Covalon Technologies

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Covalon Technologies (COV.V, CVALD)
Current Price: $0.40
Shares Outstanding: 9.3 million
Fully Diluted: 20.5 million

CovalonTechnologies

Company Description

Covalon Technologies Ltd. researches, develops and commercializes new healthcare technologies that help save lives around the world. Covalon’s patented technologies, products and services address the advanced healthcare needs of medical device companies, healthcare providers and individual consumers. Covalon’s technologies are used to prevent, detect and manage medical conditions in specialty areas such as wound care, tissue repair, infection control, disease management, medical device coatings and biocompatibility.

ColActive and ColActive Plus: Collagen Matrix Dressings. The ColActive family of products is based on our patented collagen matrix and is used to treat chronic and infected wounds including diabetic ulcers (including diabetic foot ulcers), pressure ulcers, venous ulcers (including venous leg ulcers), donor and graft sites, traumatic wounds healing by secondary intention, dehisced surgical wounds, first and second degree burns. These dressings begin from a collagen base, which is generally biocompatible with the Covalon Technologies Ltd. MD&A Q3-F2013 Page 4 of 19 human body, and enable the release of beneficial materials, such as antimicrobials, into the wound site and/or enhance the removal of undesirable materials, such as wound exudates from the wound.

Covalon’s patented method of making ColActive has certain clinical advantages over other dressings, such as open binding sites for destructive enzymes, effective antimicrobial activity and exudate management properties that help chronic wounds heal.
IV Clear: Antimicrobial Clear Silicone Adhesive Dressings with Chlorhexidine and Silver. IV Clear is intended to cover and protect insertion sites and to secure intravenous devices to skin, including IV catheters, central venous lines, peripherally inserted central catheters (PICCs), hemodialysis catheters, other intravascular catheter and percutaneous devices. IV Clear is the only antimicrobial clear silicone vascular access dressing that combines silver and chlorhexidine to provide broad-spectrum antimicrobial activity for 7 days. IV Clear meets the current FDA standards for the antimicrobial claim “greater than 4 log reduction” against bacteria and yeast most commonly associated with healthcare acquired infections.
The soft silicone adhesive provides greater patient comfort, does not macerate or damage the skin, and was shown to be up to 10 times less painful upon removal when compared to acrylic adhesives.

SurgiClear:

Antimicrobial Clear Silicone Adhesive Dressings with Chlorhexidine and Silver. Covalon developed SurgiClear based on the same technology as IV Clear to address the shortcomings of other surgical site cover dressings in the market. SurgiClear is intended to cover and protect wound sites against external contamination, including post-operative, debrided or partial thickness wounds such as skin graft donor sites, abrasions, lacerations, skin tears, first and second degree burns. SurgiClear can be used to cover and protect wound closure devices (i.e. sutures, staples, clips), orthopedic pins, fixtures & wires as well as drains. SurgiClear may also be used to cover and secure primary dressings.

SurgiClear inhibits microbial colonization and suppresses microbial regrowth under the dressing. SurgiClear is gentle on the skin for maximum patient comfort. Its removal will not tear or damage fragile skin, and the novel adhesive film provides excellent tissue contact and infection management. The use of silicone materials on wounds is known to help reduce excessive scarring during the healing process.

SurgiClear Product Video:
http://www.youtube.com/watch?feature=player_embedded&v=b4srJTmWVmY

IV Clear Product Video:

Colactive Product Video:
http://www.youtube.com/watch?feature=player_embedded&v=RKhNF6XrrX8

SilverCoat:

Antimicrobial Silicone Foley Catheters: Covalon’s SilverCoat urinary Foley catheter is coated with Covalon’s patented antimicrobial silver polymer coating which is lubricious and elutes silver from the surface to kill bacteria and yeast over a seven day period. SilverCoat Foley’s are used via prescription in hospitals, extended care facilities, acute care facilities, and home health care situations to catheterize patients for extended periods of time. Among urinary tract infections (UTI) acquired in the hospital, approximately 75% are associated with a urinary catheter, which is a tube inserted into the bladder through the urethra to drain urine. Between 15-25% of hospitalized patients receive urinary catheters during their hospital stay. The most important risk factor for developing a catheter-associated UTI (CAUTI) is prolonged use of the urinary catheter, according to the United States Center for Disease Control.

Special Services:

The company develops novel medical devices for clients, as well as licensing their technology and products to medical companies on a global basis. Some medical companies and distributors license these technologies for incorporating into their own product offerings, which they sell to healthcare providers under their own brand names. Referred to by the industry as an OEM sales model (original equipment manufacturer), this approach assigns the major cost of selling to their customers, who are able to penetrate the market with a large sales force in geographical locations where Covalon does not have staff or offices. Covalon’s revenue streams are typically generated from product sales, services, technology licensing fees, and royalties from the sale or commercialization of products.

Fundamentals:

Quarterly Information

Total Revenue             Earnings                      Wound Care Revenue

Q3/13              $1,477,632*                $234,826*                   $1,411,220*
Q2/13              $535,224                     ($558,831)                   $478,371
Q1/13              $578,268                     ($794,481)                   $520,523
Q4/12              $951,134                     ($1,854,874)                $502,715
Q3/12              $1,085,791                  ($732,308)                   $632,749
Q2/12              $1,100,222                  ($604,146)                   $524,247
Q1/11              $704,706                     ($800,054)                   $235,714
Q2/11              $581,599                     ($1,294,531)                $313,765

*This increase was primarily due to the start of sales of the company’s two new products IV Clear and SurgiClear

Wound care dressing sales, because of the new products, grew by 195% from the previous quarter and 122% from the year ago period. This fact is hidden when you look at overall revenue growth of only 37% from the year ago period but 176% over the previous quarter. They have suspended their other low margin coating business and are now focusing on wound care products. The jump in dressing sales was close to $1 million from Q2 to Q3. Even if that is inventory loading then it’s a possible sign that their distributors have strong faith in the new products as it seems to me to be an extraordinary amount of product compared to past sales. Clearly the wound dressing products carry much better margins and I think they are doing the right thing by focusing on these products. I’m thinking there might be a slight dip in sales due to lesser inventory loading this next quarter but if it isn’t too significant it will be the sign to me that the launch of the product is working well and perhaps now with additional funds for marketing we could see much stronger growth.

The Market:

The advanced wound care market, estimated at $5 billion (U.S), is projected to grow approximately 8% per year driven by increases in pressure and diabetic ulcers related to the growth of an aging population and the increased prevalence of diabetes.  Covalon’s proprietary pro-active collagen technology serves this growing demand, and is customizable to create unique tissue repair products for the orthopaedic, neurological, dental, and ocular spaces.
The infection control market, which includes Healthcare Acquired Infections (HAI), is not only a growing healthcare issue, but a significant financial one as well. In the United States alone, the additional costs of HAIs are estimated to cost the system an additional $45 billion a year, and is therefore being aggressively targeted by all jurisdictions. Covalon’s proprietary infection control technology is a customized platform for coatings, vascular access, and wound care products. Every year in the United States alone, over 48 million in-patient procedures result in wounds that could benefit from SurgiClear’s antimicrobial silicone technology.
The medical device coatings market, which is estimated by Global Industry Analytics to exceed $7.5 billion by the year 2015. Covalon’s proprietary technology delivers therapeutics, such as silver ions from medical device surfaces for extended periods of time thereby creating an antimicrobial or therapeutic surface coating. The coatings can be applied to silicone and latex catheters, peritoneal dialysis catheters, hemodialysis catheters, wound drains, central venous lines, orthopaedic metals and many other medical devices. Our proprietary coating can be formulated to provide controlled delivery of  various  therapeutics for a wide range of devices and is supported by an FDA device master file.

More on Covalon’s Newest Product SurgiClear

Like its recently cleared sister product IV Clear, Covalon’s SurgiClear antimicrobial film dressings for wounds have a number of unique and highly desirable characteristics:

  1. SurgiClear combines the comfort of skin-friendly silicone adhesive technology with the advanced antimicrobial protection of two gold-standard antimicrobial agents – chlorhexidine and silver.
  2. SurgiClear has uniquely bonded the two antimicrobials into the actual adhesive of the soft and non-sensitizing silicone that allows the clear film wound dressing to comfortably adhere to the skin while providing antimicrobial protection.
  3. SurgiClear kills over 99.99% of bacteria that come into contact with the dressing’s antimicrobial adhesive and prevents the re-growth of bacteria on patient’s skin over 7 days of wear.
  4. SurgiClear is breathable unlike most other silicone dressings.
  5. Patients are able to bathe while wearing the waterproof silicone SurgiClear wound dressing.
  6. Studies have shown that SurgiClear is up to ten times less painful on removal than leading film dressings that use acrylic adhesives.
  7. Studies have shown that the use over a 14-day period of silicone similar to SurgiClear prevents keloid and hypertrophic scarring following surgical procedures.

Management:

I don’t usually spend too much time talking about management but this time I will make an exception. The 2 individuals that caught my attention were the Chairman of the board Abe Schwartz and the CEO, President and temporary CFO Brian Pedlar. Mr. Schwartz and Mr. Pedlar are very familiar to anyone who was fortunate enough to own shares of a company called Cedara Software. Mr. Schwartz was President and CEO of Cedara, a publicly-traded medical imaging company where he led an extremely successful turnaround between 2002 and 2005. Mr. Schwartz worked closely at Cedara with none other than Covalon’s Chief Executive Officer, Brian Pedlar. Under Mr. Schwartz’s and Mr. Pedlar’s leadership, the company’s stock went from $0.50 to $15 in a successful merger transaction completed in 2005. Cedara was bought out by Merge Healthcare for $476.6 million

http://www.cbc.ca/news/business/cedara-software-being-acquired-in-476-6m-stock-deal-1.560804

A little more on Mr. Schwartz: http://brocku.ca/biolinc/advisory-committee/abe-schwartz

Notes from my Discussion with Management

The company is clearly in turn around mode and management admit that while they have made some great strides and are very happy to see the demand from their distributors for their newest products it is still too early to claim victory. It is still be determined whether the significant increase in wound care sales in Q3 can be maintained or if the increase is due to distributors’ inventory loading. This next quarter will be key. The company also believes that they need to secure a large distributor as currently their distributor base is dominated by small and very small re-sellers. A larger medical supply distributor such as Smith and Nephew should have the size and muscle to secure much greater sales.
The company recently closed a $750,000 financing. It is interesting to note that “Pursuant to the private placement, and as already approved by shareholders of the Company, Abe Schwartz announced that he has acquired 330 Units. After giving effect to this acquisition, Mr. Schwartz directly or beneficially holds an aggregate of: (i) $330,000 principal amount secured convertible debentures, representing 44.0% of the outstanding convertible debentures of the Company; (ii) 1,038,740 Common Shares representing 11.2% of the issued and outstanding Common Shares; (iii) 2,903,830 Common Share purchase warrants, representing 44.0% of the Warrants issued pursuant to the Offering and 50.1% of all outstanding share purchase warrants of the Company (including the Warrants); and (iv) 220,000 stock options. If all share purchase warrants held by Mr. Schwartz were to be fully exercised and all convertible debentures held by Mr. Schwartz were to be fully converted, Mr. Schwartz would beneficially own approximately 30.5% of the Company’s Common Shares on a diluted basis”

Of the remaining 420 units, directors and officers of the Company subscribed for 120 Units for gross proceeds of $120,000. Mr. Pedlar purchased 50 units.

Of the remaining 300 units, 150 or $150,000 were purchased by Mitec Technologies which prior to the financing owned approximately 9% of Covalon. The final 150 units were purchased by the Goldfarb Corporation, a large privately held holding company and former owner of a controlling interest in automotive service and repair specialist SMK Speedy International (Speedy Muffler King).

Some other things good and bad:

-The recent financing through a convertible debenture although mostly subscribed by insiders of the company is convertible into shares at $0.155 and would result in an additional 4.84 million shares upon conversion. There are also 4.84 million warrants exercisable at $0.155 resulting in an additional 4.84 million shares upon exercise.
-Proceeds of the private placement will be used by Covalon to finance the market launch of the company’s new products IV Clear and SurgiClear and for general working capital.
-The balance sheet could use some improvement. Working capital as of the latest quarter was only $260,000.

Why I Like Covalon Technologies:

This is not a typical stock for me. I prefer to see at least 2 consecutive quarters of revenue growth and positive earnings. However, the potential upside and the early signs of a turn around are too hard to ignore for me.
The company is being run by a very strong management team with a history of successful turn arounds including the wildly successful sale of Cedara Software for $476 million. The company’s latest quarter is potentially an early signal of another very successful turn around. Covalon management is focusing the business on their high margin products and has now launched two new products with early signs of market acceptance. I view the recent insiders’ and the Goldfarb Corporation purchases of the debenture financing as strong vote of confidence.
There are a reasonably low number of 9.3 million shares outstanding and approximately 20.5 million fully diluted. The recent reverse share split has resulted in a very high cost base for existing shareholders therefore there should be little selling resistance until much higher share price.
The company’s shares are currently trading at approximately 1 times revenue and about 2 times revenue on a fully diluted basis. Similar, albeit bigger, companies in this space such as Derma Science (DSCI) and Cytomedix (CMXI) trade at 3 times sales and higher. When annualizing the most recent quarter the company’s shares currently trade at a very low PE of 4 and a PE of 8 when factoring full dilution. The company is a medical technology company and these companies typically garner some of the highest valuations in the public markets. In my opinion Covalon offers an outstanding risk/reward scenario.

Company website: http://www.covalon.com/