Biologics Focus And Divestiture Of Noncore Assets Will Drive Long Term Earnings Power

Catalysts

About Xtant Medical Holdings

Xtant Medical Holdings develops and manufactures orthobiologic and regenerative medicine solutions used primarily in spine surgery and related surgical specialties.

What are the underlying business or industry changes driving this perspective?

• The divestiture of noncore, modestly unprofitable Coflex and Cofix assets and related international entities is expected to sharpen focus on higher margin biologics, supporting improved gross margin and net income as the business mix tilts further toward core regenerative products.
• Scaling an internally manufactured portfolio across all major orthobiologic categories, including new growth factor, collagen and advanced DBM offerings, positions Xtant to capture a greater share of procedure volumes and increase biologics revenue growth above recent mid single digit levels.
• Reinvestment in the commercial organization, including a planned doubling and then further expansion of direct sales reps, is aimed at accelerating surgeon adoption of newer products such as Collagen X and Trivium. This is intended to lift top line growth and operating leverage as fixed expenses are spread over higher revenue.
• Expanded presence in hospital based wound care and surgical repair, enabled by low cost in house amnion manufacturing and strong hospital contracting, should benefit from the shift of wound care volumes into acute settings and support sustained revenue growth and more stable cash generation.
• Disciplined cost controls combined with positive adjusted EBITDA and the expectation of no need for additional external capital following asset sale proceeds create a foundation for self funded R&D and commercial investments that can enhance long term earnings power and net margins.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Xtant Medical Holdings's revenue will decrease by 4.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.3% today to 1.9% in 3 years time.
• Analysts expect earnings to reach $2.2 million (and earnings per share of $0.02) by about December 2028, up from $1.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $4.5 million in earnings, and the most bearish expecting $1.5 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 122.2x on those 2028 earnings, up from 64.0x today. This future PE is greater than the current PE for the US Medical Equipment industry at 30.0x.
• Analysts expect the number of shares outstanding to grow by 0.67% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.39%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company’s recent revenue growth is heavily supported by $5.5 million of high margin licensing income linked to Q codes and amniotic membrane arrangements, and any reduction or non renewal of these agreements as reimbursement rules evolve could depress revenue growth and compress gross margin and earnings.
• Biologics, the long term strategic focus, grew only 4% year over year. Management acknowledged prior cuts to commercial resources have hurt legacy DBM sales. If the rebuilt sales force fails to re accelerate procedure volumes, revenue momentum and operating leverage may remain below expectations, limiting net margin expansion.
• Regulatory and reimbursement shifts in wound care, including CMS changes and the migration of volumes from non acute to acute settings, create uncertainty for the amnion and broader wound care platform. If hospital contracting advantages do not translate into higher utilization, this could constrain revenue diversification and earnings stability.
• The pending divestiture of Coflex, Cofix and international Paradigm Spine entities removes approximately $23.5 million of annual revenue. Although these businesses are described as modestly unprofitable, any execution missteps in replacing this volume with higher margin biologics could result in slower total revenue growth and weaker net income than anticipated.
• The growth strategy depends on internally manufactured, higher end products like new growth factors, Trivium and Collagen X gaining surgeon adoption across multiple surgical disciplines. If competitors respond aggressively or the clinical uptake is slower than planned, expected gains in revenue mix, gross margin and long term earnings power may not materialize.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $1.5 for Xtant Medical Holdings based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $115.4 million, earnings will come to $2.2 million, and it would be trading on a PE ratio of 122.2x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of $0.8, the analyst price target of $1.5 is 46.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.