PolyNovo Limited

Company Overview: PolyNovo Limited (ASX: PNV) is a medical device company that designs, develops, and manufactures dermal regeneration solutions using its patented technology. The company’s development program covers Breast Sling, Hernia, and Orthopedic applications. NovoSorb^® is a unique range of bio-resorbable polymers, which are produced in formats such as film, foam, fibre, and coatings.

PNV Details

Higher Sales of NovoSorb BTM and Geographical Expansion 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. The company’s development program covers Breast Sling, Hernia, and Orthopedic applications.

The company remains on track to benefit from higher sales of NovoSorb BTM, which skyrocketed 104% in FY20 from the previous corresponding period. 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 company aims to enter new markets in Europe and Asia, going forward. The company remains on track to invest further in R&D resources. FY20 has seen strong sales performances in the USA, Australia, New Zealand and Germany, Austria & Switzerland (DACH) region. The company’s depth of resources has improved considerably, and it remains strong to withstand the COVID-19 led uncertainties. The maturity of the organisation and the empowerment of local teams have compelled the company to double NovoSorb BTM revenue each year.

The company’s US sales infrastructure has increased substantially during the period with the addition of new sales and marketing people. The company rides on greater geographic reach along with increasing customer referral network. The company further expects sales roles to be added in the UK and Ireland and the DACH region. The BTM is commercially sold in Australia, USA, Canada (by exemption), New Zealand, United Kingdom, Ireland, Germany, Austria, Switzerland, Singapore, Malaysia, South Africa, Saudi Arabia, and Israel. The company further expects to strengthen its foothold in new markets in FY21, which are expected to be Sweden, Finland, Norway, France, Benelux, Greece, Italy, Taiwan, Korea, UAE, and Kuwait. The company has also strengthened its foothold in India and SE Asia, depicting promising opportunities in the future.

Coming to the past three-years performance over the period covering FY17 to FY20, PNV witnessed a top-line CAGR of ~80.4%. This reflects that PNV can make deployments towards its business activities, which might help it in tapping long-term growth prospects.

Revenue Trend (Source: Company Reports)

FY20 Key Financial Highlights: During FY20, total revenue of the company stood at ~$22.2 million, which included commercial sales of NovoSorb BTM amounting to $19.1 million and revenue from the BARDA clinical trial program of $3.1 million. The company reported higher NovoSorb BTM sales during FY20, up 104% relative to pcp. Revenues including BARDA went up ~54.6% year over year. The company noted research and development costs of $2.4 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 $4.2 million, which included $2.06 million in share-based payments expense. Capital expenditure for the period stood at $8.87 million. During the period, the company entered new markets successfully and improved gross margin on product sales by ~7.6%.

Key Financial Highlights (Source: Company Reports)

Geographical Highlights: The company recorded decent growth in all key markets, with USA sales amounting to $18.7 million in FY20, up from $11.7 million reported in FY19. Revenues from Australia and New Zealand stood at $2.9 million, up by $0.3 million from the year-ago period. The company made its entry into new markets of the DACH region with strong sales and recorded first sales in Singapore and the UK.

Geographical Highlights (Source: Company Reports)

Balance Sheet & Cash Flow Highlights: The company exited the period with a cash balance of $11.6 million. PolyNovo secured a $9.3m debt facility during the period from the National Australia Bank to fund the hernia cleanroom construction, manufacturing equipment and miscellaneous capital expenditure. Operating cash outflow in FY20 came in at ~$0.4 million. Total assets stood at ~$37.9 million at the end of the period. PNV seems to be well-positioned for future growth, on the back of significant growth in its flagship product and intends to invest cash flows in expanding its business strategies and research and development programs.

Cash Highlights (Source: Company Reports)

Recent News: Recently, the company stated Mr David Williams, a substantial holder of the company has acquired 500,000 ordinary fully paid shares for a consideration of $2.042 per share.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 20.57% of the total shareholding. The Vanguard Group, Inc. and Williams (David John) hold the maximum interests in the company at 5.03% and 2.8%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: In FY20, the company had a gross margin of 92.3%, higher than the industry median of 72.9%. In FY20, debt to equity ratio stood at 0.42x. The company remains on track to meet its debts and obligations by increasing production capacity and output and focusing on digital sales and marketing campaigns.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Key Risks: The company is exposed to shorter-term disruptions from challenging macro-economic environments due to COVID-19 outbreak. The company’s financial instruments comprise mainly of receivables, payables, bank loans and overdrafts, finance leases, loans from related parties, cash, and short-term deposits. The main risks PNV is exposed to through its financial instruments, are foreign currency risk, interest rate risk, liquidity risk and credit risk. Further, PNV also faces stiff competition from peers.

Outlook: The company expects a significant expansion of sales of BTM in the US, Australia, and New Zealand. The company is increasing its manufacturing capacity of hernia device production and is well advanced in its Hernia repair device development and anticipates US market entry in early FY22.  Based on the fourth quarter of fiscal 2020 product sales of $5.99m, the company began FY21 on a sales run rate of $24m. FY21 capital expenditure is expected to be ~$2.3m, which will be funded from operating cash and facilities. The company expects to reinvest in cashflows to enter new markets, expand market share and develop new products.

Going forward, the company plans to make higher investments to deliver high quality products to its clients with exceptional customer service. 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 near future. 

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

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

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelver Months

Stock Recommendation: The stock of the company generated positive returns of 2.83% in the past one year but went down by 18.96% in the past three months. At the CMP of $2.200, the stock of the company has a market capitalisation of ~$1.44 billion and ~661.09 million outstanding shares. Currently, the stock is trading slightly below the average of its 52-week high and low level of $3.285 and $1.275, respectively, proffering an opportunity for share accumulation. Considering the above factors, recent developments, optimistic outlook, and current trading levels, we have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit growth (in percentage terms). For the purpose, we have taken the peer group - Telix Pharmaceuticals Ltd (ASX: TLX), Neuren Pharmaceuticals Ltd (ASX: NEU), and Clinuvel Pharmaceuticals Ltd (ASX: CUV), to name few. Hence, we recommend a “Buy” rating on the stock at the current market price of $2.200, up by 0.917% on 2 September 2020. 

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

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