Their Product:

Novosorb - a biocompatible synthetic polymer used to create a dermal matrix, effectively scaffolding, to assist in the healing of the deeper layers of the skin (dermis). Used for burns and other wounds to fill and secure the wound as it heals, biocompatibility means the polymer is safely absorbed into the body as it heals.

2 versions of the matrix exist:

• BTM - consisting of Novosorb with a laminated outer layer to strengthen the foam and to seal the wound from external contaminants. The laminate has to be eventually removed as it does not biodegrade within the body.
• MTX - Novosorb without the laminate, can be implanted within the body and will be entirely degraded

Being synthetic Novosorb is a more consistent product (from batch to batch) in comparison to biologic equivalents resulting is less post-operative complications. 

Their Customers:

In simple terms, based on who they receive money from, their customers are the medical institutions (public and private) that purchase Novosorb.

However, I think their actual customers are doctors and surgeons primarily in burns and trauma centers, but also other types of hospitals, medical centers and medical research institutes.

You could also say the patient that receives Novosorb as treatment is the end customer/consumer though.

To stich these all together:

Polynovos customers are medical institutions whose practitioners use Novosorb to treat patients. Practitioners will prefer Novosorb if:

• It is easier to use than other products
• Can be used in wider array of procedures
• Provides better outcomes for the patient

The crux of this is while the Institutions buy the product, it's the doctors they sell it to.

Moat:

Sources of a moat for Polynovo include:

1. Regulatory approval - Polynovo have approval for Novosorb in North America, India, UK and Europe, Australia and parts of S.E Asia. This is a significant hurdle for new competitors to get over
2. Hospital approvals - individual hospitals will assess and approve new products. Polynovo has a good history of expanding the number of hospitals is sells into.
3. Becoming the standard of care. Once you become the go-to product it makes it harder for new players to compete. They will have to work hard and spend a lot of money on sales people to convince doctors to switch to their products. The more indications the product is useful for the greater the entrenchment.
4. Lower cost - while I have not seen the pricing exactly myself, my understanding is the synthetic product is cheaper to produce than the equivalent biological product

The first 3 are kinda a tiered network-effect moat - First you need Country/Regional approval, then the hospitals themselves, then finally the doctors. In the end it becomes a network effect as you become the standard.

2 and 3 are still expanding for Polynovo with Novosorb as it adds more hospitals and doctors as its customers

Their Competitors

There are a lot of companies in the space, however not all of them are direct competitors.

Some examples are:

Integra Life Sciences

Integra produces a range of biologic dermal products used for wound reconstruction - some of these compete directly with Novosorb. Based on the last few earnings calls it seems revenues for these products are declining. With their guidance anticipating flat growth for these products for 2024.

Note Integra make the bulk of their revenue from products unrelated to Polynovo (e.g. Neurosurgery products and instruments)

Mallinckrodt Pharmaceuticals

Mallinckrodt acquired the company developing StrataGraft, a direct competitor to Novosorb, however according to their website the product is still in clinical trials.

Their Scalability

While Novosorb is a manufactured product, according to David Williams the facilities are not that capitally intensive. (It is a to-do to assess the capital cost of their factories). Worth noting they do have software like gross margins (~80%).

Existing manufacturing + the new facility (due to come online in 2025) should provide the capacity to deliver ~18x the devices manufactured in FY23.

Creating extra manufacturing, if required, should not be an issue and will be possible from the amount of cash they currently have + future cashflow.

The TAM is large, but hard for me to quantify in $.

As a guide, currently there are 145,000+ burns and soft tissues wounds in the US each year. I think an increase in sales of 2 orders of magnitude would not be unreasonable.

Management

Mr David Williams - Chairman

Experienced director and investment banker. Has special interest in the medical and pharma industry. Most importantly, used his own money to buy shares in Polynovo.

Stake: 21m shares (3.1% of PNV)

Mr Swami Raote

Was previously divisional head at Johnson & Johnson. Has no stake in the company as far as I can tell

A number of their senior leadership and board have stakes in Polynovo - while not large percentage-wise these do amount to reasonable amount in dollar terms.

Jan Gielen - CFO: 930k (0.14%)

David McQuillan - CTO: 670k (0.1%)

Leon Hoare - Director: 1.2m (0.18%)

Bruce Rathie - Director: 3.2m (0.47%)

Risks

They have a product which is (or at least seems) significantly better than the status quo and is being increasingly adopted, both in terms of their target market but also new markets (use cases). They have reached cashflow breakeven, have ~$40m in cash and basically no debt. From here I think there are 2 main risks:

1. Execution - They have to continue to gain sales and produce quality product. It is critical that they maintain contaminant free and uniform product as they scale production. A single severe incident of contamination could cost them years of sales traction (if not the whole business).
2. Disruption - A better product could come to market, perhaps that works in a in drastically different way. The benefit of their moat is it would take time for it to gain traction, but would not stop a better product with a good sales team (who have enough money).

I was able to find 2 products that could potentially compete with Novosorb both are apparently in trial stage:

• StrataGraft - Mallinckrodt
• DuraSorb - Integra

However I'd note they seem very similar (synthetic absorbable matrices) so not sure they would be sufficiently better to warrant adopting. However, with such great gross margins on offer, they could potentially compete on price particularly in the more price conscious markets.

Thesis

The thesis here is pretty straight forward - Polynovo to continue to increase market penetration and (therefore) revenue of it's Novosorb products.

Why I'd Sell

1. A prolonged period (12+ months) of sales stagnation (that is, even if there no competitor, but suggests a saturated market or a failure of new sales execution)
2. A new market competitor that takes significant sales from Polynovo's existing customers - even if Polynovo has continued top line growth
3. A major incident involving the quality of it product.
4. An acquisition buying spree - if Polynovo decides to use it's cashflow and buy other companies. A couple of good, strategic sounding, acquisitions is fine, but I'm not interested in owning a "roll-up".