With all eyes focused on the much anticipated first U.S. based social networking IPO of the year from LinkedIn (NYSE:LNKD) on Wednesday, there is another IPO this week that is quietly garnering investor interest. Advanced BioHealing, Inc. (ABHB) looks to debut Wednesday morning to solid demand.
The Advanced BioHealing IPO consists of 13,350,000 shares at $14.00 to $16.00. Of the shares being offered, 8.35M are offered by the company and the remaining 5M shares are being offered by selling shareholders, including Canaan VII L.P., Wheatley Partners and its affiliates, as well as certain executive officers, directors and other stockholders. Proceeds to the company are expected to be used for the development of a second manufacturing facility, for working capital and other general corporate purposes and to potentially repay the outstanding balance on their existing term loan. The offering is led by BofA Merrill Lynch (NYSE:BAC) and JP Morgan (NYSE:JPM).
Advanced BioHealing develops and commercializes living cell therapies. Their lead product, Dermagraft, is FDA approved for the treatment of diabetic foot ulcers (DFU). Dermagraft is a human dermal replacement, and described by the company as one of only three products to have ever got FDA approval through randomized clinical trial data sets for accelerating wound healing. Since the launch of Dermagraft in 2007, the company has sold over 200,000 units used to treat an estimated 50,000 patients.
The company believes their market opportunity in DFU alone is approximately $3B in the U.S. This is made up of the addressable market of approximately 538k cases of "slow healer" cases of DFU in the U.S., out of a total of approximately 900k cases per year in the U.S. The company is conducting a large 500+ patient study for their next indication for Dermagraft, vascular leg ulcers (VLU). The company believes the market opportunity in VLU is equal to that of DFU, or approximately $3Bin the U.S. alone. The primary endpoint in this study is 100% wound closure in 16 weeks. They expect to have final data in Q4'11, and target FDA submission in Q1'12.
The primary competitor in the treatment of DFU is a product called Apligraf, which was developed and is manufactured by Organogenesis, while Novartis (NYSE:NVS) has the worldwide distribution rights. One of the primary competitive advantages of Dermagraft as compared to Apligraf is in the shelf life. Dermagraft has a shelf life of approximately 6 months, while Apligraf has a shelf life of approximately 10 days. Apligraf does however already have the VLU indication as well. As far as potential generic competitors are concerned, there is no pathway currently for a generic competitor. This is primarily due to the complex nature and inhibitive cost associated with the manufacturing process.
Advanced BioHealing has grown revenue from $9M in 2007 to $147M for 2010. Fist quarter 2011 revenue was up 50% over the same period in 2010 to $44M. Gross margin, operating margin and net margin for 1Q'11 were 80%, 18.4% and 9% respectively. At the midpoint of the range, the company is coming at approximately 4x 2010 Price/Sales, and at a more attractive valuation when looking at forward P/S estimates.
Advanced BioHealing is a unique healthcare/drug related IPO as compared to many recent offerings, in that it offers an FDA approved product that is currently profitable and addresses a large underserved end market. At a midpoint market capitalization of $597M, the current range appears to be a reasonable valuation.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I may initiate a long position in ABHB over the next 72 hours.