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 other applications. NovoSorb® is a distinctive range of bio-resorbable polymers, which are produced in formats such as film, foam, fibre, and coatings.

PNV Details

Partnership Synergies & Increased Demand for NovoSorb BTM Aids PNV: PolyNovo Limited (ASX: PNV) is a medical device company that designs, develops, and manufactures dermal regeneration solutions (NovoSorb BTM) using its patented technology. PNV remains on track to benefit from higher sales of NovoSorb BTM, which increased ~31.2% in 1HFY21 from the previous corresponding period. The company has also witnessed decent initial commercial success with NovoSorb BTM and expects significant and tangible sales opportunities in the days ahead. The company had announced that it has appointed MedinaMedical to distribute NovoSorb® BTM in the Danish, Norwegian and Icelandic medical device markets. PNV’s partnership with MedinaMedical extends the former’s coverage in the Nordic region, which contains few of the highest quality healthcare systems globally. The move marks an incremental step in PNV’s journey to expand its sales across Europe. Further, the company continues to grow its sales team in all regions and received regulatory approval and market entry of NovoSorb BTM in Taiwan, Finland, Turkey, Benelux, Norway, Sweden and Greece.

The company had informed the market that it received the final Independent Review Board (IRB) ethics authorisation for the phase I of a clinical study assessing NovoSorb® SynPath for the medication of non-healing diabetic foot ulcers. The first part of the clinical trial was conducted on 10 patients and revealed that SynPath could support temporary wound closure. The second part of the trial will be conducted on random 100 patients by treating them with SynPath versus the standard of care. The company expects this study to commence in September/October 2021. This trend is expected to contribute further growth in FY21.

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. PNV is well equipped with Hernia repair device development and expects to bolster its foothold in the US market in FY21. The company 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 FY21. The company also remains on track to invest cash flows in expanding its business strategies and research and development programs to commercialise its new products.

Key New Products (Sources: Company Reports)

1HFY21 Key Financial Highlights: During 1HFY21, the total revenue of the company stood at $12.6 million (up ~24% year over year), which includes commercial sales of NovoSorb BTM amounting to $11.25 million and revenue from the BARDA clinical trial program of $1.35 million. The company reported higher NovoSorb BTM sales during 1HFY21, up 31.2% relative to pcp. The company noted research and development costs of $1.28 million 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 $3.54 million, which included share-based payments expense and unrealised forex loss.

In 1HFY21, the company signed 22 new customers in the US amid COVID-19 uncertainties. The company also conducted strong webinar referrals along with new account evaluations.  The company also received IDE authorisation by US FDA for the Pivotal trial aided by $US15 million funding from BARDA. The company also completed Stage 2 Hernia factory build by 31 May 2021 after COVID-19 lockdown impacts. The company has strengthened its foothold in India Israel and SE Asia, depicting promising opportunities in the future. The company continues to work on distribution contracts in other states and regulatory approvals across different markets in order to enable market entries in the year ahead.

1HFY21 Key Highlights (Source: Company Reports)

Key Updates:  

1. On 7 May 2021, the company informed the market that it has appointed Dr. Joshua Cheetham as the Director of Research and Development of PNV.
2. On 25 March 2021, the company inked a group purchasing deal with Premier Inc, for the supply of NovoSorb® BTM under their breakthrough technology program, to ensure that the hospital members have timely entry to innovative products in order to drive high-quality and cost-effective care. 

Top 10 Shareholders: The top 10 shareholders together form around 18.34% of the total shareholdings, while the top 4 constitutes the maximum holding. The Vanguard Group, Inc. is the entity holding maximum shares in the company at 5.02%. Williams (David John) is the second-largest shareholder, with a holding of 2.86%, as also highlighted in the chart below: 

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

Key Metrics & Liquidity Position: The company exited the period with cash balance of $7.7 million. The company’s total debt at the end of the period came in at ~$10 million. Operating cash outflow in 1HFY21 came in at ~$1.4 million. Total assets stood at ~$36.3 million at the end of the period. In 1HFY21, the company drawn down $6.9 million debt facility from the National Australia Bank, which was taken to fund the hernia cleanroom construction, manufacturing equipment and miscellaneous capital expenditure.

In 1HFY21, gross margin of the company stood at 93.9%, higher than the industry median of 74.4%.  Quick ratio in the same time span stood at 11.48x, higher than the industry median of 6.32x.  Cash cycle in 1HFY21 came in at negative 393.6 days.

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

Key Risks: The company is exposed to numerous risks related to the development of medical devices and commercialising them to the market. These risks include uncertainty of patent protection and proprietary rights, obtaining of necessary regulatory authority approvals and uncertainties caused by the quick innovations in technology. Additionally, competition from peers, and the global threat environment add to the woes. Further, lower investment in generating working capital requirement exposes the company to liquidity risk. The company also increased investment in R&D, to achieve its growth plan, which might weigh on margins, going forward.

Outlook: The company is well positioned for future growth, on the back of significant increase in its flagship product and expansion of its business strategies and research and development programs. The company expects BARDA trial program revenue to be in the ambit of $2-$2.5 million in 2HFY21. Further, the company expects to increase patient activities in FY22. The company is taking necessary initiatives to add trial sites in the US and Canada. In FY21, the company expects to expand its research and development team to accelerate new product pipeline developments. 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 (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 below the average of its 52-week’s high and low level of $4.08 and $1.98, respectively. The stock of the company went down by ~18.18% in the past one month. 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 slight premium as compared to its peer average, considering its higher Sales of NovoSorb BTM, geographical expansion, top line growth in 1HFY21, and decent liquidity position. For the purpose, we have taken the peer group - Telix Pharmaceuticals Ltd (ASX: TLX), and Paradigm Biopharmaceuticals Ltd (ASX: PAR), to name a few. Considering decent performance in 1HFY21, increase in its flagship product, expansion of its business strategies, decent long-term outlook, international expansion, current trading levels and valuation, we recommend a “Buy” rating on the stock at the current market price of $2.52, down by ~0.788% as on 19 May 2021.

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

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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