When it comes to biotechnology companies, investors are always looking for the next company that offers the potential for a breakthrough technology platform. After scouring the marketplace, it appears that AxoGen (AXGN) has such potential. Late last year, fellow author Tedra DeSue, wrote an article describing the revolutionary technology that AxoGen was working on. This article will be a continuation of that stellar piece and will discuss 5 reasons why AxoGen offers investors significant upside:
· Breakthrough Technology
· NASDAQ Listing
· Insider Buying
· Recent Analyst Coverage
· Strong Financial Position
AxoGen is a regenerative medicine company with a portfolio of products and technologies for peripheral nerve reconstruction and regeneration. The company's goal is to help patients suffering from traumatic injuries or who are undergoing surgeries that impact the function of peripheral nerves. The importance of the peripheral nerves is paramount as they provide the pathways for both motor and sensory signals throughout the body. Any damage to these nerves can result in the loss of muscle or organ function, the loss of sensory feeling or pain and can significantly impact the patient's quality of life.
Reason #1 - Breakthrough Technology
As mentioned above, the company has developed a diversified portfolio of products and technologies. The company's portfolio includes the following products:
- Avance Nerve Graft - This is the company's alternative to autografts. It is a processed nerve allograft used for bridging nerve discontinuities.
- AxoGuard Nerve Protector - Used to reinforce a coaptation site, wrap a partially severed or compressed nerve, and isolate tissue.
- AxoGuard Nerve Connector - A coaptation aid which allows for close approximation of severed nerve ends.
The target market for these products is the medical community, specifically surgeons. The above technologies can provide a way for surgeons to reconstruct injured nerves without the comorbidities associated with a secondary surgical site. As such, the market potential is immense.
As the diagram below shows, the current estimated annual market for AxoGen's products totals $1.6 billion in the U.S. alone.
Just last week, Magellan Medical Technology Consultants published an independent research report detailing the potential for AxoGen's regenerative medicine portfolio. Given that AxoGen's market capitalization is approximately $76 million, the potential for share price appreciation is based on the potential market size should really get investors excited.
Reason #2 - NASDAQ Listing
Earlier this month, AxoGen received approval to list its stock on the Nasdaq Capital Market. The move to the NASDAQ represents a major milestone for the company and offers the company several new advantages. Karen Zaderej, CEO of AxoGen, noted that the company's move to the NASDAQ will help to place it among the most innovative growth companies in the world. It will also provide more efficient trading for shareholders and increase the company's visibility to institutional investors.
Reason #3 - Insider Buying
Over the past few weeks, AxoGen has seen significant insider buying activity, which is always a good sign as it suggests that insiders are confident about the company's prospects.
The below table indicates the numbers of shares purchased by various AxoGen insiders.
When a company begins to see significant insider buying, that is normally seen as a sign of strength for the company. Investors especially enjoy seeing it because they feel safer when management is as heavily invested as they are. Because all shareholders want the share price to rise, everyone's goals are aligned.
In addition to corporate insiders, it should be noted that there are two large institutional holders of AxoGen shares. AMG National Trust Bank holds almost 16,000 shares while Reilly Financial Advisors holds 8,000 shares. As the company continues to develop its proprietary technologies, I expect the amount of institutional holders to rise dramatically.
Reason #4 - Recent Analyst Coverage
In addition to management being bullish on the company's prospects, Wall Street is apparently beginning to take notice as well.
In a recent research note, analysts at JMP Securities reiterated their Market Outperform rating on the stock. JMP Securities has a price target of $7 on the stock, which is based on a multiple of 5x EV/Sales applied to the brokerage's 2015 revenue estimate of $32 million. If this occurs, investors would be looking at a return of about 55% on their investment. According to JMP Securities, AxoGen remains cheap when compared to high-growth peers. The analysts forecast that the company will generate revenue of $12 million in 2013. In 2014, analysts expect that number to jump to $19.2 million. The current consensus forecast for 2013 and 2014 is $12.83 million and $18.72 million, respectively.
JMP Securities also notes that its bullish stance on AxoGen is mainly due to the time savings, lower cost and enhanced safety profile of Avance compared to the standard care. It's also important for investors to note that the revenue estimate could prove to be conservative as it was mentioned earlier that this particular industry has an estimated annual market of $1.6 billion. One needs to look no further than the recent takeout of MAKO Surgical (MAKO) to understand the premium that other companies will place on innovative technologies within the medical community.
Reason #5 - Strong Financial Position
While analyzing the potential for a biotechnology company is always the most important step, investors also need to take a look at the existing financials to understand what kind of shape the company is in at the current time. After looking at AxoGen's financial statements and recent performance, the company appears to going strong.
In August, the company completed a secondary offering in which it sold 6 million shares while raising $18 million in the process. JMP Securities analysts view the offering as a long-term positive as the cash should help the company accelerate its growth trajectory by hiring more representatives. The company has already stated that it plans to use the net proceeds from the offering to expand its product commercialization and marketing efforts for its portfolio of peripheral nerve repair products, as well as further develop its product pipeline. AxoGen's CEO said that the successful closing of the $18 million stock offering provides additional validation of the peripheral nerve repair market as a growth segment.
It's also important to note that this offering significantly boosted the company's cash reserves and should be enough to fund the company for years. As of the end of June, AxoGen had approximately $8.7 million in available cash. Together with the recently completed offering, the company's available cash sits at $26.7 million. However, we must also compute the monthly burn rate to get an accurate approximation. Based on the recent quarterly income statements, AxoGen has a monthly burn rate of approximately $700,000. Given that it is now almost the end of September; investors can safely assume that the company has approximately $24.6 million in available cash. That should be enough to fund the company through at least the end of 2015 and into 2016.
In addition to a very strong cash balance, the company has also made significant strides with its revenue growth. The company posted second-quarter revenue of $2.86 million, an increase of 42.2% on a quarter-over-quarter basis. The company's gross profit for the quarter also came in at an exceptional $2.23 million, an increase of 47.6% on a year-over-year basis.
Despite all the promise that the company holds, investors need to also understand the risks associated with an investment in AxoGen. The shares are already up more than 65% YTD. While this is an incredible performance, new investors need to understand that if there is any sort of market correction, AxoGen shares may see a selloff. Now, of course, if the market continues its strong performance, AxoGen could continue to climb at a rapid fire pace as the company continues to progress with its plans.
The company is also competing with some of the biggest companies in the world such as Integra Life Sciences Holdings Corporation (IART) and Johnson & Johnson (JNJ). Both of these companies are valued at a higher market capitalization so their ability to spend is a little higher than that of AxoGen. At the same time, the potential reward is also much higher with AxoGen so investors need to weigh the risks/rewards laid out in this article.
Based on the 5 reasons above, it appears that AxoGen is headed for a bright future. With the recent insider buying and positive analyst coverage, investors should begin to take notice of this significantly undervalued company. And with the recent improvement in the company's financials, AxoGen should begin to gain more traction in the nerve repair market and help investors reap the rewards of an early investment.