HTL.V: 2017 Second Quarter Revenue Grows By 135%

By Anita Dushyanth, PhD

TSX:HTL.V

On August 23, 2017 Hamilton Thorne (HTL.V) reported financial results for the second quarter of 2017.

Revenue for the second quarter increased 135% to $5.6 million as compared to the same period in the prior year which was contributed by the quality control testing services and assay business. Since Gynemed acquisition was completed in early May 2017, the firm realized partial contribution (two months of revenue) from Gynemed’s product sales during Q2 2017. Sales were primarily driven by growth in the human clinical market. Roughly 55% of total sales came from consumables and services. Revenue was largely inline with our $5.8M estimate.

Gross profit for Q2 increased 124% to ~$3.4 million as compared to Q2 2016. Gynemed offers a mix of both high and lower margin products. As the service and consumables revenue grows, we continue to model incremental widening of gross margin. R&D expenses amounted to $0.3 million. Selling and marketing expenses amounted close to $1.2 million. The expenses stemmed from compensation to staff as well as post-closing amounts. Acquisition related expenses ($560k in Q2) are captured in the general and administrative category, which totaled $1.4 million for the quarter and were related solely to the April acquisition of Gynemed.

Hamilton Thorne’s income is subject to state taxes from its U.S.-based operations and U.S. alternative minimum tax and also from Germany based on sales from Gynemed. The firm’s U.S.-based federal taxable income continues to be offset by net operating losses totaling about $26 million, which begin to expire beginning 2020.

The firm has outstanding debt of roughly $14 million. Hamilton Thorne continues to generate significant operating cash flow. Cash flow from operations was $295k and $1.6M in Q2 and 1H 2017 ($716k and $1.3M, excluding changes in working capital). CapEx was just $75k and $100k in the same respective periods. The firm exited the quarter with a cash balance of $5.3 million. We think this amount is sufficient to carry on operations until mid-2018 assuming the momentum in revenue growth continues.

Business Update

In the beginning of August 2017, Hamilton Thorne expanded its product offering by introducing the TrakJector™ micromanipulator system, designed and manufactured in Germany. It is designed to fit on the most commonly used inverted microscopes including Leica, Olympus, Nikon and ZEISS. Micromanipulators use advanced techniques to perform complicated procedures at different stages during IVF. Looking to capitalize on growing demand for ICSI and embryo biopsy procedures, Hamilton Thorne continues to develop devices that help the ART market. TrakJector offers a unique and intuitive control system for procedures performed at the ART labs.

The TrakJector has a movement range of 24mm with a resolution of greater than 100nm in one direction. The device is able to repeat the measurements with less than 1µm accuracy. The velocity of the trackball is adjustable in 30 steps and permits balancing between operators and different magnifications. The weight of manipulator is less than 5kg.

Since there is an enormous amount of familiarity and efficiency associated with micromanipulators, we think there could be several IVF clinics that readily adopt the TrakJector. The TrakJector offers several technical advantages. Unlike its competitors from Narshige, Eppendorf or Research Instruments, the TrakJector truly offers a one-handed operation using the AIOtrackball (All-in-One Trackball) in conjunction with the MIUmotOil (Motorized Oil Injection Unit). The trackball and two buttons allow easy control of the injection holding pressure and motorized movement. The GELpillow greatly assists the ergonomics by allowing the hands to stay relaxed during extended operating sessions. The TrakJector microinjection holder provides a two-step adjustment for the injection and holding angles by using a rotating control for coarse and fine adjustments. The TrakJector micromanipulators offer a new standard in smooth fine control with precision (tolerance less than 1 µm). These micromanipulators can be easily cleaned and do not require routine maintenance. Management is planning to rollout the device globally through its distribution network.

Factors fueling Hamilton Thorne’s growth

Innovations in IVF technology such as capsule IVF, micromanipulators and embryoscopes are expected to fuel growth in the IVF devices segment. Regionally, the Asia Pacific (APAC) region is expected to witness the highest growth rate in the IVF market owing to abolishment of China’s one child policy, burgeoning fertility tourism in India and Thailand, growing demand for surrogacy, advanced maternal age in Japan and soaring ART procedures in Australia and New Zealand.

As planned, the company has its focus on growing consumables, accessories, software and services sales. Gynemed is a profitable and growing business that offers premium branded IVF cell culture media, OEM and distributed consumables and devices, and has an excellent reputation and proven sales channel in the well-established European ART market. Gynemed’s consumables segment is roughly 80% of their business and helps drive recurring revenue.

Hamilton Thorne has significantly expanded its product offering with a highly complementary product portfolio. 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. We expect that the company could achieve increased sales from cross-selling and expansion into new markets.

We have updated our financial model following second quarter 2017 earnings. We expect operational expenses to rise with increased marketing and sales expansion and business development activities. We remain optimistic on Hamilton Thorne’s expansion plan.

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