Polynovo signs with Premier Inc.
A really promising supply contract announced today with the second largest GPO in the states, Premier Inc.
From April 1st, Premier Inc. will be making group purchases of Novosorb, and in turn give Polynovo access to their 4100 health facilities and hospital members. There’ll be a long period of training & trust to hit a steady sales rhythm, but I would imagine there’ll be some initial large orders which could positively affect the H1 fy22 result.
The announcement doesn’t go into any specific detail about procurement discounts, but margins are extremely healthy on Novosorb, so even a significant discount is unlikely to cause problems. Frankly, this is the strategy I suspect managament are keen to pursue as a way to supplant their biologic competitors and gain market share rapidly.
I wouldn’t like to guess at what an initial order figure would be, but we’d be talking in the single-digit millions I suspect. This would ramp up over 3-4 years as more clinical data becomes available, and surgeons become more comfortable with the product.
Great news, and validates the product to other large groups watching and wondering if Novosorb is worth the effort. We probably can expect more of these announcements in the coming years.
In the latest announcement today, David Williams bought $300K worth of shares at $2.40 price. It is ~ 2% of his holdings so not a significant purchase but significant nonetheless. I will buy as well hoping the price is lower than $2.4 (preferably buy when it’s less than $2 but as pointed out by Strawman you cannot be too picky)
Polynovo H1 FY21 Results
Some scattered thoughts looking through the report today and after listening in on the earnings call.
Although stunted by Covid, BTM sales are still up about 30% overall and up about 40% in the US, once again showing that demand is not slowing down.
Operating cash flow was about -$1.4m, down from -$2.2m in the prior period, which is a good result when considering that the staff count increased by about 25% on the PCP, and that Covid impacted sales in the back of the half. Total revenue for the period was $12.8m, an increase of 25%.
Although the numbers are clearly not as strong as the market had been expecting a few months ago, there is nothing discouraging here that I can see. All the headline figures are tracking well, especially considering the challenges of 2020.
The only disappointing number to me was the BARDA contract revenue, whose payments have understandably been stymied as a result of so many hospitalisations in the US delaying the Pivotal Trial. Having said that, BARDA revenue is not a marker for business performance or demand – it’s purely a funding program for clinical trials of promising technologies.
Cash on hand remained fairly stable, with a capex reduction across the board and the Hernia facility nearly complete. Management have flagged another $1.3m of capex to finish this off, so expenditure in the second half should be minimal.
Rest of World category shows some very encouraging signs of growth, rising about 730% in BTM sales from the PCP. It’s coming off a low-base, but given how bad the UK and Europe got hit by COVID, this is really promising. This will likely outstrip Aus and NZ numbers next year at the current rate.
I think we can expect a much better second half, as the US hospitalisations ease and sales activity warms up. Management were cautious in giving forward looking answers to questions on the call, but my take away is that they’re all confident of the long term trajectory.
I’ll update my valuation a little later today.
Chris Judd Interview - A must watch to get a detailed understanding of Polynovo. The interview shows a lot about David Williams' (Chairman) personality and what he thinks about the company. These are my initial thoughts of the Chairman:
2020 AGM - The team works well together also interesting questions asked by shareholders. Paul Brennan (CEO) has deep technical understanding of the product and how the clinical trial is structured. Some notes from the AGM (November 2020):
On a sidenote, I was second guessing myself before adding to the strawman portfolio. You could see it with the buy order, then the cancel and the buy again. When the market valuation dropped, I felt the growth opportunities is large enough to justify the high valuation and was second guessing the management. I am giving it a pass as the product is strong enough to expand their market share.
Started to do a bit more research on PNV after listening to the chairman David Williams outline the investment cash for the company.
Undoubtedly this is a great company in the making but when it priced for perfection any hiccup will cause a significant drop in the share price as witnessed when the company released a 1H21 trading updates. Sales only increased by 41% when the expectation was probably more like 100%. The share price dropped from around $4 to $2.50.
What is worrying though is that 3 directors including the CEO sold large parcels of shares a month before this sales up. Admittedly, the amount of shares compared to their total holding was samll the $ amount was significant with one director selling over $1m is share at $3.36. The reasons for all 3 directors selling was for property related reasons.
When there are significant share sales, especially when prices at quite high, it always pays to take extra caution.
2 Dec 20: Hoare -100,000 for -$345,400 [175,555; 1.00m] For property purchase
1 Dec 20: Brennan -200,000 for for -$678,000 @ $3.39 [9.32m] Property renovations
1 Dec 20: Rathie -355,555 for -$1.19m @ $3.36 [3.24m] Commercial property
Chariman David Williams appeared on Judd’s ‘Talk Ya Book’ today, with his trademark panache and enthusiasm:
This is required listening for holders, as he repeats most of the reasons why I think the long-term thesis is well intact.
In particular, he mentions how biologic competitors, such as ASX listed Aroa (ARX), in his opinion have no hope of carving out large market shares in the US, a point I agree with.
I’ve always enjoyed listening to David’s perspective on his large holdings, and although he’s clearly biased here (with a massive holding in PNV) It’s hard to argue with his insider knowledge of the competitive landscape in the US and in particular the surgeon feedback he recieves, which is seemingly always overwhelmingly positive.
Valuation is still very high, even with the recent drop from $4, but again I would point out that with a synthetic product this could be a winner takes all market… David certainly thinks so!
Am watching SP action very closely at these levels.
Recorded 27-Jan-2021: LivewireMarkets.com: Buy Hold Sell: The 5 most-tipped small caps
Bella Kidman: Jun Bei, I'll start with you. Polynovo - they develop and manufacture technology for skin graphs. Buy Hold or sell?
Jun Bei Liu (Sell): It's a sell for me because I'd much rather be in a different business, it’s very similar, it's called Aroa, and it is a very similar business, but trading at a fraction of the multiple. Now, Polynovo is a great market leader, it's innovated the market, it's expanded the market, but more recently it has disappointed the market in terms of the impact from COVID-related shut down in the hospital system and the like, and potentially it will come through. But it is trading on a very, very expensive multiple. And on that basis, I just think you'll get much better return coming out of buying Aroa, which is a very similar business coming out of New Zealand and just reported today, great numbers. Of course at the same time, they're all being impacted by the same COVID impact. So it’s very leveraged to the second half and the earnings coming through quite quickly. It’s innovated its business and actually has a very, very good clinical study to support the efficacy of its product, Aroa itself. So yes, on this basis, I think much rather to be in the up and coming market leader than the incumbent one that's trading on much higher multiple.
Bella Kidman: James, Polynovo was up 107% in 2020. It hasn't really kicked the year off the same way. Buy, hold, or sell?
James Gerrish (Sell): Yes, I've got a sell on it. Really expensive stock that has missed in terms of their outlook. I think that's a really key thing for investors to monitor. If something is priced for perfection and it doesn't deliver it, I think it'll be under a fair amount of pressure going forward. They're super high beta stocks. We don't trade a lot in the biotech space, simply because they're really high beta we’re a high conviction portfolio. So it's really hard to put a really decent market weight into, or a decent portfolio weight I should say, into a stock that's so uncertain and non-predictable in the short term and has such big swings in share price.
--- Other stocks covered include Lynas Rare Earths (LYC), Pointsbet Holdings (PBH), EML Payments (EML), Zip Co (Z1P) and Nearmap (NEA).
[I do have a small position in PNV, and they are also on my Strawman.com scorecard.]
1 February 2021
PolyNovo enters Italy
PolyNovo is entering the Italian medical device market through the appointment of Medival as the Company’s distribution partner in Italy.
Italy is the fourth largest medical device market in Europe with a value circa US$10 billion. The Italianmarket is innovative and mature, with a high demand for advanced products. NovoSorb BTM offers improved functional and cosmetic outcomes for patients.
Prior to appointing Medival, PolyNovo has been working with surgeons at a major hospital to have NovoSorb®BTM included in an important new national guideline. The hospital has implanted two BTM and early feedback is very positive.
Medival are focused on providing advanced and innovative medical devices to critical care and surgical specialties. Theyhave an established customer base throughout Italy accessing approximately 1500 plastic surgeons and have 25 reps on the road and one dedicated product manager. NovoSorb BTM rounds out their product portfolio ensuring they can offer their surgeons a complete range. http://www.medival.it
20 January 2021
PolyNovo enters Turkey
PolyNovo is excited to announce the Company’sentry into Turkey with the appointment of Incomed Saglik Hiz and its medical sales channel LotuS®, as our distributor. This expansion in the Europe-Middle East-Africa (EMEA) region is a significant step in bringing NovoSorb BTM to a significant number of surgeons and patientsin the region.
LotuS®has an established product portfolio and sales relationships within wound and burn treatment.They have over 10 years’ experience launching innovative devices through their extensive customer base. LotuS®are also the distributors of Suprathel and they are familiar with the benefits of synthetic products in the treatment of complex surgical wounds.NovoSorb® BTM will complete their plastic and reconstructive surgery offering.
LotuS began operations in2006 supplyingmedical devices to the Turkish market.The company concentrates on wound and burn treatments and has a number of complimentary products designed for use in burn surgery, general surgery and plastic surgery. They have a large sales force comprised of direct sales, dealers and sub-dealers covering the whole of the Turkish region. LoutuS have strong relationships with KOL's and are present in the key burn centres throughout the country and are therefore well positioned to successfully promote NovoSorb BTM.https://www.lotusmdc.com/
Turkey has seen significant economic growth over the past 10 years,and they are building a modern medical industry. Turkey has a population of 82 million people and a GDP of $761B (USD) in2019. PolyNovo sees good medium-term opportunities in Turkey.
20 January 2021
PolyNovo enters Poland
PolyNovo is excited to announce the Company’s entry into Poland with the appointment of Hortho Medical Innovations as its exclusive distributor. Hortho distributes modern and innovative devices for medical reconstruction.They distribute a number of complimentary bio-absorbable implant technologies and work closely with key opinion leaders inplastic/reconstructive surgery.
Hortho have a direct team servicing all of Poland and plan to add dedicated personal to support their NovoSorb®BTMsales and marketing.http://www.hortho.pl/
Hortho Medical Innovations specialise in distributing innovative surgical devices and havea large network of surgeons. Theirexperience in selling biomaterials and complex surgical implants makes them an excellent growth partner for PolyNovo.
Poland is the sixth largest country in the European Union with a population of more than 38 million, and a medical device market valued at over $2.2 billion.
12 January 2021
Interim Trading Update
New Accounts – Direct Markets
19 November 2020
PolyNovo enters Belgium, Netherlands, Luxemburg, Sweden
PolyNovo is excited to announce the Company’s entry into Belgium, Netherlands, Luxemburg (Benelux) and Sweden through an extension of our partnership with PolyMedics Innovations (PMI) in Germany.
PMI have been an excellent partner for us in Germany, Switzerland and Austria (DACH) with their sales exceeding projections to date and showing signs of further growth. PMI have recently placed their fourth stock order with PolyNovo since January 2020.
PMI’s strong key opinion leader network has been a key success factor. Their track record this year convinced PolyNovo they can quickly bring further growth to our European revenues through these four additional countries. The Benelux and Swedish region have a population of circa 39million people
FDA Approves pivotal trial IDE
Some excellent news announced this morning ahead of today’s AGM. The FDA has finally approved the pivotal trial to commence after a brief detour into the ‘fast track’ planning phase.
If the pivotal trial results – now due for publication in CY23 or 24 – reflect the current set of smaller clinical study results (which so far demonstrate that Novosorb is an extremely effective product) then it will mark the beginning of the end for biologic competitors.
The pivotal trial will recruit about 150 patients over 20 sites and provide enough data points for surgeons to once and for all put its efficacy to bed. As always, it’s difficult to say with 100% certainty what upshot will be, but it’s hard to see how the pivotal results will vary too far from the plethora of results already in place by the pioneering surgeons in Adelaide and the US. On the balance of probabilities, I’d say there’s a >90% chance that we’ll sail through without any real difficulties.
Let’s not forget that this study is broadly funded by BARDA to the tune of US $15m, which looks like a lump sum payment though it is hard to say for sure. If so, it would have a material impact on this years results.
Lastly, just to focus once more on the ultimate prize here. If a synthetic material proves vastly more effective than a biologic after these results, it really could be a winner takes all market, representing an incredible opportunity for the first mover in this space. I would estimate revenue in the billions of dollars per year ultimately, given a suite of synthectic products to sell on the back of the Novosrob platform.
We're still very much in the early days of this incredible Australian success story.
US FDA approves Pivotal Trial IDE
PolyNovo is excited to announce the US FDA has approved the pivotal trial investigation device exemption (IDE).
This approval allows PolyNovo to begin patient recruitment once the various hospital Independent Review Boards (IRB) grant approval. We will utilise 20 sites and recruit 150 patients. PolyNovo has prequalified the sites and we are in advanced contracting with these sites. Further details of thesites and study details will be released in due course.
28 October 2020
Taiwan FDA approval for PolyNovo
PolyNovo is excited to announce the approval of NovoSorb BTM by the Taiwan FDA for sale in Taiwan.
PolyNovo said it has also contracted with Evermed,a Taiwan based distributorto sell BTM.
Managing Director, Paul Brennan said,“This is an exciting developmentfor PolyNovo. Taiwan hasan advanced health system and has a population of circa 23 million concentrated in three regions. The dermal matrix market in Taiwan has good potentialfor us in reconstructive surgery, trauma and burns.”
Mr. Brennan went on to say that “Evermed is a very good partner and has 20 sales staff focused on medical devices. The company has well established relationships with hospitals and key opinion leaders throughout Taiwan.”
In order to start selling, Evermed needs to lodge reimbursement data with the health authority, typically a three-month process, to achieve billing codes for use by the hospitals. First sales are anticipated circa March 2021.
PolyNovo appoints distributor for Finland.
PolyNovo is excitedto announce the appointment of Innova Medical Oy, in Helsinki, to sell NovoSorb® BTM in Finland.
Innova Medical Oy service a broad range of surgery; plastics, trauma, general and burns; already supplying a range of wound and second degree burn products.
There have already beenfour surgical applications of NovoSorb BTM with three surgeons on a chronic leg stump wound, burns and scar revision.
The surgeons have reachedskin graft closure stage on two of these with excellent results to date.
Polynovo FY20 Results
A good set of numbers out today for FY20, with sales inline with my expectations of ~$19m for BTM and another $3m or so for BARDA pre-pivotal trial.
Total loss after tax was a little higher than last year at -$4.3m which at first surprised me, but backing out some share based payments makes it a more palatable -$2.13m. Total cash outflows from operating activities was just -$427k, which was a marked improvement on the previous year despite a reduction in the BARDA portion of funding, and clearly signals a CF+ year in FY21 unless something goes horribly wrong.
Balance sheet remained relatively stable, and with $11m+ in the bank with a extra few million in the debt facility, I doubt we’ll see a raise again unless they went for an acquisition, but that looks extremely unlikely to me now.
A couple of expense related observations. Employee-related expenses skyrocketed to nearly double on last year at ~$15m from a 66% increase in staff numbers, reflecting how much hiring they did in the US prior to covid. It shows how easy it would have been to take the foot off the pedal and simply post a maiden profit.
The other was a drop in R&D spend, now that commercialisation of BTM and the new Hernia ‘Syntrel’ product is the priority. It might pick up slightly this year with the amount of products in the development pipeline though, something to keep an eye on.
Finally, the CFO commentated in the presentation that capex would remain low this FY, as the bulk of the cost of the Breast and Hernia facility is nearing completion. They used a significant portion of the debt facility to finance this, and I would expect they might draw down the rest to fully complete it, then start paying it back in FY22 after the Hernia product is fully approved & commercialised.
Looking ahead to this year, with a June quarter annualised sales run-rate of ~$24m, on the surface it’s not an explosive amount of YoY growth flagged, but given the June month was 36% or so above May – which was already another record sales month in the US – it’s clear the trajectory is only going one way. I have BTM sales forecast at ~$35m for the full year which is ambitious in this climate, but I think it’s possible given the way they exited FY20.
Add the one-off $15m BARDA funding and my top line estimate of $50m looks in sight. I would expect that we’ll see profit this year even if it falls short of my estimate, provided we don’t get any more curveballs.
The real prize is the Hernia and Breast products due in FY22 and 23. If they get that right and steal market share, then today’s price will look cheap in hindsight. My valuation reflects this, but I think on the balance of probabilities things will work out in their favour. Novosorb is a platform technology with wide-ranging approval around the world already, and so regulatory approvals don't strike me as an issue.
A NZ-based competitor, Aroa Biosurgery, lists today on the ASX. Aroa makes a biologic scaffold from sheep stomachs, reportedly at a very healthy 60-70% gross margin. There is some crossover with Polynovo on their target markets, so I reached out to our MD Paul Brennan and asked him what he made of their product.
To summarise our discussion, there doesn’t seem to be anything particularly new or innovative here that would supplant other animal variants. It’s still a biologic, and prone to similar infection rates the same as other collagen-based products.
Perhaps most concerning for Aroa is a rumour that they use a similar manufacturing technique to Lifecell, who in 2016 settled a lawsuit with TELA Bio over patent infringement. It’s possible that at some future date, Aroa could find themselves in court for similar reasons.
Having said that, Aroa are already generating NZ$20m+ in revenue, mostly from the US, so they have some penetration there. Given they’ll float with a m/cap of only $225m+, that also makes it a lot cheaper than Polynovo. But there’s nothing I can see in their technology or sales run rate (their top line was flat over the last two years) that suggests market dominance over the next 10 years.
To my mind, the key to any market dominance in this space is how disruptive each product is on the clinical practice mindset. Even an inferior product can dominate this space for years if surgeons are too comfortable with the procedures they know, and/or are unwilling to experiment. The only hope for a newcomer is to have a superior enough product that it forces surgeons to change their behaviour. I suspect yet another collagen-based competitor will not have enough going for it to knock Integra off its perch.
A synthetic product, however – and the only one in the market – could very easily take the top spot, especially if it performs significanty better in 3 key areas:
If the upcoming large-scale Pivotal Burns Trial for Polynovo backs up current studies that already demonstrate market-leading results in all three of these areas for Novosorb, then that will likely be the tipping point for surgeons to adopt it en masse. As far as I can tell, Aroa hasn't demonstrated a leading position on any of them as yet.
Aroa is one to keep an eye on, but for what it’s worth I’m not too concerned at this stage.
BARDA Funding of USD $15m recieved today as part of the Pivotal trial arrangements.
The confirmation is good news, and aligns with my expectations, although it looks to have been a lump sum payment, rather than a two year staggered arranged as I had originally thought.
This funding will appear as revenue on the P&L, but will be offset by the a 'minor' co-contribution by the business, the details of which are still unclear.
It will be a few years before full thickness burns FDA approval, but given so many surgeons already use it in that capacity in the states, it looks much more like a formality at present.
All in all, very good news.
By my napkin math, the recent trading update of a 33% increase for the June Qtr would place BTM sales at about $19m for the full year. H1 BARDA revenue was approx. $1.6m, so we can reasonably assume it will double, bringing FY20 total revenue to about $22-24m, which puts us just shy of my forecast of 24m+.
Difficult to say how many overheads they stripped out in this last quarter for cost control, but I don’t anticipate a breakeven result at this stage (which frankly would have been astonishing).
The result is a solid one and continues the growth narrative, albeit with a covid shaped bump in Q3. The strong Q4 result signals that demand has been strong, even through a tough period for competitors. This should continue into the next year.
Looking ahead, I think they could comfortably do $40m in revenue in FY21, which assumes a 35% increase in BTM sales and a scale up of BARDA funding for the pivotal trial from about ~$4m this year to about $9m each year for the next two years as per the original agreement. (Note however that the FDA have also requested some additional information relating to the trial procedure today, so this funding may be delayed into FY22.)
On the competitive front, Integra today flagged a ~35% revenue drop in their Q2 results, which sounds promising in terms of the land grab that’s happening, but it’s likely that most of that drop can be attributed to a lack of elective procedures. We won’t know the segment breakdown until Aug 10th, but we’re on the lookout for a stagnating wound care revenue number to confirm the thesis.
Valuation still looks stretched, but the Syntrel Hernia product and Breast sling will very likely add an enormous amount of top line growth within 2-3 years if all goes well, so it largely depends on the merits of those two products and their commercial uptake. I'll update my valution shortly to reflect all this.
10-July-2020: Trading Update
June 2020 was a new record sales month in the US. Since the record sales month announced on 7 April the company has opened 7 new hospital accounts. From July 2019 to 30 June 2020 there has been a 67% increase in hospital account in the US. Despite the adverse impact of COVID on many businesses, Polynovo has had success opening new accounts and achieving record sales. To achieve this, the company is using a number of tools to support surgeons where face to face meetings are not possible.
The company is pleased to announce its first sale in the UK. There have been six operations in England and Scotland and for this reason we expect additional new term sales.
There have been numerous applications of the BTM in the DACH countries (Germany, Austria and Switzerland) and sales are growing accordingly as we gain traction across the region.
The company repeats earlier guidance that product sales for FY20 are likely to at least double FY19.
Sales for the June quarter were 33% greater than the March quarter, but this includes a record US result for June.
Managing Director, Paul Brennan said, “These sales results for NovoSorb BTM are very strong given the difficulties faced with CoVid19. Our teams have maintained their engagement with customers, and we continue to see sales growth.”
Chairman, David Williams said, “Sales are still lumpy but there is a strong upward trajectory as surgeons embrace our product and the patient results it gives. While FY20 sales will show impressive growth over FY19, the sales run-rate is more impressive and should be a better indicator of the near-term future.”
05-May-2020: PolyNovo presents at Macquarie - presentation slides
That link is to the 28 page presentation to be given by Paul Brennan at the Macquarie small and mid-cap virtual investor forum today, Tuesday 5 May, 2020.
23-Apr-2020: First BTM use in Canada
PolyNovo is pleased to announce the first use of NovoSorb BTM in Canada. This case was initiated by one of Canada’s leading surgeons who is a key opinion leader in this field.
PolyNovo has not yet applied for regulatory clearance in Canada as the country has some unique requirements compared with the US, Australian and European regulatory processes. PolyNovo is working towards a Canadian regulatory filing in CY2021.
Product for this first case was supplied under an exemption scheme made on an individual case by case application. Health Canada’s Special Access Program (SAP) allows doctors to gain access to medical devices that have not yet been approved for sale in Canada. Special Access is requested in emergency use cases or when conventional therapies have failed, are unavailable or are unsuitable to treat a patient. All medical devices that have not been approved for use in Canada, require special access authorization prior to being imported and/or sold in Canada.
This first case was a child with extensive burns. PolyNovo is very pleased we could assist in the care of this child and from all reports the child progressing well. The PolyNovo family is proud to be able to improve the outcome for all patients but particularly when a child is involved.
PolyNovo’s CEO, Mr Paul Brennan said “Our US team have worked closely with the Canadian surgeon and the hospital to get NovoSorb BTM into Canada for urgent use last week and over the weekend. Canada is a very important market for us in the near term and seeing demand for our product in advance of market entry is a reflection of the strength of the global key opinion leader network and the high regard for NovoSorb BTM.”
It's still unclear what impact the virus will have for Polynovo over the next 6-12 months, but in the long term I don't think much has changed to the businesses ability to grow substantially. In fact, there's good reason to think it could rise from the ashes of this catastrophe bigger and better than ever.
Although there may well be some short term disruption to BTM use, stock levels are bound to be much greater than their competitor Integra, who have a wider and more extensive manufacturing process which is absolutely being impacted. With inventory prior to COVID-19 at capacity, there should be zero supply issues over this period.
Coupled with the fact that the manufcaturing is only done in Pt Melbourne (not yet under lockdown), and that they could make the decision to continue manufacturing under strict, sterile conditions – which they do anyway – means we could be about to see an enourmous 'land grab' in the states.
Not only that, but margins for BTM are over 90%, meaning aggressive price reductions could further strip demand from Integra, as by all accounts they are close to only breaking even on their already drastic price reductions for their colagen-based products.
Combine all of this with enourmous director buying at levels way above where we are now (and another $150k from Chair David Williams today) suggests they sense an opportunity.
11 March 2020
Coronavirus: Little impact on PNV
PolyNovo wishes to inform the market that the coronavirus is unlikely to have a direct impact on its business or sales going forward. In particular, the Company:
Good set of numbers out today, in line with my expectations. BTM growth from the PcP was up 127% to ~$8.6m, with BARDA revenue slightly lower at $1.6m for a total of $10.2m.
These top line numbers are tracking very well, and the company expects to easily surpass $20m in revenue this FY thus avoiding any R&D rebates. There was no mention of a potential positive earnings result for the full year in this report, but they will come very close I think for FY20, especially if the pivotal trial reimbursement from BARDA dramatically steps up as I think it might in the half, though this may be next year, and they maintain some cost discipline.
The only niggle – which I had previously factored in to my valuation – was that they will probably to do a cap. raise in the next 6 months depending on how aggressively they pursue extra sales staff and expansion, which looks to be high. Cash balance remained at ~$8m with receivables at $4m so it may still be longer off, but they will do one, I’m sure of it. Either way, dilution shouldn’t be an issue above $2.
Some pundits may be looking at the drastic reduction in cash on hand from this time last year, but when you account for the Pt Melbourne facility purchase expense, and total outflows of just $2.5m, the balance looks like it could carry them on this next half with the uptake in sales likely to occur as well. My guess is that they will resist until the SP creeps back up to lofty heights on the back of more positive announcements in the coming months.
On that note, the CE Mark burn trial results which have been flagged in the report for a March release may help with a spike in surgeon uptake in Europe and the UK. Somecould be waiting for further clinical evidence, and this is what they will look to for validation to start using BTM, in tandem with the pivotal trial pathway.
I was hoping we would have more concrete BARDA reimbursement numbers for the pivotal burn trial in this report, but at least we have some idea of patient recruitment beginning in June/July, and commentary that the reimbursement will be increased from the previous feasibility study. I would expect it to at least double the revenue number, perhaps even triple, given the additional patients to be treated.
Overall, a very solid set of numbers to my eye, with plenty of opportunity for margin expansion through production upgrades, revenue growth through expanding markets, uptake and new products, and finally sufficient evidence that profitability is just on the horizon.
26 February 2020
BTM sales up 129% H1 FY20, AND run rate accelerating
PolyNovo said today that NovoSorb BTM sales for the half year were 129% higher than the same period last year. However, the Company said the rate of increase in sales is growing in existing markets and should grow further as new markets come on stream. BTM sales in January 2020 were more than three times the sales in January 2019. While this is encouraging, especially in the US which had the largest month on month growth of any region, as previously advised we expect sales to be lumpy as each market develops. Based on year to date performance the company now expects that NovoSorb BTM sales for FY20 should comfortably double FY19.
PolyNovo’s CEO, Mr Paul Brennan said,“The past half year has been exciting for all of us because many areas of our business are experiencing rapid and dynamic growth. My personal highlights for the first half,apart from the sales growth referred to above include:
Polynovo is proving itself to be a truly disruptive company on the cusp of tipping (finally) into profitability. I think my valuation deserves a revist.
Moving to a DCF model permanently now and using some fairly aggressive assumptions over a 5 year period. FY20 1st half unaudited revenue was sitting at ~$8.5m – and before the CE mark was given – so I’m going to assume a better second half for $25m in total BTM revenue for the full year including BARDA, which has historically been about $4m p/a.
I’ve made some basic assumptions about the timing of Breast and Hernia product entries, whilst ignoring the drug eluting partnership revenue with Beta Cell, since that’s a long way off and a little unknowable at this stage.
Huge investment into the facility in Pt Melbourne makes it a little more certain that these products are going to become commercially available – and remembering that these are based off the same Novosorb platform – so I don’t anticipate any real regulatory complications.
I’m going to assume a cap. raise of say, AUD $75m in the next few months at about $3.50, which dilutes the share count by about 21m, raising the total count to 682m.
In FY25 I’m forecasting (in AUD) $150m in BTM revenue, $17.5m revenue for the Hernia product, and AUD $1.5m revenue for the breast sling, as I’ve assumed that only comes online in that year. These assumptions are based loosely on the historical growth of BTM, and allows the hernia product 4 years of relatively modest market penetration. I suspect it could be double, but I don’t want to get too carried away.
I’ll also assume that the staff count triples, R&D spend triples, corporate costs double and inventory quadruples, and gross margins stay roughly at 90%.
Gives an EBITDA of roughly ~AUD $86m. Apply a 25% tax rate and ~$1m in A&D expenses, for NPAT of ~AUD $65m.
P/E is the difficult part.
In FY25, I estimate the company will be growing its earnings by about 30-40%, with a long runway of growth remaining for the breast and hernia products, as well as continued growth in BTM. I think the 30% number could be sustained for a few more years after this with minimal effort.
Given its biggest competitor, Integra, is currently on a p/e of about 88 (wow!) at the time of writing and is more or less at maturity (only growing it’s bottom line this year [before tax benefits] at about 5%), a p/e of 50 seems fair for a much higher margin business growing its earning at a higher rate.
50 might seem rich until you consider that the bottom line growth of 20-30% is probably going to be sustained over FY26 and FY27 if breast and hernia products perform well. IF that happens, it would come down to a much more conservative number. I'm comfortable with that assumption.
Putting it all together we get:
An EPS of .095c in FY25, applying a p/e of 50, and discount back 10% each year to the end of FY20, gives an IV of $2.80.
Upside to this is if BTM sales drastically come in higher than I anticipate in the next two years, Breast and Hernia products go to market sooner than expected, gross margins somehow improve from 90%, or the eluting polymer comes to market in that time with significant royalties from Beta Cell.
A couple of encouraging progress reports out of the UK and Europe in the last two weeks which suggest sales over there are going to do OK this FY.
Clearly it's too early for them to give exact sales numbers or estimates, but it looks very likely based on their commentary that 2H FY20 will be significantly better than the first.
Immediate surgeries and a second order from their German-Based distributor PMI implies that the significant time and investment preparing the way in advance of the CE paperwork was probably worth it. Moreover, the additional staff hires for the Direct UK sales channel might suggest stronger than anticipated demand.
I previously estimated ~$10m in BTM sales over there this FY, which is unfortunately looking unlikely given the longer than anticipated CE mark delay and lack of hard numbers in these announcements. It's impossible to pin down a range at this stage, but if I had to guess, I'd say maybe $2-4m, possibly 5, based on the rapid implementation we’re being told is happening.
However figures aside, my biggest take away from these two announcements is the continued doctor/surgeon enthusiasm coupled with the speed of uptake for BTM in clinical practice. Because BTM has such a niche target market – highly skilled surgeons – any further praise they heap upon BTM adds another nail in the coffin of the collagen-based competitors such as Integra.*
Their enthusiasm for the product not only drives immediate sales, but it also steadily builds a strong moat for synthetics, encourages other surgeons to try the product, and reduces the need for excessive marketing.
Valuation is getting hard to wrap my head around, but if surgeons take to Novosorb breast and Hernia products in the coming years as quickly as they seem to do with BTM, then frankly it could still be considered cheap via DCF.
*(Integra incidentally gave an update on their anticipated results earlier this month and it wasn’t great: revenue at or near the lower end of guidance and organic growth in the low single digit range. Press release here).
I think Chagsy raises some interesting points in the recent Bear case straws, and I thought I would address them as best I could since they are legitimate concerns.
The second which concerns BARDA is a little more straightforward to address because BARDA isn’t ‘sales’ as such - it’s a contractual reimbursement for the cost of the trials plus a fixed fee. The two ‘million-dollar months’ in a row from recent market updates aren’t attributable to BARDA in that sense, so a significant uptake in hospital purchases is more likely the cause. Add back in the fantastic HY sales, and I think we're looking at a significant reduction in the revenue attributable to BARDA this year from 60% down to something more like 20-30%.
Nevertheless, BARDA revenue will continue to be significant in the next two years as they are about to begin funding the pivotal trial which is much larger, which brings us to TAM and what we consider an 'expensive' product, and what a small but expensive market is.
To begin to understand where the TAM begins, we should look at the main competitor, namely Integra Life Sciences. They currently have a m/cap of ~$4.5b US, have been around for decades, and have the incumbent products to which NovoSorb is the disruptor. Surgeons have been using their product for over 20 years and are familiar with the procedure.
Last qtr, their equivalent revenue was about $125m and growing at a modest 3.7% on the previous equivalent qtr. At about half a billion revenue per year, that’s nothing to sniff at.
NovoSorb is currently about half as expensive as Integra’s product (See my product costs straw), so let’s halve that to $250m revenue per year, if we can capture all the market Integra currently holds. Of course we won’t, but we could capture a significant chunk within the next 5 years on the current run rates being reported recently. Bear in mind too, NovoSorb is only really expensive in the US; in the AUS/NZ for example, it’s x2.5 cheaper, and the price varies per market and distributor. This plays out well in those countries that may have trouble justifying the high prices (see my Geographical revenue straw for information on market penetration). NovoSorb is also on a 90% margin in the US before operating costs, so there is a huge profit margin involved, and plenty of room to compete on price.
The breast sling and Hernia products currently in development are worth consideration too when considering TAM, and if we were feeling optimistic, we could take at face value what PolyNovo have previously said in the chart here on page 6, which adds $5b to that number in future. I’m really interested to see what the insulin secretion and drug elution products could add to this as well, though it's completely blue sky right now. These are all some years into the future of course, but the parent polymer (NovoSorb) already has FDA approval, so a great deal of the risk has been removed.
Not being a surgeon, I can’t speak as to the reduced frequency of burns and heroic surgery in the developed world as you claim, so I’ll take you at your word that it’s declining, despite the increases in Integra revenue. I would be interested in hearing what the patient outcomes are for those undergoing chemo immunity and radiotherapy, and specifically, if they provide a better patient outcome over the long term than a BTM application with skin cultures. If it's clear those procedures provide a better result than a BTM, then it would be worrying.
TAM for NovoSorb is by chipping away at Integra’s established revenue short-term (and other animal base competitors) + product pipeline longer-term.
BARDA revenue is likely to be an insignificant amount once Integra TAM is partially realised, probably in FY22 onwards. The pivotal phase trial (which BARDA will continue to fund over the next two years) is highly likely to be successful based on the available evidence (though I agree that anything going wrong with it would constitute a broken thesis).
There are some distinct risks to the PolyNovo thesis that I can see. These are in no particular order, though they primarily centre on Integra.
Of all the listed risks above, I'd say that Integra cutting their margins by a moderate or aggressive amount represents the biggest near-term risk to PolyNovo. It's conceivable that they will begin to slash their prices this FY (if they haven't already), as they grapple with the disruptive threat of NovoSorb.
Look for the Integra FY results scheduled for release to the market in the US on or about the 24th July – the Orthopedics and Tissue Technologies segment will likely improve on a yearly figure, but the Qtrly revenue figure should ideally be coming down or remain steady. It wouldn't be too troublesome to see it grow modestly, but it would be a little disappointing. Ideally, no more than ~3% growth qtr on qtr.
Should become available here
There are plenty of anecdotal and scientific studies that espouse the efficacy and quality of NovoSorb, giving the product a strong potential moat.
Below are a few samples from scientific papers.
Early study on mice – comparison with major rival Integra
Favourable results achieved, but notes there was an increase in an inflammatory response compared with Integra.
Study 1 – Early 2016 study with promising results, Royal Adelaide Hospital
Very early trial with 3 patients:
"Our results demonstrate that using BTM is a novel, viable approach to the management of acute burn injuries involving major joints as well as reconstructing burn-related joint contractures."
Study 2 – January 2018
This study was conducted as an early follow up to Study 1, with 5 patients who suffered significant burns from various sources. The results warranted changes to the BTM which included the addition of the top layer to reduce the fail rate to near 0% levels. Some graphic images in this study, but the 365-day results seem remarkable, even with the unfinished product being used here.
1. Section 1 –Introduction https://www.sciencedirect.com/science/article/pii/S2468912217300378
3. Section 6 – Conclusion https://www.sciencedirect.com/science/article/pii/S2468912217300378
Disclaimer: 2 of the authors, John Greenwood and Marcus Wagstaff, were shareholders of PolyNovo as of January 2018. They work at the Adult Burn Service, Royal Adelaide Hospital, and the Department of Plastic and Reconstructive Surgery, Royal Adelaide Hospital, respectively.
I would be put off by such a conflict of interest normally, but in this case, their endorsement of the product has the reverse effect on me, given their expertise.
Study 3 – Ongoing
Ongoing trials of targeted 30 patients with results due soon. As yet unpublished in peer-reviewed papers. Study involves 4 Australian hospitals and 1 in France.
Study 4 – Australasian Journal of Plastic Surgery, March 2019
https://ajops.com/index.php/ajops/article/view/72/299 (warning: graphic medical imagery).
From the conclusion:
"Necrotising soft tissue infection is a devastating disease that often leaves a patient with large full-thickness skin loss. SSGs provide a reliable and functional reconstruction, but have numerous shortcomings. The synthetic dermal template NovoSorb™ is a product that offers a two-staged reconstruction for complex skin defects. We demonstrated its successful application in treating a large soft tissue defect that contained exposed tendons and presented a high risk of infection. It has the potential to offer a thicker, more durable and more mobile skin reconstruction when compared with SSG alone."
Finally, here is an extract from a recent ASX Announcement from Chairman, Mr David Williams on Nov 18, in which he touches on the two surgeon/shareholders that unertook initial studies (Studies 1 and 2 above):
"I would like to emphasise the wonderful support we are getting from surgeons in all the markets we enter. I would also like to acknowledge and thank Drs John Greenwood and Marcus Wagstaff from Royal Adelaide Hospital for what they do representing us around the world. I am happy to report that both are large shareholders."
My own conclusions
Demonstrable early and ongoing success with NovoSorb in both burns treatment and soft-tissue plastic surgery. Industry specialists seem to be approving of the product wordlwide, with more results due in soon from Study 3. Indeed, many of them are acting as pseudo salespeople at conferences where they present their findings.
The scientific consensus seems to be extremely positive so far, and in my mind, very minimal risk seems to be present in the BTM product.
PolyNovo is the commercial spin-off/arm of a CSIRO R&D project that began in 2004, with a mission to find superior polymers for medical use. Their flagship range of products, under the umbrella name, 'NovoSorb', are a series of non-toxic synthetic polymers that biodegrade in the body over time via hydrolysis.
Crudely speaking, the NovoSorb 'BTM', or 'Biodegradable Temporising Matrix', acts as a sort of 'scaffold' for damaged tissue to rebuild itself into over time. Common applications range from severe burns to wounds where significant tissue and skin has been lost. It has the desired effect of creating a more supple and elastic skin once fully healed, with a noticeable reduction in scarring.
Polynovo have created an animated video that explains their product in greater detail here:
Since a restructuring in 2014, management have been steadily kicking goals getting the product to market, and revenue is starting to really take off. PolyNovo are close to breakeven on a month-to-month basis, with lumpy revenue just about ironed out via an ever-increasing customer base and repeatable orders when inventory is low.
R&D spend is looking to extend their product into a wider variety of uses, such as hernia, breast and diabetic applications as well, with trials well underway.
Feedback from surgeons in Australia and the US is very positive, with great clinical trial results and numerous approvals.
The majority of revenue is presently from the US, where they have recently secured a Dept. of Defence contract, however the AUS/NZ and 'Rest-of-World' component is rapidly increasing as well, with direct sales teams and distributors in place across the globe.
They face some fierce global competition, but arguably have a much better product which is showing early signs of supplanting the current animal matrices from large competitors such as Integra.
With a lot of the speculative elements off the table now, and if management can execute sales and production capacity well in the coming years, expect PNV to do very well.
"A trading halt is requested in respect of verifying final sales results for December 2019 half year period and finalising an announcement regarding the significant uplift in sales. 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 the morning of Wednesday 8 January 2020".
Sounds promising- what is everyone's thoughts?
PNV's first $2m month. Very impressive uptake, they also note that their first $1m month was only May 2019. The announcement does note that the sales might be lumpy going forward so good to see they aren't overpromising.
Overall I think a very good announcement but keen to hear any further thoughts.
Recent presentation at Macquarie showed parents will start expiring from 2023. That’s only 4 years of exclusivity, then competitors may copy product and eat away at market share. However, there may be some significant “know how” and trade secrets required to reproduce NovoSorb.
Potential for future patents around method of use in new indications/treatments eg Hernia, Brest Surgery
After a long wait, the paperwork for CE approval has finally arrived.
Although expected, this is fantastic news as it means BTM can now be sold throughout Europe and the UK, adding significant long-term revenue streams.
Already there has been significant investment in the UK and Germany preparing the direct and indirect teams for sales ahead of this announcement, so they will be champing at the bit to get going. A number of hospitals across Europe have been waiting to evaluate BTM as part of their clinical practise, and with the advent of CE approval, they no longer have to wait.
CEO Paul Brennan said, "This is a watershed moment for Polynovo. Our global regulatory approvals have expanded significantly with this certification. Our early preparedness in UK/Ireland and DACH should mean a shortened timeline to booking our first sale. We also believe CE approval will fast track regulatory approval in a number of other countries including several in South East Asia."
Well done to all who bought into the recent dip and any brave souls who topped up!
-PolyNovo claims to have an edge over competitors because they can design NovoSorb to have varying lengths of degradtion rates depending on what is required by the clinical case
-Generally speaking, once a medical product gains ground, medical professionals are very relucantant to change due to the risk of a new product failing, thus if NovoSorb gains ground it will have quite a defensive revenue stream
-Always the possibility that complications/adverse events from use of NovoSorb may arise as more patients are treated with NovoSorb. Whilst clinical trials are meant to mitigate this risk, the increased sample size following entry to market of a medical device is the real test of safety
-Approval by regulatory bodies removed or not granted
-My sense is that medical professionals are risk adverse meaning they are reluctant to try new products on patients, consequently penetration into the market is always slow with new medical devices. Risk is that PolyNovo can not convince surgeons to adopt the use of NovoSorb
-Facility to manufacture NovoSorb is likley highly sophisticated meaning NovoSorb can not be produced anywhere and destruction of the facility by fire for example would cripple the supply chain
-NovoSorb likely needs to be sterile, contamination of the product and subsequent infection of the patient would critically wound PolyNovo
-Health care industry continues to grow as the world progressively becomes more affluent meaning more people can access healthcare, ultimately increasing demand for medical device products
-Increased adoption by surgeons for use on patients will drive revenue growth in the mid-term
-Approval of NovoSorb by regulatory bodies
-Entry of NovoSorb for dermal regeneration into new geographic markets
-Success of clinical trials testing the application of NovoSorb in new clinical cases, currently have a trial for tissue repair following burns
-Sales realised in the USA to date
-Given the wide variety of clinical cases that require dermal regeneration I am guessing the application of NovoSorb is expansive (Dont have a market size in terms of $$$ yet)
-Currently approved in the USA, Israel, AUS, NZ, South Africa, Saudi Arabia
-In process of gaining approval in Europe and entering market
-PolyNovo is a medical device company whose current activities are focused around commercialising its patented tissue scaffold technology "NovoSorb"
-NovoSorb is a polymer (kind of like a plastic or fibre) that is used to assist in tissue repair following injury
-NovoSorb is applied to a wound to act as a scaffold to aid in the regrowth of dermal tissue (the tissue under your skin) and blood vessels, then degrades over time.
There was a noticeable buzz about the room at this year's agm, and management were grinning from ear to ear.
To a packed, standing-room-only gathering, Chairman David WIlliams was as gregarious and loose-lipped as his reputation would suggest when he delivered his address; he was clearly a very happy man.
What we now know is that the sales run-rate, reported to the ASX as an annualised FY20 target of $15.6m in early August and based on June sales alone, is now sitting at approx. $18.6m, suggesting healthy sales growth MoM for the 3.5 months into FY20. I feel confident we can expect sales to outpace broker consensus, with the last few months of FY20 looking to deliver stellar results.
There a long list of things I heard that emboldened me, but to highlight a few, let me begin with Williams' comments on staff hiring in the US.
He mentioned that they are looking to hire 30-50 extra sales staff in the near term, with each reportedly so far clawing back their entire yearly salary within 3-4 months of being hired. Annualised, and assuming that the average sales staff salary over there is about $50k, that represents a minimum of $200k+ of sales for every staff member per year.
Another thing that struck me was CEO Paul Brennan's comment on inventory levels. They are keeping 6 months worth of BTM on hand at all times in the US and APAC regions to ensure demand is always met – which is in contrast to Integra – who seem to be struggling to keep up with demand. It would seem to confirm my theory that BTM is much quicker and cheaper to produce.
A small detail that was glossed over was the fact that we've delivered the first sales to the DoD. No detail was provided by way of numbers, but I assume they will be eventually ordering very large amounts. This was excellent news that no one seemed interested in.
Intriguingly, the Singapore and Malaysia markets are now going to be handled direct, rather than through a distributor, which will be great for margins. It signals huge confidence that the Asia region will be a strong growth driver in the years to come.
There were some good questions thrown at management, and I'll highlight two that stuck out.
Avita (ASX:AVH) was brought up in connection to a SH concern that they could superseed BTM with their spray-on-skin technology. However as Williams and Brennan pointed out, both products operate in entirely different use cases and they are seen as complimentary products. They mentioned that they were on good standing with the CEO Fiona Wood, and had a good relationship with her and the company. I'm not at all concerned about Re-cell at this stage, as it has nothing to do with rebuilding the dermis.
Finally, I asked Paul how he thought the competitive landscape in the US might play out in the next couple of years with respect to the large incumbent (Integra). The response was exactly what I was after.
"We'll take away that bio market away" he said.
Very optimistic! But coming from Paul Brennan – an otherwise calm, rational and scientific minded individual – it spoke volumes. Integra scaffolds account for approx. US $340m in sales p/year, so taking all of that away would be very nice indeed.
He elaborated extremely well as to why, mentioning that surgeons are changing their clinical practise to substitute the biologics with BTM, and that it's now widely understood that infection rates are 0% with a faster heal rate. Slowly but surely, the noose is tightening, and anyone keeping track of my Integra straws will see that their revenue looks like it's starting to flatten off.
Valuation is still a major concern for many, but I think PNV is expensive because it is a genuine disruptor with technology that won't be matched for many years to come. With this in mind, I think it more than likely that PNV will exceed Integra's MC at some point in the future, whether it be 2, 5, or 10 years away.
Keeping in mind too that none of my calculations cater for Hernia and Breast products, which are due to hit the market in the next 2-3 years... and have a much, much bigger TAM than BTM.
Integra Q3 FY19 Results
Polynovo’s biggest US competitor, Integra, released their Q3 results today, with the Orthopaedics and Tissue Technologies (OTT) revenue flat YoY at $126.1m (down by 0.6% on Q3 FY18). Wound reconstruction contributed $82.2m, of which outpatient wound care increased by mid-single digits.
As a reminder, the OTT revenue houses Integra’s range of collagen-based dermal matrices, which PNV’s NovoSorb is competing with. Integra's matrices are the incumbent and market leading range of scaffolds.
Plotting the last 3 years of quarterlies in the OTT segment reveals a distinct flattening off of revenue, which is odd given that Integra mngm't said they were not meeting the underlying demand for their product in this segment. The Integra supply issue is surprising and potentially good news for Polynovo.
Polynovo have flagged a ramping up of production to meet expected demand in the coming year, and given NovoSorb is synthetic it's presumably it is much quicker to manufacture. A significant opportunity lies in being able to fullfil the demand not being met by Integra’s slower manufacturing methods.
Reflecting on the flattening of revenue then, it seems unlikely to be driven by lack of demand and more because of a cost reduction. Indeed on the earnings call mngm't said they were ‘restructuring’ some of their pricing models, though they didn’t provide detail on what that meant other than mentioning that they were looking to make access more cost-effective.
A number of the analysts on the call raised questions about competitors (again, without specifically mentioning PNV), but none got straightforward answers. The overall mood from Integra mngm't is that they expect single digit growth in the OTT space in the next qtr, and that they don’t see a major long-term problem other than some headwinds in Q4. They do have a vast range of products in comparison to PNV however, so any OTT slowdown could be offsett by increases elsewhere.
Overall, there's no silver bullet here, but the flattening of revenue does imply that we might be making some headway into their market share.
Integra’s SP promptly dropped by 7.5%.*
*ticker is IART.NAS for those that want to look.