Small Caps | Nov 11 2019
Next Science has an answer to the continuing rise of resistant microbes that plague the health sector and several brokers expect interest in the stock will increase sharply in 2020.
-Some delays but addressable market likely to expand significantly
-Short-term distraction at 3M may provide entry point for the stock
-High gross margins and minimal labour requirements
By Eva Brocklehurst
The continuing rise of resistant microbes has meant healthcare providers are alert to correctly diagnosing and managing infections and Next Science ((NXS)) has provided an answer.
The company has developed a non-toxic technology to eradicate both biofilm and planktonic bacteria and this is now being commercialised. Multiple applications exist across medical devices, over-the-counter drugs and prescription pharmaceuticals. Four US FDA approvals have been obtained along with significant commercial agreements with multinational firms such as Zimmer Biomet and 3M.
These partnerships involve leveraging off the sales force of established businesses rather than Next Science building its own. Canaccord Genuity believes this approach is likely to have a faster positive impact on the revenue line.
The company uses a proprietary technology to physically break down the protective structures, exposing and eradicating bacteria through cell lysis (and osmotic process which compromises the cell integrity). Destroying the biofilm barrier can reduce the rate of recurrence. There is no competitive product and the company expects to take material market share from incumbents with existing products.
The addressable market is expected to expand over time but currently includes surgical infections, wound care and dermatology. Next Science recently listed on ASX and Canaccord Genuity initiates coverage with a Buy rating and $3.04 target.
Wilsons suggests there may be a few slow quarters to work through, given disappointing revenue that has been attributable to regulatory delays and partner distraction (3M acquisition of KCI Acelity) over the short-term.
Next Science has taken positive steps to build out its distribution capability, and the increased levels of awareness by surgeons along with experience in the product platform is likely to be most meaningful value addition for the stock, the broker's view.
There is a performance rights revenue target of $20m which has proved to be ambitious as there have been delays in product approvals. Still, this has no bearing on the long-term thesis around the commercial potential, Wilsons asserts. The broker has an Overweight rating and $3.46 target and suspects the near-term distraction at 3M may provide a good entry point to the stock.
Sales in 2019 are only likely to achieve minimum contracted levels which Canaccord Genuity estimates to be US$4.8m. However, use in a key product Blast X, a wound care item owned by KCI Acelity, is expected to substantially drive sales in 2020.
The broker expects revenue will more than double in 2020, both from existing products and following the approval/launch of four new items. Canaccord Genuity expects compound growth of 115% over the next three years.
Gross margins are high because ingredients are in abundant supply and the company is making a device where the ingredients are not require to be Active Pharmaceutical Ingredient grade. The batch processing also requires minimal labour. Nevertheless, the broker expects an escalation in external R&D costs as investment is undertaken to take advantage of opportunities.
The company has six products already in the market and an ambitious program ahead. Several more product approvals should come through by mid 2020 and 2020 is expected to demonstrate the long-term potential of the company.
Representing around 90% of all bacteria, biofilms have sophisticated defence mechanisms and are difficult to eradicate. Biofilm consists of populations of bacteria living under a protective matrix which adhere to living tissue and both natural and artificial surfaces. Bacteria exist in two forms, free-floating (planktonic) and anchored (biofilms, spores, fungus).
While planktonic bacteria are well understood and relatively easy to eradicate, biofilms pose a challenge. Biofilm can consist of several bacterial or fungal species and chronic wounds represent one of the more extreme examples of how biofilms negatively affect human health.
Next Science has been granted 20 patents with another 50 applications pending. The patents provide broad protection for the solution parameters of the company's formulation.
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