WIth the currently Share Price (SP) of PNV moving upwards, I'm trying to work out what to do with PNV.

Given the reduction in PNV short position since Dec 2024....I think the key questions are:

• Do we think the short position will continue to be reduced?
• To what level?
• How long will that take?
• What other buying momentum might happen along the way?
• What will happen after the funds stop reducing their short position?
• What are the factors that might push the SP down at this point?
• What are the factors that might hold or push up the SP at this point.

The following is a bit of a ramble to answer the above questions:

The short position has reduced from about 4.5% (SP $1.50 Mid Dec 2023 approx) to 3.5% (Current SP $2.40 Mid Mar 2024 approx). Unlikely to see the short position go down past 2.5%. (Keen if someone has a view on this). But not all the SP movement upwards since Dec 2023 is due to the shorts buying on the market and reducing their position. We have had a bunch of great news from PNV.

However, if the short position is to drop back to about 2.5% than means about 7 million shares to be bought back. Daily PNV volumes sit at about an average of 1.5 million shares traded a day. So assuming the shorts buy back about 200,000 shares a day....that is 35 trading days to reduce their position....So in about mid May the SP could be at about $3:00 - 3.50? Do we think that volume of trades per day is likley to provide much upward momentum? Maybe just a little? It is more likely that people are starting to recognise PNV as a great investment?

I have had a look at what happened around the last big short squeeze during the last half of 2020. And I think that set of events and where PNV is now compared to then....means it is not that relevant. PNV had loads of head winds with COVID, ASX200 games being played, change of CEO etc. And now PNV turns a profit, growing massively etc. And the other smaller squeeze in 2022....that to me was the ASX200 games being played and the market didn't have consistent data on revenue. So again very different to now.

When the shorts stop buying back...will that have an effect on SP? Well it will cease that small tailwind effect.

In terms of future SP catalysts (positive and negative). I think once more news/orders from India appear that will be a positive. $10m month revenue figure will be a positive. Potential negatives could be cost blow out on the new production facility (but we would not likley hear about that for at least 9-12 months).

Conclusion:

When i started to write this straw....I was convinced we were in a small short squeeze. But now i don't think so...just some tail wind being added to the general positive momentum upwards for the SP.

BUT - As many of us have modelled, a valuation of about $2.50 seems fair. And at what point do we start to see PNV as overvalued and start to sell/trim our PNV positions?

John Parkinson

Note: I have also posted this on HotCopper to see what the chartists and others think...there are some HC members with great access to professional trading screens etc. But so far I have not got any great insights...

I made the mistake of IRL trimming PNV during the week but I did have a lot of them.

they seem to just be getting started, they are growing at pace, recently profitable and seem to be able to scale rapidly.

the reference in recent announcements to having to pay for a distribution centre over the next couple of years caused me to rethink the capex.

but the co has got to $4 a few years ago and is in a much better position now. I would expect this to fly there fairly soon. But it didn’t stop me from trimming.

$PNV have announced the Indian Government has approved Novosorb BTM for inclusion on the e-Marketplace.

I'm not sure whether this, of itself, directly leads to material sales, as what is needed are the tenders in process to put in place the contractual frameworks that enable publicly-funded hospitals to make purchases.

Of course, $PNV are already selling into the private sector. As a 2020 there were 44k private hospitals (1.2 million beds) versus 26K public hospital (700k beds), so the private sector is very important.

While the release below indicates real traction in India, it would be nice to get some $ and margin insights in due course.

I'm not grumbling, though, this is good news and we will no doubt hear when the first public tender is awarded.

Full Text of the Announcement

The Company is excited to announce that the Indian Government has approved NovoSorb BTM to be included in the Government-e-Marketplace (GeM) portal.

GeM is a centralised procurement platform for Government hospitals that can now buy NovoSorb BTM throughout India. This approval provides access to supply BTM across all the Defence hospitals, Railways hospitals, ESIC (Employees State Insurance Corporation) hospitals and the various AIIMS (All India Institute of Medical Sciences) hospitals. We expect the first order within a month.

Simultaneously, our India team has been participating in several government tenders which will enable the Company to supply public hospitals.

Sales in private hospitals in India have been growing rapidly on a month-on-month basis.

PolyNovo participated at the National Academy of Burns of India Conference (NABICON) from 15 to 17 February 2024, the flagship event for burn surgeons. This was attended by 180 burn surgeons from all over India. In addition to a PolyNovo sponsored symposium, featuring U.K. surgeon Dr. Pratap Dutta, there were several other presentations featuring NovoSorb BTM by Indian and U.S. surgeons.

Chairman, David Williams said: “Our India team is optimistic we can win a number of other tenders that will open the doors of public hospitals for BTM.”

CEO, Swami Raote said: “It will be a huge step to be able to access burn patients admitted to public hospitals for treatment. NovoSorb BTM will enhance the standard of care and significantly improve the quality of life for Indian patients.”

This announcement has been authorized by PolyNovo Company Secretary Jan-Marcel Gielen.

Disc: Held in RL and SM

A billboard in a Melbourne tram stop... Is this a market top?

zooming in....

I just had a look at the current PNV short position.

Since Dec 2023 it has dropped from about 4.5% to 3.5%.

I would imagine it will fall back to about 2.5% in the next few weeks.

So that means about 7 million shares to be bought back.

I've already shared some analysis on the $PNV financial results in earlier Straws, which I do not repeat here. However, I commented earlier this week that David, Swami and Jan provided a lot of detail both in their voiceover on the presentation and also in the Q&A.

So, I thought I'd share the key nuggets I extracted from going back over the call and the transcript. In total, I think it provides a much richer picture of the strength of this business, and underscores my bullishness on it as a long term growth stock.

I'll bear all this in mind when I do my major valuation update at FY. There is a lot to consider.

So here goes.

--------------------------

My Overall Key Takeaway: Sustained, capital efficient, long-term growth, driven by existing and new markets, existing and new indications, and potential new platforms. $PNV is now profitable and cash generative.

Key messages

1. Strategy and capital allocation - long term growth
2. Financials - outperformed their internal budgets and plans
3. Capex - material step up in FY25 to build "Mega" for $25m, but fully budgeted in 2022 capital raise
4. Markets - now serving 37 markets with increasingly material RoW growing strongly
5. Organisation - now built out, so future growth in headcount slowing
6. Clinical development - clinicians leading broad expansion of indications; potential for multiple new platforms

1. Strategy and Capital Allocation

DW made clear the strategy is to keep expanding “both in indications and in geographies” wherever they can see the margins. He said this in clarifying feedback he has received on his statement that he doesn’t care about profits. The clarification is that by focusing on growth where he can see margins, then profits will follow. He tweaked his rhetoric by saying, “if you want dividends, you’ll need to sell some shares.”

2. Financials

All details covered in previous straws, but CFO Jan made the comment that they have achieved profitability earlier than budgeted because sales have been above plan

For example, the $8m month in November wasn’t budgeted until April

On cashflow, the business is essentially cashflow breakeven. 

DW discussed reporting. He said there has been feedback on their approach of reporting "record sales months". He's discussed it with the Board, and they've decided to continue because they want to keep investors informed as key milestones are achieved.

3. Capex

On the new facilities, the main investment is yet to come

1H24 Capex of $1,1m was design work for facilities plus some R&D equipment

2H Capex “marginal increase in capex as the design process nears completion and we expect to commence construction in 1Q FY25.”

Total planned capex for the third “Mega” production line is $25m over two-year period

Guidance on the spend profile will be given once design is completed (FT24?)

Until new facilities are ready there are no issues with current manufacturing output form the existing two lines, which see continuous improvements in output and efficiency, evidence by the very low % Gross Margin.

Mega will be designed to be modular and scalable, as they plan to have to accommodate many more SKUs than at present.

(My note: Key risk to monitor: will procurement and construction costs increase materially since project first announced in end-22 when the design is complete and contracts let in FY25? A 25-50% cost blowout would not be unprecedented. While that would not be good, it is not really that material, overall.)

4. Revenue & Markets

RoW sales are becoming material "from 16% of total sales to 24%"

Now have sold product into 37 countries

Key market details (not all presented but covered in voice-over):

After not having raised prices in US for several years, there is now an agreed approach for price revisions

In the US, “narrowing the gap” to the market leader in the “difficult burns” category

BARDA trial now 91 patients enrolled; 1st patient enrolled in India (2 centres approved). Looking at options with FDA and BARDA. Base option is to get to 120. Enrolment expected to be complete by May. There will be announcement when it is decided how to close out the trial to a meaningful close. Also working with another FDA agency to see how “real world” data can be sed to give added claims into the trial.

Strong growth in ANZ where already #1 in burns is largely outside of burns

India – “half a dozen tenders” under way. “Getting good soundings.” “Very optimistic that in the very near term we’ll have something to say.”

HK also continues to “trade well”. China – pathway identified, but not yet going beyond HK. Developing plans for extending into Shenzen area (GBA).

Germany: market leader in “Advanced Dermal Substitutes” (4^th largest market after US/UK/ANZ – note: Ger. is a distributor market)

Turkey – large initial sales

Middle East – sales driven by a physician who relocated to ME from East Coast US and wanted the product

Japan – have a partner defined and a lead KOL. Working to see if data already submitted to US FDA can be used for submission in Japan with MoH, KOLs and reimbursement agencies.

New demand arising from war zones in Ukraine ($1.2m sale in February - not 1H; “we believe another coming”) and Israel. They believe they are getting some sales orders from other countries that are ending up in these locations, as well as charities.

Several ongoing discussions with charities, UN agencies, Gates Foundation, WHO, MSF, etc. to help get the product to countries that otherwise can’t afford it.

5. Organisation

Headcount +64 on PCP, but only +19 in 1H FY24

Plan for 2H FY24 from 237 to 260 +(23-25)

• US sales: currently 75 (65 reps + 10 managers) going up to 85
•  ANZ sales
• R&D and Manufacturing
• Back Office: now have the full teams and scalability

Completing the build-out of the senior management team

• HR lead has started in last few weeks
• Chief Medical Officer joining – leading on FDA and BARDA conversations
• General Counsel about to be appointed
• Close to appointing APAC lead, for entry to China and Japan, and other countries

6. Clinical Developments

My key takeaway: It is clear here is the potential for many years of development leading to new platforms and multiple groups of new indications. Most of this is clinican led.

A key observation is just how important the customer-led (clinicians) work is. (My Note: Just reflect on the following points and consider the tiny R&D budget. I don’t think I’ve ever seen this before in healthcare. There is so much upside to come.)

DFU study: stopped after 25 patients because not getting right wound debridement. Protocol to be re-written and brought back in-hospital (rather than outpatients) to get great consistency needed for a successful trial. Expecting to focus more on to limb salvage – new trial, Announcement on trials coming in a few weeks

Prof Marcus Wagstaff trained 30 surgeons in UK who then took the knowledge onwards to Ukraine

Much clinician-led development taking place into new indications; 230+ publications (214 at FY23), “literally across the entire clinical spectrum”

Customers proposing BTM could be a replacement for allografts (papers on this). Potential to upshift and replace grafts

Several authors proposing that BTM could be a good solution in low and middle income countries where other technologies are constrained

Overall global markets outside US and W. Europe and a few market in APAC “on the fringes” (hey! Swami, that’s no way to talk about ANZ) – we are focused on sustainable, global growth

MTX rolling out in US – demonstrating great outcomes in open abdominal and dehisced wounds. Will start compiling evidence to allow MTX to be rolled out globally. Focus has been using MTX with “expert clinicians” on complex applications, and expecting wider roll-out from July.

Working to be differentiated in connecting KOLs across the world who can teach other surgeons in how to treat acute complex wounds.

$PNV already recognised in burns and trauma, and now looking to go beyond these into:

• Oncological resections of head, neck, scalp, skin and oral cancer
• Potential to use in infections (necrotizing fasciitis and hidradentis) where competitor products cannot deliver
• Getting into complex vascular space to save limbs from being amputated

Developing an implantable platform in hernia and breast. Still not happy to share timelines, but happy with the feedback getting from clinicians. Addressing how to build a “sustainable platform in the implantable space”. (Sounds like still some time off, but I still think this is OK given the growth potential of BTM and MTX)

Working on developing Novosorb Mesh product, currently bench testing, testing with animals, and sharing it with clinicians to establish their expectations on added strength and flexibility. Work is being done to compare with the market leader.

Disc: Held in RL and SM 

Three updates this morning - seems about right.

Superbull Macquarie slowly coming into line!

While I am not running my model update until FY, I'll tweak my val. up by 5% just so as not to be too out of whack with the new information.

Disc: Held in RL and SM

PNV 1H FY24 Results

Dermal repair company $PNV reported its 1H FY24 results this morning. The major elements of 1H have been pre-released in the “Trading Result” announced over a month ago. This set out the sales results, which were very strong, as well as anchored the key financials. So, I expect that today will be less about the result itself and more about the trajectory towards the FY. More on all that below.

 Their Highlights

The half year audited results attached to this release show:

• Record 1H FY24 sales of A$42.2m up 54.9% on STLY of A$27.3m.
• Total revenue including BARDA of A$48.8m up 65.6% on STLY of A$29.5m.
• Strong growth in U.S. achieving record sales of A$32.2m up 41.7% on STLY of A$22.8m.
• ROW sales of A$10.0m up by 122.2% on STLY of A$4.5m including strong performances in ANZ, UKI, and the Middle East, also growing sales in India, Hong Kong, and Canada.
• The Group recorded a net profit after tax of A$2.7m (1H23: A$3.8m loss).

During the Period, the Company’s other key initiatives and achievements include:

• Exceeded $8 million monthly NovoSorb BTM sales for the first time in November ($8,810,000).
• Appointed Chief Medical Officer and Chief People Officer.
• Additional funding of US$10 million from the Biomedical Advanced Research and Development Authority (‘BARDA’) for the pivotal trial of NovoSorb BTM in full thickness (third degree) burns.
• Passed the mid‑way point for the recruitment of the pivotal trial, with 90 patients currently enrolled.
• Increased sales teams and customer base globally, 861 hospital accounts and 237 staff.
• Progressed the product pipeline for NovoSorb BTM and NovoSorb MTX and developed surgical mesh prototypes for hernia repair.
• Finalised concept design and commenced detailed design of additional, new manufacturing facility in Port Melbourne.

Context for today’s result (you can skip this as it is a little self-indulgent!)

SP action for $PNV is a rollercoaster that sometimes defies belief, bearing little relationship to the business fundamentals. A bit like riding a rollercoaster in the dark, where you cannot see if the next move is a soaring climb, or a plummeting fall that risks bringing the contents from the last fast food stall you visited before the ride back up! Entertainment value is added by Ride Master David Williams – red-jacketed, red-faced, and gesticulating, wildly to “Roll-up. Roll-up” as he waves at you with a 30cm piece of BTM, while CEO Swami in the background cooly explains the genius of the engineering that allows the ride to function, assuring punters of their safety.

$PNV reached its most recent low point in October. This was driven by a mixed market reaction to the growth of the cost base supporting the global acceleration (clearly signalled at the 2022 capital raise), raising doubts as to the path to profitability, not helped by Ride Master DW saying he didn’t care about profits.

However, since that time, four factors have driven a sustained 5-month uptrend of +80%:

1) the release the $8m/($9m record month in December,

2) the January pre-released Trading Result with preliminary bottom line,

3) the record single sales order of $1.2m and

4) broader, macro-risk-on.

But this is a rollercoaster, and we are still some way off the lofty heights of $2.69 reached in the run-up to 1H FY23, so you never know how far the climb continues or whether we temporarily lurch downwards once more before recovering.

Through all this, I try not to let the “Buy, Buy”, “Sell, Sell” trader-analyst-fundies distract me. They’re not much help really with an average Target Price of $1.95 representing a wild range of $1.00 to $2.90 – materially down on 12 months ago ($2.53, $1.90 - $2.90).

My model is at $2.00 ($1.63-$3.30) with my eye clearly focused on the disproportionate upside potential, even though I have also come off my position in Sept-22 ($2.46, $1.62-$3.28).

So, with the scene set, what do I make of today’s result?

My Analysis

On the release David has said: “There is little new here that was not in our 22 January announcement. It was a great half, but we have moved on. There is a lot to talk about that has happened since 31 December, which we expect to talk about during our investor webcast on 27 February.”

In other words “Roll-up Roll-up to the David, Swami and Jan show at 1pm AEST today!

Important Note: My analysis below may differ to what is presented today. In fact, it will, That is because $PNV typically make various adjustments and report underlying numbers in their presentation, whereas I stick to the audited accounts. That said, no-one audits my analysis. So, all care, no responsibility!!

Revenue

There is nothing to add on sales to the detail I gave in my straw on 22-January. Revenue (which includes BARDA) is up 65.6% - a slight acceleration from the PCP. Sales are up 54.9%, with the US up 41.7% and RoW up 122.2%, with sales in several new markets.

With a FY revenue consensus of $101.4m, revenue in H2 needs to hit $52.6m, which would be growth over the pcp of 42.0%. So, how likely is this? Well, H2 growth rates in FY22 and FY23 have been 43% and 56%, respectively. And looking at the last three years, there is no clear 1H / 2H trend. H2 FY24 also has the boost of at least 1 large order to Ukraine valued at A$1.2m. And with the recent impetus in RoW from the expansion of the global sales and marketing footprint, everything points to a strong finish to the year. My model is for FY sales of $105m for the FY. But I am a $PNV bull, so DYOR!

Gross Margin

Gross Margin comes in at 95.9%, compared with 94.5% in pcp. Overall,it is in the usual ballpark of 90-96%. This is expected as the direct fixed costs of the current facilities are recovered over progressively increasing volumes. However, when the new facilities come onstream in FY25, I expect %GM will drop back sharply, as the new facilities have been sized to support sales up to $500m p.a!

Still, compared to the competition in dermal repair, $PNV has an extremely high %GM.

Opex

Opex (excl. D&A) grew 46% from $30.6m to $44.6m, a slower rate than 107% in the PCP. Importantly, it is now growing at a slower rate than revenue. Opex is now 91% of revenue, down from 104% in pcp. Yay!

This moderation was expected for two reasons, First, a major expansion of the workforce occurred during FY23, following the capital raise, to pursue the broader global sales strategy. While expansion has continued in 1H24, there has been a greater focus on execution. The second reason is that the FY23 comparison was distorted due to some items relating to former CEO compensation. In the presentation this is one of the “underlying” corrections that Jan has made.

That said, corporate costs have expanded significantly, given the senior hires indicated above. However, $PNV is not a truly global business, and you need functional heads capable of delviering their roles in that context.

Within Opex, R&D continues to expand. This is important and welcome, as without ongoing innovation $PNV can never become a long-term winner in dermal care. Management seem to be applying capital discipline here, holding R&D/Revenue at 10%, in order to deliver their commitment to getting to profitability.

So, overall, I am very happy with the progression of the Opex profile.

Profit and Cash

By my calculations, EBIT is $1.1m (up from -$3.8m) – an improvement of $4.9m.

NPAT is $2.7m, up from a PCP loss of -$3.8m – an improvement of $6.5m, assisted by the Tax refund of $1.6m.

So, well done David, Swami and Jan and team. You are on track to delivering your commitment at the FY22 Capital raise to be profitable in FY24.

Cashflows align quite well with the financials. We are now just Operating Cashflow positive, at $0.58m compared with -$2.73m in PCP. And by my measure of FCF (which includes all capex), they are close to breakeven at -$0.48m.

It is worth noting that capex has increased from almost nothing to $1.1m, as the build the new production facilities. This should be expected to ramp up significantly over the next 12 months. So, hopefully, management will guide on that in the presentation this afternoon.

The balance sheet is strong with Cash and Equivalents at $45.58m, and debt at $2.2m (current and long term) is negligible and being paid down.

My Key Takeaways

Solidy on track. Continuing strong revenue growth and management demonstrating cost discipline to meet their commitments. May it continue.

Valuation

I’ll update my valuation after the FY24 results. For now, I am content to stay at $2.00 ($1.63-$3.30)

However, I can say that if execution continues in this manner, I'll be upgrading as the downside cases in my model start to fall away.

Disc: Held in RL and SM (with high conviction)

DW as ever quick to make sure everyone on the mailing list gets the Macquarie update on $PNV following yesterday's trading update.

Macquarie are the most bullish of the bulls, and lifted their $2.70 Price Target to $2.90 on the trading update that came in 8% ahead of their revenue number.

Accordingly, their FY revenue forecast is $103.0m, which is about where I am.

The Macquarie price target is well ahead of my central view (update this morning to $2.12) as they are more aggressive on revenue growth and profitability in the early years. I can easily get to the Macquarie valuation, as my upper scenarios are north of $3.00, so they are in my view well within the realm of reason.

$PNV remains one of my favourite holdings. After a few years of trading sidesways - and down more often than not - 2024 could be a breakout year for the company as it moves to deliver its first NPAT - particularly if it can maintain >50% revenue growth, which appears likely as super strong ROW progress offers the prospect of offsetting any moderation of US growth that may occur over coming years.

Disc. Held in RL and SM

$PNV has issued its 1H trading update, which it usually does around this time.

Trading Update

Their Highlights

• Total global revenue including BARDA was A$48.8m, up 65.6% on STLY of A$29.5m.

• Record 1H24 sales of A$42.2m up 54.9% on STLY of A$27.3m.

• U.S. 1H24 sales of A$32.2m up 41.7% on STLY of A$22.8m.

• Rest of World sales of $A10.0m up 122.2% on STLY of A$4.5m including strong performances in ANZ, UKI, and the Middle East, also growing sales in India, Hong Kong, and Canada.

• BARDA revenue of $A4.9m up 133.1% on STLY of $A2.1m. Currently 83 patients enrolled in pivotal clinical trial.

• EBITDA, EBIT and NPAT all positive. EBITDA $1.9m, up $4.4m on STLY EBITDA ($2.5m)

• Underlying EBITDA $3.6m (excl. non-cash items)

My Analysis

With total revenue up 65.6% to pcp, we are now seeing the expected acceleration. (The last two pcp comparison for 6m reports have been +56.3% (2H23) and +62.1% (1H23)), which means we are seeing the benefits come through of 1) the early 2023 expansion of the US salesforce and 2) the entry intro new territories.)

Digging into the numbers, this growth was only possible due to the expanding BARDA trial, without which we'd have seen growth of 55% (still decent), driven by US with 42% (Recall US FY23 growth in cc was 34.0% in CC, so it will be interesting to see the cc number when the full report comes out. However, 42% should be good as it comes at a time of greater fx stability and potentially even a stronger $A in Q4).

ROW ticking along nicely too at 122% off a small but increasingly material base.

It is also good to see the report for "EBITDA, EBIT and NPAT all positive". The NPAT bit is the key commitment made at the last capital raising, which has been re-affirmed at each report, even though DW claims not to be concerned about.

Overall, provided $PNV maintain a reasonable cost discipline then the second half could lock in a decent maiden profit.

$PNV appears on track to my forecast of $102m for the FY.

Overall, on track, and in line with expectations.

Disc: Held in RL and SM

Sure enough,.... another "record month".

ASX Announcement

First $A8M sales month and $A9M revenue month

PolyNovo announces record monthly sales of $A8.8m (unaudited) for November 2023.

Highlights:

 The U.S. business grew strongly, with monthly sales of $A6.1m (unaudited), up circa 74% on STLY

 Rest of World had monthly sales of $A2.7m (unaudited), up circa 290% on STLY. There was strong growth in UK/I, ANZ, and the Middle East.

 Total group revenue for the month, including BARDA was $A9.5m (unaudited), up circa 110% on STLY  

My Analysis

With previous results announced for July and August, this has $PNV on track for the year, as far as your can tell with this type of cherry-picking reporting methodology. Strong numbers across the Board.

Disc: Held in RL and SM

A few people have been waiting for this...

Potential for next record breaking month....

Nothing new in here, but nonetheless a succinct summary of progress over the year.

DW's address to the Bell Potter Conference.

Disc: Held in RL and SM

Just online at the $PNV AGM as I love the DW Circus, coming today from the MinterEllison Big Top in Melbourne.

Interesting question to DW first up from a shareholder on why $PNV doesn't provide regular quarterly reports. I've scanned ahead the MD and CEO's report and, lo and behold, no reference to the last quarter's revenue, highlighting only the August $7.7m.

David has predictably defended the practice, but he can't escape that the market will likely interpret this means that Q1 was not such a strong result (otherwise the'd report it). The cherry-picking will continue and with it, in my view, the SP volatility!

Not reporting is reporting, when you're a cherry-picker!

Nice to see director buying Dr Elliott doubling her holding on market trades (38k purchase for context)

Information or documents not available now must be given to ASX as soon as available. Information and documents given to ASX become ASX’s property and may be made public.

Name of entity PolyNovo Limited ABN 96 083 866 862

Introduced 30/09/01 Amended 01/01/11

Appendix 3Y Change of Director’s Interest Notice

 Appendix 3Y

Change of Director’s Interest Notice

Rule 3.19A.2

  We (the entity) give ASX the following information under listing rule 3.19A.2 and as agent for the director for the purposes of section 205G of the Corporations Act.

Name of Director Dr Robyn Elliott Date of last notice  30 June 2023

  Part 1 - Change of director’s relevant interests in securities

Direct N/A

31 October 2023

In the case of a trust, this includes interests in the trust made available by the responsible entity of the trust

Note: In the case of a company, interests which come within paragraph (i) of the definition of “notifiable interest of a director” should be

disclosed in this part.

Direct or indirect interest

No. of securities held prior to change

Class

Number acquired by Dr Elliot Number disposed

42,789 ordinary fully paid shares

 Nature of indirect interest

 Note: Provide details of the circumstances giving rise to the relevant interest.

(including registered holder)

  Date of change

    Ordinary fully paid shares.

 32,000 ordinary fully paid shares.

 Nil.

 Note: If consideration is non-cash, provide details and estimated valuation

No. of securities held after change

$38,080.00 paid by Dr Elliott to acquire 32,000 shares at $1.19 per share via on market trade.

Value/Consideration

 Across all holdings:

74,789 fully paid ordinary shares.

  + See chapter 19 for defined terms.

 01/01/2011

Appendix 3Y Page 1

ME_206737525_4

Appendix 3Y

Change of Director’s Interest Notice

Shares acquired via on-market trade.

 Example: on-market trade, off-market trade, exercise of options, issue of securities under dividend reinvestment plan, participation in buy- back

Nature of change

    Part 2 – Change of director’s interests in contracts

Note: In the case of a company, interests which come within paragraph (ii) of the definition of “notifiable interest of a director” should be disclosed in this part.

Detail of contract N/A Nature of interest N/A

  Name of registered holder N/A (if issued securities)

 Date of change N/A N/A

 No. and class of securities to which

  Note: Details are only required for a contract in relation to which the interest has changed

interest related prior to change

  Interest acquired N/A

Interest disposed N/A

 Value/Consideration N/A Note: If consideration is non-cash, provide details

and an estimated valuation

 Interest after change N/A Part 3 – +Closed period

  Were the interests in the securities or contracts detailed No above traded during a +closed period where prior written clearance was required?

If so, was prior written clearance provided to allow the N/A trade to proceed during this period?

  If prior written clearance was provided, on what date was N/A this provided?

  + See chapter 19 for defined terms.

 Appendix 3Y Page 2

01/01/2011

ME_206737525_4

This is a handy tip in and I particularly like that 3 Indian sites are being added to the trial… getting subsidized access for surgeons in India can only help towards opening up this market

BARDA increases funding US$10 million

PolyNovo Limited ABN 96 083 866 862

2/320 Lorimer Street Port Melbourne

VIC Australia 3207

P +61 (0) 3 8681 4050 F +61 (0) 3 8681 4099

PolyNovo is pleased to announce that it has received additional funding of $US10 million from the Biomedical Advanced Research and Development Authority (“BARDA”) for the Pivotal Trial program of NovoSorb® BTM. This increases the total funding commitment from BARDA to $US25 million. The contract is a cost-plus monthly reimbursement arrangement. PolyNovo will continue to contribute to the trial through the provision of product, employee resources and infrastructure support.

The NovoSorb® BTM Pivotal Trial is gathering data on the effectiveness of NovoSorb® BTM for treating full thickness burns. Successful completion of this trial will enable PolyNovo to file a PMA application for use in full thickness burns and may lead to BARDA buying NovoSorb® BTM for disaster management.

NovoSorb BTM is already indicated for full thickness burns outside of the U.S. and has the CE Mark for the EU market, including an indication for use in full thickness burns, other surgical wounds, and reconstruction procedures.

PolyNovo’s BARDA contract, funded by the U.S. Department of Health and Human Services (Office of the Assistant Secretary for Preparedness and Response), commenced 28 September 2015. The first patient was enrolled in September 2021, with patients currently being recruited from 22 U.S. burn centres and 1 site in Canada. An additional 5 U.S. sites, 4 Canadian sites and 3 Indian sites are in the process of being enrolled to participate in the trial.

To date, 71 patients have been enrolled out of a target 120. Recruitment is expected to be completed in FY24.

Director of Clinical Operations, John Cockwill said, “Our partnership with BARDA over the past decade has been extraordinary. Together, we have pioneered innovation in the medical device industry, pushing boundaries and saving many lives. It's been a journey of dedication, collaboration, and the relentless pursuit of excellence. Our shared vision has driven technological advancements but has also made for a profound impact on healthcare worldwide."

Chairman, David Williams said “BARDA and PolyNovo have a clear end game to bring our technology to as many patients as possible. It is an honour for us to know that our technology will play an important part in the US preparedness for mass disasters.”

 Chief Executive Officer, Swami Raote said “BARDA has been partnering with us and the FDA on this program in the most collegial way. We appreciate their consistent engagement and guidance in helping us construct, navigate, and execute a complex, large-scale multi-centre trial to secure FDA approval for our life saving and life changing technology.”

This announcement has been authorised by PolyNovo Company Secretary Jan-Marcel Gielen.

Further information:

David Williams

Chairman

Mobile: + 61 414 383 593

About PolyNovo®

Swami Raote

CEO

Mobile: +1 904 314 6346

 PolyNovo is a disruptive medical device company, focused on Advanced Wound Care that designs, develops, and manufactures dermal regeneration solutions (NovoSorb BTM, NovoSorb MTX) using its patented NovoSorb biodegradable polymer technology. Our development program covers Breast Sling, Hernia, and Orthopaedic applications. For further information see polynovo.com

About NovoSorb®

NovoSorb® BTM is a dermal scaffold for the regeneration of the dermis when lost through surgery, trauma or burn. NovoSorb® is a novel range of bio-resorbable polymers that can be produced in many formats including film, fibre, foam, and coatings. NovoSorb’s unique properties provide excellent biocompatibility, control over physical properties, and a programmable bio-resorption profile.

Reach

PolyNovo supplies approximately 638 hospitals directly in Australia, Hong Kong, India, Ireland, the Middle East, New Zealand, Singapore, the United Kingdom, and the United States. Other countries, such as Canada, Germany, France and Spain are serviced by a distributor.

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

Why I Wish He Wouldn't

I couldn't help myself write this straw on why I wish David Williams would change his investor relations behaviour. The commentators I have seen since yesterday's trading update announcement have made three statements about yesterday's release:

• Why report two months sales data compared to pcp, when the quarter end is a few days away? (There wasn't even an $8m month to at least be consistent with previous patterns of reporting) Particularly when there isn't really anthing to disclose.
• The growth results are strong, fair enough. (Particularly given the languishing SP)
• It doesn't change views on valuation

That's pretty much where I was yesterday in my straw.

But, you say, the market has moved up 14% in the two days. True, but the stock is still down 50% from its current 12m high in February.

So here is why I don't like David's "cherry picking reporting" and it needs a graph to explain. Note that the numbers below are made up, as they seek to illustrate a general point that is applicable to $PNV. The calculated rates of growth are relevant, however.

So here's what it shows. (Don't worry about the absolute numbers, I just picked 100 as an arbitrary starting point!)

Blue Line (acutally a curve), starting at June-22 at 100, this line grows each month at a compound monthly rate of 3.99% or 60% p.a. - which is in the ballpark of $PNVs current annual sales growth.

Orange line: Jul-22 and Aug-22 are depressed below the trend by 20% - indicative of the lumpiness we know exists month to month in $PNV sales. Let's assume we had two bad months at the beginning and two strong months at the end. The "lost" sales from the beginnining are added back in above trend in Jul-23 and Aug-23. So the total sales over the 14 month period is the same for the Blue curve and the Orange curve. It's just that the blue curve is perfectly smooth and on trend while the orange curve is lumpy at each end.

This is my suspicion of what could be going on. Two soft months cherry-picked at the start and cycling two strong months at the end for pcp comparison.

Red Line: So, let's do the maths. What's the ANNUAL SALES GROWTH rate from Aug-22 to Aug-23 (or Jul-22 to Jul-23)?

Blue Line = 60% growth. Red line (for orange curve) = +125%. Over double the underlying growth rate.

That's how misleading annual growth numbers can be if you cherry pick your data-set.

Which is why the high reported numbers in yesterday's ASX release from a management team with a reputation for cherry-picking data shouldn't necessarily result in any change in our view of the underlying value of the business.

Of course, the good news is that, even if the release represents "peak cherry picking", its does mean that underlying revenue growth is still in the region of 50-70%, whereas the market is expecting +42% this year and +34% in FY25.

As a result, no analyst upgrades should be expected, apart from the bears who have a SP <$1.50 or so. (There is one in my dataset with a price target of $1.08. Maybe they'll wake up one day).

Life would be much easier if we got any of the following:

a) Monthly sales, every month or

b) Quarterly sales, every quarter or

c) HY and FY results. Period.

Of course, I could be wrong, and perhaps the underlying trend is stronger. I hope it is. But that's the problem with management who are too promotional and inconsistent in how they report. You just can't tell.

If I wasn't so high conviction on the product and the business, I think I would have given up long ago due to exhaustion.

No doubt, the David Williams Circus will continue to roll on. So,... roll up, roll up.

Disc: Held

So here is the annoucement:

ASX Announcement

Key messages

• August Revenue of $7.7m up 119% in August pcp and 93% YTD
• YTD revenue is $14.9m vs. $7.7m in prior year
• US sales in first two months of FY24 were $10.6m up 85.3% over pcp
• RoW is $2.4m up 78% over pcp

I can't see any promised "upgrade" anywhere.

More detail is given in the release.

My Analysis

OK, so FY24 starts with 2 strong months, in what is normally a lumpy sales business month to month. Hopefully, as it scales, lumpiness should continue to smooth out and maybe we can get to some regular 6-monthly reporting.

These guys are relentless in cherry-picking good news periods and issuing a release, which to me says nothing other than they are peeved that the SP is as low as it is and they are trying to correct that. I think that is a fruitless, pointless effort. The half-year and full-year results will do the necessary work over time. OK rant over, as ranting is also pointless.

There is of course good new in here. In my recent assessment of their annual results, I commented that the US appeared to be slowing with only 34% constant currency sales growth in FY23 over FY22, in a period when the sales force was significantly ramped up. Even though we are not seeing a constant currency comparison in today's release, a two-month burst of 85% growth over the pcp is very good news and would be very strong even after correcting for $A to $US.

In most of my valuation scenarios, my expectation was that the US FY23 over FY22 result was a softer result than the underlying trend, given lumpiness of individual periods. Today's announcement lends some support to that case.

Key Takeaway

I've recently published a detailed, updated valuation of $PNV. Today's announcement contains no material new information, but it supports my overall bullish thesis. If anything, it nudges the likelihood of my lower valuation scenarios of <$2.00 lower in likelihood and is in-line my more bullish view of the business. No updates required as a result of this. I remain a high conviction hold.

No doubt the market will take the short-term sugar hit. But one day the SP will move on from these low levels and never return.

Disc: Held in RL (3.8%) and SM (14.6%)

Polynovo has just requested a trading halt for the following reasons:

• The trading halt is requested in respect of a trading update and upgrade

Unless otherwise requested by the Company, PNV requests the trading halt to remain in place until the earlier of the release of an announcement or Tuesday 26 September 2023.

That’s a much needed announcement for the share price! What’s DW got in store for us this time? Perhaps it’s another new monthly sales record?

David has kindly emailed around the recording of $PNV's presentation at the Bell Potter Emerging Leaders Conference 2023. Here it is for those not on the mailing list.

https://youtu.be/scQoF-zaZrY?feature=shared

Many are stories we've already heard (some again and again ... and again).

But there are a few nuggets of interest

India

DW says they are now generating sales in India. In a separate statement he says they want to hold consistent pricing internationally. "Even if we made the decision to go into India at half the price, that we're charging in the US or Australia, we'd still be making a margin in excess of 80%."

In my recent valuation, I have been more bearish on emerging market pricing, running scenarios at 25%, 30% and 35% at modest volumes.

I couldn't imagine that DW would still be using a 50% benchmark (implying its a lower bound) unless they were generating sales in that ball park. Its difficult to avoid reading the tea leaves, and I probably just have to be patient until Feb/Mar 24.

Germany & Europe

In providing some further details about Germany, David confirms Novosorb is the standard of care there. This was also shown on a recent presentation. He notes that although their preference is to market directly, they are using a distributor in Germany because the distributor already has a complementary product. Perhaps this goes some way to explaining FY23's +189% German sales result.

DW noted that they are now also selling in France and Spain.

USA

He said that the product is getting more traction with diabetic foot ulcer and venous leg ulcers in the USA. He said they are considering hiring a specialist sales force for the podiatric surgeons OR are considering a specialist distribution deal. Again, Swami spoke about this pretty much on day 1, and a year later they are still mulling this one over.

Focus & Blue Sky

The other key message confirms that they are focusing on broadening the clinical applications of the current products, or rather, staying close to the surgeons who are leading the innovation.

David finishes by flashing the "blue sky" applications. We spent a lot more money on R&D in the last two years,... we used to have a man and his dog ... now we must have about 8). "We've got people developing new products for us",...with an update on the second patient now treated with the diabete drug elution product at Royal Adelaide Hospital.

Of course, the tangible measure is when DW announces the next milestone month, which would be $9m.

In summary, there is nothing really new here, but I like listening to understand how the messages and emphasis are evolving.

Disc: Held in RL and SM

@mikebrisy i'm keen on your thoughts ...

Just reading through the PNV Annual report and seeing the CEO Long term incentives for Swami. 5million shares over 5 years with share price strike price of 1.64. YoY hurdles but definitely provides incentive for swami to stay the course

Wary of companies that have share price incentives but at least they a spread over 5 years.

I have finally rebuilt my valuation of $PNV. The reason for the challenge in doing it, is that the change in sales & marketing strategy since Swami came onboard as CEO. This has driven the need to create an entirely different way at looking at both sales growth and contribution margin - the dual push on developed and developing markets means that modelling performance by averaging key metrics means you lose sight of what is going on. So the model needed a total rebuild.

Estimated Value $2.00 Range [$1.63 - $3.30]

Based on 9 scenarios, I arrive at an expected value/share of $2.00, and an estimated p10%-p90% range around this of [$1.62 – $3.30].

This is a significant downgrade from my prior valuation $2.46 [$1.63 - $3.28] from September 2022. However, what is interesting is that the upside and downside ranges are largely unchanged (albeit also reduced about 10% given the passing of a year.)

Revenue Growth

Revenue growth is modelled driven by sales force expansions aggregated into separate Developed Markets and Developing Markets buckets.

• Developed market performance starts with average sales per rep of $0.811m p.a.
• In Developing markets, realised prices are modelled at 25%, 30% and 35% of developed market prices (see “Commentary” at end of this Straw). At this stage we don’t really know what the net sales values will be in these markets.
• Costs and Revenues are subject to constant annual inflation (2.5% developed markets and 5.0% in developing markets.)
• Like-for-Like growth: As more and more indications for Novosorb become accepted and applied, the value of each account is expected to increase, and each saleperson become more productive by accessing more clinician-customers at each hospital visit. Research publications indicate that we are still very early in this process of adoption. On average, an annual “Learning” growth factor is applied to each Sales Rep across a range from a minimum of 3% to as high as 7% across different scenarios. This is one of the most important value drivers. (Hence DW is actually getting investor to focus on the right information in emailing around clinical review studies showing the increasing breadth of clinical applications.) In truth, I have no idea what the appropriate learning rate is. However, as an indication at the expected valuation, a 1% increase in annual learning at the mid-range leads to a $0.30/share increase in valuation. Wow! The best way of tracking this metric is by continuing to focus on the number of sales reps in the USA and the value of US sales. (Swami has said from day 1 that $PNV has to stay close to the physican customers to understand how they are innovating in their use of the product. That's why.)
• Sales and Marketing costs have been estimated by calculating: benchmarks market rates, adding allowances for super, health insurance, seniority mix, incentives and applying a a ratio of one marketing FTE per 7 sales FTEs. A non-FTE sales and marketing expenses factor of 12% revenue has been applied (this covers everything from advertisements, free sales, to conferences and flying opinion leaders around the world.) This is likely to be on the high side, but I have modelled a range of expense growth scenarios to accommodate this uncertainty.
• In developing markets, a 2023 cost for a sales rep. has been estimated at $40k p.a.. This is probably on the high side for current costs in India (as quoted by DW), but over the 10 years the model assumes expansion to all major cities in middle income countries across Asia, Central and South America and the Middle East. The valuation is not hugely sensitive to this assumption.

The output from the Revenue Growth and Sales and Marketing modules is shown in Figure 1 for one scenario, below.

Figure 1: Revenue and Sales and Marketing Headcount for one Scenario

It is worth commenting that I have followed a cautious approach to the build-out of developing markets that may not stand the test of time. For example, in 2023 a team of 22 people has been established in India within months of market entry, with as yet no material sales. By contrast, the combined UKI and ANZ sales teams number only around 13, with combined annual sales of around $7-8m.

As a result, I follow a more cautious build-up in the developing market sales force over time. These reach a total workforce of between 160 to 320 by 2033, with a contribution of 13% of total 2033 revenues in the most conservative to an upper case of 26% in the most aggressive case, with 20% shown in Figure 1 above. This is somewhat at odds with the rhetoric we’ve been hearing from Swami and David over the last 12 months. However, I want to see proof that developing markets can make a meaningful margin contribution before setting too much of my investment thesis against that.

It is getting to grips with the new prominence of India (in particular) and developing markets in general that has given me the most pause for thought in modelling the updated strategy.

In my earlier September 2022 valuation, I assumed a more aggressive approach to Europe and other high value markets like Japan, South Korea, and Taiwan. So, as far as my valuation is concerned, the change of strategy has lopped $0.40-0.50 off my valuation. That is the price of me NOT sharing Swami and David’s conviction. I may well be wrong and will be happy to be so proven!

Cost Growth – R&D and G&A

In all scenarios I assume a moderation in the % rate of cost growth of the company, which over recent years has really been in a start-up mode. David and Swami should demonstrate this disciplined as they are now under pressure to breakeven this year and show a meaningful profit in FY25.

While expenditure on R&D and G&A both grow strongly throughout the 10 years modelled, I assume $PNV remains a highly focused company selling only variants of the Novosorb product (BTM, MTX, etc.). This allows for a highly-focused organisation and cost structure which achieves exceptional net margins.

Figure 2 shows the projected evolution of expenses as a % of Revenue. In Scenario 6 (shown), the 2033 Net Margin is 32%. The range of modelled scenarios yield net margins are 30-36%. This compares with a Net Margin in 2022 for competitor $IART of 12%. Good net margins in medical devices are more typically in the range of 10-20%. So how can this possibly be?

The answer lies in the high gross margin (93% in FY2023 for %PNV). Medical device companies more typically achieve gross margins in the range of 50% to 65%, with $IART achieving 64% in FY22. Thus, $PNV has a very material Gross Margin advantage, providing headroom over the competition of a full 25-30%! That's massive.

This positions it well to respond to competition, as other synthetics will inevitably emerge over time. (To be fair, David has been banging on about this for the 5 years+ I've been following the company, and it was only over the last weeks when I did some detailed industry benchmarking, that I realised how important this is.)

Figure 2: Evolution of Expenses (Scenario 6: $2.16/share)

Looking at the % expense/revenue structure modelled in the above scenario in 2033 and comparing it with $IART in FY22:

• R&D of 8% at $PNV compares with 6% at $IART
• SG&A of 36% at $PNV compares with 40% at $IART (with the latter a much more complex business)

Of course, $IART is a much larger company with a much more diverse product portfolio, so the comparison is limited. However, what $PNV lacks for in economies of scale, it can be argued to recover in its narrow product focus.

(*As a "post-production note": I've probably been a bit aggressive on $PNVs G&A, so will address this next time. In the case illustrated above, if 2033 G&A/Revenue is more like 12%, then value is reduced to $2.04.share)

Total R&D spend over the 10-year modelled period amounts to over $200m (nominal), however, no new products are assumed beyond new variants of Novosorb, such as MTX. It is assumed that significant funds should be spent in supporting studies to broaden the range of product indications, and providing tailor variants, like MTX.

New products for applications in breast, hernia, other internal procedures, and drug elution are all still assumed to be “blue sky” upsides, even though this is where the lion's share of the R&D spend will do. So, there are significant potential upsides for the business that have not been contemplated in these valuations.

This level of R&D investment without an explicit revenue stream justifies the continuing value annual cashflow growth beyond 2033 of 5% p.a. (However, this might be conservative if $PNV is successful in positioning itself in developing markets. Here, although revenues are low by comparison to developed markets, growth rates are very high.)

Gross Margin (GM) Evolution

Historically, $PNV has achieved %GM ranging from 91% to 95%. With the proliferation of product variants and lower price realisations in emerging markets, I assume 93% represents a cap on future gross margins. As the new facilities come onstream in 2025, lifting sales capacity to $500m, I assume %GM falls to 91% as the existing sales bear the fixed costs of the larger production facilities, before returning to higher values as plant utilisation ramps up.

Capex

Capex has two drivers: "base PPE" capex and investment in new production facilities.

Base PPE capex is assumed to grow proportionately with sales.

Expansion of new production facilities occurs in two tranches: $30m capex to scale up to $500m total sales (current reported cost is $25m), and I've assumed a further $40m to scale up to $1000m total sales.

Timing of expansion capex is driven by revenue growth assumptions.

Common Assumptions

WACC = 11%

Inflation = 2.5% (5% in developing markets)

Effective Tax Rate = 30%

Shares On Issue = 1% growth p.a.

Capital Leases grow proportionately with G&A

Working Capital grows proportionately with Revenues

All R&D expensed

Cash Flow Growth in Continuing Value Period = 5% p.a.

Valuation has been performed on a 100% Equity basis - no debt. As the business scales it will make sense to put in some long term debt. $IART by comparison has Net debt/EBITDA of about 2.4x. However, at this stage in its evolution, I prefer to consider the business as 100% equity funded.

Commentary on the Analysis

Developing Markets

With the current push on India and with China to follow the Hong Kong beachhead (3 out of the 4 major hospitals already signed up), $PNV is entering new territory, so all the developing markets analysis is a placeholder. I have, however, tried to err on the side of conservatism. At this stage we have no idea what contribution margins might be achieved.

So let me put this my reservations in context, because I suspect Swami and David would disagree with my analysis. The US medical devices market is c. $164bn p.a., around 3.4% of the US Healthcare Spend. The Indian medical devices market is around $6bn p.a. That’s less than 4% of the US market. In the US, average annual healthcare spend per person is c. $15,000. In India, it is $101.

I understand the clinical and humanitarian imperative to bring lifesaving and life-enhancing treatments to developing markets. And I support it. My point in writing here, is that I can’t at this stage model the economics for $PNV in developing markets with any confidence. The strategic shift in the priority of market rollout has chopped about $0.50 off my expected valuation. Only time will tell it that’s reasonable.

US

The US is a potential concern. With a salesforce now in the region of 80 in the US (up c. 50% on end FY22) to have seen only 34% constant currency sales growth in FY23 over FY22 raises a question mark. None of the analysts appear to have picked up on this, so far as I can tell. But it is the key result I'll be focused on in 1H FY24.

It is this question-mark which leads me to be cautious on the ultimate potential of the US market. (I max-out the US sales force at 150 reps. at about 2030. If US sales growth of >30% p.a. can be sustained for a few more years, then I will revise this upwards next year.) This upside possibility is not fully accounted for in my range of scenarios.

Europe

For me, Europe remains the untold story. UKI was a big surprise in FY23. Growth of +169% means this must be getting to total of around $3.50m-$4,0m in sales. (Of course, by comparison to ANZ, an equivalent penetration would be more like $12m at a comparable stage, so there is a lot further to go.) Germany grew +192%, but this is via a distributor, and off a very low base as to probably not be meaningful.

Still, UKI and the EU is a high value market of some 450 million people and, even though a smaller $ market in aggregate than the US for medical devices overall, it is still very significant and largely untapped by $PNV. In all my scenarios, I assume a direct sales model for Europe but a slower build-up over the 10-year period. So, there is the potential for upside to all scenarios, particularly if the latest UK experience leads to management getting more serious about Europe. (C’mon on Swami, you can do it!)

Ongoing Visibility

It looks like $PNV are going to disclose sales on a US and RoW basis only going forward, with scatterings of informal disclosures to highlight individual market milestones or successes. I don’t like that because RoW is going to be a blend of 1) long term developed markets (like ANZ and UKI), 2) new developed markets like (EU, Canada, and Japan) and 3) developing markets, primarily India and China. This is going to make it hard to track how things are going for us analysts. However, the good news is that the US will give good insights into clinical adoption, market penetration and competitive positioning … and for the rest, we’ll just have to extrapolate! Hopefully, we will soon be able to get intelligence on realised prices and volumes in India.

Range of Modelling Outcomes

Below in Figure 3 is a summary of the valuation outcomes. I’ve equal-weighted each of the 9 scenarios, and from the graph been able to read off p10, p50 and p90 estimates of value.

Table 1 summarises some of the key valuation metrics and multiples.

What I do know from all the modelling is that higher valuations can easily be achieved, and it is much harder to drive downsides much below the $1.40 - $1.50 range. This is the same conclusion I reached in 2022.

So, I am comfortable that today $PNV is significantly under-valued. It remains my largest SM position and at the top of my conviction list in my high risk holdings.

In RL, the great progress of $WTC, $ALU and $TNE (plus my doubling-down on $RMD against the shortselling-thesis), means it now only sits in 6^th position at 4%. It is tempting to add more at these prices; however, it remains a risky proposition with a lot of execution risk. Often the best investment strategy is to do nothing.

Figure 3: Outcome of Valuation Modelling Scenarios

Table 1: Summary of Key Valuation Metrics*

* Note that the High value of $3.62 is higher than my quoted upper limit of $3.30. This is because the valuation range is read off the above chart at the p10% and p90% levels, and ignores any extreme individual valuation results.

Disclaimer

The above analysis is not valuation or investment advice and is for my personal purposes only. It is provided for information and to stimulate debate. The analysis is not validated to be free from errors.

Disc: Held in RL and SM

I know a few other StrawPeople follow $PNV closely. So this is a question of detail for them.

I've been trying to get my head around the statement: "U.S. NovoSorb sales $46.1m up 44.6% (34.0% in local USD)"

We don't get consistent reporting of numbers, so I have constructured the following table for US Sales in A$ and US$. (Warning - shaded numbers are my calculations and have not been reported by $PNV and may be wrong, particularly given that I am using an annual average FX when volumes vary significantly through the year).

The numbers I am focused on is the constant currency USD sales, %y-o-y difference.

My estimates of the FY-end US Sales Force (FTE) are as follows (note: not reported)

2021 = 36 (reported)

2022 = "54" (At end 2021, DW said Ed would add another 20,... I assume he came up a couple short)

2023 = "75" (And then the same again in FY23)

Note - the last two numbers may be inaccurate, but as far as I can tell, they haven't disclosed US sales force numbers for a bit. DW has thrown some numbers around, and there is as far as I can tell now a sizeable non-Sales US headcount. However, directionally, the numbers make sense given 218 total reported at 30-June-23.

Forget, the fine detail, but doesn't this point to a significantly slowing of US$ sales/ salesperson? We know it takes a year or two for new starters to ramp up their sales volumes. So, given the big increase in numbers over the years, shouldn't there be a sizeable lag effect as productivity of sales staff added 2 years ago continues to grow. So, however you cut it, incremental USD sales of $7-8m FY22 to FY23 appears light.

Maybe something structural is happening. Maybe the initial workforce covered high-use burn clinics, and now incremental workforce are hitting lower returns, with new accounts being less valuable in general hospitals. (By the way, that is an entirely rationale sales and marketing strategy.)

IF (and it is a big if) this is real, its going to masked in FY24 by big numbers coming form emerging markets, and we won't find out until some time down the track that saleforce productivity or market penetration is flattening off.

I feel like I am having to play Hercule Poirot here, and just wish they were more consistent in their reporting. But before I fire off a missive to DW, has anyone else sensed anything?

Has anyone else had a look at this?

$PNV reported their FY23 results, and before heading into the David and Swami show, I am reporting my quick take.

Top line: strong revenue growth slightly ahead of market expectations at +59% (alebit behind my model), but with a significant expansion in costs, with total expenses up +66% largely driven by expanding the sales force into new markets. This drove an increased net loss of A$4.93m (FY22 A$1.19m), which they go on to say is essentially flat after adjustments (departed executives ... the gift that keeps on giving).

Their Highlights

• Total revenue including BARDA of A$66.5m up 58.8% on prior year of A$41.9m
• Strong growth in U.S. achieving sales of A$46.1m up 44.6% on prior year of A$31.9m
• ROW sales of A$13.5m up by 133.9% on prior year A$5.8m
• The Group recorded a net loss after tax of A$4.93m (2022: $1.19m loss).
• The loss in the prior year FY22 included the reversal of A$4.7m in share-based payments from the forfeiture by the previous CEO and COO on their resignations. The underlying net loss after tax excluding non-cash items is A$2.32m (2022: $2.00m loss). At year end the business had A$46.8m cash on hand.
• Excellent sales growth can be explained by the genius technology that is NovoSorb BTM and NovoSorb MTX, and by an increased sales force and geographical expansion. However unprompted surgeon engagement around the world in trialing the product, and publishing and presenting their results and developing new uses for the product has been amazing.

The Company’s other key initiatives and achievements include:

• First $7 million sales month in May 2023 (May 2022: $3.3 million), Total Revenue $8.3m in May 2023
• $53m capital raising
• 510(k) clearance from the FDA for NovoSorb MTX and saw first sales to plastics and reconstruction
• Entered Hong Kong, India, and Canada markets and saw early sales
• Grew the U.S. team from 54 to 93 and increased U.S. customer accounts from 189 to 299 hospitals
• In our direct markets including the U.S., we increased our customer accounts from 470 to 638
• Increased staff worldwide from 152 to 218
• Enrolled 64 patients into the U.S. BARDA pivotal burns study (53%)
• Enrolled 25 patients into the U.S. DFU Chronic Wound study for health insurance reimbursement (18%)
• Enrolled 35 patients into the chronic wound study with Flinders University South Australia (55%)
• Leased an adjacent property in Port Melbourne to significantly increase manufacturing capacity
• Awarded Victorian Government grant for manufacturing Diabetic Foot Ulcer product (NovoSorb SynPath)

My Analysis

With a strong cash position post the capital raising late last year, $PNV are making good on their investment in sales and marking to accelerate sales.

So, the 43% expansion in headcount (surely, mostly in sales and marketing) is hardly unexpected, and is their fastest expansion for a while. And given that we know it takes up to a year for a new sales and marketing employee to break even, such a scale of investment comes at a necessary cost.

Cash is still being burned. A total of -$8.3m (including leases) which is up from -$2.4m in FY22 (where I am excluding the benfit of the sale of the Melbourne property). With $47m in the bank, the rate of burn is not a concern, although the major spend in the new manufacturing facilities is still to ramp up – so we should expect to see significantly more capital investment in FY24.

Global hospital accounts at 638 are up 35%, and of course new accounts are a leading indicator of the sales growth to follow.

In both the report and the presentation, prominence if being given to the number and breadth of publications demonstrating the expanding clinical applications physicians are finding. And those of us on the DW mailing list have seen the benefits being report. So, another leading indicator of future growth.

The presentation is light on detail in terms of market progress. We can see that US Novosorb sales grew 44.6% (although only 34.0% in USD) and RoW sales reached $13.4m up 133.9%.

On sales, the US constant currency rate is slower that I expected, so it will interesting to hear how this is characterised on the call this afternoon. (There is no evidence of a boost from Integra’s recall of Surgimend.) With US accounts expanding by 58% to 299 from 189, and existing accounts expected to grow sales, the US sales growth number is a bit soft in my view.

RoW is starting to become more material, and this is a key number to watch in the future. Several of these markets including Canada, Hong Kong and India only started during FY23, with several only really getting going in H2. Of course, this is where a lot of the sales and marketing expansion has been, so it is not surprising.

I’ll leave it at that ahead of the call.

My Key Takeaways

Overall, there is something in the result for every thesis. Bears more focused on the short term will point to increased cash burn, rising costs and slowing US Sales. The bulls will point to expanding market footprint with strong RoW becoming material, new accounts, top line growth, and growing positive clinical evidence.

I remain in the bull camp based on this report. But I can see a stronger focus on revenue growth pushing the cash generation profile backwards, and so there is nothing in this report for me to upgrade my valuation. If anything, the upper part of my range is scaling back. But that’s for later in the year.

Based on this result, I am a solid hold. But I want to learn more about US progress, as I am sure others on the call will too.

Disc: Held in RL (4.3%) and SM

Who are PolyNovo?

• Melbourne based medical product company.
• Produce a synthetic “lattice” product for burns/skin repair.
• Works extremely well and Doctors are loving the product and finding more and more uses. 
• PNV R&D team working and validating more and more uses. 
• High margin product. This is obviously a high guarded secret. But in my research, I have heard people throw out 90% etc. I don’t know and can’t confirm, but I do know that compared to it’s competitors who use a different type of product (Integra - pig skin), the margins are best in the field. 

Management:

• Mr. Swami Raote – Current CEO – Ex senior exec in Johnson and Johnson. He is Indian and knows the Indian market well. India has the highest burn rates in the world. 
• Mr. David Williams – Current Chairman - Holds a large portion of PNV shares, worked in mergers/acquisitions for years, also tells the company story well and keeps the market well informed. Loves a red wine I hear and the Flower Drum in Melbourne. 

Growth/Regions:

• PNV did a capital raise at $1.90 in late Dec 2022, to fund growth through expanding production, setting up new teams, and expanding existing teams globally.
• Currently USA is cash flow positive and growing (said by David Williams in last Revenue discussion).
• India has just been established in early 2023….highest burn rates in the world…and low cost for employees/sales staff. Yet to see sales data for this move. 
• Europe has many contracts in place with existing distributors. These are being monitored for performance. My view is they are underperforming. And I think when more revenue is being made in 2024….a European PNV team will be established. 
• Australia/NZ has much of the head office/manufacturing/R&D team. But the Sales Staff are also increasing and gaining traction/revenue.
• On Wednesday 23 August 2023 (2pm), PNV will be doing an announcement of revenue. It is expected to be a record month/year. I hope they provide some more details on the revenue splits between regions etc. 

Valuation:

• To predict sales revenue, I believe the number of Sales Staffs should provide a pretty good coloration with revenue. I also have heard on some of the meetings, the Macquarie Bank analyst keep pushing management to divulge sales staff information. 
• David Williams (chairman) has previously said it takes about 6-12 months for a new sales staff member to start paying for themselves with sales. So there tends to be a lag between sales staff being appointed and revenue uplift. I have tried to simplify by just using the previous year’s staffing levels to determine a Revenue per Sales Staff.
• For 2023 PNV should generate about $100m in revenue ( I will update this post 23 August 2023). And in 2022 they had 152 staff globally (Page 6 of 2022 Annual Report). 
• I think approx. 80 of them are Sales Staff. 
• I think approx. 26 are management/support staff
• I think approx. 5 are R&D
• 5 are Directors
• I think approx. 10 are factory workers
• The rest are estimates of equivalent staff in their distributors (Europe etc)
• So I calculate that each Sales Staff generates about $1.2m in sales. However, on closer inspection, I understand that a large chunk of those sales staff came on in early 2023. So they may have generated more revenue earlier. I would thus guesstimate that each Sales Staff would generate approx. $900k per year. (they would cost PNV about $200k a year, so they would net PNV about $700k per year.)
• I have then created a spreadsheet with each country/region and likely Sales staff numbers for the next few years and tried to map out the expansion and thus future revenue. 

• So if we use the net revenue assumption of $700k per sales staff per year, and multiply by the previous year Sale Staff numbers we get the following revenue estimate:
• I think that maybe this model/assumptions are generating net revenues a little too high and I will re cut the model once new data is available post 23 August 2023. But for this straw…lets keep going. 
• I then looked forward 10 years and inserted a slowdown in the Sales Staff recruitment over another 6 years. So that we have a 10 year view. 
• Then I did an NPV at 5 and 10% discount rate (seems this is about right for a medical device company). 

• So the NPV for 10 years of revenue ranges between $1.3 – 1.8 billion. If that is considered the Market Cap…that would mean a SP of $2.00-2.60. Current SP is about $1.55. 
• I will continue to update my staffing/revenue model as new information is presented. Possible other sources of info could be job adverts in different regions etc. 

Growth Opportunities:

• PNV’s largest competitor is Integra. They use animal skin for skin transplants. They were doing approx. $1.5b in revenue in 2022. However, around June 2023, they had to recall all their products because the FDA (US regulator) found unacceptable levels of bacteria in their products. It will be at least 6 months before they can begin to produce new products and there is also a question mark if they can actually produce their product without this bacteria. This is a massive opportunity for PNV. It is unlikely the last revenue announcement (which was a record of $7m for a month), could have any sale attributable to the demise of Integra. But the upcoming revenue announcement tomorrow 23 August 2023, should have some revenue attributable to the Integra demise. I also think, that once Doctors use the BTM product from PNV, they are not likely to go back to Integra. 
• PNV are finding more and more uses for their product. So I think any money spent on their R&D is valuable. And the Sales Staff will then earn more per person because they have more products to sell on each visit to each hospital. 
• I also think that in 5 years, a large chunk of the profit that was going into growth (ie more Sales Staff), can be invested into complementary acquisitions. PNV will have a sales force with relationships, and can easily add other complimentary products. And that revenue can generate further growth. Akin to CSL. 

Takeover:

• There has always been talk of a Johnson and Johnson type company buying PNV. 
• I think this is a distinct possibility. 
• I think a J&J would value the new products that will come from the PNV R&D area. 
• Also the CEO is ex J&J and I’m sure that there would have been discussions. Or will be soon. 
• People throw prices out there…but I think the board would be unlikely to recommend selling for anything less than a SP of $3-4. 

SP history:

• PNV has had a roller coaster SP over the last few years. 
• There have been a number of events/explanations for this:
• Loss of CEO
• Covid massively stopping sales and growth.
• PNV sitting just in and out of the ASX200 meaning lots of funds buying or selling.
• Shorters taking advantage of the above.
• Recently, PNV has experienced shorting from about $2.70 down to $1.30. But with the latest revenue announcement (record $7m month) has sat around $1.50. 
• ]If the next announcement is positive regarding revenue, then I expect a jump in SP. Given the shorters having been working this stock hard, and if they still think it may fall out of the ASX200…then they may try to hold the SP down. 
• But in the longer term, with revenue continuing to rise, the shorters will reduce their positions and the SP should become steady. 

Conclusion:

• I think PNV will continue to achieve it’s growth strategy and see revenue continue to grow globally for it’s existing products. 
• I think PNV will continue to add new products which will expand it’s revenue.
• I think PNV is currently undervalue at $1.50 (22 August 2023) and should move up to about $2.20 by the early 2024.

Latest email from DW. (I chuckled at his remark about the "Britishness" of the article. Those of us who have experienced David's flamboyant approach to communication will get the joke. But I think that is also a difference between investor relations and publishing in a serious peer-reviewed journal.)

Key Take-away: Growing evidence supporting breadth of potential in BTM in complex wound care.

Side question to StrawMedics: Does anyone know why BTM isn't FDA-approved for full thickness burns, whereas it is approved for this indication in so many other jurisdictions?

----------------------------------------------------

EMAIL from DW follows

Kidd T, Kolaityte V, Bajaj K, Wallace D, Izadi D, Bechar J.

The use of NovoSorb biodegradable temporising matrix in wound management: a literature review and case series.

Journal of Wound Care. 2023; 32(8):470–78.

https://doi.org/10.12968/jowc.2023.32.8.470

This is a retrospective observational case series evaluating the use of NovoSorb BTM in 37 patients across a wide range of wound types including acute trauma, hard-to-heal (chronic) wounds, acute infections, and skin cancer excision.

Data reviewed included patient demographics, wound characteristics, time to BTM integration, time to skin grafting, and the incidence of complications.

Successful outcomes were achieved in most cases, despite the type of wound bed (muscle fascia, exposed tendons/paratenon, bone/periosteum), patient age, and wound size. Success was demonstrated in difficult cases where other treatment options are limited.

The flexibility that BTM provides to treatment pathways is highlighted, enabling factors such as operating theatre availability and patient compliance to be accommodated.

Of the complications arising, the majority were attributed to patient factors that worsen a patient’s healing capacity (e.g. diabetes and peripheral vascular disease). Of note, the authors state that the method used to document complications was over-cautious because a patient with infection and complete skin graft integration was still included, despite a successful clinical outcome.

Valuable learnings regarding the use BTM are included, such as the need for judicious debridement before application, regular wound reviews after application, and the use of wound swabs and appropriate antibiotics.

The authors conclude:

“BTM continues to show promise as an additional tool in the reconstructive ladder, especially in wound beds less amenable to immediate grafting or soft tissue reconstruction.

Additionally, it plays a role in patients not suitable for autologous reconstruction due to fragility, comorbidities or anaesthetic risk for long procedures.

…BTM is robust and complications, such as infection, can often be strategically managed with judicious care and still lead to positive outcomes.”

Disc: Held in RL(5%) and SM

Wednesday 23 at 2pm for those wanting to tune into this one. Very quiet from DWilliams the past couple of months...

PNV director buy today from Dr Robyn Elliot - $40k worth

More DW buying this morning and Macquarie set price target of $2.75.

the ride continues....

The short email below is just in from DW.

While a competitor product recall can be a huge tailwind to any healthcare firm (witness the tailwind $RMD and $FPH have received over two years from the Phillips recall), it should also serve to remind investors of this key risk in healthcare.

$PNV is a young company, early in the development of its own manufactuing capability. I hope whatever lessons are to be learned from Integra in the fullness of time are learned at $PNV, and that the assistance of any potential tailwind arising, does not lead to complacency.

Turning to the recall, the size of the recall time window indicates that this is something fundamental with the manufacturing process or the product itself. I spent 5 years early in my career as a pharmaceutical operations manager. The spectre of this kind of event is the stuff of nightmares. I wish them well.

Email from David Williams

Integra was down overnight in the US on news that they have “initiated a voluntary global recall of all products manufactured in its Boston, Massachusetts facility distributed between March 1, 2018 and May 22, 2023.”

 The greatest impact of the recall is on Tissue Technologies Segment with the voluntary recall including the SurgiMend , PriMatrix , Revize™ and TissueMend™ products. See attached.

I'm not sure all holders here are on the DW mail list. So I am sharing the following which has just come through.

It is yet another example of how surgeons are driving innovation using Novosorb and BTM. We heard David talking about other instances in the last SM meeting.

The article can be accessed via the link ... warning: contains images not for the faint hearted!

While I am online, I attended the $AVH Q1 call this morning. Q1 pcp revenue growth was 40%. This confirms that $PNV is growing the fastest in the "peer group". (Note that $AVH is not strictly a competitor, as ReCell is sometimes used in conjunction with BTM.) I expect to see strong growth numbers in future periods from $AVH, as they have expanded their field sales organisation from 30 to 69 during the period and have received furhter FDA approvals for various indications.)

=======================================

A new BTM article has just been published by Dr Srinjoy Saha from the Apollo Multispecialty Hospital, Kolkata, India.

• Saha S.

Tissue-engineered minimalistic reconstruction of a severely crushed fingertip.

Journal of Stem Cells and Regenerative Medicine. 2023; 19(1):13–17.

https://doi.org/10.46582/jsrm.1901003

This article reports the clinical treatment and outcomes for a patient who presented with a severely crushed right-dominant ring finger following an industrial accident.

The treatment involved the off-label use of NovoSorb foam layers, as well as the use of NovoSorb BTM.

The palmar soft-tissues and fingertip of this patient were destroyed completely, leaving the remaining bone and finger joint exposed. The nail plate was also avulsed from the traumatised underlying nail bed.

To develop new granulations over exposed bone, platelet-rich fibrin (PRF) injections were prepared and injected into the wound. NovoSorb BTM was applied and delaminated after 6 weeks revealing good restoration of soft-tissue volume over the sides.

The main soft-tissue bulk that forms the pulp of the finger was absent. Instead, the bone was covered by only a thin epithelialized layer. To provide additional fingertip volume, the surgeon removed the sealing membrane from the NovoSorb BTM and applied two layers of NovoSorb foam over the thin layer of soft tissue. Finally, standard NovoSorb BTM was applied on the palmar aspect of the finger and the nail bed.

 Clinical review at 6 months showed that the regenerated finger appeared mostly identical to the opposite side. It was fully functional and looked a lot like the opposite finger, with well- developed nails. However, due to the loss of bony length caused by the initial trauma, the tip was shortened. The patient

performed all normal activities successfully. In addition, the regenerated finger pulp enabled him to type normally on any computer.

 This article is for shareholder interest only as the use is off label.

 Regards,

 David Williams

Level 29, 55 Collins Street, Melbourne, VIC 3000

T + 61 3 9246 4203 M + 61 414 383 593 

E dwilliams@kidder.com.au  www.kidder.com.au

WARNING GRAPHIC MEDICAL content:

DW just sent around a case study of an off label use for BTM in a finger crush injury.

The surgeon stacked layers of BTM to restore thickness. What amazes me more is that the nail bed started to regrow. The result is pretty phenomenal.

You can really understand how stacking MTX under BTM will help to restore shape to wounds. The indentations left for example on the scalp are very unsightly after melanoma removal. This product may help to provide a smooth and even surface wound.

One word- impressed!

Saha 2023 Tissue-engineered minimalistic reconstruction of a severely crushed fingertip.pdf

A great meeting with DW. It was great to get the reflections and anecdotes across all aspects of the business - so well done to @Strawman for leading a great discussion and drawing everything out of David that we might have hoped to achieve.

Some of my reflections follow.

Competitive Position

DW sounded even more confident that synthetics are winning over biologics. This is supported by the now slower growth at Integra (where the wound division has annual sales of c. $400m), however, Arora is still growing well so the category overall is expanding. (I know there are nuances in the specific applications to different indications, which mean these products are not always going head-to-head.) Ideally, companies like Integra and Aroa - who also have large salesforces - continue to expand the overall market. Then $PNV can ultimately mop it all up. That's the super-bull case, by the way!

R&D

New products (hernia, breast, drug elution) will be over a longer timeframe. PNV used to talk about timeframes, but since the new head of R&D (and Swami) have come onboard, they have stopped doing this. I seem to recall the Head of R&D makeing unscripted remarks at the last AGM where he referred to hernia and breast requiring different mechanical properties. I suspect this means back to the drawing board for the polymer scientists and also there was a reference to need to reach out and network with leading researchers in the field. So I am very much seeing hernia, breast and drug elution as long term "blue sky", which is consistent with $PNV dropping timeframes in their communications.

On capital allocation, it will be interesting to see in the annual results how much is going into R&D. Hopefully, this can be managed in a sustainable fashion as a certain % of revenue.

I'm not concerned by this by the vague timeline for future developments. As David's anecdotes make clear there is huge opportunity for widening the dermal repair applications for BTM and MTX, and progressing the global roll-out. If there can really ramp this up over the next 3-5 years, then $PNV will also have the cashflow to self-fund future developments.

Share Price Action

For what it's worth, I'm not convinced by David's explanation about the SP action being fully-explained by shorts. Shorts are at 2.68% (2-May), vs. their peak of 11.4% mid-last year, and the flow of shares into the market from short selling has been 9,000,000 since the low point in 16-March. With about 30 trading days, that's 300,000 on average per day vs a typical daily volume of c. 2 million.

I think four factors in combination have got us to where we are today:

• David's sale in March
• The market knows they announce the $xm revenue months, and it took a while getting to $6m
• The trading update was a weaker sales number than many bulls (including me) had for their FY23 revenue forecasts
• And yes, 9,000,000 of shorts makes a contribution in the supply-demand balance.

None of this worries me at ths stage. Some quarterly periods will be stronger and some will be weaker. Based on established SP volatility, $PNV is clearly still a trader's stock, so its going to contine to be a volatile ride. But, if you are a long term investor, now could present a great opportunity.

Valuation

Overall, today's meeting leaves me unchanged on conviction (i.e. very strong). I'll review my valuation cases once the FY is in later in the year.

In terms of analysts, 4 of 6 reports on www.marketscreener.com have reduced SP since the recent updates, so the average target SP has gone from $2.53 (close to my central case) to $2.25.

However, this warrants a further look. because one valuation has gone from at or above $1.90 to $0.90. In my view there is nothing in the recent disclosures that makes me think that is plausible (even my Bear case is $1.63). So I wonder if any StrawPeople have seen this report? Ignoring this oddball result, the target has nudged down only very slightly.

For now, I'm happy for the team at $PNV to crack with their great work!

Disc: Held IRL and SM

Announcement to finalize revenue performance

Polynovo in trading halt

Now sure if all holders are on the David Williams email list. So here is news of a publication from a Brisbane surgeon reviewing pediatric use of BTM. What I find interesting is the breadth of clinical application (which presumably reads across to potential applications in the adult market). Thermal burns being less than a third of applications.

(Good on David - he might have just purchased a house in the US, but he is still busy spending his weekend time promoting $PNV)

Email Full Text (link to paper embedded)

I am pleased to share this recent article reporting the outcomes of paediatric BTM case series from the team led by Professor Roy Kimble at the Queensland Children’s Hospital, Brisbane, Australia.

 Professor Kimble has vast surgical experience with BTM and has shared much of this in various conferences and peer-to-peer sessions around the world. This article brings those insights together in a comprehensive way.

Storey K, Lalloz M, Choy K-T, McBride CA, McMillan C, Das Gupta R, Patel B, Choo K, Stefanutti G, Borzi P, Phua Y, Bade S, Griffin B, Kimble RM.

The versatility of Biodegradable Temporising Matrix – A 63 paediatric case series with complex wounds.

Burns Open. 2023; 20 March [in press].

https://doi.org/10.1016/j.burnso.2023.03.002

 A retrospective database review was conducted and identified all patients in whom BTM was applied between September 2018 to June 2022.

 Data collected included demographics, type of injury, description of defect, and time frame from BTM application to SSG. Complications were also collated along with subsequent scar management strategies.

 The Brisbane Burn Scar Impact Profile (BBSIP) was used to assess health related outcomes and was used to determine the appropriate mode of scar management patients received.

 Over a four-year period, 63 children received BTM for wound closure. Patient age range from 10 months to 14 years.

 The mechanisms of injury or original pathology included:

• thermal burns (N=19; contact, flame, scald).
• friction (N=10; treadmill, bike/motorbike wheel, other)
• vascular malformation (N=7)
• scar reconstruction (N=6)
• non-infective skin ulcer/defect (N=5)
• electrical (N=3)
• degloving (N=3)
• fasciotomy defect (N=3)
• dog bite (N=2)
• infective skin necrosis (N=2)
• melanocytic naevus (N=2)
• dermatofibrosarcoma protuberans (N=1)

Methods of securing BTM were clinician dependant and included staples or absorbable monofilament sutures. Histoacryl was used on small areas of the face, fingers, and feet and often in combination with sutures.

Mepitel under Acticoat was the most used primary dressings over both BTM and SSG in all but 8 children. Most secondary dressings involved use of NPWT. If no NPWT was applied, Kerlix or Melolin were the most common secondary dressings applied.

Scar management was similar in all children. Initially, this involved the use of silicone gel and/or pressure garments depending on the size and location of the injury. Further scar treatment including microneedling, and laser therapy (CO2 or pulsed dye) were used on 21 children. Surgical reconstruction with Z-plasty and full thickness skin grafts (FTSG), or serial excision was performed on 8 children.

Of the 29 patients where the BBSIP assessment was completed as part of their scar management treatment, the majority reported little to no concern when looking at the impact, itch, appearance, friendship, and emotional stress that the scar causes within their life.

Detailed outcomes for the various indications are included in the paper.

The Discussion provides further insights on the following concepts and topics:

• BTM buys you time
• BTM converts complex wounds to smaller ones
• The use of NPWT
• If not secured with staples or sutures, ensure an experienced clinician removes dressings
• Wound colonisation is still compatible with a good result
• Split thickness skin grafts are not the only type to use
• BTM does not negate need for scar prevention
• BTM impacts the patient and their family

The authors conclude:

“Our experience with BTM in a variety of complex wounds has shown it to be a viable option to provide early wound closure for improved long-term patient outcomes, that is able to withstand bacterial colonisation. While long-term scar outcomes have only been observed over the past four years, patient, parent, and clinician observation have proved promising.

From our first application to our current treatment, the lessons we have learnt in using this product continues to guide us to ensure the best results for our paediatric patients and families.

BTM from our account has proven to be a more durable and versatile product, compared to previously used dermal matrices, with promising prospects for future management of complex paediatric wounds.“

David Williams

Chairman

polynovo.com.au

ASX Code: PNV

M +61 414 383 593

E  dwilliams@kidder.com.au

Amazing timing from Mr Williams, although If you look at his purchases for the past 12months, I would say he has more than covered his property purchase with appreciation in the share price

The question now, at 15% discount is it an opportunity to buy?

Noting there is no information to suggest the business has changed course, thesis has broken or macro headwinds have eased.

I wasn’t expecting this! The market doesn’t like it either…down nearly 9%. Explains why the share price has been coming off the boil lately. Plenty of emails from DW while the price was heading up. I notice the inbox is strangely quiet today. Just an observation…don’t read anything into it.

See Announcement

“Chairman Mr David Williams has sold 4.75m shares, the proceeds of which will part settle a US property purchase. Mr Williams still holds 21,384,432 fully paid ordinary shares and does not intend to sell more shares for the foreseeable future.”

David's buying a house in the US and has offloaded 4.75m shares. Ouch!

My first thought is, of all his potential sources of capital, given that he offloaded $PNV, what does that say about his view of the near-term propsects of the company's progression?

Disc: Held in RL and SM

FULL TEXT

Chairman Mr David Williams has sold 4.75m shares, the proceeds of which will part settle a US property purchase. Mr Williams still holds 21,384,432 fully paid ordinary shares and does not intend to sell more shares for the foreseeable future. This announcement has been authorised by PolyNovo Company Secretary Jan-Marcel Gielen.

Just dropped

BTM and diabetes .pdf

from Linked In Professor Toby Coates:

On behalf of Beta Cell Technologies and our collaborating partners, I am delighted to announce the online publication of our pre-clinical studies showing the Biodegradable Temporizing Matrix (BTM, Novosorb) supporting survival of pancreatic islet cells in a completely new intracutaneous transplant site outside of the liver in the American Diabetes Association flagship Journal Diabetes.

In this work, we show for the first time survival and function of pancreatic islets when implanted into a unique fully-vascularised alternative site in the skin. The key advance here is the creation of a dense vascular network in the “intracutaneous” site, that is capable of supplying blood to the islet cells and allowing them to survive for up to three months. 

Our work shows human islet survival and function in the novel intracutaneous site outside of the liver for the first time.

These studies are important because they are the first step towards creating an alternative islet transplant site, where cells can be monitored for function and rejection, which will be applicable for new sources of insulin-secreting tissues (eg xenogeneic /stem cell-derived beta cells) to be transplanted.

With this work, we fulfill the dream of Dr P. Watson Williams who first attempted to implant pancreatic tissue into the skin to treat Diabetes nearly 130 years ago in 1894. 

This work also provides the pre-clinical supporting data for a clinical trial of this promising alternative site. We would like to thank our key collaborators for this work - JDRF International, The Hospital Research Foundation Group and PolyNovo Limited.

Beta Cell Technologies looks forward to sharing our human clinical trial data in the next 18 months.

READ THE FULL PUBLICATION HERE

https://lnkd.in/g5Yzkaiy 

JDRF International The Hospital Research Foundation Group

JDRF Australia Central Adelaide Royal Adelaide Hospital University of Adelaide Kidney Transplant & Diabetes Research AustraliaBeta Cell Technologies

PolyNovo Limited

The purpose of this straw is to review the progress of $PNV in the context of its sector competitors. It contains some analysis of possible market evolution. Although somewhat academic, it may be of interest to holders of $PNV, $AVH and $ARX, so I’ve decided to publish it. (Sorry its such a long one, but I do this kind of analysis on my top holdings and I don't ahve the appetite to edit it down.)

I have done the work to further my own understanding of the long-term growth assumptions in my $PNV valuation ahead of updating my company valuation later this year.

Peer Group

The companies in the sector considered are (the “Peer Group”): Aroa (ARX), Avita (AVH), and Integra (IART).

It is important to understand that across the Peer Group there is a wide range of products with a wide range of clinical applications including burns and complex wounds. These products are not today always in direct competition with each other. For example, $PNV’s BTM can be used for dermal repair in conjunction with $AVH’s Recell, which can be sprayed on top. In this respect they are complementary products. However, each of the companies is continually trying to extend its product portfolio and applications. For example, $ARX is used in complex wounds, which is a key area $PNV is trying to grow into from its existing base in burns. As of last year the CEO of $ARX said he did not consider $PNV a competitor. But I think that will change (is changing)!

Sales Growth

Table 1 below shows the revenue growth of revenue during calendar year 2022.

Table 1: Peer Group Revenue Growth 2021 to 2022

Source: Company Presentations and Accounts

Notes:

1)    Because of the $ARX reporting calendar, I have used growth in cash receipts as a proxy and triangulated this with its target revenue growth for FY23 ending in April 2023.

2)    $IART has a more complex portfolio of products. Fortunately, in segment reporting it breaks out sales for its “Total Tissue Technologies” segment. So, I have used this.

Observations from the table

$PNV: Is easily the fastest growing in the Peer Group. In addition, we are yet to see the impact of the accelerated ramp-up in sales and marketing personnel and territory expansions following the December capital raise.

$AVH: announced that they expect FDA approval for Soft Tissue and Vitiligo applications of Recell in June 2023 and to be ready to launch on 1-July. They have identified the Vitiligo market to have a patient population of 5 x Burns and Soft tissue repair (see Figure 2 below). As a result, they have announced plans to increase their US field sales organisation from 30 to 70 professionals. While their sales growth looks modest at 4%, this is masked by the large $8m BARDA payment in 2021. Excluding BARDA, commercial sales grew by 35%. In FY2023 they have given guidance of $49-$51m, which would represent 45% growth over 2022 at the midpoint.  These factors have no doubt driven the recovery in share price over recent months. There is, therefore, the potential for very material growth for $AVH in a separate market in which other Peer Group members would not compete (Vitiligo).

In December, $IART acquired Strategic Innovation Associates (SIA), makers of Durasorb, an innovative resorbable synthetic mesh, for use in breast reconstruction. This complements the existing product Surgimed (a biologic) in Hernia repair and plastic and reconstructive surgery. CEO Jan de Witte said “Now with DuraSorb and SurgiMend, we have a path to securing the first and second PMA products in the market. And by offering 2 distinct product solutions to plastic and reconstructive surgeons, Integra can build a leading position by addressing various clinical, contracting, and economic needs across different sites of care.” From my previous $PNV straw, I noted that CEO Swami Raote has been more circumspect on the development timeline and certainty for the development of breast and hernia products. So, it appears that once again $PNV will be following a “next-to-market” path in the years ahead, with a synthetic mesh already established in breast reconstruction and potentially a biologic in hernia repair. It is further interesting to note that $IART now has a synthetic in its portfolio.

 Market Size

I found the following slide (Figure 1) from the recent $AVH investor. It is interesting to note that $PNV performed about 8,000 procedures in 1H FY23, an annual run rate of 16,000. With 84% of commercial sales in USA, that means about 13,500 procedures were carried out in the USA. Given an estimated market size for the USA of 145,000, that points to $PNV having a market share of 9% (Note: this significantly greater than the number estimated below based on revenue share).

 Figure 1: US Market

Source: $AVH Company Presentation 2023

Separately, the global TAM for surgical reconstruction and complex wound care is estimated by $IART to be $2bn and growing at 5-7% p.a. On a sales basis, the Peer Group total sales account for only 30% of the market, with $IART at 27% market share and $PNV at <3%. There are two reasons for this: 1) for many indications, including burns, the standard of care remains autografts or skins graft, which do not involve a dermal implant product and 2) there are other products produced by other companies not addressed in this analysis.

While the estimates for $PNV’s market share are very different based on number of procedures and market value methods, both are consistent in supporting what we know in that its market share is small (3-10%) and growing much faster (c 60% p.a.) than they overall market, which is currently adding c. $100-$150m revenue opportunity p.a. - much more that $PNV's current total sales.

Part of the discrepancy between the methods lies in that the procedure count method is focused on the US market, whereas the TAM analysis is global. Clearly, all members in the Peer Group are highly-focused on the US Market. However, while the largest market, it only accounts for 43% of the global medical devices market. Western Europe is 24% and Japan is 7%. Current revenues of all Peer Group members are highly US-focused (70%-90%).

Growth Scenario & Assumptions

The basic question I am interested to understand is how long and how strong can $PNV revenue growth be in a competitive context? i.e., are the current growth assumptions in my valuation meaningful in the context of the overall market size, growth, and evolution of competitors?

I have modelled several scenarios, and (for illustration) here present only one.

2022 market size is US$2bn, with revenue plugged in for $PNV, $AVH and $ARX aggregated, $IART as the market leader shown separately.

Because there are several other products in the market (e.g., competing with $AVH’s spray on skin cell solution) and other implants, although I haven’t identified and quantified these, I have put in a placeholder for the current market value of $50m growing at a steady 20% per annum. (I would update this should in the future I gain more market intelligence.)

The balance is assumed to be “Other Care Systems”. This includes the autograft (skin grafts) which is the current standard of care for many burns and complex wounds.

The overall market grows at 6% p.a., and IART grows at 7% p.a., in line with its corporate assumptions.

In a “Bull Case”, $PNV starts off growing at 50% p.a., with growth rate declining by 1.5% p.a., and the Peer Group Minors starting at 35% p.a. growth, declining at 1% p.a.

Figure 2 (below) shows the market evolution over the 10-year period for this scenario. Key metrics for 2022 and 2031 have been extracted from the chart in Table 2 (below).

Figure 2

Source: Simulation

Table 2

Source: Simulation Analysis

Of course, you can create any market evolution scenario you like, depending on the assumptions. However, this analysis has yielded the following insights.

• If $IART continues to grow in line with corporate goals, they will still be the market leader in 2031, with a market share of 29%.
• If $PNV continues to grow at 50% pa in 2023, with the rate of growth declining by 1.5% per annum to reach a growth rate of 38% in 2031, it will by that time almost match the sales of $IART ((US$981m vs $989m). Despite its success, in this scenario, given the head start of $IART, even if it sustains a decade of high growth it will still be #2.
• There is of course a potential SUPER BULL case, wherein synthetics are proven superior to biologics via comparison clinical trials. In this case, it would be conceivable that $PNV could take further share from $IART and $ARX. I have not modelled that.
• Over the coming years, as both the current market leader $IART and $PNV seek to grow, the existing market and its underlying growth are sufficient to accommodate both companies achieving almost $1bn annual sales by 2031, provided that there is a continual transition from the current standard of care to these therapies and that $IART and $PNV prove long term preferred solutions ahead of $ARX and $AVH and that no new disruptive technology emerges. (Continuing to scan the market will give early warning of this, in just the same way that $IART can see $PNV coming after it.)
• By 2031, if $IART and $PNV both succeed in achieving these results, the combined market share of these market leaders will be 58%, with room for $ARX and $AVH to have 10% market share each and 22% for others. This is not an unreasonable competitive market structure in healthcare, which space for 4 successful, profitable therapies.
• The revenue growth assumptions in this simulation ARE SIGNIFICANTLY HIGHER than the growth assumptions in both my current BEAR ($1.63/share) case and BULL ($3.28/share) case valuation scenarios.
• Latest period $PNV revenue growth of 62% (which does not include the impact of accelerated investments in sales and marketing) is significantly ahead of the simulation starting point of 50%. Provided at FY $PNV can sustain or even accelerate revenue growth beyond 62%, then a significant upgrade to the BULL CASE appears to be justified.

Conclusions

Simulation models and long-term projections can result in GIGO (Garbage-In-Garbage-Out). However, models can also provide valuable insights.

This modelling confirms that there is a justifiable BULL case for $PNV that significantly exceeds my current BULL Case valuation where the 2031 revenue growth rate is 19.0%, vs. 38% is the simulation presented here.

Such a BULL Case would lead to a valuation significantly greater than $3.28/share. Provided growth and margins results are confirmed at the FY23 results later this year, I expect a major upgrade will result in my next DCF update.

Doing this competitor analysis has provided me with valuable markers to track $PNVs sector peers, which in turn will continue to inform my valuation of $PNV.

Reality Check – Current Valuations

Of the peer group, only $IART is today a consistently profitable, growing business. Of the three small companies, $AVH and $PNV are yet break and $ARX has just broken even.

While clearly the strongest growing of the Peer Group, a lot of $PNV’s success is included in its lofty revenue multiple. So its share price will continue to respond in a volatile manner with each readout on revenues and costs, until it develops a consistent earnings trajectory – some years away. Shareholders will need to have an ongoing stomach for volatility, but my analysis indicates that the potential rewards are there.

It also follows that, because several analysts publish research based on available multiples, there will be occasions over the coming years when “Sell” recommendations are issue based on sector comparisons. We’ve already seen this last year. In addition, traders will trade. My approach will, however, cotinue to keep an eye on the long-term prize.

Table 3: Current Peer Group Valuations

Source: www.marketscreener.com 2023 consensus forecasts

Disc:

$PNV: Held IRL (7.2%) and SM (25%)

$ARX: Recently exited IRL and SM, to reallocate capital and manage portfolio exposure to this sector.

$AVH: Not Held; Watching

$IART: Not held

There was nothing material from this afternoon's call to share. However, there are some insights that I found helpful.

US

• Strong momentum sustaining
• Question on Integra feeling the heat and cutting prices. DW batted this away.

Europe

• David Williams (DW) reported that both UK/Ire and Germany (Ger/Aus/Swi/Belg) are starting to get "real traction", after slow starts over the last two years. "They'll soon be bigger than ANZ."

India

• Selling hasn't started yet as there are various administrative items being finalised ("next few weeks")
• 3 Centres of Excellence have signed up; 25 more identified. These will be key to training surgeons
• S&M staff of 20 identified covering the major geogrpaphic areas; plus 2 senior leaders
• India will be used to enrol patients in the US BARDA trial, thereby accelerating its outcome
• Surgeon trials have started with good results so far
• India is "pure market development" - the biologics aren't there
• Pricing will be "market appropriate" (Swami knows what he is doing from years in medical devices in developing and developed markets with J&J. Margins are huge, so they have room to move.)

ROW Overall

• Consequently, should see continued strong ROW growth (currently >100% p.a.) from an increasing base

Employee Expenses

• Due to headcount ramp-up, FY employee expense expected to be just over 100% of PCP
• This excludes the exceptional share based costs from FY22 (referred to in the slides and my earlier straw)

DFU (Diabetic Foot Ulcer) Trial (Last ASX announcement)

• Suspension of enrolment is needed to make sure that the study protocol correctly maps to the standard of care
• It sounds like this is an intervention to tweak the protocol to make sure the results are valid. (To me it sounds like a case of a "stitch in time saves nine.")

Broadening Clinincal Applications for BTM

• Swami's key focus is how to figure out the right way to take BTM to other places in the hospital
• Individual surgeons are innovating, (e.g., BTM being use to save limbs in trauma treatment)
• But this then has to be turned into a model that the salesforce can disseminate
• Trauma and reconstruction are big future categories (but it will be a longer burn)

R&D: Hernia and Breast

• Swami is working to ensure that $PNV accesses the right development experts (outside the company)
• He remains convinced that both hernia and breast applications will emerge, but "R&D is never and slam-dunk, so we can't say for certain"
• I believe we are now starting to get some realism into the discussion on developments. I never trusted the earlier notional timelines, and this is yet another benefit of getting a seasoned industry executive in place

Capex

• Likely to be c. $1m for full year
• More in FY24 and FY25 for the new manufacturing units which expand 2-shift capacity from $120m annual sales to $500m
• Details per capital raise documents

Cash Flow

• Expect to be close to breakeven for the FY; however, management are strongly prioritising growth and will continue to

Closing Remarks (DW)

• We did 10,000 patients in FY22
• We did 8,000 patient in the first half of FY23
• We will eventally be talking about "hundreds of thousands of patients" (SR nodding)
• "We've only just begun" (cue The Carpenters, slow fade)

Overall Impressions

• David, Swami and Jan all appeared to work well together
• This was a well organised, well executed presentation, without descending into endless adhoc anecdotes and answering every granular question
• 15-20 minutes of presentation and a solid 40 minutes on Q&A
• Great job team. I'm so glad $PNV has a CEO again.

Valuation

• I will wait to update my model until the FY.
• With the acceleration investment, I need to see more data on revenue and costs over time
• From a quick check, nothing is out of whack. So happy with $2.46 for now.

Disc: Held

$PNV today released 1H FY23 Results ahead of the afternoon's analyst call. Note that top-line revenue numbers have been pre-released. As usual, this straw includes their highlights, my analysis and key takeaways.

Their Highlights

PolyNovo’s ASX release on 16 January 2023 pointed to record sales growth of 67.5%.

The half year audited results attached to this release show:

• Record 1H FY23 sales of A$27.3m up 67.5% on STLY of A$16.3m

• Total revenue including BARDA of A$29.5m up 62.2% on STLY of A$18.2m

• Strong growth in U.S. achieving 1H FY23 record sales of A$22.8m up 61.0% vs. STLY of A$14.1m

• ROW sales of A$4.5m up by 110.1% vs. STLY A$2.1m including new sales in Hong Kong and Canada.

• The Group recorded a net loss after tax of A$3.8m (1H FY22: A$1.6m profit). The profit in 1H FY22 included the reversal of A$4.7m in share awards and share options expense forfeited by the previous CEO and COO on their resignations and an unrealised forex gain of A$0.4m. Excluding these items results in an underlying loss of A$2.5m for the prior period.

During the Period, the Company’s other key initiatives and achievements include:

• A $53,000,000 capital raising

• First $5 million BTM sales month in September (Sep 2022: $5,402,454) recurring in October ($5,263,100) and December ($5,306,540)

• Appointment of CEO Swami Raote

• Received FDA 510(k) clearance for NovoSorb MTX

• Entered Hong Kong, India, and Canada markets in December

• Leased the adjacent property in Port Melbourne to significantly increase manufacturing capacity

• Commenced SynPath Diabetic Foot Ulcer Clinical Trial

• Awarded Victorian Government grant for manufacturing Diabetic Foot Ulcer product (SynPath)

• Increasing sales teams and customer base globally

• Produced for 1H FY23 the equivalent of 74% of the total devices produced in FY22

Analysis

Revenue

On revenue, these were pre-released, so there was no material new information. A breakdown of the monthly sales following the first $5m month in September, shows that both October and December exceeded $5m.

In terms of revenue drivers, Figure 1 (Slide 5) gives a good overview. Growth in Customers (Hospitals) and Employees (a large portion being sales and marketing) are leading indicators of future revenue growth, as it takes time for the sales to grow once both a new account opens and a new salesperson is in place. This should give confidence of a strong trajectory through H2. The slide makes the point that a return to >60% revenue growth marks the return to better customer access post-COVID.

Figure 1 (Slide 5)

Figure 2 (Slide 6)

On Figure 2 (above), I see that ANZ and RoW are now starting to become significant. At $4.6m in aggregate, they are about the same as the USA was in 1H FY19. While ANZ is relatively mature, it is still growing at >60% and we are yet to see meaningful contributions from Canada, Hong Kong and India. Interestingly, there is no mention of Europe beyond UK. So RoW should be expected to maintain strong growth as we start to get early traction in new territories. BARDA is also growing, so I wonder how far off we are from seeing a strategic stocking decision?

 Costs

Today is all about understanding how expensive the cost of accelerated expansion is going to be.

Comparing 1H23 to 1H22, the incremental revenue was $11.2m, while incremental costs added are $16.9m. That sounds pretty bad on the face of it. However, the previous period included a credit of $4.7m reversing lapsed options of departing executives, so the underlying incremental cost is only $12.2m, by my calculation. While I am not a fan of underyling corrections - particularly when they happen every period - in this case, I hope we will see some management stability and so I'll let that adjustment pass. Overall, cost increases will always run ahead of revenue growth. So, the real test of this strategy is going to be in the FY23 and 1H FY24 reports.

Of course, it is important to remember that we haven’t seen the full effect of the step-up in cost base as the changes in increased staffing occurred through the half. We’ll see the full effect in the H2 numbers at FY. I expect to hear some questions on this from the analysts on this afternoon’s call about a forward view on cost evolution.

Profit and Cash Flow

Unexpectedly, therefore, we’ve seen a small increase in losses to $(2.2)m.

FCF was $(3.1)m compared with $(3.7)m in the PCP (note: I'm deducting lease costs from the FinCF line from OpCF), so in the context of now having $50m in cash available, the cash burn is sustainable. Of course, in FY24 and FY25 we are going to see a step-up in capex, as new facilities are built. However, if revenue continues to grow at current rates, the cash generation should mean that cash reserves are not eaten into that much.

 My Takeaways

With revenue numbers pre-released, and the capital raise clearly indicating that SR had moved DW on from the “boot-strapping” strategy (no doubt a condition of SR’s joining), today was always going to be about how much costs are stepping up to drive expansion. Because of timing, we are only getting a first view of that.

Overall, it’s a bare-bones, no-nonsense presentation, which I personally find refreshing. It will be interesting to see how it is received. The analysts have been used to getting more granular detail, so I expect there will be more digging in the Q&A, as analysts try to get their FY numbers right. (I’m looking forward to the tussle!)

I am happy with the progress shown in this report. Nothing has a material bearing on my valuation, which sits at $2.46 (being the average of distinct bull and bear case DCF scenarios.) I will wait to do an industry read across including Aroa, Integra and Avita reports to see if this offer any insights on competitive positioning over the coming weeks.

Disc: Held IRL ( 6.8%) and SM (22.9%)

Those following $PNV will be aware that as part of the December capital raise, there was a $3m component of Director contributions. We are all used to DW buying shares in the company and, at the time, I assumed he would be putting his hand in his wallet again.

However, today we got to see who bought what. (Personally, I don't know if this detail was disclosed at the EGM, as I wasn't paying attention. Anyway it is news to me.)

• David Williams $2.229m
• Bruce Rathie $0.380m
• Andrew Lumsden $0.095m
• Christine Emmanuek $0.266m
• Robyn Elliot $0.029m

David aside, these are significant increases in the personal holdings of several of the directors, which I take as encouraging. I am particularly encouraged because this comes about half a year after Swami has joined as the CEO, so for the Board to be feeling good about the company to this extent indicates to me that internal alignment on strategy and execution is there. It is not a big deal, but a positive sign, I think.

What would put the icing on the cake would be for the CEO to get with the program!

Disc: Held IRL (6.7%) SM (23.5%)

Interesting view from Mark Gardner on reporting season update from PNV

https://www.livewiremarkets.com/wires/two-buys-and-a-sell-heading-into-reporting-season

Polynovo (ASX: PNV)

Polynovo is an Australian-based medical devices company focused on the development of medical devices based on their patented technology. Their cornerstone product NovoSorb BTM is used to treat wounds and aid the body in regenerating tissue.

Over the past six reporting periods, the company has tended to disappoint investors with the company disappointing on 83% of their recent annual and half yearly reports, falling by an average of 10.2%. This has come as investors tend to get ahead of themselves with Polynovo, where they expect great things from their medical grade polymer technology, but the company tends to not live up to these expectations.

Given the high expectations even slight misses on analyst expectations have an exaggerated impact and this typically sees Polynovo exit reporting season weaker than where it started. The set-up for the company currently is similar to the set-up six months ago where the company has risen rapidly on little fundamental news which essentially represents bets that the company will beat expectations. 

Polynovo's share price performance heading into its FY22 report compared to its 1H23 report

While we like Polynovo from a fundamental point of view and think that it is an interesting company in an exciting space, we believe it would be prudent to reduce allocations of the company going into the reporting season due to the company’s track record of disappointing investors’ expectations. Indeed, if the company does miss expectations, that would then represent discounted price to a company which has strong long term potential. 

PNV - looks all set to re-enter the asx 200. Index funds are likely to buy an estimated $67 million dollars worth of shares.

Interestingly the article places short position around 2.5% of the stock. Looks like most shorts have been able to make a graceful exit without a massive short squeeze.

PolyNovo set to re-enter ASX 200 - The Australian.pdf

Today Polynovo Chairman, David Williams, shared an article by email (below) which appears in the Herald Sun today (subscribers only). While there is nothing new in the story, it is a great read and very good publicity for Polynovo.

I have been taking some profits on Polynovo on Strawman and have sold all IRL. I might regret selling as the share price seems to be caught in an updraft! I really like Polynovo and have even bought some for my mother’s retirement portfolio which she still holds.

I hope to buy back IRL when investors are less enthusiastic. I just think it is now priced for extraordinary growth, which it may very well achieve in the not so distant future.

Disc: Held SM,

Skin in the game PolyNovo half year sales - The Australian.pdf

New release from biotech daily sent through from David Williams this morning. Does help to put some context to the Aus Biotech space. 2 of my biggest biotech holdings did very well in 2022 PNV and NEU and I anticipate an even better 2023.

BOT even got an honourable mention although I don’t agree with the lumping together with the CBD space. This is a biotech using synthetic CBD for dermatology and anti-biotic clinical trials plus it has a new non-CBD lead drug that is due for FDA approval in Q3 2023. I feel this lumping has meant BOT is one of the most overlooked and poorly understood biotech companies on the ASX.

An interesting summary below in BIOTECH DAILY

Interesting article in AFR on PolyNovo competitor Avita

https://www.afr.com/companies/healthcare-and-fitness/this-medtech-says-a-7-8b-opportunity-can-reverse-its-image-problem-20221206-p5c3yw

This medtech says a $7.8b opportunity can reverse its image problem

The new CEO of spray-on skin company Avita Medical says there is a “pot of gold” on the horizon for the biotech company, but admits the business has a lot of work to do to prove itself to investors.

The ASX and NASDAQ dual-listed company, once called Clinical Cell Culture was, made famous as the developer of former Australian of the Year Fiona Wood’s skin repair technology used to treat victims of the Bali bombings.

Listed on the ASX since 1993, Avita has had a bumpy ride, soaring in the dotcom bubble before crashing back to earth. It has had several strategy and management revamps, racking up decades of net losses, and even a strike against its remuneration report in 2013.

After its share price bounced back to more than $16 in early 2020, the business has been sold off heavily again, closing at only $1.94 on Tuesday, giving it a market capitalisation of less than $250 million.

New CEO James Corbett, an American with almost 40 years of experience in life sciences, took on the top job in September, having previously led listed companies Microtherapeutics, ev3 Inc and Alphatec Spine.

Speaking to The Australian Financial Review, Mr Corbett said the business was undervalued, but it was up to the company to turn around its own fortunes.

“I think the sell-off was a combination of us not executing adequately and us not communicating adequately,” he said.

‘It’s not a market problem’

“Those sound like my problems. It’s not a market problem. I always tell the management team, the stock market will take care of itself, but execution is up to us.

“I think shareholders will benefit from more transparency from Avita management, and they’ll get it.”

The company’s flagship product, Recell, is used to treat skin defects using a patient’s own cells.

Mr Corbett took on the job with eyes wide open, having served on the board for the last 18 months.

While the business reported a 30 per cent jump in revenue in the most recent quarter compared to the prior corresponding period, with $US9.1 million in revenue banked for the quarter, he said this wasn’t good enough considering the low revenue base.

To drive additional growth, the business is expanding Recell into areas including soft tissue repair and as a treatment for the autoimmune disease vitiligo, which causes loss of skin colour in patches.

The company has already been granted US Food and Drug Administration breakthrough device designation, meaning its pathway to market will be accelerated.

It plans to submit its FDA applications for the new indications in December, and is expecting approval in June. It intends to launch into the soft tissue repair market in July.

This market, which it estimates is worth $US1 billion (compared to its burns-treatment market, which it says is $US600 million), will be a new growth driver in the short term.

But, Mr Corbett said Avita’s “pot of gold at the end of the rainbow” would be its expansion into vitiligo – an estimated $US5.2 billion ($7.8 billion) market opportunity.

“The business challenge we have is that we have reimbursement in the hospital for burns, and... that [also] covers outpatient treatment of burns. That same reimbursement extends to soft tissue repair for in and outpatients,” he said.

The next opportunity

“When we come to market in July, we will have a broad indication with reimbursement and a proprietary unique technology, it’s a trifecta.

“Vitiligo on the other hand will get approval, but its anticipated primary treatment will occur in the physician office setting, so what we’ll be doing between the expected approval in June 2023, and January 2025... is collect in-office reimbursement approval data, work with government payers, conduct physician initiated studies and work to identify the best patients [those who will benefit most from treatment].”

Avita’s Recell product has been approved for burns treatment in the US for four years. But more than a decade earlier it was approved in numerous global markets including Australia and Europe.

Despite newer entrants to the burn treatment area growing their market share, including PolyNovo and Aroa Biosurgery, Mr Corbett didn’t believe Avita competed with these companies.

“[The market] isn’t more competitive in a way that’s negative for Avita,” he said.

“It’s possible patients would have both. There is no technology for autologous skin grafting that achieves the healing rate, speed of healing, in terms of time, and the tissue sparing... as Recell.”

Within three years, one of Mr Corbett’s goals is for Avita to be cashflow positive.

“That requires us to do the things I’ve discussed – execute on strategy and grow at a much faster rate,” he said.

“The broader international market also deserves our attention. It’s another growth driver for the company that I expect to communicate about in the third quarter of next year.”

I think David Williams has something up his sleeve for nearly every day leading up to SPP close on the 13th December. I don’t blame him as it’s important that the share price stays north of $1.90 until at least Friday next week (allowing 2 business days for BPay transactions).

To be honest, I sold down some PNV and intend to fully participate ($30k) in the SPP. I’m always up for a bit of arbitrage! Hopefully I don’t shoot myself in the foot if the SPP is oversubscribed.

Disc: Held IRL and SM

Early warning notice for Investor Presentation and Update

The Share Purchase Plan (SPP) was distributed to shareholders on Wednesday 30 November 2022 and closes on 13 December 2022. We are planning an investor update to support shareholder consideration of the SPP.

Philosophically we want all shareholders to be presented with what fund managers were presented with during the placement. In fact, this update will offer more than the investor presentation given to fund managers (see agenda below).

This will not be a question and answer session, but you will hear from the Chairman, CEO, CFO, senior management, and our legal counsel. This session will be recorded and released to the ASX.

Date : Monday 5 December 2022

Time : 10.00 AM AEDT

Registration Details: https://ccmediaframe.com/?id=CSHvbWKg

Proposed Format of the Update (subject to change):

Introduction: Chairman David Williams

Use of Funds (4 silos of growth): CEO Swami Raote and CFO Jan Gielen

Update on the U.S. and Canada: Senior Vice President of Sales and Marketing Ed Graubart Update on Hong Kong: Sales Director ANZ/HK Valerie Young

Update on India: CEO Swami Raote

SPP Process: Legal Counsel Bart Oude-Vrielink and David Williams

Closing: Chairman

This announcement has been authorised by PolyNovo Company Secretary Jan-Marcel Gielen.

Details of the $PNV capital raising now out.

https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02601380-3A607735?access_token=83ff96335c2d45a094df02a206a39ff4

also a detailed presentation.

https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02601381-3A607736?access_token=83ff96335c2d45a094df02a206a39ff4

Raise is:

• $30m institutional (+2.4% shares)
• $3.0m Director shares, subject to EGM in January
• SPP up to $17.0m for retail shareholders.

So the raising represents a dilution of <5%.

Once again David is showing total alignment. I assume he will be providing the lion's share of the Director contribution.

Looks like the insitutional bit is done, as it comes out of trading halt tomorrow.

Rationale is about organic acceleration: sales & marketing, R&D, new indications, and production facilities to support $500m sales. (that's more than 5x consensus 2024 sales!)

My conclusion: Good idea. Boot-strapping off the smell of an oily rag would be a drag on growth. Go big or go home.

Details on the rationale (from the release)

Accelerating PolyNovo’s growth ambitions PolyNovo is well placed to achieve significant growth in the near-term with four key vectors driving execution of the growth plan:

• Geographic and sales team expansion: Ongoing growth in core markets, including continued expansion in US presence with 54% increase in US staff over FY23F while simultaneously entering Canada, Hong Kong and India, with revenue expected from CY22. Exploratory steps have been taken to facilitate entry into China and Japan – the global #2 and #3 medical device markets

• New indications for NovoSorb: NovoSorb BTM is already a leader in third degree burns in Australia and on a steep growth curve in US burns. There is a significant opportunity to increase TAM through access to new markets with existing products. Surgeon led insights and innovation are driving PolyNovo to work with clinicians and regulators for new indications and applications

• New products: Investing in R&D capabilities to support new product ranges as well as upstream application and marketing, insight generation, biologic, pre-clinical sciences, process and package engineering. Potential for alliances with global category leaders and academia for Clinical & Health-economics evidence. PolyNovo sees an opportunity to enter orthobiologics, breast reconstruction and fascia repair

• Capacity expansion to satisfy growth: PolyNovo will commence development of a new colocated facility with production, R&D and office facilities. The facility will be designed to support an additional A$500m in revenue a focus on flexibility, modularity and automation. Total expected build cost of A$25m, with spend predominantly incurred in FY24F

Disc: Held in RL and SM

https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02601202-3A607701?access_token=83ff96335c2d45a094df02a206a39ff4

Trading halt and capital raise for $PNV.

Is this to fund more aggressive sales and marketing (witness the cost impact of Swami's push into Asia) or have they found the market access acquisition they've been transparently looking for? (No reference to an acquisitionin the release.)

Timing is hardly surprising given the run-up in share price over recent weeks.

If it is linked to an acquisiton, then I am happy as they know what target they are looking for.

If it is linked to supporting organic S&M and R&D, then I can understand it, too. David has done well to run it off the smell of an oily rag over the last year or two, but there is a big global opportunity they need to capture. It was almost inevitable, in my view, that as Swami started to drive strategy, capital would be needed.

I look forward to hearing more. At 8% of my RW portfolio and >20% of SM, I'll not be participating for more. But I will stay buckled in for the ride.

Disc. Held

Edit: corrected monthly growth in sales past 8 months to 4%, not 4.9% as previously stated.

A very pleasing Q1 FY23 sales result, September quarterly global sales up 73.3% on the same time last year.

The monthly sales graph provided in the announcement was a bit weird, if I have interpreted it correctly! The ‘x’ axis does not show consistent time periods between the monthly sales bars. This skews the graph to make monthly sales growth look linear, which it is not!

Polynovo have done themselves a disservice here. What this graph fails to show is the accelerated monthly sales growth over the past 8 months up to September 2022 compared to the previous 3 periods.

On the graph below I have indicated the time gap in months between each of the monthly sales bars, and calculated the monthly growth in sales for each period (ie. simple monthly growth for the period, not compounded month on month growth).

In the first 8 month period on the graph (Apr 2019 to Dec 2019) the growth in monthly sales was 7.7% per month.

Then for the next 18 months (Dec 2019 to June 2021) the growth in monthly sales was much slower at about 2.1% per month.

Between June 2021 and Jan 2022 (7 months) monthly sales growth increased to 3.4% per month.

The good news is that over the past 8 months the growth in monthly sales has increased by 4% per month. This acceleration in monthly sales growth is very significant for Polynovo, especially if it continues at this rate for the remainder of FY23 and beyond.

Disc: Held IRL (3%), Strawman (12.6%)

ASX Announcement: First Ever A$5m sales month and Record First Quarter Sales A$5 million Sales Month

• The Company is buoyed by its first ever $5m sales month and by the growth trajectory outlined below

• The graph highlights the first achievement of each AUD 1m incremental monthly sales milestone

First Quarter Financial Highlights

• The Company had record (unaudited) September quarter sales of AUD 12.5m up 73.3% on STLY of AUD 7.2m. This includes a record month in September of AUD 5.4m.

• Growth accelerated in U.S, achieving a record quarter sales result of AUD 10.4m up 71.3% vs. STLY (in USD $7.3m up by 61.3% vs. STLY), whereas sales ROW at AUD $2.1m grew by 84.0%

Chairman, David Williams said “By focusing on hiring the right talent and expanding our commercial footprint, we are confident of building a Global leader in Soft Tissue Regeneration based in Australia. However, while the growth trajectory is clear and exciting, month to month sales are still lumpy.”

Chief Executive Officer, Swami Raote said “Our results are a vindication of surgeon recognition of consistent outcomes, better patient experience along with hospital systems acknowledgement of lower complexity and cost associated with NovoSorb BTM. I am pleased with how our teams are now beginning to translate our burn heritage and supremacy into trauma and other acute surgical soft tissue reconstruction opportunities. PolyNovo has always been focused, responsible and capital efficient in delivering results and I look forward to accelerating our global impact.”

This announcement has been authorised by PolyNovo Company Secretary Jan-Marcel Gielen.

About PolyNovo®

PolyNovo is a disruptive medical device company, focused on Advanced Wound Care. PolyNovo is an Australian based medical device company that designs, develops, and manufactures dermal regeneration solutions (NovoSorb BTM) using its patented NovoSorb biodegradable polymer technology. Our development program covers Breast Sling, Hernia, and Orthopedic applications. For further information and market presentations see www.polynovo.com

About NovoSorb®

NovoSorb® BTM is a dermal scaffold for the regeneration of the dermis when lost through extensive surgery or burn. NovoSorb® is a novel range of bio-resorbable polymers that can be produced in many formats including, film, fibre, foam, and coatings. NovoSorb’s unique properties provide excellent biocompatibility, control over physical properties, and a programmable bio-resorption profile.

https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02578612-3A603966?access_token=83ff96335c2d45a094df02a206a39ff4

A positive update. September achieves first $5m month at $5.4m .

Q1 sales of $12.5m, up 73.3% on PCP, with US growing by 61.3% on a constant currency basis.

There is a currency tailwind in this overall Q1 number.

Good to see US sales growth has picked up again after softer growth in a couple of the Q4 months.

ROW grew by 84.0%.

(Reaching my target FY23 sales of $70m is probably out of reach, but that supports a SP of $2.46 and I am way ahead of consensus which is $63.5m)

Disc: Held IRL and SM

https://www.businessillustrator.com/product/innovation-distribution-curve-crossing-chasm-cartoons/

Coming from an agricultural background where I specialised in sustainable agriculture and Best Management Practice (BMP) adoption (before retiring), I am familiar with how long it can take for an industry to reach widespread adoption of a proven innovative technology (sometimes longer than 7 years). As a practitioner this phenomena is extremely frustrating…but it is reality!

I thought this might also be the case for innovative medical technology and very relevant to where Polynovo is in its current journey. While researching this online I found an interesting article written by Mike Fix.

Mike Fix has more than 15 years experience across the pharmaceutical and medical device industries, with additional experience in retail. His work focuses on leading engagements assessing market landscapes for startups, mid-size, and multinational medical device manufacturers.

Mike talks about the Rules Of Engagement, and Adoption and Penetration in medical devices.

Mike believes “The average clinician takes no personal stake in helping a technology succeed or fail; their only stake is in providing positive outcomes for their patients. To convince them it’s worth using a new innovation in favor of what they already know works, you need to motivate them through belief that the technology will deliver:

• Improved patient outcomes, safety, quality of life or comfort
• Improved efficiencies, economics, or time savings

He says “Adoption follows a well-understood path to standard of care. Most technologies fail to get past the early adopters (about 15 percent) through the classic “chasm” to the early majority, which serves as the gate to the rest of the market.”

“The difference between each adoption group is its intrinsic beliefs about both the status quo and what the new technology offers. The innovators and early adopters are driven primarily by the idea and promise of the new technology. Therefore, they need little evidence or guidance on patient selection; they want to figure it out on their own, and often believe other clinicians think like they do. In contrast, the “early majority” needs hard evidence and a proven patient selection algorithm. And, importantly, the “late majority” and “laggards” share the early majority’s needs, plus personal experiences that give them confidence in the new technology”, he said.

“Consequently, convincing each subsequent stage of adopters requires more evidence and validation of a new technology’s clinical and economic value proposition, along with a roadmap identifying the best patients. If no guidance is provided on best-use case scenarios (i.e., patient segments most likely to experience a positive outcome from the treatment option), physicians usually apply the therapy to patients as a last resort. As a result, outcomes will be questionable, at best, and often negative — which ultimately diminishes adoption rates.”

“However, if a pipeline of evidence and patient selection guidance is provided, then early stage adopters will gain confidence, share their experiences, and provide useful insights. These insights will help the manufacturer make relevant modifications to the product and/or resolve other adoption-related barriers, enabling the manufacturer to continue building confidence among physicians, and to roll the therapy up and over the adoption curve.”

Mike says “Once physicians are confident in a technology’s value proposition for a certain segment, they will more readily expand to a fuller indication. Each positive step accelerates and deepens market penetration. Full adoption occurs when behavior change fully transitions. The clearer the benefit and better the results, the faster the adoption.”

Mike goes on to talk about the importance of patient selection and segmentation in the early stages of adoption. However, the point I wanted to make here is that Polynovo is still early on Roger’s Innovative Adoption Curve, and I believe just starting on the journey between T1 and T2 in the Adoption Path above. We know this because the revenue growth rate is not exponential (yet!).

I think new CEO, Swami Raote, is the right person at the right time to lead Polynovo across the Adoption Chasm. Swami said recently “When I think about spreading this tech, I think about the access, secondly education and then thirdly, how to scale it up. To get a hospital [as a customer], you need one surgeon to believe in the product. And then they spread it to more surgeons.”

Currently, I think Polynovo is priced for revenue growth of c. 70% (Using McNiven’s Formula), and when the share price reached $2.25 recently it was priced for 100% revenue growth. It was revealed last week that FY22 revenue growth was 43% and obviously the market was expecting a lot more.

However, if Polynovo does cross the Adoption Chasm (and I think it will) the current revenue growth will be irrelevant as sales will grow exponentially between T1 and T2 on the adoption pathway. I think the million dollar question is when will this happen?

Disc: Held Strawman (11%) and IRL (2%) after a significant reduction between $1.80 and $2.20.

References:

Take The Narrow Path To Wide Adoption — Here's Why And How

https://www.afr.com/technology/polynovo-shares-slide-13pc-after-earnings-miss-20220826-p5bczz

Research update from Bell Potter received with morning from $PNV Investor Relations

TP upgraded significantly from $1.50 to $1.90.

(I had a few helpings yesterday, so I need to stop here to avoid indigestion.)

Polynovo (PNV)

Matrix Revelations

FY22 result. Record revenue of $41.9m represents a 42% increase from FY21 (BPe $43.0m). Operating expenses of $41.1m were 26% greater than FY21 (BPe $42.1m). Net loss of $1.3m reflects improvement since FY21 (net loss $4.9m). Adjusted NPAT of $0.2m accounts for the $1.4m impairment loss on the sale & leaseback of Port Melbourne facility. Capital expenditure of $0.5m (BPe $1.5m) and net cash outflow of $1.6m (BPe $0.9m). Cash position of $6.1m as at 30 June 2022.

Matrix expansion & strengthening portfolio. BTM sales recorded in new territories within Europe and follow-on sales in key markets (India, Taiwan, South Africa) within the burns & wound care sector. The new MTX product allows application in complex wounds over joints and ulcers (venous leg, diabetic foot). FDA 510(k) clearance is targeted in 1H23 with commercialisation in 2H23. R&D continues within breast & hernia and novel therapeutics including the BetaCell collaboration for treatment of Type 1 Diabetes.

Clinical trials update. Enrolment of 23/120 patients in the pivotal BARDA funded trial in full-thickness burns. SynPath diabetic foot ulcer trial has commenced enrolment in August 2022. Expected completion for both studies is 4Q23. Randomised controlled trial also underway with Flinders University in neuroischaemic diabetic foot wounds.

Investment view: Maintain Buy, Price Target $1.90. We increase our price target to $1.90. The valuation has been generated from a blend of two methodologies: DCF (WACC 10.5%, TGR 3%) and EV/Revenue (8.6x from comps). Key catalysts driving this upgrade include BTM expansion in the Asian market, greater penetration within the US market from existing & new accounts and launch of MTX during 2H23. Product pipeline with SynPath and the novel therapeutics also strengthen the longer term potential for Polynovo.

Recommendation:

Buy

Previous Close:

$1.64

Price Target:

$1.90

Bell Potter Securities Limited

Level 38, 88 Phillip Street,

Sydney NSW 2000 

www.bellpotter.com.au

Disc: Held in RL and SM

Good results – and the market reaction so predictable!

$PNV yesterday reported its FY22 results. While overall revenue growth of 42.8% to $41.9m was a touch under consensus ($42.2m, marketscreener.com., n=6 and below my bullish view of $43-$48m), eps and cashflow were slightly negative, where consensus was for both to get into positive territory. None of this concerns me but it explains the market reaction.

In this Straw will cover:

1) the list the highlights from the results

2) details from the discussion on the investor call and

3) my overall take-aways, which includes an assessment of the market reaction which was a 19% drop in the share price!

1) FY22 HIGHLIGHTS

The full highlights of FY22 are (with comparisons to FY21)

• Revenue up 42.8% at $41.9m
• Novosorb BTM sales up 47.6% to $37.6m with USA up 55.1% at $32.1m
• Customer accounts increased by 135 hospitals, excluding distributors
• Key appointments delivered: CEO and Ops Director
• Staff grown from 106 to 152
• US sales team now at 54. There are 9 new starters in last two months and 5 positions remaining unfilled
• R&D team expanded from 1 to 8 (or 9) to intensify new product development, with R&D spend increasing from $3.6m to $5.7m
• 510(k) lodged for MTX with FDA
• BTM registration lodged in Canada. Sales to some surgeons have started and training of staff has commenced.
• Recruitment underway in 3 clinical trials: BARDA Pivotal; US chronic wound insurance reimbursement; and chronic wound study
• $0.62m BTM contributed to clinical trial and $0.52m BTM for humanitarian causes
• Several European markets entered; 3PL deal struck in Belgium
• Property sale and lease back completed
• $3m debt paid down

2) DETAILS OF THE INVESTOR CALL DISCUSSION

Conduct of the Results Call

Those who know Chairman David Williams’ style, appreciate his maverick, straight-talking and unconventional approach. But today’s call bordered on the chaotic. David raced through the slides. The financials weren’t even properly presented. David’s introduction was then followed by a loosely structured conversation with CEO Swami Raote, former Acting CEO Max Johnston, and CFO Jan Gielen all chipping in on various topics.

It was always going to be an interesting call to choreograph but, from my perspective, it needs to be the last one like this. At 1H23 David needs to let Swami take the lead.  In fairness to David, a lot of information was conveyed in the discussion which you’ll see below, and we got to see more of the emerging thoughts from Swami that will hopefully set the future direction of the company.

US Sales

The analysts picked up (and prised open in the Q&A) that in the USA, May and June were slower compared with a record April. July was strong again and August is “tracking well”. This signals a slowing of the growth rate in Q4 (and explains why results missed my estimate, which was ahead of consensus.) US growth in H2 was 23% up on H1 (which is 51%  annualised), compared with up 55% for the year. While that sounds like splitting hairs, all the rhetoric in previous presentations had conditioned the market to expect accelerating growth in the US. For me, what perhaps made the US number surprising was that H1 was more impacted by COVID-19 access issues than H2, although DW said that the US team had used remote engagement successfully when access was constrained.

Growth in new Accounts (hospitals):

Global new accounts (hospitals) added accelerated. 135 hospitals were added in FY22 compared with 99 hospitals added in FY21. Of these, 80 were added in the US. Sales in accounts existing at the start of the year grew by 88%. This is consistemt with improved access post-COVID and a much-expanded S&M team.

ANZ bounced back after lockdowns impacted H1

ANZ was impacted by lockdowns in H1 (with NZ impacted into H2). With lockdowns lifted, H2 sales were 63% up on H1. The ANZ sales team has now been expanded with a dedicated person in NZ. In 2021 it was over-stretched with one rep covering 30 accounts. Now, the senior reps are supported by associates, a model which is working well and creating entry-level opportunities.

ROW – what’s going on?

It’s a tale of two very difference parts. ROW consists of UK&I and what is now quite a long list of continental European countries. Overall, sales were up 50% from $1.6m to $2.4m, as follows:

• In UK&I the direct sales model is getting traction. UK and Ireland achieved sales of $1.3m, up 185% y-o-y from $0.5m. 31 new accounts added from a salesforce expended to 9 from 5.
• The Rest of “ROW” (Continental Europe) was flat: Backing this out, all these other countries achieved $1.1m, essentially flat from FY21, but apparently it “improved in 2H22”. (I asked a question why the distributor model in Europe is clearly not getting traction, but this question was not selected in the Q&A! :-(

Capex down to $0.5m from $3.6m

With the second production line built and undergoing validation, capex has fallen significantly. It was emphasised that this is a capital-light business, and they are keeping spare production capacity in place to underwrite future growth. FY23 capex will also be low.

BARDA

BARDA – the US government agency – is funding a $15m multi-year trial to generate the data that, if successful, will lead to $PNV being stockpiled by the US Government, so that there are strategic reserves in case of a major disaster. Swami has experience from J&J in working with BARDA and he said that the focus and attention BARDA are giving to BTM is as high as he has ever seen (including on vaccines!) Down the track, this offers the potential for some material boosts to sales. BARDA is working with $PNV and the FDA to get approval for BTM for second-degree burns. This would give a more general market-wide boost to BTM sales.

Product Development

Good progress on all 3 “pillars”

1. Advanced Wound Care: Focussed on extending the current product beyond burns. The idea is to improve connections with innovative surgeons who are surging ahead. R&D will work to  tailor the product to their needs (e.g., smaller sizes; useful shapes).
2. Implantables: 4 prototypes have been developed for hermia; and one “breast sling”. No specifics provided on timing for launch.
3. Therapeutics: there is “enormous interest” by external partners (pharmaceuticals) to use drug-impregnated BTM as a local drug delivery vehicle. David and Swami recalled a recent trial case study from Adelaide in treatment of a Type I diabetes patient, which was transformational for the patient. David in his latest red jacket, provided his characteristic simulation of the procedure. (My note: If this gets traction, the opportunity is huge, but we need to think of timelines in terms of 7-10-+ years, but it does present very material, long-term blue-sky).

The focus in the short to medium term will very much be on Advanced Wound Care, because the regulatory hurdles are lower, time and cost to market is lower, and the synergy with the existing sales and marketing capability is very high. Several clinical studies are being funded to get the data to support a broader set of wound indications. The sales reps need this data to influence their customers.

Finances

There is $6m cash on hand, down only $1.1m from YE21. Last year $PNV said “The business will continue to reinvest cashflows to expand market share in existing markets, enter new markets, and develop new products.”  That is exactly what they have done. In addition, $3m of debt has been paid down using proceeds from the property sale and lease back.

I think this is where the market might have been expecting more. Looking back at FY21 results (slides 28 and 29), the net profit and cash flow trend charts set the expectation (reflected in consensus forecasts) that both cash flow and net profit would be clearly in positive territory. Neither were.

That said, H2 was operating cash flow positive compared with H1 s;ightly negative.

In Q&A, when asked to comment on the sufficiency of capital, DW was more circumspect than this time last year, deferring to Swami. That was a good call because he has to leave space for Swami to put forward his growth strategy, To close the option of access to capital would have been a BIG MISTAKE. IF Swami is smart (and I think he is) he would have agreed this with the Board as a condition of joining. Of course, with debt paid down and rapidly growing revenues, $PNV has greater debt capacity in FY23.

Jan reported that margins were continuing to increase, due to price increases to offset rising costs and higher facility throughput. He reported gross margins are up 0.2% to around 95%. There was a brief discussion that the market can bear higher prices if necessary, because the competing products are more expensive and their treatment and post-treatment support is more complex and therefore more costly. The healthcare economics equation is about more than just the product cost.

Sales and Marketing – further insights

The imminent Canadian launch will adopt a hybrid sales and marketing model. A distributor partner has been selected with 17 identified, experienced sales agents. Ed, the SVP S&M Americas will retain responsibility for the sales in Canada, including training and supporting the outsource partner. David, Swami and Max were all very positive about the prospects for this model, and they expect rapid traction in FY23 as a result. Swami said that some surgeons in Canada who have already carried out some procedures have reported "tremendous results". Surgeons are already placing orders “at their own risk” ahead of product registration.

Generally, we heard repeatedly that sales and marketing for BTM requires a “high support” model. Swami said that many distributor partners wouldn’t work, because they see their job as “getting to the hospital purchasing desk” to take orders. With BTM, the relationship is between the sales agent and the surgeons and nurses. (I think this explains why Europe is treading water at the moment. They know what to do, they just didn’t want to talk about Europe because they don’t have a solution there yet!)

In the USA, Max mentioned that 2 GPO deals are in the pipeline, with one big one close to landing. However, Max and Swami reinforced that GPO deals must be underpinned by the Sales and Marketing people on the ground at the hospitals for the reason discussed above.

On sales and marketing, we heard a repeat of prior messages: that new sales agents don’t do that much in the first 6 months, but that by 12 months they are contributing more than their costs. This time, however, the messages were somewhat more nuanced pointing out that it depends on a range of other factors. These include how many existing accounts are in the territory and how mature they are. Going forward, it will be important for both management and analysts to learn how to model sales growth expectations from S&M investment.

We heard some more of Swami’s ideas

• He believes that BTM is a superior product to biologics: better clinical outcome, easier to use, better economics (for the hospital), better patient experience in treatment. He cited that staff who have come across from Integra and Recell support this.
• He wants to leverage a November Conference in India to stand up a team there and launch. “Eventually, there will be more procedures in India, however US will remain biggest for revenue, due to much lower revenue per procedure.” He doesn’t want to wait to strategize on this, but he wants to get going. DW said it had been discussed at the Board meeting that morning. Swami said that hospital-sourced infections is a big problem in India, so BTM has big advantages because of the reduced risk of infection in its use.
• More generally, Swami is focused on how $PNV can accelerate global adoption, add new markets, broaden from burns into trauma (DFU, oncology, etc.), and move beyond the hospital.
• He believes in the US sales team can “take the trajectory up”.
• He is scanning for acquisitions that can enhance market access. They are not looking for products, but access to surgeons, particularly podiatric surgeons in the US (who usually operate out of stand-alone facilities, not hospitals, unlike in Australia). (Incidentally, DW asked investors to stop writing to him to suggest they buy $AVH or $ARX. They don’t want biologics in the portfolio.)
• He said that if they had a blank sheet of paper his market priorities would be USA, Japan, China, Western Europe. So, I think we should see some changes over the next year. When challenged in Q&A over whether the priority should be to bed down existing markets before expanding, Swami’s view was that this wasn’t necessarily valid, as what goes on in one market doesn’t detract from another. (I believe that Swami will bring to $PNV an impressive contacts book of sales and marketing managers from his international experience, and that this might prove to be a huge asset to $PNV.)
• In terms of product development, he wants $PNV to get even closer to the surgeons and get their feedback on how they want to use the product. He is clearly an advocate of customer-driven innovation. An example of this is regional Australia. He asked, how can procedures and product be evolved to allow the patients to come in to hospital for one treatment, and then not have to return to hospital? Swami cited what he called “unicorn surgeons who have already taken BTM to more places that we have”.
• He noted that applications involving implants will have a longer regulatory hurdle to overcome (lots of experience from J&J!), and he believes that engagement with regulators is very important.

3. MY OVERALL TAKEAWAYS

On the Results

By any measure, these were good results in USA, ANZ and UK&I; even if it is unclear why May and June experienced softer growth in USA. It is not a concern at this stage, because on such a fine timescale you’d reasonably expect some variability month to month.

Europe (distributor markets) requires attention, as the model is not capturing the opportunity. They know it. They just don’t have a plan yet.

They did what they said they would do: using cash generated to grow sales and marketing and expand product development. This is exactly what they should do. In addition, some debt was paid down, creating balance sheet capacity.

The Future

Swami is passionate about the product and the market opportunity, and he wants to move quickly. Given what $PNV has proven to date, it makes sense to go much harder on key markets in Europe and Japan and (I defer to Swami’s view about ...) China.

This is going to take a big investment in building out the global sales and marketing capability. For example, it has already taken three years building in the USA, and they have further to go. It won't be so easy elsewhere, but fortunately, Swami have very relevant experience outside of USA and Europe - a huge asset to the company. It will likely involve a mix of direct selling and deals with appropriate contract sales and marketing entities/distributors. It is unclear to me what the cost of this will be, but $PNV should be willing to raise debt and capital to fund it. Growth at these margins will drive shareholder value.

I expect Swami will go through his own adjustment period. $PNV doesn’t have a fraction of the depth and breadth of capability that Swami was used to in J&J. So, he will have to lead in a very different environment. It is important that David supports him, but also doesn’t stifle him. This is a key potential risk to key an eye on, but David is well-aligned with investors.

Finally, the Market Reaction

In short, the 19% SP drop is entirely unsurprising for the reasons I foreshadowed in my Straw the evening before results.

Since the Q3 trading update, which received a muted SP response, the SP had rallied 77% from $1.13 to close at $2.00 prior to results, standing 22% higher than market consensus. This was driven by DW’s share purchases, buying by short sellers, and a positive response to Swami’s appointment.

The results in terms of revenue, net profit and cash flow were a slight miss on consensus, so it is entirely unsurprising that the price has dropped right back to the consensus level. The market has behaved precisely as you’d expect.

Furthermore, not only is $PNV one of the more shorted stocks on the ASX, its historic volatility makes it a traders favourite. Don't invest in $PNV if you don't have a strong stomch for volatility. We should expect this to continue until performance becomes more predictable. Here, I think David and Swami have a key role to play in improving the quality of investor communications. This subject is worthy of a separate note.

All that said, I believe Mr Market has handed investors another opportunity to get onboard at what I believe is a large discount to fair value.

CONCLUSION

With $PNV now 6% of my portfolio and my high conviction unchanged, I am a HOLD for now.

However, should there be any further SP weakness below $1.60, then I will increase my holding.

I believe the market is significantly under-valuing $PNV. However, thee is real valuation risk in sales and marketing execution. In the appointment of Swami Raote I believe the risk has reduced, and I will be eager to observe how he settles into the role over the next 12 months.

I’m looking forward to the AGM on 28^th October and to FY23 – which will hopefully be a “cleaner” year without all the caveats and stories about COVID-19 obscuring the underlying performance of the business.

(My valuation to following in a week or two.) 

Disc: Held on SM and IRL

I am very much looking forward to hearing Swami and David deliver the $PNV FY22 Results tomorrow.

Whatever the results, it will be hard to call the price action. Shorts (graph below) have been reducing given positive updates(Q3), DW share buying spree and a strong CEO appointment. However, taking a 3-year view they remain high at 6.78% as of last week - there's a possibility for strong movement either way, depending on response to results.

Analysts don't know what to think or haven't updated. SP is 22% above consensus (n=6, marketscreener.com, range $1.11-1.90). I'm at $2.80 (central case, DCF, will update on SM after I have digested the results).

Consensus on sales is $42m, but my estimate is $43-48m range.

With DW's last purchase reported on 9 June, and with his strong buying through Q4, I assume the sales trajectory will be strong.

Cash flow will be at or close to breakeven, before including proceeds of real estate sale.

A few uncertainties impacting cash flow are impact of wage increases and inventory changes to support sales, although according to Swami $PNV is being sought out in the sector as employer of choice and according to David, supply is easy due to very high %GM, so no need to hold significant local regional stocks now that borders are free flowing again.

Here is the link to the results call, tomorrow at 2:00pm:

https://services.choruscall.com/mediaframe/webcast.html?webcastid=DVUbmPqJ

Disc: Held.

On both SM (18%) and IRL(7.4%), $PNV has become my largest position, even after trimming along the way. My conviction on this firm is such that I am going to let my winners run.

from www.shortman.com.au

A reconstructive innovation is giving skin cancer patients another option

Mrs Aenone Harper Machin

Consultant Plastic Surgeon, St Helens and Knowsley NHS Trust

” A synthetic dermal scaffold used in reconstructive operations is providing an effective alternative for skin cancer patients who, until recently, had no surgical options left. “

Health Awareness Uk Article

PNV new CEO impressions.

Apart from a few technical hitches that was a good quick introduction to the new CEO.

My impression is that David has found a visionary with plenty of experience to help shape PNV into a global success story. 

Swami outlined his work history and experience working for J and J across Indonesia, India, Philippines, China and the US. He has worked his way from the ground up in global medical technologies to the ‘head of the table’ – as Global President for J and J Vision Care.

Motivation for coming out of retirement 

He describes PNV as a ‘diamond in the rough.’ He stated that he is amazed at the simplicity of the Novasorb technology to help the body to heal itself. This reduced complexity is what excites him as he sees PNV transforming from a burn and wounds company to a complete soft tissue platform company. 

1.     SIMPLICITY: 

The reduced complexity of the technology is its competitive advantage. He describes the value chain as robust and scalable quickly. He describes the limitation of all other competitors to PNV as they will have difficulty growing and scaling due to the complexity of their manufacturing as opposed to PNV.

2.     BOARD: 

His second stated reason is that he has rarely seen such a unified and motivated Board. They are all unified and motivated to push the company global 

3.     COMMUNITY:

The teams and staff are all very motivated and excited to be working with the Novosorb technology and there is a real belief in the product

4.     MARGINS:

The margins and sales model has huge potential 

US

-       PNV needs to get key influencers and surgeon advocates on board to sell to other surgeons. 

-       Retraining surgeons as this technology is totally different from what most of them were taught in their training

-       There is initial disbelief and suspicion at how simple and effective the technology is – once a doctor tries it they are ‘converted’ – He want these converted ‘Evangelical’ surgeons teaching others about Novosorb

-       Peer to Peer education in the key to PNV sales strategy

EMERGING MARKETS

-       PNV will be the inventor of this sales model- He sees the company as constructing the rule book here.

-       There is a greater need for the product in the developing world as burns and / trauma is more common

-       Swami believes adoption will be quicker and easier here as developing countries are faster at adopting and embracing new technologies. 

NEW PRODUCTS

  PNV can’t keep pace with the number of case studies and ways doctors are successfully finding to use NOVOSORB.

Once again he reiterates that the technology will move to a complete soft tissue reconstruction platform. 

M & A

-       Is possible for acquiring supply chains and capable distributors that already have pathways into plastics and reconstruction

-       If PNV finds good synergy – with income generating companies there may be future acquisitions

DIRECT V DISTRIBUTOR SALES

            -Distributors must add value – not just a warehouse

-They must be involved in surgeon education or else using distributors will not be successful. On this point he does seem very aligned with David Williams 

-Big belief that PNV must impact the customer positively

JAPAN

Swami states that Japan is a great market to attack – as it is evidenced based etc… It is a gateway and provides traction into the Asia Pacific markets. As head of Vision Care (Contact lenses etc…) he will have a wealth of knowledge and experience in navigating this traditionally difficult market. 

He states he is more cautious about entry into China and Brazil

PARTING COMMENTS

Swami is a big believer in company community. This is an area that has been attacked with PNV over the past and shorters have used this instability to their advantage. There was clearly tension with the departure of Paul Brennan. However hopefully this is the start of a calmer and more unified chapter. 

If the team feels good about what they are doing the business will thrive. 

It was also confirmed on this call what most shareholders had suspected PNV is involved in taking Novosorb to the Ukraine. Swami mentioned that ED the head of the US sales division is in Ukraine to support surgeons use their product. If that isn’t feel good I don’t know what is. 

David finished the call saying that there were lots of things happening right now and that he would be communicating these events with shareholders very soon. 

So overall a pretty excited and happy shareholder. 

Cheers

Nnyck

Just adding to @Slomo’s straw, it will be particularly interesting to hear what CEO Swami Raoti has in mind for the the future direction of the business. Here are a list of questions Chairman David Williams will be asking Swami in 30mins from now:

Webcast Registration: 9.30am, 3 August (today!)

https://ccmediaframe.com/?id=xqhrEY6A

New CEO Webinar tomorrow morning 3rd Aug, 9:30am AEST

Should be interesting (always is with Polynovo)

Rego details here:

https://ccmediaframe.com/?id=xqhrEY6A

disc: Not held

https://newswire.iguana2.com/af5f4d73c1a54a33/pnv.asx/3A598154/PNV_CEO_Appointment_Swami_Raote

$PNV have just annouced the appointment of Swami Raote as the new CEO, following a search process that David has been running for 9 months. As reported, the new CEO appears to have a track record of both operating at greater scale and driving growth, and is well-credentialed in healthcare including medical devices in a world class company (J&J).

Market has responded positively so far today with SP up 6% at time of writing.

David is going organise a meeting in the next week or so to introduce Raote to shareholders.

Disc: Held on SM and IRL

Today Chairman David Williams shared a report from Macquarie Research dated 6 April 2022. PolynovopnvAu-SalesMomentumBuilding.pdf

Macquarie gives Polynovo an ‘Outperform’ rating and a 12 month price target of $1.60. Macquarie expects BTM sales of A$25.7 million for 1H23, which would be a 58% increase on 1H22.

Disc: Held IRL and SM

Polynovo Chairman, David Williams, shared two broker notes and price targets for Polynovo this morning by email. Bell Potter have recommenced coverage of PNV.

PolyNovo’s (PNV) 3Q22 trading update had group revenue of A$12.3m, +59% vs pcp. But there appears to be a step down in US BTM sales, with Feb/Mar average implying ~A$2.9m sales per month compared to A$3.7m in Jan-22, although exit rate is unclear. Despite this, PNV has achieved YTD group revenue of A$30.42m, and applying 3Q22 revenue to 4Q22, the result appears in line with FY22CL group revenue of A$42m. Cash end-Mar-22 ex-property sale was A$3.8m (+A$517k vs Dec-21), a positive outcome given this was a key concern for investors at its 1H22 result. With the result tracking in line with CLSAe, we make no changes to earnings and reiterate our A$1.80 price target and BUY rating.

Our PNV thesis: what’s changed following PNV’s 3Q22 update?

We’ve held the view that 2H22 would provide a platform for PNV to leverage off its growing sales force and recent sales momentum, and cash flows end FY22 flat H/H (ex-property sale), alleviating concerns of the need for a near-term capital raise (noting we do see the value in additional funding to fast-track its R&D portfolio). This transition could support a pathway to profitability from FY23 onwards. PNV’s trading update appears to support this journey, with group revenue in line with FY22CL albeit on what appears to be step down in US BTM sales. And with cash increasing QoQ ex-property sale, the latter adding a buffer of ~A$3m after paying down debt, for now we maintain our longer-term thesis on the stock.

BTM sales in line with CLSAe, albeit below strong Dec/Jan result

US BTM sales were A$9.53m for 3Q22, +79% vs pcp, but the result implied a step down in Feb/Mar average revenue following strong Dec/Jan results, and provided no clarity on the exit rate. Despite this, PNV added 15 US accounts in the quarter to 169 total, suggesting it continues to gain traction on the ground, but needs to convert these higher penetration rates. Australia and New Zealand saw strong gains, with 3Q22 sales of A$1.16m, suggesting a stronger than expected exit rate.

QoQ rise in cash balance supports view of FY23 cash flow positive

Commentary from PNV at its 1H22 result suggested 2H22 cash balance would be flat H/H, ex the A$6.35m property sale. But with PNV’s cash flow adding +A$517k QoQ, albeit with no clarity on how this was achieved, the result should help see PNV’s cash balance turn cash flow positive in FY23, in line with CLSAe.

Price target A$1.80 and BUY rating retained

While Covid disruptions may still affect near-term sales, BTM sales and account growth show momentum is being maintained. Near-term share price volatility is likely to persist, but longer-term value remains

Polynovo (PNV)

Cash and Burns

Novel device in burns & complex wounds market

·       Polynovo is a commercial stage medical device company and its core offering, NovoSorb Biodegradable Temporising Matrix (BTM), is used in the management of burns and complex wounds. 

·       Expanding indications for use have increased its clinical utility and BTM has been commercialised in the US, Australia and Europe with further expansion targeted in key markets including India & China. 

Accelerating BTM sales addresses cash position

·       Record revenues reported during 1H22 of A$18.2m (42% increase from 1H21) have been followed by accelerating BTM sales with record 3Q22 performance (A$12.3m).

·       The cash position has improved from A$3.3m (as at 31 December 2021) to A$3.8m (as at 31 March 2022). This does not include proceeds from sale of land & buildings (A$6.4m).

·       The strategy during 2H22 and FY23 will be to continue expanding sales personnel to engage key hospitals & clinicians and drive utilisation of NovoSorb BTM. 

Key clinical trials and Polynovo pipeline

• Recruitment in the pivotal trial evaluating BTM application in full thickness burns commenced in 1H22.
• The target cohort size is 120 patients and data from this trial may be used in a potential label expansion to include full-thickness burns. 

·       The second arm of the SynPath study is underway and is examining BTM in the management of diabetic foot ulcers. This will assist in obtaining reimbursement in the outpatient setting. 

Investment view: Transfer Coverage with Buy, Target $1.50

·       We recommence coverage of Polynovo with a Buy recommendation and a 12 month price target of $1.50.

·       The price target has been generated with a blend of two methodologies we apply to the company: EV/Revenue and DCF.

At long last the short activity for Polynovo is declining. This is what you would expect after the trading update on the 11th January, however the Shortman data below is at the 4th January (before the update) and the short trading was down 2.16%. Why is it that there always seems to be people out there that know the news before you do!

Data graphed above represents aggregate short sales, provided by ASIC with a lag of 4 trading days (T+4). The ASX releases non-aggregateddaily short sales figures which can be used as an indication of short sales activity within this 4 day window. 

Disc: Shares held SM & IRL

Yesterday (13/12/21) James Mickleboro from The Motley Fool shared a note out of Macquarie Group Ltd (ASX: MQG) on Polynovo in his article titled ‘Polynovo (ASX:PNV) share price tipped to double in value’ as follows:

“That note reveals that Macquarie has an outperform rating and $2.85 price target on the company’s shares.

Based on the current PolyNovo share price, this implies potential upside of greater than 100% for investors over the next 12 months.

Although Macquarie acknowledges that PolyNovo is underperforming its expectations so far in FY 2022, which has led to a sharp reduction in its earnings estimates, it remains positive on the future.

This is due to its belief that PolyNovo is well-positioned for growth over the medium to long term thanks to the NovoSorb product. Particularly as the company looks to expand its use into other areas such as the hernia repair and breast augmentation markets.

These are much larger opportunities than its current target market of dermal scaffolds (worth $1.5 billion per annum) and are estimated to be worth US$3 billion per annum each at present. Overall, this gives the company a $7.5 billion per annum market opportunity to grow into in the future if all goes to plan.”

The outperform rating by Macquarie along with the Polynovo’s record sales announcement this morning might have short sellers scrambling to close positions over the next few days.

Disc: shares held IRL & SM

I just don’t get it. After highlighting a pleasing Q1FY22 result in BTM sales, orders and accounts, Chairman David Williams goes on a bazaar tangent about the impact of shorting on the PNV share price. It was pretty clear from the graphs that the share price went in the opposite direction to the level of shorting. It also demonstrated that DW understood clearly the impact of short activity.

For a short time after the Q1FY22 announcement the short activity decreased and the price went up, which is what you would expect.

Then comes the bombshell on 5 November…The CEO/MD Resigns! If this is not bad enough the Board goes into inflammatory detail about the circumstances of the resignation, quoted below:

‘However, in more recent times there have been increasing differences with the Board in relation to Paul’s interaction with the company’s senior management team and his management style. Accordingly, the Board has accepted Paul’s resignation.’

This was like throwing petrol on the short activity fire! Why would the Board air it’s dirty laundry like this? Surely an expert on the impacts of short activity (DW) would have known what was to follow. DW has nearly 3% skin in the game, the most recent shares purchased on the market on 9 March 2021 at $2.34 per share. DW is hurting as much as anyone.

In 3 days from the 5 November to 8 November shorted stock increased from 6.19% to 6.84% (up 11%). Shortman.com lags ASX short activity by 4 days. I’m guessing short activity has spiked further since then, possibly over 7% by now. I don’t see this trend changing until there is some good news from PNV.

So what now? Polynovo is looking cheap on the fundamentals, current growth and future potential and I have continued to add shares to my IRL portfolio. But has the Golden Goose temporarily lost its mind? I guess we’ll need to wait for a new CEO to find out. Let’s hope it’s someone exceptional as I think this is what’s needed to gain some confidence in the management of Polynovo.

The AGM was a bit unusual in that the chairman David Williams ended his introduction with an interesting dissection of PNV share price movements in the past year. He attributes the sp volatility to short interest, which is currently quite high at 6% of issued share capital, the same as it was this time last year. After last year's very positive AGM, the short interest plummeted to 2%, creating a lot of buying pressure which led to a spike in the share price.

It seems very likely that this pattern will play out again after this year's AGM, which was also full of positive news, particularly about strong sales in the US in the past quarter. The only slightly negative sentiment from the meeting is that the company continues not to set any annual revenue target. The justification given for this is that the company is still early in its growth trajectory, and has not yet established a consistent, predictable pattern of growth.

This doesn't worry me in the slightest as a long term holder (in RL). There are so many avenues for growth - selling the existing BTM product into more markets, broadening the use cases for this product, then bringing on the new hernia product in 2023 - and the product is so superior to the competitors' products, that I'm struggling to see anything but a bright future. The big capital investment in manufacturing capacity is behind them, and now the company is focussing on sweating those assets, as the MD Paul Brennan stated.

FY 2021 AGM PNV

#Targetinggoldstandard #Morecountries #Morehospitals #Moreuses

Major take-aways from AGM:

Polynovo products entrance into new hospitals -  up 56% YOY

FY22 Q1 $8.05 million (including patchy September with US lockdown)

New countries on board Q2 Q3 and Q4:

Cyprus

Italy

Czechoslovakia

Canada

France

Sales team now following up in hospitals across multiple wards:

1.     Burns/amputations/plastics

2.     Oncology

3.     Endocrinology

Polynovo has taken 4 years to reach break-even (actually tiny profit)

Awaiting BARDA status in the US for full-thickness burns – this will be more for bragging rights as PNV will be able to officially declare itself as the Gold Standard for burn care (formerly held by Integra IDT biologic)

Increasing number of small size BTM product sales – better margins

Beta cell study in Type I diabetics about to launch

David Williams provided a good explanation about PNVs aim to enter US government stockpiles with their BTM product. 

US government is looking to stockpile products for burns treatments, in case of incidents of mass injury. BTM can easily be stockpiled and has a shelf life of 3 years (stored below 25 degrees Celsius which is standard for medical products). 

This is the other major advantage of this product over biologics which cannot be mass produced and stockpiled like BTM. 

My Summary of PNV achievements, strategies and FY22 outlook

What does Polynovo (PNV) do?

PNV produces novel medical devices using patented bioabsorbable polymer technology Novosorb. PNV currently has 56 international patents covering their products. Its leading product is Novosorb BTM.

Novosorb BTM is used in the repair and treatment of burns and wounds and reconstruction. New products Syntrel BTM is currently undergoing studies for breast and hernia reconstruction and SynPath BTM line is used in chronic wound healing.

Novosorb BTM has been applied in a range of different demonstrated cases from new full thickness burns to old cases of scarring and regraft to wound care. 

SUMMARY of why this companies product is so ground breaking (think cochlear for skin surgeries)

 ADVANTAGES of Novosorb BTM – Synthetic resorbable polymer

Synthetic means man-made – unlike competitors that use animal products (e.g Aroa)

Resorbable means that the body can break it down to harmless by products and slowly excrete it (e.g through urine).

It is a temporary structural scaffold to allow the bodies’ own natural cells to regrow – BTM merely supports the body while is undergoes this regeneration and then the body removes the product.

Novosorb BTM has inbuilt design flexibility and biocompatibility 

Key advantages include:

1.     Reduced infection rates: The polymer product is not a food source for bacteria so BTM limits bacterial growth. It can remain in situ and any infections can be treated without product removal. Biological graft techniques are more prone to infection – bacteria spread through biological tissue more readily. This means large tissue sections have to be removed, the infection treated, then new grafts placed. 

2.     Minimizes contracture – this means shrinkage and wrinkling of post graft skin is reduced. Improves the cosmetic look  and function of the skin. Contracture of skin can lead to immobile limbs that permanently stay bent as the skin is so tight it can’t stretch and fully straighten.

3.     Can aid in generating new skin over bones and tendons – wound healing

4.     Helps to salvage limbs as the new skin growth is vascularized (has blood flow) so can keep limbs functioning and avoid amputations

COVID IMPACTS

Polynovo (PNV) acknowledges the huge impact of COVID on its FY21 growth strategy in its latest report out to market today. What has impressed me as a Strawman and IRL shareholder is PNVs very quick pivot to online strategies for growth. This was primarily done in the form of online conferences to demonstrate advantages of their BTM product. Surgeons were able to gain direct online feedback from peers around the globe who had applied the product in real life cases. 

Why I am happy with my investment:

Increasing Geographical Coverage for POLYNOVO products

European market

Growth for FY21 has been significant, despite COVID interrupting traditional marketing strategies.

PNV is predicting very strong growth to continue and new hospital accounts to increase during FY22

European breakdown

 ·      Hard hit by COVID

·      CE mark for BTM achieved just as Europe locked down- very challenging

·      Sales team in EU couldn’t get in front of hospital decision makers and doctors in traditional meet and greet methods

·      Moved to online meetings – PNV stated that they were able to have wider reach and took more  online meetings than they would have taken with traditional on road approach

·      During FY21 and FY22 Increasing sales headcount is a priority across UK EUROPE and IRELAND

·      BTM now accepted into 16 countries as of time of update

UK/IRELAND

·      Elective procedures cancelled during COVID

·      Digital strategies only due to hospital closures

·      Data published in key surgical journals 

·      BTM recently highlighted in hospital documentary

·      Now only just being allowed to meet face to face

US market

Business rapidly expanding in revenue and sales personnel and continued growth expected in FY22

US breakdown

·      36 sales team members

·      US based finance

·      Market awareness and commercial growth increasing

·      Best talent recruitment strategy adopted

·      FY 21 US organisation has more than doubled

·      New GPO agreements

·      PNV intend to take market share through continued market penetration

·      Weathered COVID well

·      Built surgeon based webinars

·      Despite challenges:     

o   49% growth in sales FY21. 

o   FYH2 sales grew by 38% above and beyond FYH1 – indicating start of COVID recovery.

o   FYQ4 21 pick up 40% more orders than in Q1

o   Added 52 additional accounts in FY21

o   More accounts in trial phase currently. These numbers are not added to reports until cash flow achieved.

·      Acknowledge that Hospital closures really did affect sales 

·      Full US coverage planned

·      Clinical and medical education planned as part of growth strategy

·      BTM becoming standard of care at many hospitals in the US 

Australian market

·      COVID impact less is Australia

·      FY21 2nd year following TGA approval in Australia 

·      Growth phase

·      2 new head counts

·      4 person sales team

Strategy for growth in following addressable markets in Australia 

·      Plastics and reconstructive surgeries

·      Trauma in degloving and crush injuries

·      Necrotising soft tissue infections

·      Burn centres

·      Wide excisional skin cancers

·      Congenital disorders

·      Chronic wounds (saving limbs from amputation) – targeting vascular surgeons

New Zealand market

·      Burns centres comprehensively used Novosorb BTM

·      Widely adopted by plastics and reconstruction teams

·      Very successful market past 3 years and widely adopted

·      White island volcano success stories

·      FY21 and FY20 similar results

·      Beat market sales expectations

Global growth

53% increase in global distributors sales growth in FY21

Australian growth

25% increase in Australian distributors sales growth in FY21

US growth

Up 49% in sales growth FY21 

2020: US $10.4M

2021: US $15.5 M

Net profit after tax 

Up 121.5%

2020: US $-1.2M

2021: US $0.2M

EBITDA (Achieved break-even / profit in FY21)

UP 161.1%

2020: US $-1.0 M

2021: US $ 0.6 M

Cash on hand 

US $7.69M

BARDA Trials

Pivotal Burn Trial full completion FY25 and Chronic Wound Reimbursement Trial Diabetic Foot Ulcers (completed first 10 patients and moving on to trial phase 2) continue in FY22 

Chronic Wound TAM

SynPath chronic wound product has predicted US $400 M market in FY23

PNV is investing in itself and planning for growth

New Facility and upgrade: Port Melbourne

·      Tripled current manufacturing footprint

·      Installed new ISO 7 clean rooms for the production of medical devices

·      Increased storage areas – aim to store and distribute from facility (some devices are temperature sensitive)

·      Duplicates BTM production sites – allows for increased demand and built in redundancy to sure up integrity of POLYNOVO supply chain 

·      New equipment already installed to support Syntrel Hernia product line

·      Initial Syntrel Hernia production runs have been done – product in testing phase 

·      New Equipment will allow for Bioresorbable Polymers to be produced in a range of different formats for multiple indications – what would take months, new equipment can produce new product line in weeks or even days to get product to market immediately. 

·      All products now completely produced in-house

Future TAM and product line potential is huge. 

PNV has become a multiple trick pony. 

Future Applications for PNV

Beta-cell diabetes application joint collaboration with Beta Cell Technologies Pty Ltd.

Using Novasorb BTM in alternative application forms. The plan is to infuse BTM with Pancreatic Islets in the skin for diabetes treatment. 

A trial is planned FY22 for applying this new technology to Type I diabetics who have had renal transplants. 

Novosorb BTM has potential as a drug elution delivery system. 

Ongoing exploration of new addressable markets and applications for this product. New facility in Melbourne will allow light-speed alteration and development of products, mass productions and delivery to market. 

Added Strategy as ESG responsible investment

PNV aligned  with ESG focused responsible ETF investments. Potential for SP growth with adoption of PNV into larger fund portfolios.

Aiming for carbon neutral certification by FY23

This mostly repeats Shrivak's straw, but these are my takeaways from the investor presentation and call.

Turned a profit for the first time (if you exclude share-based payments)
49% revenue growth in US to $15.5m, despite Covid , still ramping up sales team,which grew from 18 to 36. This region is profitable and the largest revenue contributor.
25% revenue growth in Australia
Total revenue growth 32% to $29.3m
Entered 8 new jurisdictions in Europe and Asia via distributors
Revenues will increase faster than costs from here on, capex costs were down 60% after commissioning of new factory
Cash on hand $7.7m - no change from 6 months ago
Growth is all about increasing the sales force to get in front of more surgeons
Manfacturing capability for hernia devices is complete, animal trials in progress, working toward FDA approval in March 2023

This is a fabulous Australian innovation story, with a world-beating product and a clear growth path through geographical expansion and development of more products based on the BTM technology to address more use cases. Covid has been a very significant headwind this year since face-to-face selling (to surgeons) is the primary means of acquiring new customers, so to achieve 32% revenue growth in these circumstances is pretty impressive.

former hot stock, sales down in pandemic due to less people out and about getting burns injuries. 
38% growth 2H on 1H
small profit 

Yesterday the PolyNovo share price plunged around 9% closing at $2.10. James Mickleboro from Motley Fool said "the decline appears to have been driven by a couple of broker notes this morning in response to its sales update on the 13 July. Both Bell Potter and Ord Minnett have downgraded the medical device company’s shares to hold ratings and cut their price targets. Bell Potter’s price target has reduced to $2.65 whereas Ord Minnett has cut its price target to $2.54."

I think the market is over reacting to the re-rate.  Bell Potter cut their price target buy only 10c/share from their previous target of $2.75 and recommended HOLD. The market seemed to have interpreted this as sell, and sell quickly!

I note the new target price is similar to the Strawman consensus valuation. It is hard to value PNV right now, but I think it will grow rapidly when the COVID impacts decline, more hospital beds become available, and the sales team can travel around and do their job. One analyst on Simply Wall Street thinks earnings growth will be 78% over the next 3 years (see chart below). I think the stock is now a buy and is undervalued by at least 30%.

Disc: Adding to RL portfolio