Company Overview: PolyNovo Limited (ASX: PNV) is a medical device company that designs, develops, and manufactures dermal regeneration solutions using its patented technology. The company’s development program covers Breast Sling, Hernia, and Orthopedic applications. NovoSorb^® is a unique range of bio-resorbable polymers, which are produced in formats such as film, foam, fibre, and coatings.

PNV Details

PNV Rides on Higher Product Adoption and Geographical Expansion: PolyNovo Limited (ASX: PNV) is a medical device company that designs, develops, and manufactures dermal regeneration solutions (NovoSorb BTM) using its patented technology. The company’s development program covers Breast Sling, Hernia, and Orthopedic applications.

In 2019, the company remained on track to benefit from higher sales of NovoSorb BTM, which skyrocketed 435% from the previous corresponding period. The group’s investment in expanding the sales teams has yielded significant growth not only in sales but also in the rate of customer acquisition. In 2019, the company reported revenues of $13.683 million, which soared 128% year over year. During the period, the company reported a net loss after tax of $3.190 million as compared to a loss of $5.974 million reported in FY18. The company witnessed a YoY reduction of 46.6% in net loss, on the back of higher revenue generated by NovoSorb BTM sales in multiple markets.

The company’s US sales infrastructure has increased substantially during the period with the addition of new sales and marketing people. The company rides on greater geographic reach along with increasing customer referral network. The company further expects sales roles to be added in the UK and Ireland and the US. The company also received approval to sell NovoSorb BTM to the US Department of Defence and Veteran Affairs and expects to witness accelerated revenues from its direct marketing in the US, Australia, New Zealand, UK and Ireland. The company has also strengthened its foothold in India and SE Asia, depicting promising opportunities in the future.

The company has witnessed decent initial commercial success with NovoSorb BTM and expects significant and tangible sales opportunities in the days ahead. The company is well equipped with Hernia repair device development and expects to bolster its foothold in the US market in early FY21. The company also remains on track to undertake organisational expansion with corresponding growth in its skills and depth of talent. This fortifies the company’s ability to offer future growth, with strong sales in FY20. In FY20, the company plans to invest cash flows in expanding its business strategies and research and development programs in order to commercialize its new products.

The company has reported a significant growth in commercial sales of NovoSorb BTM, both locally and overseas. It announced that it has been granted four new patents within the NovoSorb polymer family, which will cover its Hernia and Breast products along with few other devices which are to be developed in the near term. Further, the company updated on the results of the CE Mark Burn Study for assessing the reliability of NovoSorb® Biodegradable Temporizing Matrix for the treatment of deep burn injuries. The clinical study was conducted on 30 patients across five sites and revealed that BTM was capable of supporting temporary wound closure and the reconstruction of a dermis for subsequent wound healing. This trend is expected to contribute further growth in FY20.

BTM Commercial Revenues (Source: Company Reports)

1HFY20 Key Financial Highlights: During 1H FY20, the total revenue of the company stood at $10.18 million, which included commercial sales of NovoSorb BTM amounting to $8.57 million and revenue from the BARDA clinical trial program of $1.61 million. The company reported higher NovoSorb BTM sales during 1H FY20, up 129% relative to pcp. BTM sales in January 2020 were more than three times as compared to the sales in January 2019. The company noted research and development costs of $1,359,616 for the period, recognised with respect to the hernia, breast and BARDA projects along with other projects to support new product pipeline initiatives. Net loss after income tax stood at $2.42m, which included $0.88m in share-based payments expense. Excluding this expense, the underlying loss has decreased year over year, which depicts the significant growth of NovoSorb BTM commercial sales. R&D and new capital expenditure for the period stood at $3.22 million.

Key Financial Highlights (Source: Company Reports)

Balance Sheet & Cash Flow Highlights: The company exited the period with a cash balance of $8.14 million. The company’s total debt at the end of the period came in at ~$2.17 million. Operating cash outflow in 1HFY20 came in at ~$2.2 million. Total assets stood at ~$29.6 million at the end of the period. PNV seems to be well-positioned for future growth, on the back of significant growth in its flagship product and intends to invest cash flows in expanding its business strategies and research and development programs.

Cash Position (Source: Company Reports)

June 2020 Trading Update: The company witnessed a new sales record in June 2020 in the US. The company has opened 7 new hospital accounts since the record sales month announced on 7 April. PNV has also witnessed an increase of 67% in hospital account in the US from July 2019 to 30 June 2020. Despite the adverse impact of COVID-19 outbreak, the company remains on track to open new accounts and achieve record sales. Further, the company reported sales growth of 33% in the June quarter on a sequential basis. The company opines that sales results for NovoSorb BTM have been decent amid global uncertainties, owing to a dedicated team and continuous engagement with customers.

Recent News:

1. Recently, the company stated that it has received funding of USD15 Mn from Biomedical Advanced Research and Development Authority (BARDA) to help the Pivotal trial program of NovoSorb BTM.
2. PNV recently notified the market with the first use of NovoSorb BTM in Canada, which was initiated by one of the leading surgeons of Canada. However, the company has not yet applied for regulatory clearance in Canada.
3. In April 2020, the company has also secured a debt facility worth $9.3 million from the National Australia Bank to fund the hernia cleanroom construction, manufacturing equipment and miscellaneous capital expenditure.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 20.51% of the total shareholding.

Top Ten Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: In 1HFY20, the company had a gross margin of 90.9%, higher than the industry median of 71.1%. In 1HFY20, current ratio stood at 6.28x, higher than the industry median of 2.84x. Debt to equity ratio for the same time span stood at 0.09x, lower than the industry median of 0.16x.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Key Risks: The company is exposed to shorter-term disruptions from challenging macro-economic environment due to COVID-19 outbreak. The company’s financial instruments comprise mainly of receivables, payables, bank loans and overdrafts, finance leases, loans from related parties, cash, and short-term deposits. The main risks PNV is exposed to through its financial instruments, are foreign currency risk, interest rate risk, liquidity risk and credit risk. Further, PNV also faces stiff competition from peers which adds to the risk profile.

Future Expectations: The company expects a significant expansion of sales of BTM in the US, Australia, and New Zealand. The company is increasing its manufacturing capacity of hernia production and is well advanced in its Hernia repair device development and anticipates US market entry in early FY21. PNV also expects to break even in FY20, however, cash flows will continue to be reinvested to drive growth. The company anticipates NovoSorb BTM sales for FY20 to be at least double as compared to the sales figure of FY19.

Going forward, the company plans to make higher investments to deliver high quality products to its clients with exceptional customer service. PNV continues to focus on cost control measures, while investing to support its growth outlook. The company is also taking necessary measures to grow organically in the short term and improve operational efficiency. Eventually, the expenses incurred to support these strategic initiatives are likely to result in new sources of revenue for the company in the near future.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation Approach (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures have been taken from Thomson Reuters

Stock Recommendation: The stock of the company generated positive returns of 39.61% in the past one year but went down by 8.12% in the past one month. At the CMP of $2.100, the stock of the company has a market capitalisation of ~$1.42 billion and ~661.09 million outstanding shares. Currently, the stock is trading below the average of its 52-week high and low level of $3.285 and $1.275, respectively, proffering an opportunity for share accumulation. Considering the above factors, recent developments, optimistic outlook, and current trading levels, we have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit growth (in percentage terms). For the purpose, we have taken the peer group - Telix Pharmaceuticals Ltd (ASX: TLX), Neuren Pharmaceuticals Ltd (ASX: NEU) and Suda Pharmaceuticals Ltd (ASX: SUD), to name few. Hence, we recommend a “Buy” rating on the stock at the current market price of $2.100, down 2.326% on 12 August 2020.

PNV Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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