Wilsons does acknowledge PolyNovo’s “solid performance” in 1H 2024, for which it concedes that the company should be given credit. Consequently, they've shifted their PNV recommendation from Underweight to Market Weight and upped their price target to $1.79!
They state that one of the reasons for their negative view on PNV over the past 12-18 months has been “the fact that valuation was steep, particularly in comparison to peers”.
They’ve made the decision to now move away from using DCF valuation for PNV to estimating price target by using a CY24 EV/Sales multiple of 11.0x.
As for peer comparison, it’s not ASX companies such as Avita or Aroa that they choose to compare PNV with; rather, with US-listed companies that they claim to be “similar-stage growth companies in the woundcare segment”. The two peer examples they provide are Establishment Labs and Vericel, which they note attract forward EV/Sales multiples of a maximum of 9.0x.
After looking more closely at these two peer comparisons of “similar-stage growth companies in the woundcare segment” I must admit to being puzzled.
Firstly, in the case of Establishment Labs, it is not even in the woundcare market; it is a breast implant company which self-identifies as being in the “aesthetics market”. In fact, the company blames its recent weak performance to a downturn in the (discretionary) aesthetics market.
Secondly, Establishment Labs has been in that market now for 14 years and continues to make losses (US$58m in the first 9 months of 2023), whereas PolyNovo has been in the wound market for half that time. Establishment Labs still frequently needs to top up the cash – for example, it is raising US$50m this month after having already raised US$90 m just last April.
Finally, Establishment Labs has downgraded expected revenue for 2023 from US$200m to US$165m, which compares with US$161.7m in the previous financial year. Consequently, Establishment Labs’ market cap has fallen. It's now US$969m (A$1.47bn), down from US$1.88bn (A$2.85bn) just 6 months ago.
Vericel is at least in the woundcare segment, although it markets autologous cell products. In recent years, its focus has been on cell product therapies for burns and cartilage wound repair.
As for being a similar-stage growth company to PNV, its main product (Epicel) entered the market 37 years ago.
Last FY, its operating loss was $17m. Checking back for just the last decade, it’s been losses all the way for Vericel, with the exception of 2020 when it made US$2m income from operations.
In 2022, sales were US$164m, which represented 7 % growth on the previous year, and the company took on US$175m in debt at ~ 10% interest rate. This year is tracking better for Vericel, with sales up 18% on the previous year. Loss on operations in the first three quarters has been US$19m. Current market cap is US$2.01bn (A$3bn).
Anyway, I'm grateful to Wilsons for having drawn my attention to alternatives in the US market. Having checked out the "comparators", I'm happy to stick with my investment in PolyNovo.
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