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SNWV: Record Revenue As International Strategy Builds Momentum

04/07/2017

By Brian Marckx, CFA

OBB:SNWV

Q4 Results, Operational Update:  Re-Igniting International Biz As Await FDA Decision on De Novo

SANUWAVE (OBB:SNWV) announced fourth quarter financial results and provided a business update.  On the financial side, revenue set a new record  - as expected following the company’s January preannouncement.  While we continue to expect revenue in the near-term to be susceptible to lumpiness as the company further broadens its international footprint – which could encompass adding up to ten new regions/distributors throughout 2017 – we also think that annualized revenue will continue to march higher.

On the operational front – management talked about several new or expanded initiatives on the call aimed at both broadening the potential market for dermaPACE as well as promoting adoption of their flagship device.  In addition to expanding their international presence, this includes the initiation of additional clinical studies in non-DFU related medical indications.  Management also provided an update to the de novo filing seeking Class II classification of dermaPACE by FDA – while SNWV is keeping details tight to the chest, they did indicate that they process remains on-track, that interaction between them and the agency (including recent requests for additional information) is fluid and that they continue to expect to hear a final decision sometime this year.    

Record Revenue

Q4 2016 revenue was $648k, representing sequential and yoy growth of 153% and 74%, respectively, and setting a new record.  For the full year, revenue was $1.38M, also a record and up 43% from 2015.  Management noted on the call that they sold twice the number of machines in 2016 as they did the prior year.  Much of the growth is related to an increase in sales of orthoPACE devices in S. Korea – management outlined their focus to further build on their momentum in that country and expects sales there to again steepen later this year.  

The uptick in international orders appears to be coming from the fruits of SNWV’s recently implemented higher-touch strategy with their third-party distributors.  As a reminder, the company recently adopted a more interactive role with their distribution partners in order to better understand and respond to the dynamics and intricacies of each of their OUS markets with the ultimate goal of growing international revenue.

They are further building on this strategy, which included the recent (February) hiring of Andre Mouton, an experienced sales director to lead their international sales efforts.  Mr. Mouton has apparently been busy as the company is aiming to add an additional 7 – 10 distributors in the course of 2017, 3 – 5 of which he thinks will be on board by late Q2.  We discuss the company’s re-ignited international strategy in more detail below.    

Q4 OpEx was $1.0M, roughly inline with our estimate.  And while G&A jumped about 45% sequentially from Q3 ’16, all and more of the increase looks to be related to (non-cash) stock compensation.  

Cash

Cash used in operating activities was $490k ($196k ex-changes in working capital) and $3.2M ($2.7 ex-changes in wc) in the three and twelve months ending December 31, 2016.  Cash balance was $134k at year-end.  Subsequently the company received approximately $77k from warrant exercises.  SNWV expects monthly cash burn in to average $175k - $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 did provide a brief update on the status of their de novo filing with FDA on the Q4 call.  As a reminder SNWV filed their de novo application on July 23, 2016 requesting that dermaPACE be classified as a Class II device.  On the earnings call earlier this week management mentioned that their most recent interaction with the U.S. regulatory agency was in late-January/early-February of this year and consisted of responding to questions and clarifications related to the filing, clinical trial data and “technical performance and labeling.”  

So while management did not provide specifics of the questions or other inquiries from FDA, we interpreted their message to be that the process continues to move along with no particular surprises.  Management did specifically mention that they have been promptly replying to all of FDA’s inquiries and that they (i.e. SNWV) expect a final decision from the agency later this year.  

Recall that during SNWV’s Q3 ’16 earnings call (November ’16) that management noted that they expected to hear from FDA by the end of January ’17 in the form of additional questions (which occurred as expected).  As we noted since SNWV’s announced de novo filing, it is not uncommon that FDA’s response to de novo filings happens much later than their intended goal of 120 days  - in fact average review time for de novo applications in 2014 and 2015 was almost 400 days.  So, applying that ~400-day average to SNWV’s filing, would put a final FDA decision somewhere around the end of August 2017 – while that timeline is just a hypothetical at this point, it provides some context around intended versus actual decision timelines.  

See our Appendix (see link below for access to our full report) 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 later in 2017, 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 on the Q4 call that they expect revenue to begin to pick up towards the end of Q2 of this year and expect 2017 to set a new record in total revenue.  

In Parallel


In parallel to broadening their geographic footprint SNWV will also look to expand the indicated uses for their device.  In that vein they have several clinical studies that have either recently initiated or are expected to do so in the near-term.  One or more of these studies could have results published by the end of 2017.  These include:

- Belgium DFU Home Care study: SNWV has partnered with Ortho-Medico, their distribution partner for the Benelux region, in sponsoring a clinical trial evaluating dermaPACE in the treatment of diabetic foot ulcers in the home-care setting.  The trial, which recently commenced enrollment, is being conducted by the Free University of Brussels and UZ Brussel (University Hospital) and is expected to include ~100 DFU patients randomized to either dermaPACE or standard-of-care.  As all patients will be treated in-home (i.e. outside the clinic/hospital), results of the study are expected to help broaden the potential international customer base to users such as home-health professionals and organizations.  As DFU patients often have significant mobility limitations and challenges, trips to the hospital for treatment can present substantial hardship.  As such, we think home-health could be a particularly attractive segment for dermaPACE and one that results of this study, assuming positive, could help SNWV to exploit.

- Australian Venous Leg Ulcer studies: SNWV’s Australian distributor, in collaboration with researchers in Melbourne, has participated in several case studies using dermaPACE in venous leg ulcers.  Management noted on the Q4 call that they expect feedback from these studies by the end of 1H ’17.  

- U.S. studies:  In addition to DFU, SNWV is investigating the use of their technology in the healing of post-operative scars and in improving vascularization – both of which lend themselves to the dermaPACE’s method of action – that is promotion of blood flow and related healing.  While these studies are still in the early planning stages, management did offer some general information on the Q4 call  - including that the post-op scarring program may initially involve patients undergoing elective cosmetic surgery (such as tummy-tucks) with each patient representing both treatment and control arms (e.g. one incision scar would be treated with dermaPACE, while the other would receive standard-of-care).  If deemed successful, larger studies could follow – including potentially overseas.  

While SNWV did not specifically mention that cosmetic surgery would be their intended end-market for such a potential post-op scarring indication, we think that it could represent a significant market.  We note that the aesthetic/cosmetic medical device space has been particularly hot as of late – evidenced in part by the February 2017 announcements that Allergan (AGN) will acquire ZELTIQ Aesthetics (ZLTQ) and Hologic (HOLX) will acquire Cynosure (CYNO).  Based on our research (we cover VIVE and MRLB, both aesthetic medical device companies) much of the growth of the aesthetic space (according to the American Society of Plastic Surgeons, the number of cosmetic procedures performed in the U.S. has grown 115% since the year 2000) relates to the fact that aesthetic procedures are largely patient-pay, non-reimbursable which affords clinics the benefit of virtually no exposure to denied insurance claims or otherwise uncollectable or aged accounts receivables.  It can also provide a supplemental source of revenue for healthcare providers.  And it is not just the U.S. that is seeing an increase in these types of procedures.  In fact, according to ISAPS, S. Korea (i.e. SNWV’s most important international territory) ranks 3rd (behind only the U.S. and Brazil) in the total number of cosmetic/aesthetic procedures performed each year.  

READ THE FULL RESEARCH REPORT HERE

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