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V.HTL: 62% Revenue Growth in Q1 2017

06/01/2017
By Anita Dushyanth, PhD

TSX:HTL.V

Financial Update

On May 25, 2017 Hamilton Thorne (TSX:HTL.V) reported financial results for the first quarter of 2017.

Revenue for Q1 2017 was $3.3 million led by the contribution from the recently acquired Embryotech business.  Revenue also reflected strong growth in the sales of clinical laser systems and services. The graph above shows y-o-y revenue growth (61% in Q1 2017) and portrays a good picture of the rate at which Hamilton Thorne has been able to expand their business through acquisitions since Q3 2016.  As a reminder, Embryotech acquisition in September 2016 brought a recurring revenue stream and incremental gross margins which reflects in the last quarter of 2016 as well as in first quarter 2017 results.  Gross profit as a percentage of sales improved to 68% in Q1 2017 versus ~64% the prior year, primarily due the contribution from increased sales of higher margin Embryotech services and consumables.  Owing to recent closing of Gynemed which offers a mix of both high margin and lower margin products, we continue to model incremental widening of gross margin as service and consumables revenue grows as a percentage of total revenue.

The firm reported OpEx of $1.7 million which was in line with our estimate.  Q1 net income was $0.4 million, which again, reflects positive contribution from Embryotech which has high margin products.  Hamilton Thorne’s acquisition strategy has resulted in growing net income and free cash flow in a relatively short period of time.  

Cash flow from operations was close to $1.3 million.  The company has proven its capability to continue to generate positive cash flow.  Since Embryotech’s acquisition, the firm has reported higher profitability and a growing cash balance.  Thus far, Hamilton Thorne has reported remarkable growth in earnings and anticipates achieving higher cash flows and profitability in the coming quarters.  The cash balance as of March 31, 2017 increased to $2.2 million.  With the proceeds from an April 2017 private placement (part of which was used to fund the Gynemed acquisition) the company’s current cash balance is approximately $5 million.  Assuming revenue growth continues and financial resources grow as per plan, we believe that the current cash position should be sufficient to support operations for the coming year.  

Since our initiation (April 2016) and until May 29, 2017’s close, the company’s shares have risen 352% following two acquisitions. 

Business Update

Hamilton Thorne, looking to follow-up with the success of their Embryotech acquisition, announced the acquisition of Gynemed GmbH & Co. KG in late April for approximately $15 million using cash, stock and seller debt.  Gynemed is a Lensahn, Germany based leading manufacturer and distributor of premium consumables and equipment for the IVF clinic and laboratory markets in Germany, Austria and Switzerland.  The acquisition was completed using $9.3 million cash, $2.3 million of stock as well as $3.5 million of unsecured convertible notes.  The cash portion was funded by cash on hand, plus $4 million of new debt facility and $9.2 million private placement.
The firm had a $5.5 million five-year term loan at 4.25% maturing in September 2021 and a $2.5 million secured line of credit with a US bank which is scheduled to mature in September 2018 and is subject to renewal.  The amended credit agreement will add to its existing credit facility, with two term loans of $4  million at 4.49% and $5.5 million at 4.25% and a $2.5 million line of credit at prime rate (currently 3.75%) which matures two years from the closing date and is renewable annually upon bank approval.  Hamilton Thorne will use the facility to strengthen its working capital position following the acquisition of Gynemed and to position the firm for future growth opportunities.

Service revenue had grown significantly in 2016 and since the strategic focus for their business going forward will be to grow consumable sales, thereby driving recurring revenue, the firm intends to focus their sales efforts on accessories, consumables, software and services.  Hamilton Thorne’s strategic acquisition of Gynemed, whose consumables segment is roughly 80% of their business, speeds along the company’s strategy of diversifying via acquisitions.  

Towards the end of May 2017, Hamilton Thorne signed a distribution agreement with BCSI that allows the company to sell pH monitoring solutions to existing and new customers in the U.S.  Additional products, services and territories are expected to be added to the agreement over time.  

In IVF labs, a consistent and stable incubator environment is required for the successful development of the embryo.  Embryos are sensitive to disturbances that occur during routine laboratory handling.  To prevent loss of embryos, critical equipment such as an incubator requires a monitoring system, which would register critical parameters such as pH shifts that are trending out of range.  Although newer classes of incubators are equipped with pH monitoring capability, several labs having older equipment have no such monitoring system in place.  For such labs, Hamilton Thorne offers its services to retrofit benchtop incubators with pH monitoring solutions.  TrakStation and TrakPod are the two latest systems from BCSI for continuous monitoring of pH non-invasively from multiple incubators in IVF labs.  For the entire one-week period of the IVF cycle, the system (the TrakPod is attached to the TrakStation) has the capability to monitor and log pH data from as many as eight probes simultaneously.  Calibration of the probe is not required.  The disposable sensor is replaced once per week.  Since this system can continuously monitor pH without opening/closing incubator doors, it promises an uninterrupted incubation cycle that eventually results in better outcomes for IVF procedures. 

Hamilton Thorne’s acquisition strategy is a specific, well-articulated value creation strategy that pursues international scale while filling portfolio gaps.  Gynemed is a profitable and growing business that offers premium branded IVF cell culture media, OEM and distributed consumables and devices, has an excellent reputation and proven sales channel in the well-established European ART market.
  
Secondly, there is significant expansion in product offering with a highly complementary product portfolio. We think that the combined company can benefit from Hamilton Thorne’s strong partnerships in global markets and Gynemed’s strong presence in Europe.  Working together, they can introduce their products into new territories much more rapidly.  The expanded product portfolio allows the company to leverage the existing global distribution infrastructure in key markets not currently served by Gynemed, including the U.S.  It positions Hamilton Thorne to better capture higher future growth in key global markets. 

Management intends to focus on expanding primarily in territories that accept the CE Mark.  The U.S. and Canada business will be the next focus going forward.  The company had sales to three major distributors, which exceeded 10% of revenues in 2016.  Hamilton Thorne has the second largest trading partnerships with China but Gynemed has not yet penetrated this large market which holds substantial upside potential.

Valuation

The past two years have been incredible in terms of growth and transformation as the company continues its rapid expansion through acquisitions.  The acquisition of ELI and Gynemed will increase Hamilton Thorne’s revenue base.  For the year ended December 31, 2016, Gynemed had annual revenues of over $9 million, EBITDA of approximately $2.8 million (approximately $2.3 million after normalization adjustments) and net income of close to $2.5 million (approximately $2 million after normalization adjustments).  This acquisition is expected to be immediately accretive to revenue and EBITDA.  

We have updated our financial model following Q1 2017 earnings and the acquisition and integration expense related to the acquisition of Gynemed.  Since Gynemed acquisition was completed during Q2 2017 (early May 2017), we expect partial contribution from Gynemed’s product sales during Q2 2017.  We expect operational expenses to increase with increased staffing compensation, increased trade show presence and business development expenses.  The firm continues to face foreign exchange headwinds as much of its costs are in U.S. dollars and more than 60% of its instrument sales are outside the U.S.  We think the effect of FX can be offset as Embryotech’s services and consumables will be sold in the U.S. and Gynemed operates largely in Europe.  

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