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SNWV: International Expansion To Accelerate Revenue. De Novo Guidance: Late-2017

05/25/2017
By Brian Marckx, CFA

OTC:SNWV

Q1 Results, Operational Update: Add’l Distributors Should Accelerate Revenue, De Novo Guidance: Late 2017….

SANUWAVE (OTC:SNWV) reported Q1 financial results and provided a business update.  Relative to the financials, revenue fell significantly on both a yoy and sequential basis – which was not unanticipated given some recent softness in S. Korea attributed that country’s political difficulties as well as a decline in Europe.  We also reiterate that SNWV’s sales have been lumpy as of late, reflecting the progress in broadening the international footprint via new distribution relationships.  Based on comments on the Q1 call, it appears additional forward movement was made in those efforts during the quarter and is expected to continue to do so in the coming months.  Onboarding of additional distributors (up to 7 this year, including 3 – 5 in Q2), along with other near-term catalysts, such as reimbursement coming online in the company’s highly-important territory of S. Korea, is expected to drive device sales higher throughout the remainder of 2017.

On the operational front, the main topic of interest remains the status of the De Novo application seeking Class II classification of dermaPACE by FDA.  While no big surprises or revelations, management noted that they received additional questions from FDA and have since responded to all of them, save two.  While the remaining will require some additional testing, SNWV expects this to be completed and their related response to FDA to happen by the end of June.  Importantly, management indicated that they have little concern regarding sufficiently answering FDA’s recent questions and responding to these final two items is not problematic, but only time consuming.  SNWV also noted on the Q1 call that, based on general guidance from MCRA, they believe the November/December 2017 time frame is a reasonable expectation on when they will hear a final answer from FDA (which they believe will be positive).    

Financials
Q1 revenue was $150k, representing a yoy and sequential decline of 45% and 77% (we note that Q4 sales, $648k, were a record high), respectively and slightly below our $185k estimate.  As noted, general lumpiness as well as variability in revenue from S. Korea and Europe contributed to the decline.  As it relates to S. Korea, while strong revenue in Q4 2016 reflected growth in device sales in that country, the hangover from political turmoil was at least partially to blame for the relative softness in sales in Q1.  But, management expects this to turn back around in the very near-term given reimbursement coming online as well as just a general increase in demand – acceleration in this country could come as soon as 2H 2017.  Europe also was mentioned as a laggard in Q1  - with management noting that they are in discussions with alternative distributors in that part of the world.  

And with up to seven new distributors coming onboard before year-end, coupled with the requirement that new distributors purchase at least two devices initially, revenue should track considerably higher throughout 2017 as compared to Q1.  As a reminder, growth in the distributor-base is largely attributable to the hiring in February of hiring of Andre Mouton, an experienced sales director who is leading SNWV’s international sales efforts.  

Q1 OpEx was ~$700k, lower than our $840k estimate.  

Cash…
Cash used in operating activities was $115k ($750k ex-changes in working capital).  Cash balance was $98k at quarter-end.  SNWV expects monthly cash burn in to average $125k - $225k in 2017.  We continue to expect the company to look to raise additional cash via the sale of equity or debt or potentially through one or more partnering arrangements.  

FDA Pathway Update…
While management noted that they will continue to follow their policy of disseminating any material news as it relates to their quest towards FDA clearance of dermaPACE via press releases, they do continue to provide brief updates on the status of their de novo filing with FDA on earnings calls.  As a reminder SNWV filed their de novo application on July 23, 2016 requesting that dermaPACE be classified as a Class II device.  

In early 2017 SNWV received from FDA additional questions regarding clarifications related to the filing, clinical trial data and “technical performance and labeling.”  SNWV subsequently responded to all 33 questions except for two.  Those remaining two require some testing and are expected to be responded to by the end of June.  As noted, management has indicated that they have little concern regarding sufficiently answering FDA’s recent questions and responding to these final two items is not problematic, but only time consuming. 

Based on MCRA’s experience, they believe a final response (i.e. yes or no) from FDA will come by current year-end.  While we had been ballparking a response to come somewhere near the end of this August, management noted on the Q1 call that they now believe the November/December 2017 timeframe is a reasonable expectation.  Importantly, management’s timeline now corresponds to our prior assumptions (which we maintain) of dermaPACE receiving FDA clearance in late 2017.  

See our Appendix for refresher on dermaPACE U.S. pivotal studies as well as the de novo filing.  

In The Meantime….
In the meantime SNWV is powering ahead with its newly revamped and again recently updated strategy aimed at growing international sales.  As noted, most recently this included the hiring of Mr. Mouton to lead their international efforts who expects to bring on an additional 7 – 10 international distributors/territories over the course of 2017, including 3 – 5 by the end of Q2.  S. Korea has recently developed into a more substantial territory for the company and while SNWV does not break out revenue by geography, the implication is that S. Korea was likely the most significant catalyst to 2016 revenue growth.  Reimbursement in S. Korea, which management indicated could materialize this year, could provide another boost to adoption in that country.

International strategy involves targeting key opinion leaders to help drive adoption.  Management noted that it typically takes about 3 – 9 months after a new distributor/territory comes online to be able to assess the potential of the launch and before any significant related revenue may be generated.  As such, assuming SNWV does bring on the number of new territories that they hope to during the current year, much of the revenue benefit may not be realized until 2018.  Nonetheless, management noted that new distributors are required to purchase at least two systems initially ($40k - $60k revenue) which means Q2 could see incremental revenue of at least $120k – and possibly as much as $300k from the just the signing of new distribution agreements.  We continue to model 2017 to set a new record in total revenue.  

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