Fahroni/iStock via Getty Images

Fahroni/iStock via Getty Images

Sanara MedTech (NASDAQ:SMTI ) is somewhat undervalued based on realistic growth expectations for its primary product, Cellerate. However, the company aims to be far more than this single product. The Sanara team is aiming to provide wound care services across the care continuum and is actively developing and piloting a wound care EMR and telemedicine service. Given its talented and well-aligned management team, I think there are reasonable odds they can pull it off. In bull case scenarios, Sanara is a multi-multi-bagger.

Sanara MedTech is a company that develops, markets and sells surgical and wound care products to physicians, hospitals, and other care settings in the US.

While Sanara has or is developing a number of products, the star of the show is CellerateRX (hereafter just Cellerate), which accounts for over 90% of Sanara's revenue. Cellerate is a hydrolyzed collagen powder used after surgery to promote wound healing and reduce the risk of infection.

Cellerate's primary use case is with wounds that are going to be hard to heal, either due to idiosyncratic features of the wound or due to the patient's co-morbidities. For example, a wheelchair-bound, obese diabetic person's toe amputation wound is going to take much longer to heal than the average wound and will be far more prone to infection along the way. It is generally estimated that 2-4% of surgical wounds become infected, but as you can imagine, this rate is significantly higher in certain populations/wounds.

The company grows Cellerate sales by first gaining approval for use at a given hospital then selling through to surgeons as they are able to make the use case clear. The company's products present a value proposition for these hospitals, as post acute-care complications are an incredibly expensive burden. When a wound develops an infection, dehisces, or fails to heal, the patient may need extensive treatment, repeat hospitalization, or even repeat procedures. Under most reimbursement models - although depending on the time frame in different settings - hospitals typically have to eat these costs. Thus, the paying $600-700 for Cellerate to reduce the risk of a $50,000+ hospitalization for a fairly high-risk wound presents a pretty tolerable value proposition.

It is important to note that Cellerate is not under patent. The company is looking to develop the next-generation of Cellerate and to develop an IP framework around this next generation but does not yet have this in place. The company does, however, indicate that manufacturing Cellerate is difficult and that this process is protected by trade secrets, potentially mitigating the likelihood of a competitor product being developed.

Cellerate is approved for use in 900 hospitals as of the most recent report (this will likely be higher at the next earnings report this week) and has an estimated possible TAM of ~12,000 hospitals.

Aside from Cellerate, the company has a product portfolio and several products in the development pipeline:

Rather than delve into each of the other products, I will simply lump them into the "optionality" bucket. Valued today on Cellerate, Sanara is attractive.

However, when we talk about the possible growth levers, things start to get downright exciting.

If you take a look at Sanara's investor presentation and listen to its leadership, it becomes clear that Sanara wants to be more than Cellerate. Rather, Sanara wants to be a comprehensive solution for wound and skin problems at all stages of the healthcare continuum:

This is where we get to the upside optionality Sanara offers investors. Not only is Sanara continuing to develop and market the remainder of its product suite, but more interestingly, Sanara is looking to develop a comprehensive diagnostic, telemedicine consult, and EMR suite of products that, while nascent, could prove to drive extraordinary shareholder value if executed upon.

At the end of the day, the thesis for Sanara is simple: the company is likely moderately undervalued based on future growth expectations for its main product, Cellerate. In Cellerate, investors have the potential for significant upside as well as relatively capped downside. Embedded within this, however, investors also enjoy tremendous upside optionality with Sanara's telemedicine platform in development and a more complete product portfolio and development pipeline.

Sanara has a talented and well-aligned management team, starting with its Chairman, Ron Nixon.

Nixon founded The Catalyst Group, a small/medium sized private equity group in 1990 and continues as its managing partner. He additionally serves on the Board of Directors of LHC Group (LHCG) after having been an early investor; LHC is a post-acute care company. Nixon is a smart operator in capital markets and one who knows the post-acute care industry. Today, key insiders, including Nixon, own approximately 50% of the company, keeping management well-aligned with shareholders.

The Sanara story and Nixon's involvement really starts in 2014, when The Catalyst Group invested in Rochal Industries, which was basically an R&D shell focused on wound and skin care that licensed out its products to sales companies. Then, in 2019, Nixon took over Wound Management Technologies, a cash incinerating microcap, which he then rebranded to Sanara MedTech, before setting up a licensing agreement with Rochal's product portfolio. The story then comes full circle in July of 2021, when Sanara purchased certain assets of Rochal, including IP, licensing, and - critically - the R&D unit and personnel.

The company has a clean balance sheet with $27m in cash and no debt coming off the early 2021 equity raise.

While the balance sheet is clean, the company is currently cash flow negative and will have to continue to fund operations through its cash balance and may need to issue more equity for future growth opportunities. Again, much of the investment case for Sanara involves an inflection in the business and an increase in profitability.

With an annual operating cash flow of -3-4M for the foreseeable future, I do not see a near-term equity raise, barring a significant investment opportunity.

I aim to show here that Sanara is reasonably valued only based on the growth in its primary produce, Cellerate and without any other revenue sources considered.

Below you can see my three broad models:

As you can see, a lot hinges on the balance between revenue growth rate and SGA expenses. I spent a lot of time playing around with these on my own and just show these three examples to give a rough idea of the range of outcomes I think are on the table.

On the balance, I think you can see that under most reasonable assumptions, Sanara is reasonably valued or potentially undervalued based on just Cellerate, with a range of outcomes including multi-bagger potential just with this single product.

So let's look at the two main variables - revenue growth and SGA.

To address revenue growth rate first, I do believe we are likely to see a significant acceleration in the revenue growth rate. Why? First, the company has been adding hospitals at a rapid rate but has not yet begun to sell into many of these hospitals (approved in 900 but only sold in ~300 as of Q2). As the company continues to gain approval in the hospital list and then be utilized in those hospitals in turn, revenue will turn explosive. Second, there is something of a network effect with the use of this product - once a surgeon starts to use it and likes the results, others in a given group or hospital may start to use it as well. Nixon spoke to this in the most recent conference call:

Third, COVID has likely had a significant impact on utilization uptake as COVID has had a suppressive effect on elective surgery case numbers.

In fact, when we look at some of the quarters with less COVID impact (Qs 1+2 of 2021 were post base variant and largely pre-Delta variant), we can see Sanara's growth rate ramp aggressively:

By Q2, the company's 6 months 2021 revenue was up 74% vs 2020. Of course, 2020's revenue was artificially depressed by COVID (although was still respectable with 32.5% growth over 2019), but you still get the idea - growth is accelerating.

While the Q3 release may be somewhat challenged due to effects from Delta, I expect the company to be off to the races from there.

SGA is much more difficult to model. Broadly speaking, I expect SGA to continue to rise at a reasonably high rate as the company invests in the growth of its sales force:

In fact, as an investor, I want this. I want Sanara to onboard hospitals and make surgeons aware of the product to drive revenue growth. That said, I would like to see increasing incremental returns for each SGA dollar spent. I do expect that to be the case due to the various network effects of the sales process as described above.

It's also worth realizing that with the lead time between onboarding a salesperson - which costs SGA money - and them actually adding material revenue is likely fairly long. First, Sanara needs to onboard and train the salesperson. The salesperson then needs to develop a relationship with a hospital, get the approval process rolling and then completed, and then they have to begin to actually get surgeons to use the product. As you can imagine, this takes a long time, meaning the revenue growth lags a bit behind the SGA expense, making them appear to be growing hand in hand.

Beyond Cellerate and the rest of its product portfolio, Sanara is looking to enter the EMR (electronic medical record) and telemedicine game.

Before we go too far into this, it should be noted that Sanara is in the very early innings here. It remains to be seen whether this will ever hit scale and become a driver of revenue, although I think there are good reasons to think it will.

For a primer, I'd recommend watching this presentation on YouTube. At minute mark 21:08 Nixon starts to talk about the virtual consult strategy.

I'll aim for the basics, starting with the slide that shows the overview of the flywheel:

Sanara is looking to develop a complete wound care platform that ranges from:

-Diagnostics - via the "Precision Healing" platform, which uses diagnostic imaging as well as an array of biomarkers to assess the status of the wound and thus how healing should be approached.

-Consult Services - access to on the demand wound and skin care consultants.

-EMR and Decision Support - a record-keeping system that will track the wounds but then will also develop treatment algorithms as the biomarker data and treatment response data is collected and analyzed over time.

-Products - we have already touched on the product suite, but it's pretty easy to see how the Diagnostic/Consult/Decision Support flywheel is going to feed forward into selling more of Sanara's wound care products.

Now... this is obviously a lot. A lot. We are talking about going from a single product wound care company to the one stop, comprehensive solution for wound care in all phases of the game. Let's remember, however, the company is chaired by a private equity Managing Partner with insider knowledge of the post-acute care space who has already managed to shape Sanara's virtual consult strategy through several well-placed acquisitions.

Whether the team can execute on this strategy remains to be seen, but it seems clear that the potential is enormous. Not only could this flywheel being set into motion drive enormous growth and profitability for Sanara but it also has the chance of seducing a very speculative market with its story. While Teladoc (TDOC) has returned to Earth recently, it still trades at an EV/Sales of ~13 and changed hands at an EV/Sales of nearly 40 earlier in the year... and is unprofitable.

As of the end of Q2, Sanara was in the process of launching pilots for several of its EMRS and telemedicine offerings. It will be key to watch the progress in these in Q3 and coming quarters.

As good of a product as Cellerate is, a true competitor would be bad news, as Cellerate makes up the overwhelming majority of Sanara's revenue.

Additionally, the company does not have patent protection for Cellerate. I do believe this is mitigated by the company's first-mover advantage in selling this product. Sanara additionally reports having trade secrets around the formulation of this product that may make it difficult for competition to replicate its success.

At the end of the day, potential investors must be comfortable investing in a single product company.

The share count has been rising significantly.

Thus, despite the massive revenue growth, revenue per share (orange line) has been roughly flat as the increase in share count paces it.

I would worry about this more if the company was in a more mature growth stage. Right now, this company is all about the land grab. It is adding its salesforce, growing out its list of hospital partners, and trying to develop a telemedicine platform. At this size, access to debt markets at reasonable rates is challenging. Leveraging its shares for employee compensation and acquisitions is the smart play, and the level of share issuance does not appear to me to be inappropriate. Also, I do believe insiders are aligned with the long-term picture and will not dilute for self-enrichment. Last, with a relatively large cash balance at present, I do not anticipate a raise in the near future. I will monitor this, however, as the company realizes its vision over the coming years.

SGA expense growth has matched sales for much of Sanara's recent life.

Over the last three years, you can see the growth in SGA outpacing growth in revenue:

However, over the last year, you can see the script has started to flip:

It is, however, too soon to tell if this flip is truly meaningful.

In this hypergrowth phase, I am not surprised that the company is investing so heavily in ramping up sales, and I do not believe their sales process is structurally unprofitable. I will, however, monitor this going forward, as I would like to see the incremental gain from each SGA dollar spent begin to widen.

Thus far, the pandemic has had a deleterious effect on Sanara's growth rate due to cancellations in elective surgeries. Given this, I actually suspect the Q3 earnings to be posted in a couple of days may disappoint the market. If future variants emerge that again force the cancellation of large numbers of elective surgeries, we could see Sanara's growth rate take a hit.

While each investor must play each name in a way that suits his or her own risk tolerance, I personally have accumulated a slightly smaller position than I typically would initiate with Sanara in hopes that I might be able to pick up more shares at a lower price on the back of Q3 earnings weakness.

At the end of the day, Sanara is a company that is distributing its primary product at a very high growth rate with a long runway ahead of it. The valuation is likely reasonable just for this one product, given the degree of growth and the opportunity in front of the company. Buried inside of this, we have the potential for a telehealth platform which introduces the opportunity for tremendous upside optionality. Sanara also has a talented and well-aligned management team that will help them pull it off. There are several risks to this single product (for now), microcap stock, but I think the risk/reward is heavily skewed in favor of the investor.

This article was written by

Disclosure: I/we have a beneficial long position in the shares of SMTI either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may add to my position in SMTI on Q3 earnings weakness or at any time in the future.