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

PNV Details

PNV Rides on Robust Sales of NovoSorb BTM and International Expansion: PolyNovo Limited (ASX: PNV) designs, develops, and manufactures dermal regeneration solutions (NovoSorb BTM) using its patented technology. The market capitalisation of the company stood at ~$1.72 billion as on 10 February 2021. Recently, the company released its trading update, wherein, it witnessed decent growth in sales. For 1QFY21, PNV reported an increase of a whopping 75% in sales on a year over year basis. Moreover, the company reported robust sales in December 2020, which surpassed the budget in the US, NZ, and Taiwan. During 1HFY21, the company sales went up ~31% from the prior corresponding period. In 1HFY21, the company opened 35 new accounts across all direct markets. In addition, the company opened 109 new accounts in CY20, depicting an increase of 89% over CY19. The company also witnessed strong platform growth during the pandemic, which is evident by significant account acquisition. With respect to the US, the company recorded an increase of 41% year over year in sales in 1HFY21. Q1FY21 sales from the US went up a whopping 70% on pcp.

In December 2020, the company made is first sale to Taiwan and implemented sales to Singapore, Finland, and South Africa. During the same month, the company’s sales from New Zealand and Taiwan exceeded budget and PNV entered new markets like Greece, Belgium, Netherlands, Luxembourg, Sweden, Finland, and Taiwan. Further, the company performed its first clinical evaluation in Ireland in December 2020. 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 DACH region.

Looking at the past two-years performance over the period covering FY18 to FY20, PNV witnessed a top-line CAGR of ~94.4%. Total revenues from ANZ, USA and Rest-of-the-World (RoW) also reflected an upward trend during the same time period. This depicts that PNV can make deployments towards its business activities which might help it in tapping long-term growth prospects.

Revenues and Regional Trend (Source: Company Reports)

Robust Sale of NovoSorb BTM: PNV remains on track to benefit from higher sales of NovoSorb BTM, which skyrocketed 104% in FY20 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. The maturity of the organisation and the empowerment of local teams have compelled the company to double NovoSorb BTM revenue each year. The company has also witnessed decent initial commercial success with NovoSorb BTM and expects significant and tangible sales opportunities in the days ahead. PNV is well equipped with Hernia repair device development and expects to bolster its foothold in the US market in early FY21. Going forward, PNV plans to invest cash flows in developing its business strategies and research and development programs in order to commercialize its new products.

Recent Update: Recently, the company entered the Italian medical device market via the appointment of Medival as the company’s distribution partner in Italy. In another the company also appointed Incomed Saglik Hiz and its medical sales channel LotuS®, as its distributor, thereby entering the Turkey Market. Further, PNV also made its entry into Poland with the selection of Hortho Medical Innovations as its exclusive distributor.

Top 10 Shareholders: The top 10 shareholders together form around 17.69% of the total shareholdings while the Top 4 constitutes the maximum holding. The Vanguard Group, Inc. and Williams (David John) hold the maximum interests in the company at 5.03% and 2.8%, respectively, as also highlighted in the chart below: 

Data Source: Refinitiv, Thomson Reuters, Chart Created by Kalkine Group 

Healthy Balance Sheet and Decent Liquidity: In FY20, the company had a gross margin of 92.3%, higher than the FY19 figure of 90.5%. In FY20, debt to equity ratio stood at 0.42x. The company remains on track to meet its debts and obligations by increasing production capacity and output and focusing on digital sales and marketing campaigns. Cash cycle in FY20 came in at 94.3 days, lower than the year-ago cash cycle of ~306 days. The company exited FY20 with a cash balance of $11.6 million. PNV secured a $9.3m debt facility during the period from the National Australia Bank to fund the hernia cleanroom construction, manufacturing equipment and miscellaneous capital expenditure. Operating cash outflow in FY20 came in at ~$0.4 million. Total assets stood at ~$37.9 million at the end of the period.

Growth and Profitability Profile (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group

Key Risks: The company is exposed to foreign currency risk, interest rate risk, liquidity risk and credit risk. Also, the increased costs and expenditure related to product development using a costly technology and pipeline setbacks are few major headwinds. The company is exposed to shorter-term disruptions hindering from challenging macro-economic environment due to COVID-19 led outbreak. Further, PNV also faces stiff competition from peers, which adds to the woes. Further, on a year-to-date basis, the company expects lower BARDA revenue, going forward, owing to delay in obtaining its US FDA IDE approval.

Outlook: For FY21, the company expects total capex to be ~$2.3 million, which will be funded from operating cash and facilities. Going forward, the company plans to invest cash flows in expanding its business strategies and research and development programs in order to enter new markets, expand market share and commercialize its new products. The company further expects to strengthen its foothold in new markets in FY21, which are expected to be Sweden, Finland, Norway, France, Benelux, Greece, Italy, Taiwan, Korea, UAE, and Kuwait. The company has also strengthened its foothold in India and SE Asia, depicting promising opportunities in the future. The company expects increased revenues in the days ahead, owing to higher recruitment of patients, which are scheduled for late Q3 FY21.

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

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Currently, the stock is trading slightly below the average of its 52-week’s high and low level of $4.08 and $1.275, respectively. The stock of the company has corrected by ~22.5% in the past one month. On a technical analysis front, the stock has a support level of ~$2.414 and a resistance level of ~$3.213. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a premium as compared to its peer average, considering its higher Sales of NovoSorb BTM, geographical expansion, robust 1QFY21 and 1HFY21 key numbers, and decent liquidity position. For the purpose, we have taken the peer group - Telix Pharmaceuticals Ltd (ASX: TLX), Paradigm Biopharmaceuticals Ltd (ASX: PAR), and Suda Pharmaceuticals Ltd (ASX: SUD). Considering strong 1HFY21 and Q1FY21 performance, augmented demand for its NovoSorb BTM, decent liquidity position, and encouraging long-term outlook, we recommend a ‘Buy’ rating on the stock at the current market price of $2.62, up by ~0.383% as on 10 February 2021.

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

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