This is a short analysis i wrote myself as a means to justify holding my position. It can be a good research start for any new investors interested in the stock after today's announcement. Note I did leave some points out and didn't go into deep analysis due to not wanting to emulate a university assignment, i'm on holiday at the moment.
Introduction
Polynovo are a company with main business headquarters in Port Melbourne. They operate within the medical industry, developing and selling a synthetic Dermis repair mesh that is called Novosorb BTM (Biodegradable Temporizing Matrix). This technology is a thin foam that is stapled to patients in instances of a damaged dermis. Initially surgeons predominantly used BTM for severe burns victims, however the flexibility of the product means it is being used much more widely in any cases where the dermis is damaged. The benefit of a synthetic product is that they are less susceptible to infection compared to biological products. Currently BTM is the only synthetic product on the market where competitors Integra (listed on NASDAQ) and Aroa Biosurgery (ARX:asx) are biological products. The first commercial sales of BTM occurred in 2017 and since then global expansion has been rapid with USA being the largest market. Polynovo have been rapidly expanding their sales force with the biggest team located in USA.
Polynovo has had name changes in the past and were previously called Calzada who created the drugs used in the Essendon Football Club scandal. Since then, David Williams took the helm of the company in 2015 and Polynovo was born, with a complete change in management and direction. Commenting on share recent price movements, Polynovo’s share price is very dependent on sales growth. If Polynovo can prove they are capable of reporting large revenue growth figures, the share price will take care of itself.
Management of interest
David Williams (Chairman)-David has a somewhat cult following amongst some investors having successfully built up Tassal Group and Bega cheese. His philosophy is based on growing companies that have a solid product but lack financials to market and get the product out into the world. David has shown great interest in the company with large on market orders. David is also involved in other ASX listed companies such as MVP, BD1, RMY and RAC.
Director (currently finding a new one)-Towards the end of 2021 Paul Brennan (earlier director) was asked to leave the company due to disagreements relating to how the business should be run. The company is currently searching globally for a new director, and it is expected there will be one 1Q 2022. See announcementhttps://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02466401-3A583691?access_token=83ff96335c2d45a094df02a206a39ff4
Product line and future developments
BTM-This product is a very porous foam like material with a vinyl top that can be removed when the site is ready for a skin graft. The technology works by blood cells ‘moving into’ this temporary home when stapled to a patient due to its porous nature. At this stage, the cells will move into and vascularize the foam. The foam can be kept on the patient until surgeons are ready to perform a skin graft as the vinyl is a protective layer. A healthy dermis facilitates a healthy skin graft. Further benefits are that after skin grafts, doctors have commented on better scar management and skin elasticity as opposed to other methods.
Due to the synthetic nature of the product, BTM has a roughly 95% gross margin, making it very profitable. A A4 size of BTM costs in the realm of $5000AUD. This is currently the only product on sale from PNV. With USA being the largest market currently, PNV are selling to 3 of the top 5 hospital GPOs in the country, with Premier inc covering 4100 hospitals, in addition to First Choice and Aptitude health GPO’s.
Synpath-This product is currently being trialed to treat Diabetic foot ulcers. A trial of 10 patients found that 70% of patients had full closure with a median time to healing of 7 weeks. Clinicians feedback was that”Synpath appeared to have a high degree of clinical efficacyand helped promote wound closure in many stubborn wounds”. The product is expected to enter the market in 2024, addressing a $400m USD market (FY20/21 report).
Hernia repair-This product has been delayed significantly and the announcementhttps://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02466401-3A583691?access_token=83ff96335c2d45a094df02a206a39ff4suggests there are further delays in relation to product development. This product again uses the BTM technology which is applied over a hernia. The body’s tissue will naturally grow into the mesh and completely heal the hernia. This is a benefit to current hernia operations where meshes may become lose or fail leading to further surgeries for patients. This product is expected to be on market in 2023/24. This market is valued at $3.49b USD in 2020https://www.grandviewresearch.com/industry-analysis/hernia-repair-devices-market
Breast slings-The breast sling is intended for breast reconstruction surgery whereby silicone implants can be placed in pouches made from a foam like material, much like BTM. The benefit is that implanting this pouch and silicone breast into the body together means the body will grow into the foam, completely sealing the implant from moving. This market is expected to be worth $863m USD in 2028.https://www.globenewswire.com/news-release/2021/11/02/2325346/0/en/Breast-Reconstruction-Market-Globally-is-Anticipated-to-Foresee-a-CAGR-of-6-8-from-2021-2028-Reaching-the-Value-of-US-863-5-Million-by-2028-Accurize-Market-Research.html
Treatment for Type 1 Diabetes-This is the most interesting development being undertaken by another company using PNV’s product BTM. The inventor of BTM has gone on to begin trying to cure T1D and first human trials have begun recently. It was proven successful in pigs. This trial is still ways away and is being undertaken by Beta Cell Technologies. Polynovo are not financing any of this research at this stage. There is no cure for T1D and the global market is estimated to be $6.9b USD in 2024https://pharmaintelligence.informa.com/resources/product-content/sitecore/shell/~/media/Informa-Shop-Window/Pharma/Files/PDFs/infographics/3543_Datamonitor_Type1_diabetes_Infographic.pdf
Sports medicine-This area of research is a long way away however it has been mentioned that they are researching ways to treat sports injuries such as tendons and muscle tears.
Versatility of BTM
BTM was initially designed to be used to treat patients who have had significant burns to their bodies. This was based on the technology which creates a healthy Dermis base for a skin graft later. With positive outcomes, surgeons have tested the products in broader wound repair such as trauma, diabetic foot ulcers, Necrotizing Fasciliatis and scar treatment. This has seen the addressable market significantly increase as the product can help repair a dermis in a multitude of different applications.
BTM approvals-PNV entered the US market using a 510K application and are compiling trial reports to apply for FDA approval for the treatment of full thickness burns in USA. BTM has an accredited CE mark in Europe.
BTM doctor studies of interest-
Biodegradable Temporising Matrix (BTM) for the reconstruction of defects following serial debridement for necrotising fasciitis.https://www.sciencedirect.com/science/article/pii/S2468912218300750
This study found that BTM loss was 1% Total Body Surface Area of 60% TBSA over all 7 patients. Further there was no skin graft loss when integrated over BTM. Lastly, BTM has become the default wound care and repair after necrotising fasciliatis.
Comparatively, a study of Integra’s bi-layer matrix found that in 157 patients, there was a 30% failure rate in reconstruction.https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7043722/
Biodegradable Temporising Matrix (BTM) in treating a foot degloving
A man having presented to the hospital with a degloved foot is treated using BTM. BTM was applied over exposed tendons after the wound was debrided and cleaned of dead tissue. Whilst the BTM was integrating and vascularizing, the patient is treated as an outpatient, freeing up hospital resources. This is a beneficial cost saving with a free hospital bed. The result of his skin graft was “robust, soft, mobile and excellent aesthetic” The patient could wear footwear immediately afterwards.https://journals.lww.com/prsgo/Fulltext/2019/04000/A_Synthetic_Biodegradable_Temporising_Matrix_in.30.aspx#pdf-link
Competitors
Aroa Biosurgery (ARX:ASX)Aroa are a NZ based company that listed mid 2020. Their product has the same application as polynovo’s BTM however it is a biologic product. Being made using sheep/goat intestine, the product has a higher risk of infection for patients which isn’t ideal. This product is the closest competitor in terms of pricing and is 20-30% dearer than BTM.
Integra (IART:NASDAQ)Integra are a well-established company but like Aroa, create a biologic product that is made using shark cartilage. Again this product has a higher risk of infection and is sold for a considerable amount more than BTM.
Avita medical (AVH:ASX)
Avita are NOT a competitor for PNV, and this discussion comes up often. AVH’s RECELL product is like a special spray formulation made from the patients skin cells. Upon application, it promotes the growth of new skin, eliminating or reducing the need for skin grafts. BTM and RECELL can be complimentary products, but they have different applications with BTM repairing the Dermis and RECELL the Epidermis.
Competitive advantage
Synthetic Products> Biological products-With BTM being the only synthetic Dermis repair matrix on the market currently, their product is superior to biological matrices. This is supported in this articlehttps://www.sages.org/wiki/use-synthetic-mesh-infected-field/. By using synthetics, there is less risk for severe infection, especially important in patients where large surface areas need to be repaired. There is also a cost benefit of a reduction in needing to replace infected matrix’s which Integra and Aroa’s need to be in some cases. This isn’t to say BTM is immune to infection. Infection still can occur for BTM application’s however at a much lower rate.
BTM Vs Integra’s Bilayer matrix, a study by Monash University-A study by Monash university comparing BTM to Integra's product finds "significantly more extensive vascularisation in BTM, compared to Integra® grafts" (p3). This creates a better base Dermis for a future skin graft. Also, "BTM grafts were able to home CD31+ endothelial cells from the wound bed faster than Integra" (P3). Finally, "BTM has no known binding site for host cells, and yet it supports more cellular growth than the two collagen matrices tested here". These were all taken from this study. (p10) https://researchmgt.monash.edu/ws/portalfiles/portal/316222653/316222360_oa.pdf
Cost saving for hospitals-However the cost saving to hospitals isn't only the price of the product. From a study written by doctor's, their conclusion is "In a challenging knee-thigh injury, a minimally invasive tissue engineered reconstruction salvaged traumatized ischemic soft tissues and reconstructed a complex lower extremity wound well. It reduced surgical time, lessened tissue loss, maximized soft-tissue salvage, minimized anesthesia, and prevented disability. It also reduced hospitalization, lowered morbidity, rehabilitated early, and decreased health-care costs, thus resulting in excellent patient satisfaction. In the future, a larger study with a long-term patient follow-up documenting outcome would establish the benefits and deficiencies of this novel approach" https://jocr.co.in/wp/2021/09/10/tissue-engineered-successful-reconstruction-of-a-complex-traumatized-lower-extremity/
Financial Analysis
Polynovo have a very high market cap compared to their revenue. At a near $1b marketcap at a share price of $1.53 with sales of circa $25.5m in FY20/21 (not including BARDA revenue), it can be hard to justify such a high market valuation. The company just missed break-even last financial year and is expected to hover around this level as the company rapidly re-invests revenues to grow further and faster. 2021 was the last year of considerable Capital Expenditure, notwithstanding viable investment opportunities presenting themselves in the future.
Balance Sheet-The balance sheet displays a fall in current assets to $16.24m from $19.28m in 2020. This is predominantly in the form of less cash on hand which was used for CAPEX in relation to the Hernia product development and commissioning of equipment. This can be seen in the ~$4m raise in plant and equipment. Overall, the company grew their assets by $1m for 2021 to $38.3m. Of importance in non-current liabilities, PNV have used their bank loan facility which increased by $3.1m. The company has significant cash to continue operations and the balance sheet is in a healthy position.
Income statement-The income statement shows $29.3m in revenues. Employee expenses increased greatly between 2020/21 indicating a greater number of employees. The company has voiced that they will continue to rapidly hire sales staff as they see fit, to increase their scope and customers. For the year ended, the total loss was $4.6m. For 2021/22, with less CAPEX for the next FY, we can expect this figure to move towards 0 and become positive.
Cashflow statement-The bulk of revenue comes from sales to customers in addition to BARDA revenue equalling $4.3m. Receipts from customers was up 34.5%. Overall, Polynovo are cashflow positive, indicating they have room for re-investment in the company.
Cashflows and future revenue growth
The director or chairman back in 2018 or 19 laid emphasis on doubling revenues year on year for the next 5 consecutive years. Though sales are still expected to be lumpy. This however has not come to fruition with covid affecting the business in terms of pushing back elective surgeries and limiting sales staff access to hospitals. For FY20/21 PNV posted a 33.3% growth in sales revenue. This was way below expectation, although still positive for a period where many companies went backwards. Polynovo however may be singing a different tune in the future with OCT and NOV 2021 sales up 133% on 2020, displaying that the company may be back on track for high growth. Previous years growth numbers are 105% in 19/20 and 447% in 18/19. These figures are off a low base, so high growth numbers can be expected.
The question stands as to what revenue growth we can expect over the next 10 years. Whilst difficult to model growth in a company with lumpy sales, Polynovo’s BTM is a superior product to every alternative on the market. Patience is needed before BTM contends with becoming the standard of care as more sales staff introduce the product to hospitals and surgeons. Beside the broadening application uses in different markets, in 2024 the first expected sales of Synpath are expected. This will be followed by The Hernia repair in 2025/26. In the meantime, Polynovo will have solidified their ties with hospitals, and the rollout of these new product line additions should see a much faster uptake. Further, If the Type 1 diabetes cure comes to fruition down the line, this opens a whole new market which will be revolutionary. This is far out in the future and no guarantee though news regarding the project has been positive.
Sales staff growth-Relating to revenue is the number of sales staff out and about selling the product(s). Management have taken a new direction for the business, focusing on rapidly growing revenues. 10 more sales staff have been recruited in the USA from August-December of 2021. The high profit margins allow for sales staff to cover their own wage in 3-4 months. A correlation can be drawn between the number of sales staff and sales revenue. Therefore, expanding the sales force quickly, is an indication for greater hospital access leading to greater future sales. As the chairman has said himself, “I have never met a doctor who did not buy the product after testing it”. High growth figures are based on this fact as a fast growing sales staff means BTM is getting into the hands of more and more surgeons.
Estimation and reasoning for revenue growth figures
*It is very difficult to estimate growth figures for a company where management are expecting high growth in the coming years. Reading many clinical and case studies on BTM concludes that; BTM is a superior product, cost savings, less observed infection, fewer rejections, and better aesthetic. As surgeons become more aware of this product, growth will quickly increase as BTM moves to become the standard of care.
With BTM sales continuing to grow off a small base, I assume sales growth will be in double figures for FY21/22. 60% growth was allocated based on record sales in October/November discussed earlier, however the risks of covid-19 and restricted access to hospitals has resulted in a growth rate more in line with current global issues.
The following year, 80% growth was allocated. This is based on the world becoming further accustomed to living with covid and with a greater number of sales staff allowing for greater hospital access.
For 2025, 100% revenue growth is used. This is majorly based on the introduction of a new product in 2024 and possible Hernia product sales. The new product will add a new market and takes advantage of already established sales channels with hospitals and surgeons. Therefore, the revenue growth for this product is expected to happen quicker than with BTM.
From 2026 onwards, the revenue growth tapers down 10% yearly. This is justified by sales becoming less ‘lumpy’ and more consistent. As time goes on, Polynovo will have captured a greater amount of the market and thus there is less growth. By 2032, growth is 30%.
Net Present Value
A discount factor of 10% was used to account for greater risk and high growth. The final NPV figure of ~$4.6b after tax equates to a share price of $6.99 if there is no further shareholder dilution. My take is that this is a conservative value and if management can grow revenues by a larger percentage in the earlier years, we can expect PNV to have a much higher NPV.
What will cause the share price to move?
The stock previously traded very high, based on expectations of high growth in revenues. If Polynovo can return to posting high growth numbers, investors’ confidence will shift. As previously mentioned, OCT and NOV sales were up 133% on 2020, an indication of sales staff being able to access more hospitals as covid had fewer impacts on global hospital systems. If sales fail to show significant growth, the share price can be expected to further decline.
Announcement of a new director could cause a shift in the price upwards if they are of high calibre with good credential within experience within the industry PNV operates in.
News regarding future product (especially news from Beta technologies) could see renewed interest in the stock.
Summary
Polynovo is trading at near 1-year lows at $1.53. At the beginning of 2021, PNV was just over $4/share. The sharp decline can be attributed to the company posting a poor half year report where sales were not up to investors high growth expectations. The share has since seen a large, short interest of 7.42% as of today 1/1/22 (shortman).
The future is bright for PNV if they can successfully operate and manage the business. With their current BTM product being cheaper and more effective than competitors, all it will take is time before BTM becomes a new standard of care. The high 95% gross margin on their product with room to increase whilst still being cheaper than competitors is very beneficial and will significantly aide in how fast polynovo can re-invest in themselves.
Whilst Polynovo is trading at such a low price, they are considered undervalued in my opinion in relation to how quickly they can grow and expand into multiple markets. For the long-term Polynovo is a safe bet. However, in the short term, lumpy sales may result in the share falling faller if growth continues to disappoint.
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