Re the Morningstar initiating report on PolyNovo, I wanted to add some further comment. The author, Shane Ponraj, is a health analyst for Morningstar but his research is also distributed by Ord Minnett.
Polynovo’s current strategy revolves around increasing its sales staff, expanding its geographical footprint, and exploring new uses for its NovoSorb technology beyond the dermal substitute market…
According to Ponraj, PolyNovo’s strategy for growth over the next five years is (i) add more sales staff
(ii) sell into new territories and (iii) develop new products, which he says “are still very early in the development stage”.
Ponraj fails to recognise PolyNovo’s continued work on clinical trials which will support reimbursement and regulatory approval of Novosorb BTM as a dermal substitute in the US market.
One reason that Integra’s Bilayer Dermal Regeneration Template has remained the market leader in severe burns in the United States, despite its high cost, is that it has PMA regulatory approval.
The importance of PMA approval can be seen in health funds’ determination of whether products are medically necessary. In the example provided below, Blue Cross Blue Shield deems only four products to be “medically necessary” for the treatment of 3rd degree burns. Three of these are cell products - Epicel is a cultured epidermal autograft, Recell is a non-cultured, autologous, cell suspension system and TransCyte consists of a polymer membrane and newborn human fibroblast cells cultured on a porcine collagen coated nylon mesh. TransCyte is FDA approved for temporary coverage of deep burn wounds before grafting at a later date. As cell products, all three of these products had to obtain approval via the PMA pathway. The final product listed, Integra Dermal regeneration template, a “biosynthetic” product, received FDA PMA approval almost 30 years ago (1996) after more than two decades of research. The key patent covering this product was filed in 1981 and so would have expired two decades ago. Despite this, since its FDA approval in 1996, Integra’s dermal regeneration template has remained the only FDA-approved dermal template for the treatment of life-threatening burns.
To support a PMA submission for Novosorb BTM in deep dermal/full thickness burn wounds, PolyNovo is in the final stages of a pivotal trial. Enrolment is expected to complete in H1 next year. This PMA process commenced 8 years ago when the US Biomedical Advanced Research and Development Authority (BARDA) awarded PNV a contract to commence a pilot study with the option of continuing to a funded PMA pathway. BARDA is contributing US15m to the pivotal trial.
PMA approval for BTM has two important potential financial implications for PolyNovo. The first is that the product would be “rerated” within the US health insurance system. As Swami Raote recently said, once we get PMA, we’ll see the adoption curve of BTM in the United States move dramatically. The second relates to BARDA. BARDA’s interest in funding PMA approval of BTM has been driven by its desire to stockpile products for mass casualty events.
In addition to the BARDA burns trial, PolyNovo has been conducting two other clinical trials of BTM in the treatment of chronic wounds. Evidence from these trials is to support reimbursement of Novosorb (Synpath) in the treatment of chronic wounds in the US outpatient setting – the main treatment setting for DFU’s there. While there have been delays in these trials, once successfully completed, PolyNovo will be able to tap into the chronic wound market in the United States. This market segment has an estimated TAM of ~US$400m. To drive and accelerate market penetration in chronic wounds in the outpatient setting, PolyNovo management is also considering potential M & A.
We do not award Polynovo an economic moat given low switching costs for clinicians to adopt competing products and concerns over the durability of intangibles related to NovoSorb. We think Polynovo will have little to defend its position when faced with stronger competition in the coming decade
Ponraj has concerns about “the durability of intangibles” related to NovoSorb. In a nutshell, he believes that Novosorb will lose patent exclusivity in 2028 and PNV revenue will be hit as competitors enter the market with cheaper and better products to which he thinks that surgeons will easily and quickly switch.
Ponraj states that PolyNovo doesn’t have an economic moat to defend its position (every company Ponraj covers is given a “moat rating”. I question whether Ponraj actually lacks understanding of how this sector works or is being disingenuous.
As discussed before, Integra’s dermal template received FDA PMA approval almost 30 years ago, more than two decades after its development commenced. On the strength of its PMA approval, and despite its high price and the many other products that have since entered the market, Integra has retained its position as global leader in tissue technologies until today. It could be argued that the PMA has acted as a wide economic moat for Integra, as it has since remained the only FDA-approved resorbable dermal regeneration template. Novosorb’s journey has also been relatively long but PolyNovo is not far away now from fully breaching Integra’s moat with a better and cheaper product.
Economic moats? I think that Integra will have a bigger task defending its hero product in the coming years than PolyNovo.
PNV Price at posting:
$1.31 Sentiment: Hold Disclosure: Held
. I question whether Ponraj actually lacks understanding of how this sector works or is being disingenuous.
(20min delay)