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.
Short positions on Polynovo are down significantly over 4 months, although still very high at 7.1% (down from 11.5% on the 27 May 2022). There has also been a slight increase in short positions since 6 September when it bottomed at 6.2%.
There are still a lot of people out there betting against Polynovo. The positive take on this is that the upside to the share price will be even more explosive if Polynovo starts to report significant growth in sales. Only time will tell.
https://www.shortman.com.au/stock?q=PNV
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
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!)
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
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.
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
