FACTS:
IsoTis reported Q2 2006 results showing continuous sales growth
strength, thus confirming recent market share gains as well as improvements
in operating profitability. With the current net cash position of CHF 12.5
mn being used within the next six quarters at the current cash drain rate,
management reiterated its confidence to become profitable without further
financing and increased its top-line growth guidance for FY 2006. We
maintain our Hold rating and 12-month PT of CHF 2.0 per share.
COMMENT:
Top-Line Growth Driven by OEM Business and Accell Products
Quarterly group revenue growth of 43% was better than our forecast (29%),
better- than-reported growth in the preceding four quarters (25%, 34%, 36%
and 17%) and better than the competition (2%-12%), all driven by a pickup
in demand in the US and internationally for the Accell product family as
well as a jump in sales for the OEM franchise. We believe recent market
share gains can be expanded and estimate 33% sales growth for the full year
(management guidance 25%-30%).
Profitability Benefiting From Sales Volumes and Efficiency Gains
The better-than-expected EBIT margin is attributable to a higher gross
margin and lower operating expenses. The gross margin of 63.1% is the
highest ever reported by IsoTis as result of higher selling prices, lower
purchasing prices, higher sales volumes and efficiency gains.
Lower-than-anticipated M&S and R&D expenses and only marginally higher G&A
expenses round off this nice set of numbers, only faintly tarnished by a
(non-cash effective) forex loss of CHF 4.1 mn.
CONCLUSION:
Modest Valuation Allows for Share Price Performance
Valuation wise, IsoTis trades at 1.9x and 1.5x, respectively, 2007 and 2008
EV/Sales multiples, which place it at a discount of a good 65% and 50% to
the average of Swiss and international orthopedics players. Our DCF yields
a fair value of CHF 3.9 per share. Based on our analysis of peer valuation
and DCF and adjusting for the risky nature of an investment into IsoTis, we
maintain our Hold rating and 12 month target price of CHF 2.0 per share.
Christoph Gubler, CFA
MedTech Analyst
Equity Brokerage
Lombard Odier Darier Hentsch & Cie.
Sihlstrasse 20
8021 Zürich
Tel +41 1 214 16 24
Fax +41 1 214 16 32
Mob +41 79 211 71 02
christoph.gubler@lodh.com
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