Alliqua: Unique Opportunity to Invest In Wound Care at the Embryonic Stage

Recently restructured with an experienced management team, new capital, and value-added products to grow the business, Alliqua, Inc. (Ticker: ALQA) has emerged from the embryonic stage, and is positioned to become a leading wound care company. Free Report Download >>


Alliqua recently entered into an agreement with Celgene Corp. (CELG), a potential transformational deal for placenta-based wound care treatments based on Celgene Cellular Therapeutics’ (CCT) technology. The first of these products is set to launch by mid-2014 and enter the same segment as MiMedx (MDXG), an emerging wound care company with a market cap of nearly $800M. ALQA’s valuation is substantially discounted to the MDXG comparison, as well as the peer group of other companies in the segment. We believe investors may be able to take advantage of an emerging story in the advanced wound care space, as visibility for ALQA increases. We initiate coverage on ALQA, with an expected 12-month valuation range of $195M-$200M, or ~$16/share. Please See Key Disclosures and Disclaimers >>

Opportunity Highlights

Wound Care Market is Large and Growing. The global market is approximately $17B, with an est. 7.7% CAGR. The U.S. market for tissue-based products is ~$400M, led by fast-growing regenerative products. ALQA’s partnership with CELG for placenta-derived products, similar to MDXG’s assets, should help grow the market, and take share from less advanced tissue-based competitors.

Proven Management in Wound Care Segment. CEO Dave Johnson brought to ALQA key members of his former team at ConveTec, where they grew the business to become a global wound care leader with ~$1.7B in annual sales. We believe this talented team has a strong chance to build another leading wound care company by growing its dedicated commercial organization, consolidating high-value technologies, and making select product acquisitions. Notably, two members of ALQA’s Board are executives of Celgene Corp.

Comprehensive Suite of Wound Care Products with Biotech Upside. We like Alliqua’s vision to build a comprehensive suite of products to “own the wound” from initial diagnosis to final wound closure. We estimate that ALQA could generate revenues of ~$250M by 2020 from its current product portfolio.

Multiple catalysts to drive value. A potential uplisting of ALQA on a national exchange, launch of the Celgene Biovance asset by mid-2014, and growth of the company’s other wound care products should bring visibility to the stock, and help create additional shareholder value in the coming months.

Significant Potential Upside Given Peers and Earnings Potential. Our valuation range for ALQA is based on 25x our 2018 EPS estimate of $1.54, discounted back 4 years at 25%. This $16 per share price objective suggests about $200M in market cap, which is far below the avg. market cap for ALQA’s peers.

Summary and Investment Thesis

We initiate coverage on Alliqua (ALQA), with an expected 12-month valuation for the stock in the range of $195-$200 million, or approximately $16 per share. The company was recently restructured and repositioned with a new Board and proven management team, fresh capital, and a new line-up of value-added wound care products to grow the business.

Proprietary products include hydrogel-based wound dressings, SilverSeal and Hydress, which are made in Alliqua’s own manufacturing facility. This production plant also makes and sells specialized hydrogels, and Alliqua derives contract manufacturing revenues from this unique facility. Importantly, the company is assembling a full suite of technological solutions to treat various types of wounds, with high performing products that address the three major objectives of wound healing (managing drainage, managing infection, and wound closure).

New company management previously operated and grew leading wound care company, ConvaTec, to approximately $1.7 billion in sales, and this team has already in-licensed a line of products developed by sorbion GmbH, for the treatment of draining wounds. In a deal with transformational potential, Alliqua recently entered into an agreement with Celgene (CELG) for its placenta-based wound healing products.

Celgene and a group of investors made equity investments in Alliqua totaling $14 million coincident with this licensing deal, and the company’s balance sheet is strong. Earlier in 2013, company insiders and members of Alliqua’s Board also purchased company stock when the business was in the embryonic stage of its restructuring.

The Celgene products, Biovance and a line of products based on extracellular matrix (ECM), target the fastest growing segment of the wound care market because of the natural tissue-based collagen and wound-healing factors contained in these treatments. Biovance and ECM will penetrate the same market segment as MiMedx (MDXG), which has a market cap of nearly $800 million. With a comprehensive and growing portfolio of wound care products, a strong balance sheet, seasoned management in the wound care area, and the backing of Celgene, ALQA’s current market cap of about $100 million appears significantly undervalued.

The company plans to acquire and/or license in additional wound care products to fill any remaining gaps in its product portfolio, and also intends to monetize its hydrogel drug delivery and HepaMate (bioartificial liver) assets. Despite these initiatives, we estimate that Alliqua’s current product portfolio has potential to drive approximately $250 million in sales by 2020, suggesting a future valuation that is substantially higher than the market is currently assigning to the business. We believe investors have a chance to take advantage of an emerging story in the lucrative advanced wound space that is likely to become more visible, particularly as management plans to up-list the stock on a national exchange.

Our Investment Thesis is based on the following key points:

Wound care treatment market is large and growing. According to medical market research firm, Kalorma Information, the global market for wound care products is projected to grow from $16.8 billion in 2012, to approximately $21.0 billion by 2015, a CAGR of 7.7%. Demand is rising due to aging populations in developed markets, longer life expectancies, and higher rates of obesity and diabetes, globally. The annual U.S. market for tissue-based wound care products is estimated at approximately $400 million, led by fast-growing regenerative wound care treatments like MiMedx’s EpiFix and AmnioFix products. We believe that Alliqua’s partnership with Celgene for placenta-derived products, like the MiMedx assets, will help grow the market overall, in addition to taking share from less advanced tissue-based competitors.

Proven management team has executed in the Wound Care space before. CEO Dave Johnson brought to Alliqua key members of his former team at ConveTec, Inc., where these professionals grew the business to become a global wound care leader with roughly $1.7 billion in annual sales. We believe that this talented management team has a strong chance of building another leading wound care company by developing a dedicated commercial organization and consolidating high-value technologies seeking a capable sales, marketing, and distribution platform. Alliqua is moving toward a direct selling approach from its current contract sales strategy, and the combination of both salesforces, plus a comprehensive line of value added wound care products should enable the company to generate impressive sales relative to its size over time. Notably, two members of the company’s Board, including the Chairman, are executives from Celgene Corp.

Comprehensive suite of wound care products with biotech promise and additional acquisitions likely. We like Alliqua’s current product portfolio and vision to build a comprehensive suite of products to “own the wound” from initial diagnosis to final wound closure. Hydrogel products address dry wounds, with SilverSeal providing an effective agent to fight infection. The sorbion products both absorb wound fluid and keep it away from the wound, without excessively drying the healing environment. And Celgene’s placent-based products are naturally derived and designed for superior wound healing and closure — true biotechnology advancements. Some gaps still remain in the company’s portfolio for treating the full array of wound conditions, and Alliqua continues to seek new businesses and products that can be acquired or in-licensed to further grow its business. This “bolt on” acquisition strategy can accelerate Alliqua’s path to profitability.

Recent round of prominent investors including Celgene supports our thesis. Several well-known institutional healthcare investors and Celgene itself acquired equity in Alliqua with investments totaling $14 million. We believe this validates the Alliqua opportunity. Celgene invested $6 million in that round of financing, and is obligated to invest another $4 million in ALQA equity in the future, based on certain events. Celgene’s choice for Alliqua to market its placenta-based wound care products gives us confidence in the company’s ability to execute, and Celgene’s future equity commitment instills confidence in ALQA’s valuation.

Stock up-listing and other catalysts expected to create value. Alliqua is primarily an execution story, and we believe the company’s proven management, its line-up of products, the backing of Celgene, and Alliqua’s strategy to bring in new products via licensure or acquisition provide the right mix of assets and resources to get the job done. An up-listing of the stock is expected in the near future, which may increase ALQA’s visibility and attract more investors to the story. Other key anticipated catalysts and milestones are listed below.

Our valuation estimates are based on assumptions that may or may not be correct. The achievement of our share price objective is subject to risks and may not be achieved. Some of these risks are outlined in the Investment Risk section of the downloadable report.