Thursday, 23 February 2012

Bacterin expected to generate "high revenue growth" in 2012, says Northland Capital

Bacterin (AMEX:BONE) received Wednesday initial analyst coverage from Northland Capital Markets, which started the developer of bone graft material and antimicrobial coatings with an outperform rating and a bullish $4.80 price target.

The company has developed a proprietary technology for processing human donor tissue (also known as allograft) into surgical graft material in a sterile, ready-to-use product that retains the native growth factors from the donor tissue.

Notably, the equities research firm said the product works "as well or better than synthetic growth factors at one third the price, a value proposition that ought to play well with hospitals".

Bacterin recently extended its product offerings, expanded production capacity, and built a direct sales force, with all these factors expected to come together this year to generate high revenue growth and margin expansion, ultimately leading to profitability, said Northland.

In the research report, Northland noted Bacterin's new products, which represent upside to Northland's estimates, as the company started in bone products for use in orthopedic prodcedures such a spinal fusions, but recently expanded its offering with two new product areas.

Northland's senior research analyst, Bruce D. Jackson, said: "Though the company will continue to innovate, it now has a core set of products hitting the market. More than 100,000 Bacterin grafts have been implanted as of Q3 2011."

The first new product, OsteoSponge SC, is a chondral tissue product that can be used for knee repair.

Revenue projections for OsteoSponge are supported by two-year results from a study comparing OsteoSponge to rhBMP-2, where OsteoSponge patients generated equivalent fusion results with significantly less leg pain at one year relative to the rhBMP-2 group.

This study has also been accepted for publication in a peer-reviewed medical journal, which should serve as a future catalyst for the stock, Northland said.

The second new product line, hMatrix, is a skin product for use in soft-tissue repair procedures.

These recently-launched products are not in management guidance and therefore represent potential upside, the capital markets firm added.

In addition to this, Northland forsees Bacterin's direct sales effort taking off, as since implementing a direct sales network in July 2009, it now has more than 70 sales reps. These reps should accelerate sales growth, Northland said, leading to better overhead absorption and margin expansion.

Management is also planning to add 30-35 new sales representatives in 2012. Currently representing 40 percent of total revenue, Northland expects direct sales and stocking orders to represent 50 percent of the revenue mix by the end of 2012.

Northland's Jackson noted: "Bacterin’s acellular biologic scaffolds offer surgeons superior flexibility and handling characteristics without destroying the native bone growth factors.

"Surgeons get an easy-to-use graft material that is both osteoinductive and osteoconductive, thus providing for better patient outcomes. In addition, these are the only allograft products on the market that are sterilized and ready-to-use. Bacterin’s bone products work as effectively as products like INFUSE from Medtronic at a fraction of the cost, offering both physicians and hospitals a compelling value proposition."

Bacterin holds proprietary technology in two areas, being surgical allograft and biomaterial coatings, which are used for medical devices to prevent infections.

According to Northland, catalysts to Bacterin's share price include additional indications for the OsteoSponge SC to include primary repair of cartilage in the second half of 2012, expansion of H-matrix availability, the expansion of its anti-microbial product offerings this year, as well as additional group purchasing organization contracts.

In May 2010, Bacterin signed a three-year contract with Broadlane, the number five group purchasing organization (GPO) in the United States with more than 1,100 member hospitals. Broadlane was subsequently acquired by number four GPO MedAssets, providing access to an additional 1,700 hospitals.

Northland's Jackson concluded: "After years of product development, we believe the company is more than ready to focus on marketing and distribution. So far, the company has diversified its supply of donor tissue, expanded its production capabilities, developed the infrastructure of a strong sales force, and refined the deliverable message to the market.

"During Q3 2011, the company signed four new procurement agreements, and management believes they now have enough donor supply to support anticipated growth through 2013.

"Management plans to ramp up production further in late 2011 with the addition of a second shift. We view these plans as a bullish indicator for future product demand, which gives us increased confidence in our estimates."

Risks to achieving Northland's price target include competition from larger companies, the availability of sufficient quantities of raw material, and unpredictable rates of uptake for new products, the firm said.

Bacterin is currently changing hands at $2.96, with its shares up more than 13.4 percent Wednesday on the bullish research note.

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