Plenty to like in the half report, though cash balance remains a big concern at this stage. 

Revenue reached $18.1m in the half, as telegraphed in a recent update. $14.2m from the US alone, up from $9m from the previous corresponding period, or ~58% higher. Great traction over there, which should only increase going forward. 

Australia and NZ went backwards, no doubt as a result of lockdowns, so we should definitely see an improvement in those numbers next half. Other countries only accounted for $850k and despite being immaterial at this stage, I think we should start to see some serious traction here in the coming years. Having said that, distributors clearly aren’t doing much for the top line so management might need to focus on the larger direct markets such as the UK, and grow slower whilst building out their networks across Europe.

The P&L reported a small after tax profit ($1.62m) for – I think – the first time, which is great news but that number’s a little deceptive.

Wages and salaries ballooned out to $9.3m, from $6.2, but offsetting that was a huge reversal of share based payments ($3.7m) due to the resignation of MD Paul Brennan the ex-CSL COO. It meant that all in all, employee expenses actually went down in the half, despite a massive surge in hiring over in the US. I would anticipate this expense will be much higher in the next half.

Backing this one-off out, and the loss would have been about -$2m, so it’s touch and go for the next half as to whether they can string together a full-year profit. 50/50 to my eye, but achievable if the rest of the half carries on as January did. On that note, January was a record quarter, nearly cracking A$4M in sales (currency rates might have helped here). 

Looking at the Cash & Cashflow, and this is where things look a little less rosy. Operating cash flow was -$3.2m, the biggest detractor being wages and payments to suppliers. This looks like the big concern to me. The business needs to demonstrate some leverage on this front in the coming half to show investors that hiring sales staff scales sales beyond cost to hire.

A lot of that outflow was also due to payment of suppliers however, but it’s a little opaque what the breakdown is. Either way, it jumped from -$13.5m to -$20m on the PcP. Not ideal. I think they may need to raise cash, and soon, but it really depends on sales, which seem to be really taking off now that COVID isn't as big a factor. A pity they didn’t bite the bullet and raise when the SP was much higher – hubris on the board and management’s part I suspect.

If they do raise, the good news is that I doubt the dilution will be too much, even at these depressed levels. Assuming they raise $20m or so, that’s about 20m more shares into the mix of 670m, or a ~3% addition. Not too much to worry about there, and the money raised should carry them well into FCF territory.

The truth of it is that despite leadership headaches lately, there’s no question of sales traction in the states. It’s consistently improving at a predictable rate, rather than half-to-half lumpiness.

If and when Syntrel and other products hit the market in the coming decade, this will only serve to bolster the platform technology’s sales, so still plenty of potential here.

Full report here.

Decent update from Polynovo on Tuesday and about on track with my estimates.

Piecing it all together, the unaudited sales for the first half came in at AUD$16.28m, up 45% on the PCP (AUD$11.25m) and with BARDA reimbursement, the total revenue was AUD$18.04m.

45% growth is a great result given all the recent turmoil, and gives me confidence that the product quality and results are the key drivers now of the business, with management turnover a side-show. 45% is a decent improvement on the 32% growth YoY posted last FY, so there's evidence to suggest the worst may be behind them.

Rest of world is still recovering slower than anticipated, contributing a meagre AUD$2m in sales, but this should only improve as hospitals recover in the coming years. For the full year last year, the rest-of-world sales figure was ~$1.6m, so already it's growing at over 100%. This stream hasn't been material to sales as yet, but might provide some surprise to the upside in the next few years as the product gains traction and better recognition in the influential US. 

I think they can manage to get AUD$35-40m in sales this year, with BARDA adding about AUD $4-5m, bringing the total revenue to about $40-45m. This is ever so slightly below my previous base case estimate of AUD$45m in sales, so they're on track to meet my expectations at this stage.

Just by ignoring the noise and looking at the sales numbers from the last few years, it's clear that there's decent traction. Growing evidence that they will supplant Integra and other Biologic competitors like Aroa in the not-too-distant future if the trend continues.

2017: $3.6m

2018: $5.7m

2019: $13.4m

2020: $22.2m

2021: $30m

2022: HY $18m + ?

A decent result for PNV out yesterday, in line with my expectations. The standout really was that US BTM growth remained quite resilient, growing at ~50% YoY, boding well for even better growth this year.

Overall, revenues were up 32% across the board to $29.3m, a little shy of the $30m I had flagged a month or so ago. $24.8m of this was BTM sales, whilst BARDA funding contributed $4.4m, a ~25% rise on the previous year. This number will be even larger this current year, as the pivotal trial scales. 

I was a little disappointed with the rest of world category, coming in at only $1.6m up from $668k the previous year. Although this is over 100% growth, it’s made up of a lot of new distribution channels, not least of which is the NHS, so this number really needs to improve in FY22. And it should, given how slammed the UK health system got hit with Covid. Germany should perform better too for the same reason.

The loss widened slightly to $4.6m, which they were quick to point out was primarily due to some share-based payments and other items – but let’s feel free to ignore that bluff and acknowledge that it wasn’t quite the standout year shareholders were hoping for. Still, actual profit looks more than likely this year if they can maintain costs and grow at the current rates. My sense from the call was that they will do all in their power to post a real NPAT number this year, and finally to put to bed any doubters.

And they’ll have to in order to avoid a raise. At $7.7m in the bank, they brunt through $4m in cash over the year. Pleasingly though, most of the capex for the Hernia facility is done, so we *should* see another reduction on that front over the next 12 months. I theory, all they need to do to avoid a raise is stop hiring people (which they won’t, signalling a likely rise to ~140-150 staff this year), so it’s well within their power to manage this correctly. If they do raise, that's a huge red flag for MD Paul Brennan's ability to allocate capital correctly. 

There’s plenty more in the report I could pick over, but suffice to say it was a more challenging year than most expected for Polynovo. It looks like the Hernia product has been pushed back as well, which will affect my valuation. However, despite the setbacks they still managed to improve market penetration better than any of their competitors in the scaffold space as far as I can tell, easily beating fellow ASK listed Aroa (ARX) in terms of % sales increase, and possibly even the large incumbent, Integra (full year results pending).

I would be very surprised – pending no more black swans – if Polynovo do no better than 32% growth in FY22 based on the way they’ve exited FY21. However, the valuation is still quite rich and only makes sense by inputting continued high growth, something that was missing this year. 

Full report here.

This short featurette produced by the BBC is probably the best explainer I've seen for what Novosorb BTM does and the patient outcomes it produces. Well worth a watch:

http://www.bbc.com/storyworks/natures-building-blocks/rebuilding-skin-tissue-and-lives

Great to hear from Dr Greenwood too, who pioneered the technology at the Royal Adelaide after the Bali Bombings. Worth pointing out however that he still has a stake in PNV, and that the video itself was paid for by Polynovo.

Bit of a cryptic update out today from Polynovo, but from it we can infer that they will post about $25m in BTM sales for the full year. Combined with other sources of revenue, including BARDA, they should post around $30m in total, which is broadly in line with my expectations after the half year result, and represents about 35% sales growth YoY.

Given they managed this through a period where they couldn’t get face-to-face access to surgeons this is a decent result. I would expect that % growth number to increase this year to something more akin to >50%, given how much geographic diversity they’re building, not to mention the fact that the typical sales cycle involves staff actually being in surgery showing surgeons how to use the product – something they haven’t been able to do much of this past year. 

Things look broadly on track, despite the challenging year. With sales momentum in the US picking up this last quarter (a record US$4.9m in sales), more sales staff being put on and access once again to operating theatres, we should expect a much better year in FY22.

Having said all that, it’s frustrating they don’t simply state the unaudited BTM sales numbers, or better yet, simply wait for the audited results. No change to my valuation at this stage.

Announcement here

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.

Announcement here

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. 

Chariman David Williams appeared on Judd’s ‘Talk Ya Book’ today, with his trademark panache and enthusiasm: 

https://www.chrisjuddinvest.com/shows/talk-ya-book/david-williams

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.

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.

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.

Aroa BioSurgery

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: 

1. In hospital, where the procedure is simpler, shorter and patient stay in ICU shortened
2. In price, if it's cheaper than every other competitor
3. In patient outcomes, where it shows the best cosmetic outcomes.

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.

https://aroabio.com/

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.

Announcement here

10/07/20

Trading Update

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.

07/04/20

Polynovo announced a trading update today detailing continued strong growth in BTM use and sales, with unaudited revenue for the March quarter at ~$4.49m (I suspect in AUD) representing a 166% increase on the prior corresponding period. 

The trading update also detailed some anecdotal evidence that hospitals are pivoting to BTM over collagen based products, because of the reduction in surgery times and hospital resources. This point is especially crucial. In the midst of this crisis – particularly in the US – where most ICU beds across the nation are already at capacity, hospitals are probably pressuring surgeons to be time conscious and frugal. 

It’s by no means the ideal way to change minds or clinical practice, but out of necessity the current situation seems to be driving uptake in BTM use, evidenced by commentary that sales saw a stronger uptick in late March (when it started to become clear that the US was in trouble). 

They also announced a $9.3m Debt facility with NAB, primarily for capital investment in accelerating the Hernia profit to market. Lots of rumours were circulating about a cap. raise today, but with overheads likely reduced because of this crisis, coupled with increasing sales and a heavily discounted SP, I would have looked on such a move very poorly. I don’t doubt that management would have baulked at the idea, and am pleased they didn’t do it.

I estimate they have enough working capital (~$7.4m) and growing sales to manage through this crisis without getting into trouble, so this facility looks to me like a strategic investment to accelerate the hernia product to market, given cost of borrowing is as low as it may ever get in this country. 

I’m hopeful that an extension to our BARDA funding will be announced soon as well, further reducing the need for a raise. According to the original agreement, which I managed to track down, the extension to the initial 3-year contract is for two further years and to the tune of ~USD$18m to facilitate a pivotal trial. This should come into play this FY once the scope of the trial is finalised as part of the FDA fast-track program. It was due late last year, but the fast track status – oddly enough – delayed it.

All said, Polynovo looks on track to possibly deliver a maiden break-even result. It will be close!

18/03/20

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. 

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. 

20/02/20

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.

04/02/20

Interview with Alan Kholer

This is the 3rd interview with Alan, and I *believe* the only one that got an ASX mention (as price sensitive no less!). 

This and other recent price sensitive announcements makes me suspect they are looking to cap. raise in the not-too-distant future to fund growth.

A cap. raise wouldn't necessarily be a bad thing – dilution at around $2.50-3 would be relatively small on say, a $50m raise – because they could quickly finish the refurb of next door at Pt Melbourne, accelerate breast and hernia R&D, hire more boots on the ground in the UK and US and reliably never raise again (for cash flow purposes).

––

The interview itself gives nothing new away, although some (like Alan himself) might be surprised to learn a) BTM still needs a closing graft and b) Avita are not competing.

In any case, the biggest take away personally is that Paul is still the right man for the job.

I've said it before in another straw, but his gutsy switch to be CEO in 2015 coupled with heavy investment in the business at great personal stress, means he is acting like an owner operator; carfeully considering the best use of capital, and looking longer term than a buyout play. The interview just made this more obvious to me.

28/01/20

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. 

TL;DR: 

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.

• Integra moderately cuts their prices and makes it harder for NovoSorb to compete in the near term, stunting NPAT and putting pressure on the balance sheet for more cap raises to support our expansion.
• Integra aggressively cuts their prices and makes it difficult for NovoSorb to grab market share for many years, draining the balance sheet and patience of investors. Integra has the balance sheet and the brand to do this if necessary, though it might prove futile ultimately.
• Integra (or another big pharma competitor) makes an offer for Polynovo before it can penetrate the market to any great extent. Unlikely given Paul Brennan has expressed distaste for this in the past, and there is a nucleus of high-profile Adelaide holders that are really proud of what's been achieved thus far. I wouldn't vote in favour, put it that way. The price offered would need to be minimum x4-5 current m/cap to account for the (now) obvious lack of risk in using NovoSorb and high probability of market grab potential. Very unlikely IMO.
• Integra sales continue to remain strong for the next 2 years. My valuation is dependent on NovoSorb aggressively eating into their revenue over this period. Improved Integra sales would indicate loyalty to an inferior product against firm clinical evidence. This would be a result of either a poor sales effort in the states, or Integra pursuing an intensive campaign to maintain customers. The later is preferable if sales don't materialise, though both would be worrying.
• The CE Mark approval in Europe is extensively delayed, or doesn’t come through this CY19 or before the halfway mark in CY20, without a reasonable excuse that isn't anti-NovoSorb. 
• The upcoming ‘Pivotal phase’ of the BARDA trial, scheduled to commence later this year, either fails to materialise, produces adverse results or reverses the FDA approval. Instant sell.
• Hernia and/or Breast sling products fail to achieve FDA approval, though this is a concern for FY22, and wouldn't affect the standard BTM sales. Low risk at this stage.
• A competitor produces its own distinct synthetic polymer to compete with NovoSorb, though Paul Brennan (CEO) isn’t aware of any such patent/product, and this seems very unlikely. Would likely take years to get to where NovoSorb is, and may not even be as good.
• A competitor bypasses the need for a BTM with a superior and novel product that produces far superior results. Unlikely in the next 10 years, and would require the same intensive approval hoops.
• Possible as-yet-unknown side effects that lead to crippling litigation. Instant sell. 
• Production capacity is currently only in Pt Melbourne (I believe). I would like to see this extend to a second location at some stage to diversify the risk of supply issues in the rare case of fire/flood/theft. 
• Distributors do something to adversely affect our reputation or product, leading to loss of sales. (US is direct, so not an issue).
• Sales growth slows or stagnates before significant market share is achieved. Growth in BTM sales needs to remain strong until Qtrly revenue hits $50m+ (HY $100m). Looking at FY22/23 here is my best guess.

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 

https://www.sciencedirect.com/science/article/abs/pii/S030541791600053X

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:

Conclusions:

"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."

http://www.anzbaasm.com/3288

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.

Key Points:

• Notes that PolyNovo's BTM  has several advantages over current treatments (such as collagen, glycosaminoglycan or combination dermal matrix bonded to a silicone ‘pseudoepidermis’.) The biological origin of such matrices makes them costly and may encourage infection.1 (They are referring here to the synthetic, and thus highly replicable and cost-effective, nature of our BTM over incumbent practices.)
• This study had a fail rate of <7% for the BTM, with subsequent reapplication of BTM 100% successful. All 5 subjects survived. NOTE: After this initial study the top layer of the BTM was introduced to deal with the <7% fail rate, with two further studies of 10 and 15 patients proving the undeniable efficacy of the product with no more mention of a fail rate.2
• From the conclusion: "In each case, our experience of its application, evaluation of integration and split skin graft application, along with the management of complications such as sub-seal infection and haematoma, has steadily increased our confidence in its use with lessons learned applicable to subsequent cases.3

1. Section 1 –Introduction https://www.sciencedirect.com/science/article/pii/S2468912217300378

2. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4492216/

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.

https://www.anzctr.org.au/Trial/Registration/TrialReview.aspx?id=368373

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:

https://vimeo.com/310031232

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.

Two million dollar month

Polynovo announced today that it had recorded its first ever $2m dollar month in December, with revenue from BTM sales unaudited sitting at $8.57m for H1FY20. The increased revenue represents a 129% lift on the prior corresponding period, and signals an impressive full year result ahead. For context, $8.57m is about $1m shy of FY19 total sales.

Despite a similar announcement on the exact same day last year, I have to admit being slightly annoyed. It's unclear to me why management feel compelled to issue sales udpates before releasing the audited accounts. After all, the sales figure I had in mind for H1FY20 was ~$9m (based off of commentary at the AGM that the annual runway was sitting at >$18m) so this shouldn't have come as any real surprise for people paying close attention. 

People have also been speculating as to the contribution the White Island tradegy may have had on the December result, which to my mind is a distraction. Not only are the prices here in ANZ much lower than in the US, but the cycle time to booked revenue probably isn't as short as what is being implied. I don't know the exact lag, but I can imagine it's longer than 30 days, which means that it would not have even come in yet given the incident occured in early December.

In any event, the market clearly liked the news, with the share price rising 12% at the time of writing.

What will be more interesting is the pending announcement concerning the expected impact the CE mark will have post authorisation. I have perhaps calculated this higher than most people in my valuation, but as David Williams has said in today's announcement, there is plenty of latent demand so that should help drive it quickly into something meaningful.

No change to my valuation just yet – I'll be waiting on the audited results, expected CE contribution and confirmation of BARDA pivotal trial contract revenue. All of which should appear between now and the end of Feb.

13/12/2019

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!

17/11/19

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.

1. 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.

2. 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.

3. 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.

4. 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.

1. 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.

2. 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.

25/10/19

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.

16/09/19

Polynovo today announced the Appointment of Mr Ed Graubart as Senior VP of Americas replacing Kevin Whiteley. Kevin had been in the role less than 3 months and was still on probation.

The delay and lack of transparency on the reasons why Kevin left is concerning. There are a few things to consider which might give a clearer picture of what has happened:

1. It was announced to the market on the 26th April that Kevin was appointed as VP (Note that Ed is a Senior VP). 
2. The delay in telling the market he had left today means that Kevin left a minimum of about 2 months ago. Why the delay?
3. Ed appears to have started a month ago from today's announcement (looking at his Linkedin Bio). Again, why the delay?
4. At first glance, Chairman David Williams looks to have had a role in recruiting Ed (based on the commentary in the announcement).* 

This is pure speculation, but to me it looks like they came across Ed soon after they had appointed Kevin, and decided he was actually the better choice. The Senior VP position given to Ed is maybe the clue here – my guess is that Williams headhunted Ed and sweetened the deal with a better salary, whilst still being able to let Kevin go on probation. 

Edit: It could also be that Kevin got a better offer and left. I've since been reminded that competition in the US for good salespeople is fierce. That would also account for the Senior title upgrade as a way to keep Ed on board.

Regardless of what happened, the delay in reporting is disappointing. Not sure it's a red flag, but it's worth keeping an eye on. No doubt the AGM will shed more light on what happened.

*A quick note about Williams: he gutted PNV back in 2014 when he was asked to come in and rescue the company – he sacked management and upended the board, so he's not afraid to ruffle feathers.

13/09/19

Polynovo announced today that the FDA have advised management that the upcoming pivotal burns trial can be submitted through their 'Breakthrough Technologies' pathway.

A cursory glance at what that means suggest that the trial will receive priority review and access to the FDA through the entire process for more timely feedback. It should result in PMA being given earlier than anticipated, which is good news.

The caveat, however, is that things get pushed back to accommodate a new set of trial protocols. The market was expecting an announcement later this month regarding the new funding from BARDA for this trial, but that's now been pushed back to Q3 FY20 whilst things get redesigned. Patient recruitment is set for Q4 FY20. 

This will likely affect the top-line numbers for FY20, given that BARDA revenue may not appear this year, or perhaps in lesser numbers than I anticipated. Having said that, it's possible that BARDA will backdate some of the funding when it's announced in Q3, given that the work involved with setting up the protocols is technically part of the trial for which BARDA is wholly subsidising.

Overall this is good news, as clearly the FDA seems keen to 'rush' BTM through to market. 

04/09/19

A report out of Baillieu yesterday suggests that Integra may have began to slash their PriMatrix prices by significant amounts, in some cases up to 50% for larger clients. That would put their product on par with the cost of Novosorb, and will likely impact their next Qtrly report by a significant amount.

This was a possibility I flagged in my risk straw and makes monitoring Integra's Quarterly reports even more important. I expect we'll see a drop off in their earnings from the Wound reconstruction segment in Q3, but on the flip side it may mean that our BTM uptake is slower than planned. Monitoring closely for now. If they continue to slash prices and we see a noticeable dip in the BTM sales rate in our half-year report, that would be a concern, but I think it's unlikely for now.

The takeaway for me is that we are a serious threat to their entire range of animal-based products. If PriMatrix was a superior product that yielded better results, why reduce the price?

Answer: Because it isn't.

22/08/19

FY19 results

An impressive set of results released yesterday from a company that clearly has its sights set on the long-term. 

Highlights included a 435% increase in BTM sales over past year for total sales revenue of $9.3m. Add in BARDA and total revenues were $13.7m, with net cash outflows from operating activities -$3.4m – a 51% decrease on FY18. Whilst FY19 was unprofitable, management have tantalisingly forecast a potential EBITDA breakeven this year.

Total cash on hand at 30 June was $13.9m, with most of the expenditure in the second half due primarily to the final payment on the production facility next door. This facility will accomodate the breast and hernia production in the coming years and is set to diversify the markets that Novosorb can operate in whilst generating substantial further growth in large addressable markets.

The balance sheet remains strong, and it’s unlikely that further capital is needed at this stage, provided sales continue to grow near the current pace. There will be a continued large spend on R&D, so it’s unlikely we’ll see any meaningful profit in FY20, but it is possible. A small loss is the most likely outcome, but on revenue much greater than FY19. 

There was no surprise forecast beat, and Mr. Market initially wasn’t quite sure how to react, but what shone through in the report was the growing confidence in the product, coupled with a clear vision from a top class management team who continue to wisely reinvest in the right areas of the business.

I’m particularly pleased that commentary from Paul Brennan continues to focus on patient outcomes, rather than solely on numbers. Although his background and current focus is primarily on sales, he clearly thinks that patients, surgeons and their experiences with BTM are the number one sales tool at his disposal as they create a network effect that new sales staff simply can’t. 

Demonstrating this tactic are the two new case studies released in tandem with the report which show that BTM is increasingly at the front of mind for trauma surgeons in a widening variety of situations. An interesting adjunct in there was the cost-effectiveness of BTM espoused by the surgeon in the crushed foot case study. It’s conceivable that if Integra’s product was the only option available in the US, he might have simply amputated. That is an interesting dilema for a trauma surgeon to deal with and adds weight to my thesis that we will eat away at Integra’s market share.

To my mind this is absolutely the right sales strategy, to say nothing of the right attitude; after all, BTM was conceived out of the horrific events of the Bali bombings – where dozens of people were badly burnt. The intention by the CSIRO back then, and by Paul and his team now, is still intimately tied to the good that could be done with BTM in the surgeon’s tool kit if such an event were to happen again. 

Looking ahead, the forthcoming announcements regarding the, ahem, ‘perpetually imminent’ CE approval and pivotal trial BARDA revenue contract (due late Sept.) are two known catalysts for enormous future revenue growth; EU distributors are chomping at the bit to start selling, and with interest from the NHS in the UK already in place they too will be purchasing direct in the coming months. This should significantly improve revenue from the ‘rest of world’ category in FY20.

One final thought: Integra has no choice but to take Polynovo as a serious disruptor on these numbers and stands to lose much of their dermal matrix market in the US. I think we can reasonably entertain the prospect of a buyout offer in the near future from a bigger fish – though perhaps not by Integra since I suspect they couldn’t afford it – but by some enterprising US player who is looking to supplant them as well. Paul Brennan has scoffed at the idea of big pharma taking over in the past, and his resolve can only be strengthened by what we’re all seeing unfold. My guess is that it will be business as usual.

Polynovo continues to demonstrate that it is a fantastic company built on a product that clearly improves people’s lives. I see an amazing future ahead on these results, and management clearly does too. 

08/08/19

Singapore regulatory approval

A positive announcement today regarding the successful registration of Novosorb with the Health Sciences Authority of Singapore. Of note too is the Bronze sponsorship of the Asian Burn Conference in Singapore next week that Polynovo has pinned its hopes on for a new distributor in the region.

My guess is that sometime soon after that conference that distributor will be announced with a favourable contract (i.e., good margins for PNV) given how well US sales are progressing, the growing brand awareness and how ruthless Paul Brennan is likely to be on margins.  

I'm keeping in mind that without a distributor the announcement is immaterial, other than to suggest they are more likely than before to increase sales beyond AUS and USA, though to my mind this was never in question.

In short, this announcement has no material bearing on the short/medium-term thesis that Integra will lose ground to PNV in the USA. Long-term however, this approval and others like it are necessary to expand across the Asia-Pacific region and are indeed welcome.

Watching closely now for the 'imminent' Europe CE approval and FY19 results. 

An announcement was released today to market pre-empting the Annual Report somewhat by signalling total FY19 sales of $9.4m (before Barda revenue and with no contribution from South Africa, Israel or the EU.) Adding back in assumed Barda revenue of ~$4m, that would put total revenue at ~$13.4m for the year, more or less in line with my expectations.

They also note the last Qtr contributed $3.9m of those sales, suggesting explosive growth in the last qtr, also in line with my expectations. They comment that with no further growth, we should expect FY20 sales of $15.6m, which is unquestionably well below where we'll end up IMO.

My assumption is that if April and May contributed a combined ~$2-2.3m worth of sales, then to make up the $3.9m in that Quarter, June may have contributed somewhere between $1.4m – $1.6m, continuing the upward trend. 

Forecasting from this, I will assume MoM growth from here of about 15-20%, which spits out a total FY20 sales revenue of ~$65-70m, pretty much bang on my expectations. 

Of course, this assumes that growth continues unimpeded, so it is a best-case scenario, and the FY20 Half-year report should give more clues.

However, based on this announcement, my current valuation only firms.

Integra have released their Q219 results this morning with wound reconstruction revenue contributing US $82.3m to the US$134.4m total in their Orthopedics and Tissue Technologies segment. This is an improvement on their previous quarter's earnings of $74.9m, and on par with Q418 which was $80.5m. (See attachment for presentation).

The result is a fairly strong one, despite it being impossible to see the breakdown of sales here. The presentation is vague on specific growth detail, stating only "Broad-based growth in Wound Reconstruction business...(with) Advanced Wound Care and Surgical Reconstruction leading contributors". This is somewhat of a departure from previous presentations where they've been a little more specific. Encouraging perhaps?

In the earnings call, Integra management refers more than once to new 'disruptive competitors', and specifically their expectation that there will be 'longer sales cycles in Q3' in anticipation of customers delaying orders to go through the cycle of competitor demo products. Guidance for Q3 is lighter than analysts were hoping for as well. PolyNovo isn't specifically mentioned, but I get the sense that analysts will be monitoring our activiy very closely from now on.

I was hoping for a less impressive result, but I'm keeping in mind that PNV has only just scratched the surface of the US market, so today's results aren't discouraging at this stage. At the current NovoSorb rate of growth ($1m+ per month in sales) however, I would want to see next years equivalent Qtr to show more obvious signs of trouble.

I’ve been trying to ascertain the exact costs of our BTM with respect to Integra, and I’ve tracked down an interview between Alan Kholer and Paul Brennan the CEO, from October 2017 in which Paul tantalisingly hints at the costs. Margins appear to be extremely healthy, particularly in the US where the price per large sheet is approx. 2.5x the cost than the price here in AUS.

According to the BTM product brochure, Pg 14, there are three sizes of the standard BTM available for wound dressings at present:

1. 10cm x 10cm, (1, 5 & 25 packs)
2. 10cm x 20cm, (1, 5 & 25 packs)
3. 20cm x 40cm, (1, 5 & 25 packs) 

At the 11 minute mark in the interview, Paul mentions that in AUS the larger size is about $3k, whilst in the US, it’s “under $10k”, the inference being it’s ‘not far off $10k' . He also mentions that Margin is a staggering 90%! (cost of production excluding operating costs presumably).

He goes on to mention at the 13min mark that the comparable Integra product and size is approximately US$20k+. Furthermore, he quite rightly goes on to say that if Integra decided to get competitive with their margins by reducing the cost of their product, that NovoSorb could easily absorb it (90% margins!) This is a distinct threat though to be clear, since Integra could in all probability absorb losses on Integra for a number of years before it started to do serious damage to their balance sheet – monitoring moving forward.

Paul also mentions later on that one of their first US orders was in the region of ~$300k (I believe for one hospital?), so from that we can ‘back of napkin’ style extrapolate the following:

The larger 20cm x 40cm sheet @ ~$10k, means that a typical hospital order might be something like 30-35 large sheets, or 3-4 x 5 packs of each size. 

What I don’t know yet is what the expiry of the BTM is yet, and whether that is likely to force repeat orders so that hospitals have in-date stocks. Microglia, Oxymoxdus, any ideas on this? 

P.S. There’s another follow-up interview about a year and a half later with Paul that covers some of the same ground, and is worth a listen as well – note that Paul is MUCH more coy in this interview about pricing!

There are a number of products under the NovoSorb range in development. Some of these are highly speculative or in their infancy, whereas others are nearing market readiness.

Hernia est. US$1b market

Two recent updates have been positive, but some shuffling around on production has occurred.

Seems as though it's been moved 'in-house', most likely to the new adjacent Pt Melbourne facility. Management has maintained a FY20 'mature product' for possible distribution, but my sense is that this might be extended out further given production capacity is probably not ready for market.

Breast est. US$2b market

We have designed breast prototypes with our partners Establishment Labs (EL) garnering extensive input from surgeons around the globe. There is still work required, by EL, on the regulatory strategy and timeline. We will provide an in-market estimate with the mid-year results, February 2019.

That update read as follows:

"PolyNovo entered into a partnership with Establishment Labs in FY18 to develop and market a range of breast reconstructive medical devices. This partnership is progressing well with product design nearing completion after several rounds of surgeon feedback. We expect testable devices to be produced by PolyNovo in September/October 2019. Various regulatory tests will follow through early 2020. Establishment Labs expects to progress with clinical trials through to 2022 which should lead to US FDA PMA approval."

Plenty of time for this to play out, with no guarantees of success.

OTHERS:

Drug Elution

This project has moved in-house and we have completed preliminary work of a few different drugs to look at elution rates. We will move forward this project with more resource time once the hernia project moves to production.

Bone Void Filler FY21 > est. US$2.3b market

Bladder Sling FY22 > est. US$1b market

Pelvic Floor Repair FY22 > est. US$1.5b market

CCS- Skin Technologies

We continue to work with Prof John Greenwood’s group on the use of NovoSorb foam as a tissue culture substrate. We do not have visibility to Skin Technologies timelines but believe human trials may start in 2019. This technology provides the opportunity to potentially reduce the use of skin grafts over the integrated NovoSorb BTM with reduced donor site concerns for the patient.

I believe this is directly related to a widely-covered news article about John Greenwood's work with a sever burns victim, Glenn Ogg:

https://www.sbs.com.au/news/audiotrack/adelaide-hospital-pioneers-new-technique-treat-burns-without-skin-grafts

In combination with the BTM, the skin culture would be a world-leading technology for severe burns victims, where finding suitable skin grafts would be impossible. 

Over a 5-week period, the skin is cultured whilst the BTM maintains the burns in a stable condition. The cultures are then applied and integrated over a period of about 12 months.

BetaCell – Diabetes program

This project is continuing with US-JDRF funding support. We have supplied sample NovoSorb BTM for the project and await further announcements from the BetaCell team.

Follow up in HY report:

PolyNovo is supplying NovoSorb BTM in modified sizes to Betacell Technologies. BetaCell has successfully concluded a series of three pig trials demonstrating the effectiveness of the NovoSorb BTM to act as a dermal ‘depot’ for implanting Pancreatic Islet cells. BetaCell has funding from the US JDRF (Juvenile Diabetes Research Foundation). They have indicated they will begin human trials, in Australia, in 2H FY19. This treatment holds significant promise for reducing the number of donor pancreases are required to treat patients and a simpler and safer procedure for implanting the Islet cells.

Possible antimicrobial eluting polymer coatings for implanting devices.

Briefly mentioned by CEO Paul Brennan here @3:20. Not entirely sure what this means, but sounds promising if it progresses.

https://www.youtube.com/watch?v=0pX59vYpS6o

There is a fair bit of competition and incumbents in the dermal regeneration space worldwide. However after some competitor study, there are key advantages NovoSorb has over its rival products:

• Higher reported skin elasticity
• Lower reported scarring/better cosmetics 
• Fully Biodegradable via hydrolisis
• Not made from animal byproducts or human tissue. Unique in having 100% synthetic product over competitors (according to CEO, circa 2017). Biological versions can struggle with burns and are often too expensive.
• Anecdotal feedback from Surgeons using NovoSorb have been very positive, with a number investing large stakes in PNV.

Competitors:

Integra dermal range: https://www.integralife.com/searchresults?Ntt=dermal&Nty=1&No=0&Nrpp=12&Rdm=9&searchType=simple&type=search

FYI, M/CAP = $4.5b US.
From what I can tell, Integra appear to be the current market leader.

• All their dermal products appear to be made from animal products – bovine and shark.
• More expensive to manufacture
• A larger company with a broader range of products split into two categories, with full-year revenue guidance of between $1.515 billion to $1.525 billion US. (TAM)
• Three month's Orthopedics and Tissue Technologies (i.e., the NovoSorb equivalent addressable market) revenue: US $125m, a 3.7% increase on same period 2018, down from an 18% increase the prior year, so growth in this sector appears to be slowing. Sources: FQ2019 http://investor.integralife.com/node/22921/pdf & FQ 2018 http://investor.integralife.com/node/22041/pdf

I will be monitoring this company's Quarterly statements going forward to see if this section continues to slow now that PNV is making inroads in the US. A negative growth Qtr on their part would be a clear buy signal that PNV is eating into a competitor's revenue.

Suprathel http://www.polymedics.de/us/products/suprathel/ 

• Does not appear to be fully biodegradable, with a small part needs to be removed after the skin begins to heal. Source:https://surgi-one.com/reconstructive-surgery-wound-burn/suprathel-wound-and-burn-dressing/
• Does have a small rate of infections and inflammations, though unusual.
• Does not cover full-thickness wounds – NovoSorb does.
• Difficult to see the financial standing of this company, as it doesn't appear to be publicly listed.
• I can't be certain, but it appears to be wholly synthetic, in contradiction to PolyNovo CEO Paul Brennan's comments that NovoSorb is unique in its synthetic nature.

Avita Medical

have RECELL® technology, which looks to be a kind of 'spray-on-skin'. Doesn't look to be as applicable over as wide-variety of treatmens as NovoSorb.

RECELL® is FDA approved in the USA for the treatment of acute thermal burn wounds in patients 18 years of age and over, TGA-registered in Australia, and CFDA-cleared in China.

RE: full thickness burns, a 2015 study concluded, "using a DRT in conjunction with spray skin/STSG can reduce donor site burden and decrease time to complete healing. It can also permit greater or larger meshing ratios, while aiding in improved re-pigmentation when compared with sim ilar wounds treated with a DRT and autologous skin grafting alone."

Not exactly outstanding commentary and NovoSorb studies probably supersede this. Potentially we're talking about apples and oranges with these two products, and both have their place in this space.

Stratatech

Hard to tell, but their product does not appear to be suitable for full-thickness burns or dermal regeneration, but they have completed patient enrollment in an ongoing pivotal Phase 3 clinical trial of StrataGraft®:

https://www.biospace.com/article/releases/mallinckrodt-completes-full-enrollment-of-its-phase-3-clinical-trial-for-stratagraft-regenerative-skin-tissue/

From the website (source:http://www.mallinckrodt.com/research/science-technology/pipeline/) :

HOW THIS THERAPY COULD HELP

A previous study in full-thickness skin defects showed that StrataGraft skin tissue remained intact and viable throughout the seven-day placement period when it was used as a temporary cover to prepare the wound for skin-grafting. StrataGraft skin tissue is being studied further as a way to reduce the amount of autografting required in these patients.

As I say, it's unclear if this means it isn't suitable for dermal regeneration at this stage. They appear to be in the very early stages of development, and information is hard to gather about the difference in procedure.

Organogenesis Inc.

PuraPly®

Made from porcine (pigs). Seems to be a direct product comparison to NovoSorb, but like Integra, is derived from animals. A dressing is still required to use this product.

Requires dressing to maintain moisture.

Dermagraft range for treating diabetic foot ulcers. Disclaimer on their site: "Results may vary and not all patients will achieve complete wound closure with Dermagraft." 

Product is made from human cells known as fibroblasts and grown on temporary mesh. I.e., not synthetic and cheap to produce.

http://www.dermagraft.com/patient/

Smith & Nephew, Inc.

TBC

ACell Inc.

TBC

Symatese

TBC

From the FY18 Annual report, page 35:

Sales revenue

United States of America $5,337,850  
Australia and New Zealand $651,908

Geographical expansion targeted/achieved in FY19 for:

• UK/Ireland (direct sales)
• Germany (via distributor)
• Austria (via distributor)
• Europe
• South Africa
• Israel (progress indicated as slow in Nov18 Announcement, monitoring going forward).
• Saudi Arabia
• India
• Korea (See announcement 16th Nov. No specific detail given)
• Taiwan (See announcement 16th Nov. No specific detail given)

Huge upside potential if all regulatory hurdles are overcome in these regions here in terms of additional revenue.

FY19 Report update to follow on these areas.

----

FY19 Half year-Report update, Page 12 Note 3:

Sales revenue

United States of America $4,802,869
Australia and New Zealand $847,032
Rest of world: $15,963

Note that this is for the half year. Massive growth in all areas seen, and expectations are that this would increase yet again in the full year report.

Interesting article dated 5th July highlighting the market opportunity. Lists some of the other major players in this space too:

https://titanchronicle.com/2019/07/05/dermal-regeneration-matrix-device-market-to-observe-strong-development-by-2024/

18/01/19

PolyNovo purchases adjoining building for expanded production facility

Of particular note is the mention of supply in the 'medium' term, suggesting they will look to further increase production capabilities in the future. 

Also interesting that they chose to purchase the facility outright, rather than lease. The $4.6m +gst purchase price paid in Feb 19 will likely eat into any FY19 profit. 

Chairman David Williams said: “An expanded facility is not needed today. However, increased US sales and the anticipated introduction of Hernia* in 2020 means it is prudent to expand our facility now.”

Again, the purchase of the facility rather than a lease, combined with the chairman's statement about future capacity, signals a huge belief in the long-term sales pipeline from management. 

My assumption is that there is capacity here for ran R&D prototyping section as well, although from what I can tell, the warehouse component of the site is only 250sqm. If anything, it highlights that only a small space is needed for the hernia and breast product development in future.

One thing that I'll be watching closely is the write-downs of inventory, which totalled $180k for the HY19. This is due to product expiry. An expiry date could well work in our favour in future if we can manage inventory levels appropriately since it would require hospitals to reorder on a regular basis. Watching closely moving forward.

*See my R&D straw for more information.

07/07/19

Worth noting that as much as 60% of PNV's revenue in FY18 came from the US Funding program BARDA. The initial trial is wrapping up, with the final phase set to start imminently. From page 4 of the FY18 Annual Report, dated 16th August 2018:

"Our relationship with BARDA is strong and the addition of a clinical trial manager based in the US has added value to the research sites through PolyNovo’s direct interaction with those sites. The next phase of the trial program will be the ‘pivotal phase’ which will be under a new contract with BARDA. We anticipate this trial commencing in July-August 2019. We expect to announce the terms of this new contract in late FY19.

As a requirement of the US FDA Premarket Approval (PMA) process, we are also conducting a 2-year toxicology study funded by BARDA. This program is well advanced and will provide us a detailed degradation profile of the NovoSorb BTM from implantation to full resorbsion."

Follow up to the market in Nov 18:

"We are currently building the documents and budget requirements for the pivotal trial phase of this burns trial program. BARDA has indicated continued support for the program and we anticipate beginning this trial in early FY 2020. We will announce any additional BARDA contracts once documents are signed."

---

Total revenue from the ongoing contract in FY18 was $3,827,016, or ~60% of total revenue. Notes to the financial statement relating to BARDA income:

"The contract with the Biomedical Advanced Research and Development Authority (BARDA) is a cost plus fixed fee reimbursement contract that was awarded on 28 September 2015. The contract is to fund the full cycle of clinical trial activities relating to commercialisation of the Company’s BTM in deep tissue burns"

Red flag would be the discontinuation of this funding/contract, though I think the likelihood is very low. US Defence contracts are in place now, and are likely prevent any cessation with clinical trials.

Despite the FY18 percentage of revenue contributed by BARDA, a series of encouraging announcements lately has proven BTM sales to be increasing at an alarming rate. Hard to tell if the BARDA revenue 'scales' in pace with sales, but given the previous contract was a cost + fixed fee reimbursement in the previous phases, I think we could expect the same moving forward. In any event, sales growth will more than make up for lost revenue in the next few years at current pace.

Keeping an eye out for an ASX announcement for the new BARDA contract in the coming weeks/months.

31/05/19

Two 'Million dollar' months in a row (April & May), indicates that revenue is clearly picking up considerably. What's interesting is the ratio between sales revenue from FY18 to now (i.e., not including the payments from BARDA (see my BARDA straw for more info). 

Last year, total receipts from customers came in at $1,467,117 for the whole year. In the month of May this year alone, sales (excluding BARDA payments) were nearly the same as the entire FY18.

Furthermore, this is only for the US and AUS/NZ, with established or near established certifications and distributors/direct suppliers in place for FY20 from the EU, UK/Ireland, South Africa, Israel, India, and Saudi Arabia.

Expecting sales growth to be very impressive in FY20 on these numbers.

USA

ALthough NovoSorb has special FDA approval, some regulatory hurdles still need to be overcome for full market penetration in the US. 

From the FY19 Half year report:

"Our Biomedical Advanced Research and Development Authority (BARDA) contract commenced on 28 September 2015. This is a non-dilutive capital contract that supports a clinical trial on full thickness burns that could lead to a Premarket Approval (PMA) application with the US FDA. The contract is a cost-plus-fixed fee contract and it will progress in three stages; a feasibility study, a swine study for total degradation and a pivotal trial phase. The feasibility trial has closed patient recruitment and we anticipate beginning the Pivotal trial in early FY20. "

The Pivotal phase of the trial involves over 100 patients in 20 burns units in various hospitals in the states. Full treatment takes about a year, so by my estimation, we should expect full approval somewhere around Late CY2021, early CY2022. 

However, given the recent announcement of the US Dept. of Defense and Federal contracts, and anecdotal feedback from surgeons and patients in Australian trials (see 'Scientific Community response' straw), I think it's 'safe' to assume these hurdles will be overcome.

––

Europe

For the EU, a CE Mark is being pursued.

From the HY19 report:

"The CE Mark full thickness burn trials have closed recruitment and we are in the process of the 12 months post-application patient reviews. We anticipate the trial results to be published in late CY19. Whilst this trial is not required for regulatory approval it will provide solid evidence to support NovoSorb BTM’s use in full thickness burns."

In the Nov18 market announcement, it was stated, "CE approval is anticipated in second quarter of next calendar year", so we can expect that to be announced any month now. Watching closely.