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PolyNovo (ASX:PNV) share price stalls on HY21 result – now what?

Australian medical device company PolyNovo Ltd (ASX: PNV) has released its first-half result to the market.

At the time of writing, the PolyNovo share price remains effectively unchanged at $2.40. Here’s my take on PolyNovo’s results.

COVID-19 restricts sales growth

PolyNovo reported total revenue of $12.60 million for the half, up from $10.18 million in the prior period. Overall NovoSorb BTM sales increased 31.2% to $11.25 million, with the US outperforming recording a 41% increase in BTM sales. Growth in revenue was largely attributed to 35 new customer accounts, however, sales remain impacted by COVID-19, limiting access to hospitals and surgeons.

Employee costs increased by 32.6% as management continued to expand the direct global sales team. Chair David Williams has noted in previous interviews his preference to prioritise the expansion of sales reps given the high return on investment. This is validated by the signing of two US general purchasing organisations (GPOs), which provide access to a range of hospital accounts.

PolyNovo’s net loss after tax (NPAT) was $3.54 million compared to $2.42 million a year ago. Excluding share-based payments and unrealised foreign exchange losses, the underlying loss was $0.87 million.

On 31 December 2020, the company held $7.66 million in cash and short-term investments against $7.43 million in interest-bearing debt.

During the half, the business received IDE approval by the US FDA for the Pivotal trial, supported by US$15 million funding. Recruitment of patients into the IDE trial will begin in March/April.

Furthermore, the company expanded its geographic reach, appointing distributors in Finland, Taiwan, Belgium, Netherlands, Luxemburg and Greece during the half. PolyNovo has also signed distributor agreements in Turkey, Poland and Italy so far in 2021.

New product development 

PolyNovo’s hernia program now has several prototypes, and scientists continue to assess the optimum product configuration to reach patient and surgeon needs.

Unique testing will need to be collected, which may impact the timing of the US FDA 510k application. No firm timeline was announced, however, management noted a pathway to market by July 2021.

After taking the development of the Plastics and Reconstructive device in-house, management did not provide further guidance on its timeline.

Outlook

PolyNovo didn’t provide any financial guidance, however, management is expecting lumpy sales in the second half, with the resumption of elective surgery across the company’s regions being difficult to project.

Along with its Pivotal Trial, the company will be focused on expanding its R&D team to accelerate new product pipeline developments, and furthering its entrance into the European and Middle Eastern markets via distributors.

My take on PolyNovo’s first-half results

As a shareholder, I think this is an underwhelming result for PolyNovo, given the company was aiming to double revenue to $40 million in FY21.

The company is now effectively net cash breakeven. While there was no mention of a capital raise, the company still has a cash burn of $1.40 million from operations which will need to be funded.

A number of senior management sold shares around $4.00 during the half, which in hindsight would have been a great opportunity to raise capital, with the PolyNovo share price falling over 40% since.

On a positive note, management has noted a number of informal networking groups amongst practitioners, which are not endorsed by PolyNovo. Surgeons are running their own presentations demonstrating the efficacy of NovoSorb BTM to peers, spreading positive word of mouth.

I remain a shareholder of PolyNovo as I believe the market-leading Novosorb BTM product will continue to take market share from incumbents. However, the next 12 months will likely test shareholders’ patience.

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At the time of publishing, Lachlan owns shares in Polynovo.

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