Company Overview: 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 other applications. NovoSorb® is a distinctive range of bioresorbable polymers, which are produced in formats such as film, foam, fibre, and coatings.

PNV Details

Robust Product Adoption and International Expansion Aid PNV: PNV remains on track to grow its sales team across various regions and received regulatory approval and market entry of NovoSorb® BTM in Taiwan, Turkey, Finland, Benelux, Norway, Greece, and Sweden.

• Growth Momentum in the US: The company is witnessing higher impetus in the US and all other key markets. Notably, over 50% of the hospitals are now re-engaging for the business of PNV US. The company’s US sales team has grown to 36 with an addition of 6 new trained staff in June 2021 month.
• Improvement in BTM Revenues: In FY21, the company’s BTM revenue witnessed a growth of circa 34% year over year. In FY21, US BTM revenue grew 49% year over year, whereas in 4QFY21 US BTM revenue stood at $US 4.9 million, up from $US 3.3 million reported in the year-ago period. Monthly BTM revenue in June’21 stood at A$3.3 million.
• Expansion in Different Geographies: In FY21, PNV’s Distributor revenue witnessed an increase of 53% year over year, with solid rises in the DACH region (Germany, Switzerland, and Austria). PNV also saw improved sales in India, South Africa, Finland, Italy, and Taiwan. Despite challenging Covid-19 led lockdowns, the company’s FY21 Australia BTM revenue rose ~25% on pcp. 

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 below picture depicts continuous growth trajectory in the company’s top-line since 2HFY19.

Revenue Trend; Analysis by Kalkine Group

Robust Sale of NovoSorb® BTM: 

• PNV remains on track to benefit from higher sales of NovoSorb® BTM, which skyrocketed ~2% in 1HFY21 from the previous corresponding period. The maturity of the organisation and the empowerment of local teams have compelled the company to increase NovoSorb® BTM revenue each year.
• The company has also 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 to drive high-quality and cost-effective care.

Key Findings from 1HFY21 Results:

• Growth Across All Market: In 1HFY21, the company opened 35 new accounts across all direct markets. US BTM sales in 1HFY21 increased a whopping ~41% year over year.
• Improvement in Operating Loss: In 1HFY21, operating loss stood at $0.2 million, down from $1.8 million reported in the year-ago period, owing to robust revenue growth, gross margin expansion, and cost management initiatives.
• Improvement in Bottom Line: In 1HFY21, the company’s net loss after tax stood at $3.5 million, depicting an improvement of ~46.3% year over year, owing to the growth in commercial sales of NovoSorb® BTM locally and internationally. 

Balance Sheet & Liquidity Position: The company remains on track to monitor the impact of COVID-19 led uncertainties and the governments’ measures in controlling outbreaks. In 1HFY21, PNV obtained $191,445 in government assistance in reaction to the global pandemic. This, in turn, aided the company to boost its cash flow, reduce cash liabilities and retain employees during tough times.

The company exited the period with cash, including short-term investments of $7.7 million. The company’s total debt at the end of the period stood at ~$10 million. Operating cash outflow in 1HFY21 came in at ~$1.37 million, an improvement from cash outflow of $2.17 million reported in 1HFY20.

Key Metrics: In 1HFY21, the gross margin of the company stood at 93.9%, higher than the industry median of 70.5%.  Cash cycle in 1HFY21 came in at negative 393.6 days, as compared to the industry median of 147.2 days.

Profitability and Liquidity Profile; Analysis by Kalkine Group

Key Updates:

1. On 7 July 2021, the company informed the market that the Managing Director’s LTI has been revised (subject to shareholder approval), which now permits him to earn 1,320,132 shares in each of FY22, FY23, and FY24.
2. On 4 June 2021, the company appointed Andrew Lumsden as PNV’s Non-Executive Director. With over 20 years of experience locally and overseas, Andrew has achieved Chartered Accountant and finance executive degrees. 

Top 10 Shareholders: The top 10 shareholders together form around 18.6% 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 5.22%. Williams (David John) is the second-largest shareholder, with a holding of 2.86%, as also highlighted in the chart below:

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis:

• COVID-19 Led Uncertainties: The company is also exposed to risks associated with general global economic and market conditions, particularly those impacting the healthcare industry.
• Regulatory and Commercialisation Risk: The company is exposed to risks related to the development of medical devices and commercialising them in the market. These risks include uncertainty of patent protection and proprietary rights and obtaining of necessary regulatory authority approvals.
• Forex Headwinds: Any adverse movement in foreign exchange price may impact the financial performance of the company.
• Failure of Clinical Trials: The clinical trial process is designed to assess the safety and efficacy of a medical device before commercialisation and a failure to achieve the desired results may hamper the financial performance of the company. 

Guidance: The company expects BARDA trial program revenue to be in the ambit of $2-$2.5 million in 2HFY21.  For FY22, the company expects more than A$5 million from increased patient activity and the addition of further sites. 2HFY21 capital expenditure is expected to be ~$1.5 million. PNV is well equipped with Hernia repair device development and expects to bolster its foothold in the US market in years to come. 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. The company continues to witness an expansion of sales outside of burns and expects to enter FY22 on a good note.

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

Source: 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: The stock of the company has been corrected by ~12.3% in the past six months. Currently, the stock has a 52-week’s high and low level of $4.08 and $1.98, respectively. 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 might trade at a slight premium as compared to its peer median, considering a reasonable rise in revenues, higher Sales of NovoSorb® BTM, and geographical expansion. For that purpose, we have considered peers such as Telix Pharmaceuticals Ltd (ASX: TLX), and Paradigm Biopharmaceuticals Ltd (ASX: PAR), to name a few. Considering decent FY21 BTM performance, optimistic outlook in the long run, higher demand for NovoSorb® BTM, expanding international footprint, valuation, and current trading level, we recommend a “Buy” rating on the stock at the current market price of $2.30, down by ~4.565% as on 14 July 2021.

PNV Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: 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.

Technical Indicators Defined:-

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Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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