Bacterin: New CEO Positions Company For Growth

| About: Xtant Medical (XTNT)

(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)

Summary and Recommendation

We reiterate our positive outlook on Bacterin International Holdings, Inc. (NYSE MKT: BONE) shares given the company's recent hiring of new CEO and its recalibration of its sales team to focus on its core business in the approximately $1.6 billion bone replacement market and the growing, $400 million breast reconstruction market in regenerative medicine.

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Bacterin is one of the most comprehensive biologics companies of its size in regenerative medicine. The company's new CEO, Dan Goldberger, held an investor call last week to discuss his current review of the business and provided a summary of his strategic position of the business going forward. After the call, we are more confident that management will be laser-focused on developing the biologics markets with bone grafts and dermal matrix products.

Over the past 12 months, the company has been wrought with negative headlines; the receipt of warning letters from the FDA, a subpoena from the OIG and the resignation of founder and CEO Guy Cook. The sequence of these headlines have left shareholders concerned about the sustainability of its business and as a result shares of the company have traded at all time lows.

Despite those concerns, Bacterin's interim management team lead by CFO John Gandolfo and COO Darrel Holmes focused working diligently to resolve its matters with the FDA and OIG. They also raised approximately $5 million in capital, which management believes will be suitable to steer the business towards profitability.

Now, a Commercially Focused CEO

Mr. Goldberger should be a refreshing solution that will reinvigorate the sales force to drive growth. He has a history of turning around and growing revenues in companies with similar characteristics as BONE. In his most recent position, the Stanford and MIT educated executive transitioned lackluster growth at Sound Surgical Technologies into a growth business. He procured financing opportunities for the company that allowed it to deliver double digit, top-line growth with improved gross margins. This transformation eventually positioned Sound Surgical to be acquired by Solta Medical.

A Renewed Focus

Bacterin has developed a comprehensive portfolio of regenerative products. During his inaugural call with investors, Mr. Goldberger mentioned that the Company will continue to increase its penetration of the bone replacement market with its core business products in bone grafting. He also, however, indicated that the Company will leverage the value of its dermal tissue scaffold in breast reconstruction, hMatrixPR. This would represent a new growth opportunity for Bacterin. The Company estimates that the dermal tissue market in breast reconstruction represents a $400 million market opportunity. The dermal tissue market is primarily dominated by Alloderm, the LifeCell product owned by Kinetic Concepts.

Essentially, there are two types of breast reconstruction, implants and autologous. Previously, in autologous breast reconstruction, fat, tissue and muscles were harvested from another part of the body, creating irreparable damage. With cadaveric tissue harvestation, that problem has been solved with products like Bacterin's hMatrixPR. In this process, skin from the donor is treated by removing epidermal layers and cellular components, creating an acellular dermal matrix. The product is then sterilized and packaged. Dermal matrices are used as a scaffold under the lower part of the breast to enable normal body cells to grow.

One major problem with this technology had been that chemical agents used to sterilize the product, could lead to post-surgery infection. There was a 15% higher chance of infection and 10% chance of fluid collection, despite efforts by the surgeon to create a sterile atmosphere by proper drainage, hydration and hemostasis.

Bacterin solves this problem by avoiding the use of chemical agents. Instead, it uses a small dose of gamma radiation to sterilize the product. This process helps the product become more useful, since their integration with the host is considered much superior to other allografts.

hMatrixPR Acellular Dermis was commercially launched 2 years ago for various reconstructive surgery procedures. It is extremely biocompatible, reabsorbing into the patient's own tissue in the healing process. Although Bacterin originally focused on the broader dermal tissue market,a shift has occurred to focus on breast reconstruction. With the increasing demand for this type of surgery, the opportunity for the company to penetrate this market looks good. This is also augmented by the following facts:

  1. the CEO has strong relationships with plastic surgeons via his previous role at Sound Surgical,
  2. opportunity to convert surgeons that are on the fence with Alloderm, and
  3. high barriers-to-entry in the dermal allograft market, including complex technology and quality, consistent products

Regenerative Medicine: Growing Market Opportunity

The regenerative medicine market is an estimated $3.6 billion opportunity, which is growing at a ~15% CAGR. The market is shared between the developed and the developing countries, where there is a large, unmet need. It is in this geography that there is opportunity for sustainable long term growth. However, the allure of newly-discovered geography should not let BONE lose focus on the developed economies. This is the market that will create immediate sustenance for this growing company.

BONE: Undervalued Relative to Peers

As shown in Table 1, BONE currently trades at 1.0 times EV/2014 Sales, which is a 79% discount to its peers that trade at an average 4.7 times sales. A little execution from management and top-line growth will catapult BONE shares to historic levels. Bacterin is evenly placed among peers, neither overachieving nor being at the end of the class. This is, in fact, a sign of steady growth.

In first quarter 2013, total revenues increased by 11% to $8.6 million compared to $7.8 million in the same period last year. The increase was due to the additional sales of $1.3 million which resulted from a new agreement with a large U.S. distributor during the first quarter of 2013. Adjusted operating loss was $1.06 million compared to $0.54 million in first quarter 2012. The company is yet to report positive earnings. The company uses most of its cash to support its operations and depends on external financing. As of March 31, 2013, cash balance was $2.1 million compared to $4.9 million in December 31, 2012.















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Risk resolution

According to the Mr. Goldberger, his checks in the field have determined that customers "love" Bacterin products. and he enumerated a five-point plan in during the call which aims to ensure that the Company leverages this attribute:

  1. Resolving channel conflicts in core U.S. markets.
  2. Continuing to deliver world class service through field sales activities and customer service organizations. The Company currently has 20 direct sales reps and more than 100 distributors detailing Bacterin products in the United States.
  3. Resolve product mix issues that have resulted in shortages on the one hand and excess inventory on the other.
  4. Continue to work with our GPO relationships and drive those into new business, and
  5. Driving adoption in the health systems where the Company has obtained preferred vendor states, and then use that as a model in new relationships elsewhere.

Longer term, Mr. Goldberger believes he can grow the bone scaffold franchise in spine and ortho and that the business can be scaled effectively.

Backing up what he says

In recent weeks since his hiring, Bacterin has seen significant insider buying activity from Mr. Goldberger, which is always a good sign and suggests that he is confident about the company's prospects.





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Bacterin has a highly viable set of products which has created a niche demand segment for itself. We have enumerated some of its problems here, but we believe all these are short term problems that are easily addressable by this strong management team. The arrival of a Mr. Goldberger as the Company's CEO and his track record of turning around companies like Bacterin, present a renewed focus for the business and a solid, near-term opportunity for healthcare investors.

Table 1: Peer Group Analysis

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: For the complete report including models & tables, please contact: COCKRELL GROUP does and seeks to do business with companies covered in COCKRELL GROUP Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of COCKRELL GROUP Research. Investors should consider COCKRELL GROUP Research as only a single factor in making their investment decision.CertificationThe following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report.Unless otherwise stated, the individuals listed on the cover page of this report are research analysts