Good set of numbers out today, in line with my expectations. BTM growth from the PcP was up 127% to ~$8.6m, with BARDA revenue slightly lower at $1.6m for a total of $10.2m.
These top line numbers are tracking very well, and the company expects to easily surpass $20m in revenue this FY thus avoiding any R&D rebates. There was no mention of a potential positive earnings result for the full year in this report, but they will come very close I think for FY20, especially if the pivotal trial reimbursement from BARDA dramatically steps up as I think it might in the half, though this may be next year, and they maintain some cost discipline.
The only niggle – which I had previously factored in to my valuation – was that they will probably to do a cap. raise in the next 6 months depending on how aggressively they pursue extra sales staff and expansion, which looks to be high. Cash balance remained at ~$8m with receivables at $4m so it may still be longer off, but they will do one, I’m sure of it. Either way, dilution shouldn’t be an issue above $2.
Some pundits may be looking at the drastic reduction in cash on hand from this time last year, but when you account for the Pt Melbourne facility purchase expense, and total outflows of just $2.5m, the balance looks like it could carry them on this next half with the uptake in sales likely to occur as well. My guess is that they will resist until the SP creeps back up to lofty heights on the back of more positive announcements in the coming months.
On that note, the CE Mark burn trial results which have been flagged in the report for a March release may help with a spike in surgeon uptake in Europe and the UK. Somecould be waiting for further clinical evidence, and this is what they will look to for validation to start using BTM, in tandem with the pivotal trial pathway.
I was hoping we would have more concrete BARDA reimbursement numbers for the pivotal burn trial in this report, but at least we have some idea of patient recruitment beginning in June/July, and commentary that the reimbursement will be increased from the previous feasibility study. I would expect it to at least double the revenue number, perhaps even triple, given the additional patients to be treated.
Overall, a very solid set of numbers to my eye, with plenty of opportunity for margin expansion through production upgrades, revenue growth through expanding markets, uptake and new products, and finally sufficient evidence that profitability is just on the horizon.
11 March 2020
Coronavirus: Little impact on PNV
PolyNovo wishes to inform the market that the coronavirus is unlikely to have a direct impact on its business or sales going forward. In particular, the Company:
A NZ-based competitor, Aroa Biosurgery, lists today on the ASX. Aroa makes a biologic scaffold from sheep stomachs, reportedly at a very healthy 60-70% gross margin. There is some crossover with Polynovo on their target markets, so I reached out to our MD Paul Brennan and asked him what he made of their product.
To summarise our discussion, there doesn’t seem to be anything particularly new or innovative here that would supplant other animal variants. It’s still a biologic, and prone to similar infection rates the same as other collagen-based products.
Perhaps most concerning for Aroa is a rumour that they use a similar manufacturing technique to Lifecell, who in 2016 settled a lawsuit with TELA Bio over patent infringement. It’s possible that at some future date, Aroa could find themselves in court for similar reasons.
Having said that, Aroa are already generating NZ$20m+ in revenue, mostly from the US, so they have some penetration there. Given they’ll float with a m/cap of only $225m+, that also makes it a lot cheaper than Polynovo. But there’s nothing I can see in their technology or sales run rate (their top line was flat over the last two years) that suggests market dominance over the next 10 years.
To my mind, the key to any market dominance in this space is how disruptive each product is on the clinical practice mindset. Even an inferior product can dominate this space for years if surgeons are too comfortable with the procedures they know, and/or are unwilling to experiment. The only hope for a newcomer is to have a superior enough product that it forces surgeons to change their behaviour. I suspect yet another collagen-based competitor will not have enough going for it to knock Integra off its perch.
A synthetic product, however – and the only one in the market – could very easily take the top spot, especially if it performs significanty better in 3 key areas:
If the upcoming large-scale Pivotal Burns Trial for Polynovo backs up current studies that already demonstrate market-leading results in all three of these areas for Novosorb, then that will likely be the tipping point for surgeons to adopt it en masse. As far as I can tell, Aroa hasn't demonstrated a leading position on any of them as yet.
Aroa is one to keep an eye on, but for what it’s worth I’m not too concerned at this stage.
By my napkin math, the recent trading update of a 33% increase for the June Qtr would place BTM sales at about $19m for the full year. H1 BARDA revenue was approx. $1.6m, so we can reasonably assume it will double, bringing FY20 total revenue to about $22-24m, which puts us just shy of my forecast of 24m+.
Difficult to say how many overheads they stripped out in this last quarter for cost control, but I don’t anticipate a breakeven result at this stage (which frankly would have been astonishing).
The result is a solid one and continues the growth narrative, albeit with a covid shaped bump in Q3. The strong Q4 result signals that demand has been strong, even through a tough period for competitors. This should continue into the next year.
Looking ahead, I think they could comfortably do $40m in revenue in FY21, which assumes a 35% increase in BTM sales and a scale up of BARDA funding for the pivotal trial from about ~$4m this year to about $9m each year for the next two years as per the original agreement. (Note however that the FDA have also requested some additional information relating to the trial procedure today, so this funding may be delayed into FY22.)
On the competitive front, Integra today flagged a ~35% revenue drop in their Q2 results, which sounds promising in terms of the land grab that’s happening, but it’s likely that most of that drop can be attributed to a lack of elective procedures. We won’t know the segment breakdown until Aug 10th, but we’re on the lookout for a stagnating wound care revenue number to confirm the thesis.
Valuation still looks stretched, but the Syntrel Hernia product and Breast sling will very likely add an enormous amount of top line growth within 2-3 years if all goes well, so it largely depends on the merits of those two products and their commercial uptake. I'll update my valution shortly to reflect all this.
10-July-2020: Trading Update
June 2020 was a new record sales month in the US. Since the record sales month announced on 7 April the company has opened 7 new hospital accounts. From July 2019 to 30 June 2020 there has been a 67% increase in hospital account in the US. Despite the adverse impact of COVID on many businesses, Polynovo has had success opening new accounts and achieving record sales. To achieve this, the company is using a number of tools to support surgeons where face to face meetings are not possible.
The company is pleased to announce its first sale in the UK. There have been six operations in England and Scotland and for this reason we expect additional new term sales.
There have been numerous applications of the BTM in the DACH countries (Germany, Austria and Switzerland) and sales are growing accordingly as we gain traction across the region.
The company repeats earlier guidance that product sales for FY20 are likely to at least double FY19.
Sales for the June quarter were 33% greater than the March quarter, but this includes a record US result for June.
Managing Director, Paul Brennan said, “These sales results for NovoSorb BTM are very strong given the difficulties faced with CoVid19. Our teams have maintained their engagement with customers, and we continue to see sales growth.”
Chairman, David Williams said, “Sales are still lumpy but there is a strong upward trajectory as surgeons embrace our product and the patient results it gives. While FY20 sales will show impressive growth over FY19, the sales run-rate is more impressive and should be a better indicator of the near-term future.”
Polynovo is proving itself to be a truly disruptive company on the cusp of tipping (finally) into profitability. I think my valuation deserves a revist.
Moving to a DCF model permanently now and using some fairly aggressive assumptions over a 5 year period. FY20 1st half unaudited revenue was sitting at ~$8.5m – and before the CE mark was given – so I’m going to assume a better second half for $25m in total BTM revenue for the full year including BARDA, which has historically been about $4m p/a.
I’ve made some basic assumptions about the timing of Breast and Hernia product entries, whilst ignoring the drug eluting partnership revenue with Beta Cell, since that’s a long way off and a little unknowable at this stage.
Huge investment into the facility in Pt Melbourne makes it a little more certain that these products are going to become commercially available – and remembering that these are based off the same Novosorb platform – so I don’t anticipate any real regulatory complications.
I’m going to assume a cap. raise of say, AUD $75m in the next few months at about $3.50, which dilutes the share count by about 21m, raising the total count to 682m.
In FY25 I’m forecasting (in AUD) $150m in BTM revenue, $17.5m revenue for the Hernia product, and AUD $1.5m revenue for the breast sling, as I’ve assumed that only comes online in that year. These assumptions are based loosely on the historical growth of BTM, and allows the hernia product 4 years of relatively modest market penetration. I suspect it could be double, but I don’t want to get too carried away.
I’ll also assume that the staff count triples, R&D spend triples, corporate costs double and inventory quadruples, and gross margins stay roughly at 90%.
Gives an EBITDA of roughly ~AUD $86m. Apply a 25% tax rate and ~$1m in A&D expenses, for NPAT of ~AUD $65m.
P/E is the difficult part.
In FY25, I estimate the company will be growing its earnings by about 30-40%, with a long runway of growth remaining for the breast and hernia products, as well as continued growth in BTM. I think the 30% number could be sustained for a few more years after this with minimal effort.
Given its biggest competitor, Integra, is currently on a p/e of about 88 (wow!) at the time of writing and is more or less at maturity (only growing it’s bottom line this year [before tax benefits] at about 5%), a p/e of 50 seems fair for a much higher margin business growing its earning at a higher rate.
50 might seem rich until you consider that the bottom line growth of 20-30% is probably going to be sustained over FY26 and FY27 if breast and hernia products perform well. IF that happens, it would come down to a much more conservative number. I'm comfortable with that assumption.
Putting it all together we get:
An EPS of .095c in FY25, applying a p/e of 50, and discount back 10% each year to the end of FY20, gives an IV of $2.80.
Upside to this is if BTM sales drastically come in higher than I anticipate in the next two years, Breast and Hernia products go to market sooner than expected, gross margins somehow improve from 90%, or the eluting polymer comes to market in that time with significant royalties from Beta Cell.
BARDA Funding of USD $15m recieved today as part of the Pivotal trial arrangements.
The confirmation is good news, and aligns with my expectations, although it looks to have been a lump sum payment, rather than a two year staggered arranged as I had originally thought.
This funding will appear as revenue on the P&L, but will be offset by the a 'minor' co-contribution by the business, the details of which are still unclear.
It will be a few years before full thickness burns FDA approval, but given so many surgeons already use it in that capacity in the states, it looks much more like a formality at present.
All in all, very good news.
Polynovo announced a trading update today detailing continued strong growth in BTM use and sales, with unaudited revenue for the March quarter at ~$4.49m (I suspect in AUD) representing a 166% increase on the prior corresponding period.
The trading update also detailed some anecdotal evidence that hospitals are pivoting to BTM over collagen based products, because of the reduction in surgery times and hospital resources. This point is especially crucial. In the midst of this crisis – particularly in the US – where most ICU beds across the nation are already at capacity, hospitals are probably pressuring surgeons to be time conscious and frugal.
It’s by no means the ideal way to change minds or clinical practice, but out of necessity the current situation seems to be driving uptake in BTM use, evidenced by commentary that sales saw a stronger uptick in late March (when it started to become clear that the US was in trouble).
They also announced a $9.3m Debt facility with NAB, primarily for capital investment in accelerating the Hernia profit to market. Lots of rumours were circulating about a cap. raise today, but with overheads likely reduced because of this crisis, coupled with increasing sales and a heavily discounted SP, I would have looked on such a move very poorly. I don’t doubt that management would have baulked at the idea, and am pleased they didn’t do it.
I estimate they have enough working capital (~$7.4m) and growing sales to manage through this crisis without getting into trouble, so this facility looks to me like a strategic investment to accelerate the hernia product to market, given cost of borrowing is as low as it may ever get in this country.
I’m hopeful that an extension to our BARDA funding will be announced soon as well, further reducing the need for a raise. According to the original agreement, which I managed to track down, the extension to the initial 3-year contract is for two further years and to the tune of ~USD$18m to facilitate a pivotal trial. This should come into play this FY once the scope of the trial is finalised as part of the FDA fast-track program. It was due late last year, but the fast track status – oddly enough – delayed it.
All said, Polynovo looks on track to possibly deliver a maiden break-even result. It will be close!
It's still unclear what impact the virus will have for Polynovo over the next 6-12 months, but in the long term I don't think much has changed to the businesses ability to grow substantially. In fact, there's good reason to think it could rise from the ashes of this catastrophe bigger and better than ever.
Although there may well be some short term disruption to BTM use, stock levels are bound to be much greater than their competitor Integra, who have a wider and more extensive manufacturing process which is absolutely being impacted. With inventory prior to COVID-19 at capacity, there should be zero supply issues over this period.
Coupled with the fact that the manufcaturing is only done in Pt Melbourne (not yet under lockdown), and that they could make the decision to continue manufacturing under strict, sterile conditions – which they do anyway – means we could be about to see an enourmous 'land grab' in the states.
Not only that, but margins for BTM are over 90%, meaning aggressive price reductions could further strip demand from Integra, as by all accounts they are close to only breaking even on their already drastic price reductions for their colagen-based products.
Combine all of this with enourmous director buying at levels way above where we are now (and another $150k from Chair David Williams today) suggests they sense an opportunity.
26 February 2020
BTM sales up 129% H1 FY20, AND run rate accelerating
PolyNovo said today that NovoSorb BTM sales for the half year were 129% higher than the same period last year. However, the Company said the rate of increase in sales is growing in existing markets and should grow further as new markets come on stream. BTM sales in January 2020 were more than three times the sales in January 2019. While this is encouraging, especially in the US which had the largest month on month growth of any region, as previously advised we expect sales to be lumpy as each market develops. Based on year to date performance the company now expects that NovoSorb BTM sales for FY20 should comfortably double FY19.
PolyNovo’s CEO, Mr Paul Brennan said,“The past half year has been exciting for all of us because many areas of our business are experiencing rapid and dynamic growth. My personal highlights for the first half,apart from the sales growth referred to above include:
23-Apr-2020: First BTM use in Canada
PolyNovo is pleased to announce the first use of NovoSorb BTM in Canada. This case was initiated by one of Canada’s leading surgeons who is a key opinion leader in this field.
PolyNovo has not yet applied for regulatory clearance in Canada as the country has some unique requirements compared with the US, Australian and European regulatory processes. PolyNovo is working towards a Canadian regulatory filing in CY2021.
Product for this first case was supplied under an exemption scheme made on an individual case by case application. Health Canada’s Special Access Program (SAP) allows doctors to gain access to medical devices that have not yet been approved for sale in Canada. Special Access is requested in emergency use cases or when conventional therapies have failed, are unavailable or are unsuitable to treat a patient. All medical devices that have not been approved for use in Canada, require special access authorization prior to being imported and/or sold in Canada.
This first case was a child with extensive burns. PolyNovo is very pleased we could assist in the care of this child and from all reports the child progressing well. The PolyNovo family is proud to be able to improve the outcome for all patients but particularly when a child is involved.
PolyNovo’s CEO, Mr Paul Brennan said “Our US team have worked closely with the Canadian surgeon and the hospital to get NovoSorb BTM into Canada for urgent use last week and over the weekend. Canada is a very important market for us in the near term and seeing demand for our product in advance of market entry is a reflection of the strength of the global key opinion leader network and the high regard for NovoSorb BTM.”
21 April 2020
PolyNovo is pleased to share the summary of results for the CP-002 Feasibility Study to assess the safety and effectiveness of NovoSorb®Biodegradable Temporizing Matrix (BTM) in the treatment of severe skin burn injuries. This trial was a prospective, multicentre, single-arm, open label, traditional feasibility study conducted in the USA, where NovoSorb®BTM was used under an FDA Investigational Device Exemption (IDE).
This 12-month clinical study recruited 15 subjects with burns within the range 10%–70% total body surface area (TBSA) across four leading burn centres:
Fourteensubjects (aged 21–67 years, mean 45.1% TBSA deep dermal/full-thickness burns) had BTM applied to treat thermal/contact burns. One subject consented but was deemed ineligible during screening and did not have BTM applied. The first subject was enrolled in March 2017 and enrolment ended in August 2018.
Seven subjects completed their 12-month follow-up assessments and seven subjects were withdrawn: two subjects died due to serious adverse events unrelated to BTM, one subject was withdrawn by the investigator, and four subjects were lost to follow-up.
The co-primary effectiveness endpoints were BTM ‘take’ rate assessed after integration at the time of sealing membrane removal, and split-thickness skin graft (SSG) ‘take’ rate at 7–10 days after application. The results available for 12 subjects indicate that BTM provided effective temporary wound coverage and integrated into the wound bed with a mean BTM take rate of 95.22%, median of 98.89%,and a range of 78% to 100%. Similarly, SSG take rates available for 11 subjects were high with a mean of 97.53%, median of 100%, and a range of 75.0% to 100.0%.
Wound closure was assessed at various intervals after skin grafting. Mean wound closure rates at 1 month varied across anatomical locations in a range from 94.8% to 100%, increasing to a range of 99.8% to 100%at 3 months, demonstrating success of the skingrafting procedures used to provide definitive wound closure in these large wounds.
No new risks related to the use of BTM were identified in this study. Infections were common and occurred in 12 of 14 (85.7%) subjects, with 7 subjects (50%) experiencing wound infections at BTM-treated sites. These rarely resulted in removal of BTM, which occurred in 2 subjects (14.3%).
As a consequence of these results, PolyNovo anticipates our Pivotal Study IDE to be approvedby the US FDA in June 2020.
27-5-20 PNV McQuillan -441,687 for -$1.18m @ $2.65 & $2.70 [770,313]. Relocating back to Melbourne and sold shares to fund a property
05-May-2020: PolyNovo presents at Macquarie - presentation slides
That link is to the 28 page presentation to be given by Paul Brennan at the Macquarie small and mid-cap virtual investor forum today, Tuesday 5 May, 2020.