| 2023 | 2024 | ||||||
| Price: | 8.61 | EPS | 0 | 0 | |||
| Shares Out. (in M): | 40 | P/E | 0 | 0 | |||
| Market Cap (in $M): | 344 | P/FCF | 0 | 0 | |||
| Net Debt (in $M): | 5 | EBIT | 0 | 0 | |||
| TEV (in $M): | 349 | TEV/EBIT | 0 | 0 | |||
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AngioDynamics has a market cap of $345mm with $65mm of net cash (including the sale on June 8, 2023 after the most recent quarter). ANGO has two segments 1) a medical technology business that grows 20% to 25% with 97mm in revenue (FY 2023A ending May) that is losing money as the company continues to invest in growth and 2) a medical device business growing 1% to 3% with 242mm in revenues (FY2023A) that is cash flow positive, causing a slight burn of $5-$10mm for the combined company.
Not only does AngioDynamics have differentiated products versus the competition in its medical technology division, but it has started to sell off pieces of its slower growth medical device business. In June 2023, the company sold a $32mm piece of its medical device business for $100mm or 3x revenue/7x EBIT. So yes, they sold 10% of revenue and received almost a third of their market cap in cash. If you listen to the most recent company presentation and the last quarterly call, ANGO will continue to be active portfolio managers. I do not believe this will be their last sale and the medical device business (the remaining $210mm of revenue) is worth between $150 and $225mm (I will discuss why later in this write-up). A catalyst is the continued monetization of the slower growth business, creating a more focused company with less moving pieces centered around the faster growing medical technology business.
If I am correct that the remaining medical device business is worth ~$170mm, then you are paying ~$110mm for the medical technology business, which has 95% of its revenue in recurring disposables levered to noninvasive procedures including PAD (removal of plaque in arteries), thrombectomy (removal of blood clots) and certain cancers (prostate), which have higher gross margins (mid-60s). The company uses the razor, razor blade model mainly placing machines at their capital expense (except for the NanoKnife) and gaining revenue from disposables based on procedure growth. AngioDynamics has multiple differentiated products playing in very large total addressable markets and those TAMs are growing due to ongoing clinical trials for new indications as well as international expansion.
Before we get into the details, why should you buy AngioDynamics:
Breakdown of the Medical Technology Segment
“Multiple devices and therapies are required during a PAD procedure due to the diverse nature of the lesions (types, lengths, locations). With a 355-nm wavelength and short pulse width of 10 to 25 ns, the Auryon system appears to allow for successful luminal gain regardless of lesion morphology, including moderate and severe calcific plaque.”
I am not sure how the AlphaVac and AngioVac are differentiated from their competitors (mainly Inari and Penumbra) and if they’ll be successful. Yes, they are currently a third of the total medical technology business, however, the NanoKnife with a $2bn WW TAM for intermediate stage prostate cancer could be a $200mm plus revenue product and the Auryon device already approved for PAD and a $760mm TAM in the US alone with a potential launch in treating deep vein thrombosis (DVT) which would add $2.4bn in global TAM could also be a $200mm plus product due to the 355nm wavelength technology.
So why is ANGO trading for less than 1x sales of its medical technology business when they have a clean balance sheet:
NanoKnife Potential
The biggest differentiated product for ANGO (IMO) is the NanoKnife, which uses electric currents to treat various cancers. Currently, the NanoKnife is approved (Nov 2011) for the surgical ablation of soft tissue (not for any specific cancer), however, the technology could be a game changer for prostate cancer as there are many patients (~100,000 in the US according to AngioDynamics or approximately 35% of the 288,300 new prostate cancer cases that are expected to be diagnosed in 2023, American Cancer Society) who have intermediate stage prostate cancer that could be treated with the NanoKnife. These patients either are treated with targeted radiation, radical prostatectomy, or with extreme heat or cold, all of which have debilitating side effects (incontinence and impotence) to various degrees as the prostate is close to several vital structures. Most men with early to intermediate stage prostate cancer decide to take a wait and see approach due to the side effect profile of these procedures.
The NanoKnife targets cancer cells without affecting surrounding tissues or blood vessels causing less side effects and a lower percentage of incontinence and impotence. There are several small studies and data showing NanoKnife efficacy in treating prostate cancer as well as a superior side effect profile to other procedures, however, The PRESERVE trial is an FDA trial initiated in prostate cancer. The results should be known by mid-2024 and a potential approval by year-end 2024. Obtaining FDA approval for prostate cancer should allow for greater commercial and Medicare coverage as the NanoKnife is currently considered an investigational therapy for prostate cancer. CPT codes are used by providers to allow reimbursement for various procedures. Currently, the NanoKnife has CPT Category III codes as it is an investigational product. As more clinical data is collected on both efficacy and safety, AngioDynamics moves closer and closer to gaining CPT Category I codes which are the most widely used codes for established procedures. A good readout from the PRESERVE trial would help in this journey as well as the ability to market to and educate oncologists of the clinical benefits of the NanoKnife in prostate cancer specifically.
ANGO’s MedTech comps from previous M&A
Valuation
Valuation is a little difficult because the company is currently burning cash, however, I have already given you comps relating to AngioDynamic’s medical technology business. A larger medical technology company would pay 3-5x sales for a business growing in excess of 20% with several potential indications coming over the next two years with very large TAMs. A larger company targeting the same providers (interventional radiologist, vascular surgeons, and oncologists) could cherry pick the very best sales and research employees while cutting the rest removing a large portion of ANGO’s operating expenses. At 3x – 7x 2023A ANGO medical technology revenue the segment is worth $8.70 - $18.30 per share, including net cash.
At some point, I do think management will monetize the medical device business as the medical technology segment continues to grow and reduces its cash burn. AngioDynamics’ CEO, Jim Clemmer, has a history of selling off businesses as well. In 2019, Jim sold NAMIC, which was another commoditized business run by AngioDynamics. NAMIC was sold for $169mm having ~$90mm of sales and 30% EBIT margins. Jim still points to this sale as the starting point for an increased focus into differentiated growth products. He also recently sold off another $32mm of revenue from the medical device segment for $100mm or 7x EBIT.
The medical device segment’s operating income has been used to offset some of the expense for an increased medical technology salesforce (~$23mm for Auryon in 2021 and 2022) and for clinical trials for new indications. The company also uses capex dollars to place the Auryon device (~$26mm from FY21-FY23) which not only subtracts from free cash flow but lowers gross margins through depreciation expense. Now that ANGO has completed the salesforce build out and much of the R&D expense as trials start to wrap up over the next year, I could see the company selling the remaining or a larger piece of the medical device business to fully concentrate on the large opportunity for Auryon in PAD, NanoKnife in prostate cancer, and AlphaVac in PE.
What is the medical device business worth? The EBIT margin profile for the medical device business is unknown, however, we can back into the it through past annual reports. In 2017 and 2018, ANGO had $13.8mm and $15.4mm in operating income (ex NAMIC), respectively. Auryon was bought very late 2019 and was not launched until Sept 2020 and the AlphaVac device was not launched until 2021. The company had NanoKnife sales of approximately $11mm in 2017 and 2018 and thrombectomy sales of ~$12mm and were spending R&D and SG&A dollars to increase awareness as well as for new indications. Therefore, I would assume operating income for the medical device business would be in excess of $15mm in both those years as I would assume the NanoKnife and AngioVac products were losing EBIT dollars. I would also assume that most of the $30mm in G&A is corporate or associated with the remaining business. If we assume half of R&D and sales and marketing are associated with the medical device business (which is high) and zero G&A, the remaining med device business would have EBIT of ~$25mm or an EBIT margin of ~12%. This seems right to me as NAMIC and the recently sold medical device business had EBIT margins of 30% and 42%, respectively. The businesses that have been sold had very little operating expenses associated with them. The remaining medical device business has a salesforce and R&D associated with it and is the reason why the margins would be lower than the previous divestitures. This is not to say that a larger entity with an established salesforce and R&D would not be able to cut costs if they purchased this business.
If we assume the business would sell at a multiple similar to the other medical device businesses than the remaining $25mm of EBIT would be worth $175mm to $200mm or 7-8x EBIT. This could prove to be conservative as the other med device businesses had limited operating expenses as AngioDynamics retained the entire salesforce and R&D employees. If the remaining medical device business was sold, an acquirer might pay more due to synergies. A sale of the medical device business for $175mm would leave $110mm valuation for the medical technology business earning ~$120mm of 2024E revenue growing 20% to 25% with the potential for expansion into new indications with large TAMs.
Looking at the downside, at $7/share you would have a $215mm enterprise value. If we assume the medical device business is only worth $150mm, you would be paying $65mm for ~$120mm of forward medical technology revenue. AngioDynamics purchased Eximo, the Auryon device, in 2019 for $46mm up front and $20mm in future milestone payments. At the time, the Auryon device has just been 510k approved and had no sales at the time of purchase.
Risks:
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