Guest Pitch: Next Science (NXS.AX)

Large Capital Return (at A$0.14)

This idea was shared by Duncan.

Wound cleaning products manufacturer Next Science has agreed to sell substantially all of its assets to its peer Demetra Holdings. The transaction is set to close on September 15. Net proceeds are expected to be US$30m, which the company plans to return to shareholders. That is equivalent to a distribution of A$0.158/share. With the stock trading at A$0.14/share, there’s a ~13% spread to expected distribution plus a free optionality on the remaining listed stub. Liquidity is thin, but the ask price on Interactive Brokers has remained at A$0.14/share and building a small position is quite easy.

Management’s quote on capital return from the sale announcement:

Subject to review at completion of the Proposed Transaction and subject to receipt of tax advice, Next Science intends to return the net proceeds to shareholders. After repayment of debt, transaction costs, potential tax liabilities and winding down costs, the estimated net proceeds of the Proposed Transaction to be distributed to Next Science shareholders are expected to be in the order of US$30m. The amount of US$30m is a preliminary and indicative estimate only and Next Science will update the market if there is a material change to that estimate.

My calculations of distributions per share:

Overall, this seems like a pretty nice double digit arb with a 2-3 months timeline.

Now a bit more details.

Next Science’s business is built around its proprietary XBIO technology, which targets and breaks down infectious biofilms (the sticky layers of bacteria). Its products include surgical washes and wound gels. The key advantage of the technology is that it does not require a saline rinse after surgery, which removes an extra step and saves time. NXS’ solutions can stay in the wound and continue working as an anti-biofilm agent even post-operation. The company mainly sells to wound care centers, hospitals, and physicians. The business operates primarily in the US. It also has a partnership with US medtech giant Zimmer Biomet (ZBH), which sells NXS’s products under its own brand. While the partnership likely favors ZBH and has not contributed meaningfully to Next Science’s financials, it serves as a validation of the underlying technology.

The description of what is actually getting sold in the Demetra transaction was a bit vague. As I understand, all the ‘good stuff’ will move to Demetra, which will leave the stub with just the distribution business (DME):

The Proposed Transaction includes the sale of the Company’s regulatory approvals, contracts, intellectual property, inventory, records and goodwill of the NXS Group but excludes assets related to the DME business.

The remaining distribution business will likely be close to worthless. My guess (as no details were given by management) is that the existing distribution contracts will move to Demetra together with the asset sale. So the RemainCo will be just a distribution business in name and maybe in some personnel. Management has stated that after the sale it will “assess its options as a going concern.” This could still potentially include unlocking some value from the ASX listing itself, whether through a potential liquidation, or reverse merger. Yet, ultimately, the stub is best viewed as a free option, and I don’t expect much from it.

The buyer, Demetra Holdings, is a serious strategic acquirer. It is backed by Astorg, a European private equity firm with over €24 billion in AUM. Demetra already owns a portfolio of five medtech companies, including one that also provides surgical irrigation solutions. The buyer has been actively expanding its portfolio, with its most recent acquisition completed in February this year. Next Science seems like a good strategic fit for Demetra’s growing platform.

The main condition for the sale to close is shareholder approval through an ordinary resolution, which requires support from more than 50% of votes cast. The vote is set for August 14 and is likely to pass. The asset sale comes at a substantial premium of 60%-100% over recent trading prices. Approximately 37% of Next Science is owned by the billionaire Walker family, who have been long-time backers of NXS since before its 2019 IPO. It’s highly unlikely that management would have proceeded with the sale without consulting them first.

Another major shareholder, Thorney Group, increased its stake from 5.7% to 7.3% in late February, when the stock was trading at around A$0.11/share. Thorney is also a key creditor through a US$5m loan facility, and the asset sale ensures that debt is repaid in full.

The opportunity probably exists for three reasons.

First, management’s net proceeds estimate is subject to change. As stated in the announcement, “eventual distribution might turn out to be lower or higher than the current projections of approximately US$30m.” That said, I think the US$30m estimate is very reasonable. Gross proceeds from the sale are US$50m, and the company has substantial tax losses in both the US and Australia, suggesting no taxes should be payable on the transaction. Total liabilities as of December 2024 were just US$6m, and the 2024 cash burn was only US$10m. That leaves plenty of room to cover additional costs, and it’s even possible that the final net proceeds for distribution could exceed the US$30m estimate.

Second, Next Science has a muddy history with the FDA. In August–September 2024, the FDA inspected the company’s Florida facility and issued a list of observations citing multiple violations. These included certain marketing and labeling claims made without the regulator’s premarket approval, quality system violations in manufacturing and storage controls, and failures to timely report incidents where a device may have contributed to serious injury. While Next Science claims to have addressed these issues, the FDA followed up in February 2025 with a Warning Letter, stating that a follow-up inspection will be needed to “evaluate the implementation and effectiveness” of the corrective actions. No further public details have been provided, and the company has only stated that it continues to work with the regulator.

Despite the seriousness of an FDA Warning Letter (which can escalate if unresolved), I do not think this could detail the asset sale. The buyer, Demetra Holdings, almost certainly conducted full due diligence and had access to all the details. And it still chose to proceed with the transaction and sign the binding agreement. Most importantly, the summary of the sale agreement includes no conditions tied to the FDA inspection, suggesting the buyer is comfortable with the situation and the corrective measures taken.

The third reason this opportunity might exist is the uncertainty around the tax treatment of the upcoming distribution. It’s still not entirely clear whether the net proceeds will be treated as a capital return or a dividend. If classified as a dividend, the tax implications eliminate the potential upside. However, as discussed in this forum, it seems more likely that the distribution will be treated as a capital return. The amount being returned is well below the total equity raised by the company, and NXS has never paid a dividend before.

A few additional points worth noting:

• Eventual distribution might turn out to be lower/higher than the current projections of approximately US$30m. However, management’s US$30m estimate appears reasonable.
• The downside if the asset sale transaction fails is difficult to quantify, but could be substantial.
• There’s some FX exposure here, as sale proceeds will be received in USD. However, this risk can be hedged.
• The share count that I’ve used in distribution per share estimate is 292.6m. While the company has 29.7m options and 12.4m RSUs, the options are out-of-the-money, and the RSUs are unlikely to vest in the short term, so they likely won’t dilute the distribution. Please correct me if I’m wrong here.
• For U.S. investors, a 15% Australian withholding tax would apply if the distribution is classified as a dividend. This tax is typically deductible against U.S. taxes, but please consult a tax advisor to assess your own situation.