Polynovo (PNV.ASX)

Description:
Polynovo (ASX: PNV) is an Australian based biotech company enaging in the design, development and manufacturing of dermal regenration solutions using it patented NovoSorb biodegradable polymer technology. It’s patented NovoSorb technology was developed in the CSIRO and spun out as the private company Polynovo.

So what is this Novosorb product used for? Basically when your skin undergoes traumma such as burns, road truama, surgical reconstruction it will lose its dermis( picture below).

Novosorb BTM regenerates this dermis layer of skin, by providing a scaffold to regrow dermal tissue that provides an ideal foundation for a skin graft. See picture below for details
And how Novosorb BTW works, see the link below:
https://www.youtube.com/watch?v=1MoXkwLiwzo

Finally once the dermis is regenerated the scaffold biodegrades through hydrolysis and is excreted through urine, respiration and macrophage activity. How cool is that.

Currently Polynovo has the following products:
– Novosorb BTM (just explained)
– Hernia related product (Entry Mid 2020)
– Breast related product (in development)

Skin diagram

Latest Developments:
The company recently provided their investor’s update in June. With the company focusing on:
– Accelerating market penetration in the US, reinvesting revenue
– expanding sales in the Aus/NZ/UK/ Ireland
– Investing additional resources in sales, marketing, support and admin.

– The company is forecasting to be cashflow positive by early mid 2020 and had its first $1million sales month in April.
– Polynovo has also signed a contract with the US Department of Defence and other Federal, who will be purchasing their NovoSorb BTM for the treatment of serving military, veteran’s and their families.

Competition/ Competitive Advantage:
Polynovo’s Novosorb BTM’s main competition:
– Integra Dermal Regeneration Template (DRT): has been the go to standard for dermis regeneration thus far and has been the most widely used to this point. It is a thin silicone film that acts as your skin’s epidermis and once your dermis regenerats the film/scaffold is removed.
– Suprathel :don’t know as much as about this product except that it is a synthetic one-time application wound and burn dressing. I am unsure whether this product is used to regenerate the dermis layer like Integra and Polynovo’s Novosorb.

What sets Polynovo’s Novosorb apart from its competitors is:
1. Low cost versus tradiational based biological substances
2. BTMs safe biodegradiability of the product from a wound + the high quality of elasticity of new tissue generated

Catalysts:
Confirmation of breakeven early 2020
– Succesful launch and market entry of the Hernia product into the USA Mid -2020 (FDA approval, May 2020)
– New major contracts signed for Novosorb BTM

Shorting interest (Positive):
Total % shorted as of the middle of June is 0.06%, so basically nothing

Insider trading (Positive):
Insiders have been buying this stock like crazy, with absolutely no selling

Management team (Positive):
I like this management team, particularly the non- exec chairman David Williams. Voted Chariman of the year by Biotech Daily and has been on the board of other successful companies such as Medical developments (MVP), very experienced and well regarded chairman in charge.
The CEO, Paul Brennan has estensive experience in sales and market in major healthcare companies (newphew Healthcare, Ansell) and has done a stellar job thus far leading the company.
Further details on their leadership can be found below:
https://www.marketindex.com.au/asx/pnv

Macro Environment:
Macro events don’t really have a major impact on biotechs and Polynovo is no different. The beta related to market fluctuations is relatively low compared to other industries.
According to a recent research report published by Acumen, link below, the burn care market worth is forecasted to be worth approx. $3 billion by 2026, whereas the current market size is $1 billion. Which although is a terrible thing to think about, means more work and greater revenues for Polynovo

Fundamental Analysis:
The company has strong cash on hand ~$20 million , with minimal debt. No plans for a capital raise, forecasted to hit positive cash flow by early 2020 and is financing its warehouse construction through its own cashflow. Very nice.
I am forecasting steady revenue growth for Novosorb BTM , with hernia and breast revenues coming in 2022 and 2026. As per below image

Assuming:
– OPEX costs to remain at 15% of revenue
– Revenue growth in line with previous statement
– Positive cash flow by early 2020 as per latest market update.
– WACC 3.7%
– Current Share price ( 20th June) = $1.48

From my 10 year DCF I calculate the intrinsic value of the stock at $1.69 . Which is approximately 10 – 15% higher than that of today’s stock price of $1.48 (since June 21 2019).

Technical Analysis (Positive):
Stock is showing strong momentum and has been in an uptrend since the start of January. And is currently trading in an ascending trading channel.

Conclusion (HOLD):
Because it took me so long to write this report, the stock price has really run up recently and the stock no longer seems undervalued. I like everything about this stock, great product, strong momentum, strong fundamentals, but the stock is really reaching on the expensive side right now. So it would be my opinion to hold.

Disclosure: I do hold stock in Polynovo, please treat this research as entertainment purposes only and consult a professional when investing. I am absolute novice so please don’t trust me in my analysis.

Posted in ASX

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