Polynovo Limited

ASX:PNV

Polynovo Limited

ASX:PNV
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$2.04 (+3%)
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#15
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Pinned straw:
Remorhaz
Added one year ago

Morningstar equity research initiates coverage on Polynovo with a 2 Star (**) (slightly overvalued) rating

There's more detail in the full analyst report but FWIW the summary snippet below captures the general gist


Polynovo (ASX: PNV)


We initiate coverage on medical device provider Polynovo with a fair value estimate of $1.00. Shares are currently overvalued, trading at a 34% premium. Morningstar equity analyst Shane Ponraj suspects the market is likely too optimistic on the speed and extent of Polynovo’s commercial rollout and is underestimating competitive pressures

Ponraj thinks the market is also overly excited about potential new indications of Polynovo’s NovoSorb technology. While broader indications including hernia repair and breast augmentation and reconstruction are being considered and would expand Polynovo’s addressable market, these are still very early in the development phase. Our Uncertainty Rating for Polynovo is Very High, and we assign a Standard Capital Allocation rating

Polynovo’s main product, NovoSorb BTM, is a patented biodegradable synthetic scaffold to support the regeneration of the dermis when lost through surgery, trauma, burns, or other causes of tissue loss. Polynovo’s current strategy revolves around increasing its sales staff, expanding its geographical footprint, and exploring new uses for its NovoSorb technology beyond the dermal substitute market. With its geographical reach, the firm estimates its products are available to 800 million people as of fiscal 2023, but highlights that the global market is underserved

Ponraj does not award Polynovo an economic moat given low switching costs for clinicians to adopt competing products and concerns over the durability of intangibles related to NovoSorb. He thinks Polynovo will have little to defend its position when faced with stronger competition in the coming decade, particularly when its key patents expire in fiscal 2028

Financial success in medical devices is also dependent on distribution networks, hospital relationships, brands, and marketing expertise that larger competitors may already have and can utilise more effectively
mikebrisy
Added one year ago

@Remorhaz an interesting note, thanks for sharing.

A few perspectives. I believe analysts are wrong to link any narrative on breast and hernia to sales trajectory in the foreseeable future. That ship has sailed a while ago and its now purely long term "blue sky". The widening of applications is about the extension of the existing products largely in dermal repair. You just have to look at some of the 80-odd peer-reviewed journal articles over the last year to see how opinion-leader clinicians are innovating. This is where the surgeons will be looking and it gives the sales force a lot of largely independent ammo. to take to prospective customers.

I was at a battery-tech conference yesterday (nothing to do with $PNV), and shared perspectives over lunch with a venture fund manager who has a lot of experience in medical instruments. His view was that it is the opion-leader clinicians that will do more to enable widespread adoption than anything. Interestingly, he also has a contrary view on the role of distributors to the global rollout, and he believes that $PNV should be doing more with distributors,... a subject for another day.

One point in the Morningstar note to have in focus is on IP and 2028 patent expiry. Clearly, this isn't a singular step, as $PNV will have built a whole armoury of patents around the product, the manufacturing process and the applications. However, this is why growth is so important at the moment. They want to have the lion's share of the market stitched-up (pun, LOL) so that they can use pricing to defend their position as other non-biologics start to profilerate towards the end of the decade. This is not the primary focus for now, but it is definitely something that should be on investors' radar screens in 4-5 years.

I believe 2024 is a pivotal year for $PNV. Last year, expenses grew faster than revenue under the banner of "accelerating global growth". This year I expect to see revenues grow faster than expenses. The Morningstar note is a good reminder that companies operating in a competitive market don't have forever to become profitable. I think the time has come for $PNV, and its delivery against that "promise" is now central to my thesis. So I get worried when I hear DW say, as he did on Ausbiz yesterday "when you are growing at 100% you don't have to worry about being unprofitable". By my modelling, they should easily be able to generate a positive NPAT in FY24 if they hit revenues of c. $100m or more, which seems feasible.

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