Adapttech EIS

Co-invest with Mercia and Hovione Capital in extended pre-Series A round – £80k capacity left (18 Sep)

IP-rich biomedical business with patented product aimed at potentially lucrative prosthetics market

This is an opportunity to invest alongside Mercia Asset Management (Mercia) and life sciences specialist investor Hovione Capital in an IP-rich biomedical EIS business: Adapttech Ltd.

This August, Adapttech launched its first product: an award-winning patented smart solution to improve the fitting of prosthetic limbs. Using a combination of 3D scanning, wearable technology and an iPad app, Adapttech’s INSIGHT System allows clinics to fit prosthetics far more precisely and in half the time, whilst giving patients a better, more comfortable fit. 

Following seven years of R&D and £3 million capital investment – including £2.2 million from Mercia and Hovione Capital – the INSIGHT System has successfully completed clinical trials and obtained CE mark and FDA approval as a Class 1 medical device, and it is now ready for commercial rollout. The plan is to sell to prosthetic clinics and military hospitals, initially in the US. 

To support this and continue development of other related products, the Company is raising £1.5 million under EIS in an extended pre-Series A funding round. Mercia is leading the round with a £500k investment and Hovione Capital is participating. We have negotiated a £500k exclusive allocation for Wealth Club members.

This private offer could be the last chance to invest before a planned £4 million institutional Series A round in 2021 potentially at a higher valuation, once commercial traction is demonstrated – not guaranteed.

If all goes to plan, the Company is forecasting revenues of £15.9 million and EBITDA of £8.3 million in year 5. This could help deliver mid-case investor returns of 12x (17x high case) before tax relief – high risk and not guaranteed, see the IM for details.

Adapttech’s seasoned management has previous experience of bringing new biomedical products to market, as well as raising capital and growing prosthetics businesses. They estimate the global addressable prosthetics market for their products to be worth up to c.$0.5 billion.

The business operates in a highly acquisitive market; it has the potential to be attractive to many active trade buyers, providing the business can scale as it plans to do – not guaranteed.

Important: The information on this website is for experienced investors. It is not advice nor a research or personal recommendation to invest. If you’re unsure, please seek advice. Investments are for the long term. They are high risk and illiquid and can fall as well as rise in value, so you could get back less than you invest.

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Highlights

  • Co-invest with Mercia and life sciences investor Hovione Capital in extended pre-Series A round
  • IP-rich biomedical company with portfolio of products, selling B2B
  • Now launched its first product to market: an award-winning patented smart solution to fit prosthetic limbs (CE and FDA approved)
  • Potentially last chance to invest at current share price; if launch proves successful, £4 million Series A round expected to be at a significantly higher valuation – not guaranteed
  • Over £3 million invested into the technology to date, including £2.2 million from Mercia Asset Management and Hovione Capital
  • Experienced management team and board who have done this before
  • Addressable market estimated to be worth up to c.$0.5 billion
  • Mid-case target return 12x, high case 17x before EIS tax relief after 5 years – high risk and not guaranteed
  • Limited capacity – £500k Wealth Club allocation
  • Single company deal with no diversification
  • Pre-money valuation of £3.9 million 
  • Minimum investment £21,087

This overview is based on the information available in the offer documents prepared by the management team in conjunction with Mercia Asset Management. Wealth Club has not reviewed or verified the information included, the company forecasts or the deal details. Please read the offer documents carefully to form your own view and ensure you wholly understand the potential benefits and risks.

Adapttech EISThe business

Adapttech is an EIS-qualifying, biomedical innovation company headquartered in Birmingham (UK), with offices in Porto (Portugal) and South Carolina (USA). 

The Company was founded in 2015 out of a two-year research project at the University of Porto. CEO Frederico Carpinteiro and his co-founder were respectively developing an internal scanner for prosthetic sockets and pressure sensors for foot insoles when they saw the opportunity to merge the technologies. They formed Adapttech to develop smart wearable technologies that improve quality of life for those with physical limitations – particularly amputees.

Contrary to popular belief, most amputations are not caused by trauma injury; instead, up to 70% are the result of blood circulation disorders, mainly related to diabetes.

Unfortunately, and despite the efforts of health bodies, the disease is still on the rise: the number of diabetes sufferers is expected to increase worldwide from 463 million in 2019 to 700 million by 2045. In the US, over 10% of the population have diabetes and a further c.33% are prediabetic, at high risk of developing diabetes.

While the complications of the disease could drive a corresponding increase in a need for lower-limb prosthetics, advanced prosthetic-fitting technology could improve these patients’ comfort, mobility and quality of life.

Following seven years of R&D and £3 million of venture capital and grant funding, the Adapttech team developed its flagship INSIGHT System for more precise prosthetic fitting – comprising a scanner, iPad app, wearable device and sensors that attach to the prosthetic socket. 

The INSIGHT scanner is patented in the US and Europe; the sensors are patent pending. The Company also has a second product in development – a wearable activity monitor (K-monitor) to measure amputees’ daily activity levels, planned for launch in 2021 using funds raised in this round. Like INSIGHT, this will be sold to prosthetic clinics. The Company also plans to further develop its INSIGHT scanner as a standalone product for replicating sockets – but this has not been factored into the forecasts.

CEO Frederico Carpinteiro has recruited an experienced team to help with the commercial rollout of the product. COO Roland Neal has experience in bringing new medical devices to market, while Executive Chairman Stuart Mead has scaled and raised significant capital for multiple medical device and prosthetics businesses. 

The technology

How does the INSIGHT System work? Video produced and published by Adapttech (Oct 2019)

The INSIGHT scanner creates a precise 3D model of the inner surface of a prosthetic socket in under 90 seconds, collating pressure and gait data collected from the sensors and wearable device worn by the patient during both static and mobile testing. 

The app controls every device on the INSIGHT platform. It quickly identifies pressure points and potential problem areas in the stump-to-socket interface; this is supported by comprehensive quantitative data. The user-friendly app houses patients’ fitting process history on the cloud – meaning the data can be accessed where needed anytime and anywhere in the world. 

The Adapttech team believes this is the only product of its kind on the market suitable for widescale clinical rollout: uniquely combining both 3D scanning and pressure sensors, as well as being affordable and easy to use.

Crucially, in 2019 the INSIGHT product obtained its CE mark and FDA approval as a Class 1 medical device. The product has been clinically tested and trialled across 4 clinics and 40 patients in Portugal and the US. Feedback from prosthetists has been extremely positive. The studies found INSIGHT made it significantly faster – and easier – to fit residual limb sockets and evaluate patients. 

The INSIGHT product is currently assembled in-house in Portugal, with most of the components bought off the shelf or outsourced.

My prosthetists are very excited to be using INSIGHT as it makes their lives easier and improves patient outcomes. We can grow our business with this technology.

Edward De La Torre, President, De La Torre Orthotics and Prosthetics – Regional practice with 7 sites across Pennsylvania, US

We are using INSIGHT and already seeing the benefits to patients and the profitability we’re achieving from these patients. We’re looking forward to scaling-up our adoption of INSIGHT.

Tom Passero, CP, President, Prosthetic and Orthotic Associates – Single practice in Orlando, US

Market

Adapttech will initially target the private market: starting in the US, which represents the largest single market, with 1.9 million amputees and 120,000 new amputees annually. There are c.3,200 private prosthetic clinics in the US. This gives an initial target market worth $160 million. 

Management estimates the total global market to be worth two to three times the US market, giving a total addressable market of up to $480 million. 

Once established in the US, Adapttech plans to target the private sector in its home markets (UK and Portugal) from 2022. Adapttech also plans to target the Italian market, as it has been approached by INAIL, a public body overseen by the Italian Ministry of Work and Social Policies, which provides funding for 70% of the national amputee market.

Commercialisation 

Adapttech will sell B2B and is now ready to start commercialising its product. 

Initially, it will target US national and regional private clinics with multiple practices, as well as military hospitals. A key focus will be Hanger Clinic, the largest clinic in the US which treats 1 million patients a year from its 800 locations.

To access this market, in July 2020 Adapttech finalised a distribution agreement with Cascade Orthopedic Supply, LP ("Cascade"), the US’ largest Orthotics and Prosthetics (O&P) distributor, recently acquired by industry giant Ottobock. Cascade will purchase the units from Adapttech to sell for a mark-up and has a specific distribution plan for Hanger Clinic. Contractually Cascade must hold a minimum of two units of stock – these first two units were purchased in August 2020.

The Company also plans to sell directly, primarily to military hospitals – leveraging Chairman Stuart Mead’s extensive network across the O&P industry. 

The INSIGHT system will be sold to prosthetic clinics for £16,000 plus on-going licence fees after the first year. Adapttech’s second product, K-monitor, will also be sold to prosthetic clinics for an initial hardware cost plus on-going licence fees. Management expects most forecast revenue to come from the upfront sale of the INSIGHT and (from 2021) K-monitor products. INSIGHT aims to be attractive to prosthetists as it could help them improve key clinic performance indicators: reducing costs, improving efficiency, increasing billing speed and improving patient care. These efficiencies could, in turn, allow clinics to take on more patients and increase income.

The Company estimates INSIGHT provides a 50% time reduction in the prostheses fitting process, saving the average clinic at least $50k per annum in clinical time. This could mean an ROI of 4-6 months for purchasing the INSIGHT System. 

In addition, prosthetists can use the data from INSIGHT to support and expedite claims to US insurance companies – potentially improving reimbursement speed and claim amounts.

The Company is forecasting sales of £15.9 million in 2024 (not guaranteed), predicated on selling to 646 clinics.

The offer

Adapttech is raising £1.5 million under EIS in an extended pre-Series A funding round. £600k has already been secured from existing investors Mercia Asset Management and Hovione Capital. 

The Company is in advanced discussions with two other funds over a £400k investment expected to complete shortly – not guaranteed. Wealth Club has secured an initial allocation of £500k. Any additional allocation would require board approval.

At a pre-money valuation of £3.9 million, this offer is expected to be at a discount to a planned Series A round in summer 2021 – not guaranteed. 

Funding will be deployed towards: driving initial sales for the product in the US, hiring key staff, making product improvements and investing £230k in the Company’s second product, the K-monitor.

Predicated on the business achieving its forecasts, the Company is targeting mid-case returns of 12x and high-case returns of 17x before tax relief in year 5 – high risk and not guaranteed, see the IM for details.

Covid-19 impact

Adapttech’s primary market, the US, has seen a delayed re-opening compared to Europe. Some of Adapttech’s potential US customers may reduce or delay capital expenditure decisions because of this uncertainty. Meanwhile, travel restrictions have disrupted opportunities to develop sales leads in person, both in the US and in Italy. Accordingly, all Adapttech staff agreed to a temporary decrease in salary. 

However, despite the disruption, a US distribution agreement has recently been signed with Cascade. Furthermore, the R&D team has been able to continue to work at full capacity from home. INSIGHT could help reduce face-to-face patient contact at a time when many clinics are operating on reduced hours, so Management believe Adapttech could be well placed to gain market share during the COVID-19 crisis.

Target returns

Adapttech forecasts revenues of £15.9 million and EBITDA of £8.3 million in year 5. It targets mid-case returns of 12x, and high case returns of 17x after five years (before tax relief). This is predicated on a successful market launch and successful Series A round in 2021.

The global O&P market has seen a significant volume of M&A activity in recent years, including large prosthetic component manufacturers acquiring early-stage, innovative companies. 

Two of the largest prosthetic component manufacturers are Ottobock (Germany) and Ossur (Iceland). In 2018 Ottobock acquired Pohlig, a German-based orthopaedic specialist, adding to its acquisitions of prosthetics businesses BionX and Bebionic in 2017.

In February 2019 Ossur acquired powered ankle technology from prosthetics firm SpringActive Inc. Shortly after, in July, Ossur acquired College Park industries, a global provider of lower and upper limb prostheses.

The value of all these deals was undisclosed. However, the $5.4 billion acquisition of medical device business Wright Medical Group (WMG) by Stryker in November 2019 demonstrates the potential for attractive exit multiples for medical device businesses – with WMG valued at over 5x revenue.

Adapttech is currently loss-making, with a cash burn rate of c.£100k per month. Assuming a successful £1.5 million raise, this funding round will provide headroom until the planned Series A round in Autumn 2021.

Exit options

Once the business has proved initial commercial traction, management plans to launch a follow-on Series A round at a potentially significantly higher valuation to provide the capital to manufacture the product at scale.

If the business can scale, it could be highly attractive to a trade buyer in the medical devices industry. Large O&P businesses have demonstrated a track record of acquiring innovative early stage technology companies – not guaranteed. As with all EIS companies, there is also the option of a sale to another investor, refinancing or a stock market listing. 

Exit options and timeframes are not guaranteed. Note: if the Company did achieve an early exit, this could affect EIS tax relief.

Management 

Co-founder and CEO Frederico Carpinteiro is a biomedical engineer educated at the University of Porto and Carnegie Mellon University in the US. Frederico specialised in computer vision and bio-imaging during his Masters programme. He left Biostar, a medical research organisation, to co-found Adapttech with fellow biomedical engineer Mario Espinoza. Mario has since gone on to pursue other opportunities. 

Frederico has recruited an experienced management team and board with industry experience to assist with the commercial launch of the business.

COO Roland Neal has over 20 years’ experience in leadership and engineering within high tech, high growth industries. Educated at Cambridge University, Roland has a track record of bringing innovative, high tech products from prototype to market. This includes developing a photon counting x-ray camera from first prototypes to sales of £24 million per annum at Dexela Limited.

Executive Chairman Stuart Mead has spent more than 30 years as CEO of medical device businesses, including TouchBionics, Excell Biotech and Fuel3D – all of which achieved success in the US. As CEO of prosthetics business TouchBionics, Stuart grew the business from early revenues in 2004 to £9 million of revenue in 2011. The business was subsequently sold to Ossur for £27.5 million in 2017. At TouchBionics, Excell Biotech and Fuel 3D, Stuart successfully raised over £20 million in debt and equity from private investors, venture capital and financial institutions. Stuart is actively involved in the business, with strong relationships across the O&P sector. 

Board of directors

Executive Chairman Stuart Mead leads the board, with board representation from Mercia Asset Management (Isabel Dodd) and Hovione Capital (Ricardo Henriques) and Frederico Carpinteiro.

Mercia Asset Management plc

Mercia is an AIM-quoted specialist asset manager with £800 million assets under management, invested across c.400 portfolio companies. It now manages approximately 30 EIS and regional debt and equity funds. Most recently, it acquired the management of the longstanding Northern VCTs.

Mercia’s experienced ventures team has raised and deployed more than £475 million of EIS and VCT growth capital investment funds into over 230 SME companies. This includes £34 million deployed in the year ending March 2020. In July 2020 Mercia successfully exited biotech company The Native Antigen Company for 8.4x its original investment. Since its first investment into Adapttech in 2018, Mercia has invested £1.1 million in the Company, and is leading this funding round with an investment of £500k.

Hovione Capital

Hovione Capital is a Portuguese venture capital firm, founded by the shareholders of Hovione, a $270 million+ revenue pharmaceutical business. Hovione Capital has deep sector knowledge, investing in life sciences businesses across Europe, with a focus on Therapeutics, MedTech and Digital Health. Hovione was the first external investor in Adapttech in 2016 and has since invested £1.1 million. Hovione is investing again in this funding round. 

Risks – important 

This, like all investments available through Wealth Club, is only for experienced investors happy to make their own investment decisions without advice.

EIS investments are high risk so should only form part of a balanced portfolio and you should not invest money you cannot afford to lose. They also tend to be illiquid and hard to sell and value. 

Before you invest, please carefully read the Information Memorandum, which contains further details on the considerable risks, alongside the Wealth Club Risks and Commitments. 

This is a single company EIS offer – there is no diversification. It involves investing in a pre-commercialised and currently loss-making, early-stage business. Businesses of this nature are high risk and prone to failure. You could lose the amount you invest.

In order to achieve its forecasts, the business forecasts selling to c.30% of US clinics by 2024. It is an ambitious forecast and if this market share is not achieved, this will impact forecast performance and target returns.

The timing, quantum and valuation, or indeed the certainty, of the planned Series A round are not guaranteed.

The value of tax benefits depends on circumstances and tax rules can change. 

If the Company were to achieve an early exit, this could affect EIS tax relief.

Fees

Investors are investing in the company directly, so will pay no direct initial or ongoing charges. 

The Company will pay an introducer fee to Wealth Club equal to 4% of capital raised. Wealth Club will have the right to buy shares in the Company via a warrant. There are no other fees paid to Wealth Club. 

Investors should note their investment will be made using a nominee structure via Woodside Nominees. Please read the nominee terms and conditions. 

Our view

Adapttech has invested significant time and capital in its award-winning patented technology. This is an exciting time for the business. Its first product has successfully completed clinical trials and obtained regulatory approval, both in Europe and in the US. The Company has secured a distribution agreement with the US’ largest Orthotics and Prosthetics (O&P) distributor. Adapttech is now ready to start commercial rollout and continue to develop other products (next launch expected in 2021) before raising a larger Series A round in 2021. 

The Management and board have significant experience in the sector, commercialising innovative healthcare devices and scaling leading medical device and prosthetics businesses. 

The progress made to date and the investment from reputable institutions with relevant sector expertise are impressive in our view. If Adapttech can build initial sales traction, its proposed Series A is expected to be at a higher valuation (not guaranteed). In our view, this presents experienced investors with an attractive, albeit high-risk, opportunity to invest now at the current share price alongside financial institutions. You should form your own view.

Register your interest – no obligation

Wealth Club aims to make it easier for experienced investors to find information on – and apply for – tax-efficient investments. You should base your investment decision on the provider's documents and ensure you have read and fully understand them before investing. This review is a marketing communication. It is not advice or a personal or research recommendation to buy the investment mentioned. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.

The details

Type
Single company
Sector
Healthcare & Technology
Target return
12x
Funds raised / sought
£420,000 / £500,000
Minimum investment
£21,087
Deadline
Limited capacity remaining
Last updated: 1 September 2020

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