was already +19% y/y).
A transition to positive earnings in 2024 should de-risk the opportunity
In this scenario I think a 6x revenue multiple could be justified
This translates into roughly a 2x return over two years. This excludes any potential positive catalyst from THP.
Risks
Slowing growth: as already experienced, slowing growth can de-rate the stock. A failure to expand Cellurate, launch new products or supply chains issues could undermine the investment case.
Competition: high margin and high growth attract competition. I don’t think this is a material concern at the moment but risks will increase as the product grows.
Credits, sources and where to find more
Microcapclub ($$$).
- by Jackson
Happy hunting,
The Geez
P.S. Other stuff I bought recently: MREO and CLPT. “I never buy biotech… I have no advantage there and I’m a disciplined investor… :D)