Company Overview: A medical technology company, Next Science Limited (ASX: NXS) has its headquarters in Sydney, Australia, along with R&D centre in Florida, USA. The company was incorporated in 2012 and is primarily engaged in the development and commercialisation of its proprietary Xbio technology to curb the impact of biofilm-built diseases in human health. NXS retains 100% of the patent protected intellectual property pertaining to its Xbio technology.

NXS Details

NXS Rides on Decent Liquidity Position and Encouraging Outlook: Next Science Limited (ASX: NXS) is engaged in research, development, and commercialisation of technologies, which solves issues in human health caused by biofilms. In a recent update, the company informed the market that Therapeutic Goods Administration (TGA) has approved and cleared NXS’ BlastX^TM antimicrobial gel to be marketed in Australia for utilising it as a hydrogel wound dressing on all open wounds. The company had earlier announced that it recovered the worldwide distribution rights to BlastX^TM from 3M in April 2021. Notably, the company expects to commence its first sale in Australia in June 2021. The product was sold in the US since 2017 and has been cleared for sales in EU and the UK under a CE Mark clearance obtained in December 2020. The move fortifies NXS’ mission to offer the product to healthcare professionals and patients in Australia, thereby reducing the impacts of biofilms on human health.

The company entered 2021 with a strong note, ensuring the implementation of a robust commercial strategy for its direct to market products such as XPerience^TM, BlastX, and SurgX. In 2020, ~1,623 US hospitals used XBIO products, as compared to ~1,464 numbers in 2019. In 2020, the company treated more than 150,000 patients, as compared to ~110,000 patients in 2019.

Key Statistics; Analysis by Kalkine Group

1QFY21 Market Update: During the quarter, the company reported unaudited revenues of US$2.2 million, depicting a growth of more than 300% year over year. The company received a 510(k) clearance from the US Food and Drug Administration (FDA) for the commercialisation of XPerience^TM No Rinse Antimicrobial Solution as a medical device in the US. During the quarter, the company unveiled, Bactisure in Europe and the UK with the help of its long-term partner Zimmer Biomet. With these new launches, dedicated ordering portal, and integrated supply chain system, the company expects to bolster its top-line growth in FY21.

Decent Liquidity Position & Robust Capital Raising Program: The company also remained on track to strengthen its balance sheet position with a successful capital raise and shareholder SPP of A$15 million. The company plans to use the raised funds to accelerate commercialisation of its XPerience^TM products, bolster its team and fulfil its working capital requirement. Further, NXS’ focus on developing product offerings for its customers augers well for the company in the long-term. At the end of 31 March 2021, the company’s cash on hand stood at ~US$15 million. The company also reported an improved cash flow during the quarter. Cash receipts in 1QFY21 stood at US$3.4 million. 1QFY21 net cash burn improved to US$206K. Total cash balance (including cash and cash equivalent and short-term deposits) stood at ~US$15 million, with total debt amounting to ~US$0.28 million at the end of FY20.

Top 10 Shareholders: The top 10 shareholders together form around 60.39% of the total shareholdings, while the top 4 constitutes the maximum holding. Auckland Trust Company Ltd. is the entity holding maximum shares in the company at 28.3%. Walker Group Holdings Pty. Ltd. is the second-largest shareholder, with a holding of 10.97%, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Key Metrics: In FY20, gross margin stood at 84.8%, higher than the industry median of 74.2%. In the same time span, the company had a current ratio of 6.28x, higher than the industry median of 2.99x, representing a decent liquidity position. Debt to Equity ratio for the same time span stood at 0.02x, lower than the industry median of 0.13x.

Profitability and Leverage Profile; Analysis by Kalkine Group 

Key Risks: The company remains exposed to stiff competition from peers, and the uncertainties led by the virus outbreak. Further, lower investment in generating working capital requirement exposes the company to liquidity risk. The company also increased investment in R&D, to achieve its growth plan, which might weigh on margins, going forward. Notably, the company has reported loss in FY20, owing to unfavourable foreign-exchange movements and increase in research and development expenses. Also, the company reduced its year-over-year revenue in Q1FY20, Q2FY20 and Q3FY20, bringing the full year revenues decline of 15% due to the Covid-19 pandemic. Nevertheless, the company returned to revenue growth of a whopping 75% year over year in Q4FY20.

Outlook: In 2021, the company expects to remain committed on the successful implementation of its XPerience^TM launch. In the coming 5 years’ time, the company plans to augment robust adoption of XPerience^TM as part of the standard of care in orthopaedic surgeries. Subsequently, to achieve its growth plan, the company broadened the series of clinical studies. The company remains on track to deliver on its growth strategies through a diversified product portfolio and expanding geographic reach. Growth also boosted as the company expanded its international revenue, on the heels of XPerience^TM, BlastX, and SurgX expansion and enhanced product distribution via a network of independent sales representatives. The company expects 1HFY21 revenues to be in the range of US$3.5 million and US$4.0 million, depicting a growth rate of 230% on the prior corresponding period. The company also plans to release TorrentX in 2HFY21.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of the company has corrected by ~2.4% in the past one month. Currently, the stock has a 52-week’s high and low levels of A$2.06 and A$1.1, respectively. To conclude, a healthy balance sheet and capital raising program will help the company to attain its long-term objectives of expanding the business via delivering continued growth in shareholders’ returns. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight discount as compared to its peer average, considering the the NTM trading multiple of the company with respect to its industry, foreign currency risk and strict regulatory approval, etc. For this purpose, we have taken peers Starpharma Holdings Ltd (ASX: SPL), Nanosonics Ltd (ASX: NAN), to name a few. Considering enhanced product distribution in the US, healthy balance sheet, capital raising program, valuation, and current trading level, we recommend a “Buy” rating on the stock at the current market price of A$1.56, down by ~4.295% as on 16 June 2021.

NXS Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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