Collagen Solutions Plc (LON:COS) is a biomaterials company developing and manufacturing medical grade collagen components for use in medical devices, research, and regenerative medicine. A number of investment initiatives have been introduced to accelerate the rate of growth, including global commercial infrastructure and development of a pipeline of finished medical devices, the first of which will be ChondroMimetic for repair of small cartilage lesions. Although considerable progress has been made, recent results highlight the time lag between making the investment and generating long-term sustainable growth.
Strategy: Management has embarked on an investment strategy through a series of initiatives to increase the growth opportunities. This strategy is moving COS from a reliable quality collagen supplier to one that also has proprietary products that will move it into profitability, and cash generative, at a faster pace.
Interims: Underlying sales eased back -12% to £1.73m (£1.83m) largely due to reasons beyond COS’s control – internal customer processes and regulatory delays and forex. In addition, a higher contribution of below average gross margin products (e.g. pericardium) led to a bigger than expected fall in the gross margin.
ChondroMimetic: The company has completed successfully the re-evaluation of 15/17 patients from the original trial in 2009-10. This will provide unprecedented 8-year follow-up data about the quality of the cartilage repair and support CE Mark submission (1Q 2018) and marketing material (2Q 2018).
Forecasts: Investment in marketing has resulted in 8 new accounts in 1H’18, compared to 9 for the whole of 2017, and a large number of live deals under negotiation. However, these are unlikely to come through sufficiently fast enough to benefit FY 2018, therefore sales forecasts have been reduced by 20%.
Investment summary: ChondroMimetic fulfils COS’s stated strategy to move further up the value chain. The 8-year data will significantly differentiate it from competing therapies, with all the patients re-assessed the focus is now on data analysis in preparation for submission for CE Mark in 1Q 2018. Although the FY 2018 outcome is largely out of the company’s hands, management is confident that everything is in place for long-term sustainable growth.
