Bioretec - Will the US market open?

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Hello @Haminan_Mursu,

The valuation of the stock as an acquisition target is a good question worth pondering. This is a broader issue than just Bioretec, but at least we can begin to unpack it here. First, however, a couple of points to avoid potential misunderstandings.

Our fundamental forecasts are based on GlobalData’s market forecasts, which are among the highest quality available and are widely referenced in the forecasts section and elsewhere in the report. For biodegradable trauma screws, for example, this market is illustrated in the graph on page 18. In addition, the topic is discussed on pages 15 and 16. Our forecasts are based on the projected market size (GlobalData) multiplied by estimated future market shares. Acquisitions are a separate matter, which is discussed more below.

As I understand it, Bioretec’s competitors are already selling biodegradable metal implants on the European market, meaning, to my knowledge, Bioretec has the potential to be the first specifically in the US market, but it is not the first in the world, as described in our report. As for your opinion that this was not understood in the report, I would point out that a quick glance shows that this “first in the US market” point is referred to on at least pages 3, 6, 7, 14, 18, 19, and 23 of the report. In my opinion, it is one of the report’s key themes. It is essential that our forecasted market shares include the assumption of precisely the advantage the company gains by being first/among the first to market. If they were not timely, the forecasts would be more conservative. Of course, Bioretec’s market share in trauma screws in 2027 and other products later could be significantly above/below our forecasted 7.5%, but that is a different discussion, addressed in the scenarios on page 29 and the risk/opportunity analysis on page 23.

Well then, to the actual question, which is the consideration of the acquisition option in valuation. This is indeed a broader theme than Bioretec alone, and I will try to elaborate on it here.

Inderes’ analysis is fundamentally a fundamental analysis. In Bioretec’s case, this fundamental valuation relies primarily on discounting future cash flows to their present value using the DCF model. Other valuation methods are more or less useless when operations are unprofitable and the targeted growth rates are truly ambitious. Fundamental analysis answers the question of what the company’s valuation looks like from the perspective of a long-term owner. In the spirit of fundamental analysis, Inderes’ principle is that, for example, mergers and acquisitions or share issues are not modeled into forecasts. This is because the timing, terms, and amounts of these transactions cannot be known in advance. Of course, we do highlight these themes elsewhere. The report discusses Bioretec as a potential acquisition target on pages 17-18. Additionally, the Biorez acquisition, with a total potential of 250 MUSD, is presented as an example on page 18.

In my opinion, basing an investment case on an acquisition is not so much fundamental analysis but rather resembles private equity investing: buying a stake in a company, growing its intrinsic value, and selling it off once targets are met. This is, of course, no worse an approach as an investment style than fundamental investing, but the perspective is shorter than forecasting cash flows for a decade.

I agree that in Bioretec’s case, value can very well be realized through an acquisition. Why then did it not affect the valuation? One reason is the aforementioned unpredictability and reliance on fundamental analysis. Secondly, if one starts to guess the value of an acquisition option, then one must logically also consider negative aspects such as the dilutive effect of share issues, etc. Thirdly, I believe assessing a company as an acquisition target requires a somewhat different logic from an industry perspective than what is used in fundamental analysis.

In summary: Investing in Bioretec with the idea that value will be realized through an acquisition is a perfectly valid approach. However, for the average investor, we must explain why, in our opinion, the stock is worth/not worth investing in for the long term, based on available information. Speculating about an uncertain acquisition, which, if it occurs, will be at an unknown price, time, and with unknown terms, does not fit well with this. As mentioned, the acquisition option is indeed highlighted in the report. Investors then have the opportunity to take a view on the acquisition and its value if they wish.

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Thanks for your response, Antti!

I agree that in Bioretec’s case, value could very well be realized through an acquisition. So why didn’t that affect the valuation? One reason is the aforementioned unpredictability and reliance on fundamental analysis. Secondly, if we start guessing the value of an acquisition option, then logically we must also consider negative aspects such as the dilutive effect of share issues, etc. Thirdly, I believe valuing a company as an acquisition target requires a somewhat different logic from an industry perspective than what is used in fundamental analysis.

Yep, and that’s the problem. Understanding the industry, and through that, the company, is only possible if one understands the potential value of the solution in the portfolios of large companies.
Let’s take an example of drug development companies; in those, the game is often quite binary; the result is either 0 or 1; either the capital invested in the company’s development is lost, or there is a very strong increase in value. Then again, we have Puuilo and Kone, where traditional valuation metrics apply more easily. In the latter, there are hardly any incredible premiums known in terms of current value in an acquisition sense, but pharmaceutical companies are specifically bought for their IPR (Intellectual Property Rights). Pfizer can start selling a new rheumatoid arthritis drug and make billions with it.

Bioretec is not quite at that extreme end of the spectrum with pharmaceutical companies, but damn it, almost. The value of Bioretec’s RemeOs product family, which will most likely be realized through an acquisition, is what the entire case rests upon. The value of its IPR, and the demonstration of that IPR’s proven commercial capability, is everything. Current products play a practically negligible role in terms of the company’s value; if RemeOs fails, no one is likely to want to own Bioretec just for its current business.

Inderes’ principle is that, for example, acquisitions or share issues are not modeled in forecasts.
If this is not taken into account, one is not far from trying to determine the value of a completely revenue-less drug development company with a DCF model. The only way to sensibly evaluate the value of said pharmaceutical company in that scenario would be previous acquisitions made in that scene. For example, the last 10 acquisitions of different melanoma treatment methods, take their treatment efficacy data, and if the company being valued now achieves better results with its treatment, the value could be at least in the range X-Y, if the desired efficacy results are achieved.

Most large life science companies have practically ceased their early-stage R&D and acquire small companies with new product candidates or developed products. A typical requirement from large companies is a marketing authorization for the product + 1-2 years of market presence, during which it can be monitored that no claims from consumers/law firms have arisen. After this, large companies acquire promising players from the market. If one looks at acquisitions of orthopedic implants over the last 10 years, one can notice that profitability or revenue has little to do with the company’s value. It’s worth checking out, for example, the Cartiva acquisition.

Bioretec’s explosive potential culminates precisely in the fact that bioabsorbable implants are now made possible for load-bearing indications for the first time. And you are right - in the EU, they are not technically the first, but competitors’ products are not completely safe for patients. Syntellix is a good example with its heavy rare earth metals; few would dare to put these substances into their own body. The FDA has also not approved these for its market, even though Syntellix’s product has been on the EU market for a long time. You probably also noticed that Syntellix’s product has not been a commercial breakthrough either, as heavy rare earth metals that never leave the body are generally not desired in humans.

Bioretec may not factually be the world’s first operator to enable bioabsorbable metal, but practically the first usable one, containing only human-found ingredients and a safe composition. And in the US, it is factually the first.

And these excellent benefits, of course, only hold true once marketing authorization is obtained :smile: Until then, RemeOs does not exist in the commercial markets, and Bioretec is still a semi-worthless company.

But if marketing authorization is obtained and no adverse events occur during the first 1-2 years of use, it may be that the company’s value will increase from the current level to hundreds of millions. And this potential will not be based on rapid product sales and the sales margin derived from them, but on acquisition. Although organic growth is also a possible path, sooner or later RemeOs will most likely end up in the product portfolio of some giant company.

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We have already covered those analysis principles, so I won’t go back to them. But this was a good point that adds to this case.

We recently published the initiation of Faron’s coverage. The valuation was primarily done with a risk-adjusted DCF, which, by the way, is the industry’s international standard. So, peer analysis is not the only smart valuation method, nor is it, in my opinion, the primary one.

As a practical example: Faron’s market cap is now EUR 117 million and its share price is EUR 2.07. Inderes’ recommendation, based mainly on DCF and to a lesser extent on the analysis of listed peers, is EUR 2.8. Gilead paid USD 4.9 billion for Forty-seven, a company with a similar profile. What would be the correct recommendation for Faron? 2.07, 2.8, or perhaps 40 euros based on M&A analysis? In the latter case, I believe investors would experience quite bitter disappointments, and going with that would, in my opinion, be downright unethical towards investors.

There is indeed potential, and it has been outlined in our report through scenarios, where in a positive scenario, we arrive at a present value of over EUR 6 per share. In a negative scenario, it is under one euro. If Bioretec succeeds in everything it aims for, the share will be significantly more valuable than it is now. However, in our analysis, we must take into account various things that can go wrong when a small Finnish company embarks on world domination. A couple of examples, which have also been discussed in the report:

  • Marketing authorization does not come or is delayed
  • Obtaining financing is unsuccessful (note the market is in deep freeze)
  • Product development of new materials is unsuccessful/delayed
  • Commercialization of new products is unsuccessful or delayed
  • The slowness of competitors’ metal implant sales is not due to the use of rare earth metals, but to some third factor that affects Bioretec equally.

Regarding the M&A option, it is important to realize, on a general level, that companies that become acquisition targets are a very selected group, and the average company does not become the target of a valuable acquisition. Bioretec may well belong to this selected group; time will tell.

So what did I learn from this discussion? In Faron, we used the phrase “positive option” in the valuation section to refer to the fact that investors receive, as it were, a free opportunity for an acquisition. It did not affect Faron’s valuation either. The same could have been done here, even though the matter itself is already presented elsewhere in the report. I will also add an action point for myself for the upcoming comprehensive update to consider whether M&A should be written about more extensively and visibly. As a reminder, the report currently states: “We consider Bioretec a potential acquisition target for a larger medical device manufacturer. The probability of an acquisition offer would increase, in our estimate, after obtaining marketing authorization and the start of sales. Accumulated experience with Bioretec’s products brings additional certainty regarding the functionality and safety of the products and thus reduces the buyer’s risk, for example, related to class action lawsuits.”

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I had to check out the Cartiva acquisition mentioned by Mursu from Hamina. Wright Medical acquired Cartiva for 435 million. Cartiva’s revenue at the time was 35 million, and they forecasted 47 million for the following year.
And what was Cartiva’s product? It was a synthetic implant developed for treating big toe arthritis.

Regarding Bioretec’s RemeOs technology and its products, it is, according to my humble understanding, a top product in the field (quality/safety). And I would say that there’s no need to wait 1-2 years after market authorization for an acquisition offer to come. It could come quite quickly, and it wouldn’t surprise me if there were competing offers as well.

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Here’s the video we made with @Verneri_Pulkkinen about Bioretec. We also discussed the M&A question. Of course, the matter was covered more comprehensively here on the forum.

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Today, the answer came - additional questions have been raised. The sales permit is delayed, and uncertainty is growing.

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It is very typical for marketing authorization applications to have several rounds of inquiries requesting additional information. Bioretec has a Breakthrough Device Designation for Remeon, which reduces this slow correspondence but by no means eliminates delays. The longer the permit is being processed, the closer it is to being obtained - Bioretec has good probabilities of getting the permit this spring.

If the granting of the permit were now in doubt, Bioretec would already have an obligation to inform about this doubt.

It is very logical that the first product in any field has a heightened need to thoroughly clarify its application. This was also strongly referred to in the announcement.

It’s always disappointing when things are delayed :confused:

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The application is also underway for the European market, meaning a CE approval for the RemeOs product.
This was submitted in December 2021, and it’s reasonable to assume that approval could come by the end of this year (?) and sales in Europe could begin. This, too, is a significant milestone.

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Comment on Friday’s announcement regarding the delay in European marketing authorization:

The delay appears to be purely due to processing bottlenecks and does not materially affect our view of the company’s future potential.

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If the marketing authorization were to be further delayed, how long would the company’s cash last?

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Hi @Makromies-1987,

Based on my calculations, Bioretec’s cash reserves will last until April. The FDA’s decision is expected around March-April. Regarding the CE mark, there’s no precise timeline, but Bioretec’s earlier release referenced an average processing time of 18 months currently. This would mean a decision by the end of H1, as the application was submitted at the very end of 2021.

In a positive scenario, Bioretec would manage without an offering or with a small bridge financing until late spring, receive a positive decision from the FDA, and could arrange an offering for commercialization investments at a higher valuation. It is also certainly possible that a positive CE mark could come faster than expected.

In a negative scenario, the offering would have to be made without a positive marketing authorization decision, at a poorer valuation. As a reminder: if the company uses its entire existing offering authorization, it would mean a 35% increase in the number of shares.

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Bioretec will be participating in next Tuesday’s Health Technology & Pharmaceutical Developer Night. Questions can be asked during the event via chat, but you can also leave questions here. I will try to include them in the Q&A session where possible. The event is in English, but questions in Finnish are also fine.

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Here is Bioretec’s Timo’s presentation from yesterday, followed by a Q&A session. The other presentations from the evening can also be found at the link:

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As a “Friday night” comment, it should be noted that the company’s market value yesterday was practically already nearly equivalent to what it was after the unlisted share issue in January 2020.

Time will tell whether the current financial year will reach the revenue target of the “realistic growth” scenario from the original 2020 share issue, i.e., 2.5 million euros.

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@Antti_Siltanen correct me if I’m wrong, but isn’t corporate restructuring a negative scenario, or is a share issue a foregone conclusion in the event of a negative FDA decision in this market situation?

In the US, there are examples like CVAC etc. where the valuation has fallen to almost nothing after an FDA rejection.

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The timeline for CE marking and FDA approval is certainly an open question, but I find it hard to believe that the permits would be withheld entirely. The materials of the RemeOs screw (Mg/Ca/Zn) are safe, the hydrogen gas formation associated with magnesium doesn’t seem to be a significant issue, and the mechanical properties are apparently in order. In Europe, similar products have already been approved, so CE marking seems quite likely next year. In the US, Bioretec and at least one competitor already have Breakthrough Device Designation status, meaning the authority considers the product important on a general level. Therefore, I also believe that Bioretec’s financing will be secured in the short and medium term, even if the FDA approval isn’t granted just yet at this turn of March-April. It would be strange for investors to give up on the company at this stage. Delays in permits, cash burn, and dilution of ownership are indeed realistic risks.

For CVAC and other drug/vaccine developers, the risk is more binary/black-and-white than for medical device developers like Bioretec. Especially since Bioretec already has sales in about 40 countries and relatively promising prospects for RemeOs.

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The following press release was issued an hour ago.

“### Bioretec has submitted the additional information requested by the FDA for the U.S. registration of RemeOs™ trauma screws, and the estimated timeline for approval in April 2023 remains unchanged”

https://www.inderes.fi/fi/tiedotteet/bioretec-toimittanut-fdan-pyytamat-lisatiedot-remeostm-traumaruuvien-yhdysvaltojen

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So the FDA has 90 days to process Bioretec’s application from the time the FDA has announced it has received the application.
By April, it should be clear whether or not there is marketing authorization.

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Looks like it’s taking off well :muscle:

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Here are Antti’s comments as well.

Bioretec announced on Tuesday that it has submitted additional information for its RemeOs™ trauma screw’s U.S. market authorization application. The Food and Drug Administration (FDA), which is reviewing the application, will provide its decision within 90 days. Bioretec expects to receive market authorization for the first product of the new product family in April.

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