DNB Markets – Episurf Medical: New US distributor agreement

Episurf Medical reported Q1 earnings (loss) broadly in line with our expectation, despite somewhat lower sales. While it seems to have lost some short-term momentum on a shift from own sales to more distributors, we expect a recovery in the coming quarters. The company signed another US distribution agreement after quarter-end and we expect more to come over time. We have adjusted our fair value to SEK0.75–2.25 (1.5–4.5) for the announced rights issue.
 

Earnings improving but not as fast as expected. Q1 sales were SEK3.1m, versus our estimate of cSEK3.9m, and the operating loss was cSEK20.6m, compared to our estimate of a loss of cSEK18.8m. Still, both showed a clear improvement YOY (Q1 2023 sales of SEK2.5m and EBIT of cSEK-23.5m). The operating loss deviation was partly due to the restructuring in H2 2023. The number of employees fell by c30% YOY.

New distribution agreement signed in the US. The company also announced a new distribution agreement for South- and North Carolina in the US covering the Episealer patellofemoral system. This agreement is with a distributor that is exclusive to DePuy-Synthes in these regions. In its communication, the company indicated that there might be more of such DePuy-Synthes-related distribution agreements to come in other territories. In our view, while the agreement is not directly with DePuy-Synthes, we believe approval by the latter is likely needed if its exclusive distributors take on non-DePuy-Synthes products in their assortments.

Rights issue of cSEK120m announced. The company recently announced a partially guaranteed rights issue of units (shares and warrants) amounting to cSEK120m if fully subscribed. The rights issue is guaranteed up to c75%. The warrants issued in combination with the rights issue could potentially add another cSEK48m in capital if fully exercised.

Fair value adjusted to SEK0.75–2.25 for upcoming rights issue. We have included the recently announced rights issue in our forecasts. The number of shares (in the event the issue is fully subscribed) is set to increase by c500m shares. The company also indicated that it should turn cash flow positive in the medium term (which we believe means 3–5 years) – in line with our forecasts. However, if the progress is skewed towards the end of this period, it might need to raise additional cash to reach positive cash flow, in our view (not included in our forecasts). Our fair value adjustment mainly reflects a smaller rights issue than initially expected and a subsequent higher number of shares.

Best regards

Patrik Ling | DNB Markets | Equity Research Sweden

Email: [email protected]