Continuing to execute strategy on core focus

aap Implantate 7 September 2016 QuickView

aap Implantate

Continuing to execute strategy on core focus

Healthcare equipment & services

QuickView

 

7 September 2016

Price

€1.22

Market cap

€38m

Share price graph

Share details

Code

AAQ

Listing

XETRA

Shares in issue

30.8m

Business description

aap Implantate is a German medtech company, focused on developing, manufacturing and selling products for bone fractures. This is primarily the LOQTEQ trauma plating system alongside earlier-stage innovations including antibacterial silver coating technology and magnesium-based implants.

Bull

Proven technology and strong IP protection.

Transition to a pure trauma player enables a focus on building the core business.

Focused on driving sales in more established markets – increased distributors in the US and an experienced head of US sales engaged.

Bear

FY15 sales were down by 9% on FY14. Trauma sales were down 16%. Q2 demonstrated an improvement, but risk remains in the execution of the strategy.

The orthopaedic space is dominated by a few large players, making it difficult for a small player to gain traction.

Impact of increased sales focus on established markets will not be fully demonstrated until H216.

Analysts

Dr Linda Pomeroy

+44 (0)20 3077 5738

Lala Gregorek

+44 (0)20 3681 2527

 

aap Implantate is a research client of Edison Investment Research Limited

Q216 results were in line with the upper end of company guidance, with sales of €3.4m and an EBITDA loss of €1.4m. aap Implantate continues to focus on its strategic transition to being a pure trauma company, following the recent sale of its Biomaterials business. As the company continues to drive sales of LOQTEQ in Western Europe and the US alongside the implementation of cost reduction measures, we could see a return to sustained growth.

Q216 results

aap Implantate reported sales and EBITDA in line with the upper end of its guidance. It reported sales of €3.4m (guidance €2.5-3.5m) and an EBITDA loss of €1.4m (guidance loss of €1.5-2.5m). This was achieved against the backdrop highlighted by the company in which a number of BRICS and SMIT states’ markets remain volatile such as China, Russia and Turkey and continue to make no contribution to sales. It is encouraging that aap Implantate delivered on guidance as it announced in Q1 that it had started a number of initiatives to drive Trauma sales in more established markets (Western Europe and the US). US sales were reported at €0.7m in Q2, an increase of 250% from Q215 (€0.2m). In our opinion, the progress of uptake in the US market is key to the success of LOQTEQ.

Key growth drivers

Key growth drivers in FY16 and FY17 include growing sales in more established markets (Western Europe and the US), increasing LOQTEQ indication coverage, CE marking and submission for FDA approval for its antibacterial silver coating. Management guidance remains at 20% revenue growth for Trauma products in FY16.

Valuation: Upside potential with continued focus

Q2 results demonstrate that aap has taken the first step to move back to revenue growth through various initiatives. The company is well funded following the sale of its Biomaterials business in Q2, with reported cash of €32.2m for the group at 30 June 2016. It intends to use part of the proceeds from the sale of its Biomaterials business to drive its pipeline forward and distribute part of it to its shareholders, for example, a dividend payment possibly in FY17. We expect upside potential if the increased initiatives to drive sales in the more established markets (US and Western Europe) continue to prove fruitful. In addition, a final feedback from the EU authorities on the CE mark for aap’s silver coating is expected for late 2016/early 2017. The submission of the documents for FDA is planned for 2017.

Consensus estimates

Year end

Revenue (€m)

PBT (€m)

EPS (c)

DPS (c)

P/E (x)

Yield (%)

12/14

30.6

(1.7)

0.0

0.0

N/A

N/A

12/15

28.0

(5.3)

(0.2)

0.0

N/A

N/A

12/16e

31.8

(1.7)

(0.2)

0.0

N/A

N/A

12/17e

34.5

(0.3)

(0.0)

0.0

N/A

N/A

Source: Bloomberg, aap Implantate accounts

Core business now focused on trauma

In March, aap announced that it had signed a share purchase agreement for the disposal of its subsidiary, aap Biomaterials, to a European private equity firm for an assumed enterprise value of €36m. As a result of the disposal, aap has become a fully focused trauma player.

The trauma portfolio centres on three technologies: aap’s anatomical plating system (LOQTEQ) for fracture repair; its antibacterial silver coating technology, which prevents the formation of biofilm and therefore reduces infection; and magnesium-based implants, which are biodegradable in the body.

Plating system – LOQTEQ

Anatomically shaped trauma plates are used in orthopaedic surgery to join fractured bones. This is referred to as internal fixation, as opposed to external fixation of a fracture via a splint or plaster cast. Internal fixation has been widely available for around the past 50 years, and plate and screw technology has evolved and developed to improve healing and repair.

The most recent advances combine the use of “locking” and “compression” technology, where screws have been designed to lock into the plates themselves, while at the same time allowing bone fracture compression, all with minimal bone-plate interaction, shown in Exhibit 1. This approach provides support and stability, even in weak or multi-fragment fractures.

Exhibit 1: Locking and compression schematic

Source: aap Implantate presentation

The market leader is currently Synthes’ Locking Compression Plate (LCP) system. LOQTEQ’s design could offer a number of advantages over the traditional locking compression plating systems, including:

locking mechanism: LOQTEQ’s locking and compression is achieved by one screw in one hole with one step;

potential clinical advantage if the design is proved to avoid ‘cold welding’ (locking screw becomes jammed in the plate) at the point of plate removal (none reported since its launch in 2012); and

variable compression length (stepwise compression of 0, 1mm and 2mm) offering the surgeon choice and flexibility.

IP update

In the Q2 results the company announced a notice of allowance for a further US patent, which it terms an ‘umbrella patent’. This patent reportedly integrates the claims from previous patents and, according to the company, offers comprehensive protection in the US and builds on its patent portfolio for the core technology of LOQTEQ.

Commercialising LOQTEQ key to unlocking potential in Trauma

The company’s strategic aim is to drive sales in more established markets in Western Europe and the US, with the BRICS and SMIT markets such as China, Turkey and Russia continuing to make no contribution to sales due to the current difficult economic conditions. Q2 results are encouraging as aap has reported sales at the upper end of its guidance, which indicates that the sales initiatives it has been putting in place in 2016 are starting to deliver results. These measures have included growing its distributor base in the US and hiring an experienced head of US sales. In our opinion, the US market will be a key factor in the growth of the trauma business.

The company has indicated that its LOQTEQ indication coverage is over90% for large bone fractures. The expansion of this coverage remains one of aap’s targets, which is important as it will enable the company to better leverage its organisation’s salesforce, build scale that can enable bundling offers to assist with uptake and enable surgeons to be consistent in their treatment approach, which could drive more conversions to the technology.

Potential advantage of a silver coating – platform technology

aap is working to commercialise its internally developed silver coating technology to improve infection prevention. It is a platform technology with potential in a number of different areas such as orthopaedics, cardiology, dentistry and other medical instruments.

It has the potential of addressing a critical problem found in surgery - infection. During a procedure it is possible for a medical implant to become colonised by bacteria, creating a biofilm around the implant. This can result in serious infection and is therefore important to prevent at an early stage. The silver coating technology could prevent the bacterial colonisation of the implants’ surface and could therefore prevent infections and improve healing. Finally, the company also indicated that it has good biocompatibility and is cost–efficient to apply the technology due to the relatively short coating time and low level of capital investment required for the coating machines.

aap is actively engaged with both the European and US regulatory authorities to gain CE marking and FDA approval respectively. In the EU the company is currently in the process of a CE conformity assessment procedure for a silver coated LOQTEQ plate and in the US the company has indicated it has had an encouraging pre-submission meeting with the FDA. aap has also indicated it has had positive meetings with the EU authorities and is making amendments following feedback. We expect final feedback on the application in late 2016/early 2017. In the US, aap intends to submit the necessary forms for a 510k assessment in 2017.

Potential future prospect for implants – magnesium

Another aspect of aap’s Trauma portfolio, which is being developed, is the fact that it is focused on leveraging its proprietary coating technology, in this case on magnesium based implants, to develop resorbable magnesium implants. Such implants could be used in trauma applications, particularly for small implants in, for example, hands and feet, and would remove the need for later explantation (removal) of the implant. The company has indicated that it has successfully tested coating a third-party magnesium implant. It expects to move this innovative development stream forward in 2017 if it can form a co-operation with a third party, whereby the third party would bring an approved alloy to the partnership and aap would bring its coating technology.

Valuation: Upside potential with continued focus

According to Smith and Nephew worldwide sales of orthopaedic products was estimated at c $45.9bn in 2014 and growing at 7%. The trauma segment has demonstrated strong growth over recent years, driven primarily by an increase in fractures with increased participation in sport and an ageing population.

Exhibit 2: Trauma market (by company)

Source: S&N company presentation and Edison Investment Research

M&A has been a significant factor, which has led to considerable consolidation in the trauma market. For example, Synthes, the market leader in trauma, was acquired by J&J/DePuy alongside other mega deals such as Zimmer Biomet and Wright Medical – Tornier. Exhibit 2 above outlines the Trauma market share in respect of the various competing companies. We expect a gradual shift away from these scale-based acquisitions towards transactions that enhance value through innovation and enable a focus on category leadership and portfolio depth. In the longer term, providing aap delivers on its strategy, we consider that by becoming a trauma-focused company with proven technology, strong IP protection and with increased sales, it could attract M&A value.

We note that the average price paid in recent trauma-focused deals is 5.7x sales (see Exhibit 3 below). Per FY15 annual reports, aap has generated Trauma related sales of €12.3m in FY15.

Exhibit 3: Recent trauma-focused deals

Acquirer

Target

Deal value ($m)

LTM* sales ($m)

Price/sales (x)

Stryker

Small Bone Innovations

375

48

7.8

Wright Medical

Biotech International

80

15

5.3

Tornier

OrthoHelix

135

29

4.7

Stryker

Memometal

150

30

5.0

Average

5.7

Source: Edison Investment Research. Note: *Last 12 months.

Disclaimer

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by aap Implantate and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison's solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are "wholesale clients" for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a "personalised service" and, to the extent that it contains any financial advice, is intended only as a "class service" provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited ("FTSE") (c) FTSE [2016]. "FTSE(r)" is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE's express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Disclaimer

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by aap Implantate and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison's solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are "wholesale clients" for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a "personalised service" and, to the extent that it contains any financial advice, is intended only as a "class service" provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited ("FTSE") (c) FTSE [2016]. "FTSE(r)" is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE's express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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