Tissue Regenix Analyst Q&A: New capacity now on stream (LON:TRX)

Hardman & Co

Tissue Regenix Group plc (LON:TRX) is the topic of conversation when Hardman and Co’s Analyst Dr Martin Hall caught up with DirectorsTalk for an exclusive interview.

Q1:  Could you give us all a brief reminder about what Tissue Regenix does?

A1: When the human body has a small injury, it has tremendous ability to heal itself. For example, a skin cut results in clot formation, which turns into a scab, followed by full closure over time through new skin. However, when the injury is much larger, the human body needs some help to repair itself and the company makes products to do this.

The company has two proprietary platforms to process tissue obtained from deceased humans or animals to make safe and sterile scaffolds that retain the inherent properties of tissue and bone, which can be used to repair diseased or degenerated body parts. Given the origins of the tissue, the company operates in a highly sensitive and regulated field with natural barriers to entry.

Once made, its products are sold directly to hospitals for use by surgeons in operating theatres or commercialised via blue chip third parties specialising in orthopaedics and urogynaecology, such as Arthrex, Johnson & Johnson and ARMS Medical.

Q2:  Looking back, the operating performance of TRX has been poor, why is this and what is changing?

First, there has never been any doubt about the medical need, the suitability, or the quality of the company’s products. The issues have surrounded the supply of product and how they should be commercialised.

On the supply issue, sourcing of raw material is complex and highly regulated. This needs to be stored until required for processing, and processing itself is in a sterile, clean room environment. So, even though there was good demand for its products, each of these steps was rate-limiting and there was clearly a need to increase processing capacity.

On commercialisation, the original strategy was to build its own marketing infrastructure and sell products itself. This changed when TRX bought CellRight, which added the bone technology, but commercialised its products entirely through third-parties.

So about two years ago, the company decided to sell the majority of its products through specialist partners and to expand capacity to meet the increased demand.

Q3: While that sounds good, the shares still do not appear to reflect that opportunity. Why is that?

First, although the decision was made by the board to invest in new capacity, this needed to be financed.

Secondly, from an operational stand-point, around the same time that TRX was seeking funds, COVID-19 came along and, during the global lockdown, all elective surgeries were postponed from which much of TRX’s core business is derived, so sales growth was suddenly dented.

Thirdly, at that time point, its largest shareholders were Woodford funds and other institutions that often co-invested, owning over 50% combined. So, to raise new capital, TRX needed a completely new shareholder base. The stock market, knowing all this, marked down the shares until that funding uncertainty was removed.

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In June 2020, the company did manage to raise the necessary capital and investors who bought in at 0.25p have done extremely well so far.

Q4:  What are the key messages in your research report: “Poised for growth” ?

First, despite the impact of the pandemic on elective surgeries, TRX still managed to generate broadly flat sales in 2020, which was a very creditable performance. Surgeries can only be postponed, they must still be performed at some point in the future, so the demand for products will remain.

Secondly, capacity expansion. TRX is one of very few companies with the relevant licences and network to procure human tissue. The sensitivity of this subject means that the global players prefer to out-source such activity to specialist suppliers, rather than have its own regulated network. Two years ago, the company improved its supply chain to source tissue.

With an improved supply chain, part of Phase 1 of the expansion programme was to move and improve its freezer storage capability and the company now has three times the capacity compared with that contained in the existing facility.

This, together with moving the warehousing, freed up space in the existing facility in San Antonio, to install two new clean rooms, bringing the total number of clean rooms to seven. These came on stream last week.

In summary, the return of elective surgeries is expected to see an increase in demand for the company’s products, which can now be met by the increased supply, storage capacity, processing, and manufacturing. Commercialisation is through global blue chip names that do not take on products unless they can see $100m sales potential.

Q5:  What do you think will happen to the Tissue Regenix shares?

I always like to point out some basic facts. To get TRX where it is today with a number of approved products and operating in a highly regulated environment with huge barriers to entry, has cost £103m or 1.5p per share, yet its market capitalisation is under £50m. This suggests that it is still significantly undervalued by the market.

Having said that, although new capacity is now on stream, increased underlying sales will not be seen in the 2021 interim results. However, we would expect to see a marked rise in sales (over 30%) 2H’21 over 2H’20 and for this to continue throughout 2022. Also, I would like to point out that I carefully used the word “underlying” because most of the company’s sales are in the US and recent strengthening of sterling will have a detrimental effect on reported numbers, but, conversely, it will have a positive effect on costs.

The new management team is experienced in the field of medical devices and has taken over at an ideal time – increased demand, increased capacity, excellent commercial partners, recovery from the pandemic and adequately funded to deliver. In addition, both the CEO and CFO have been buying shares in the open market.

This all augurs well for shareholders.

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