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SNWV: Several Milestones in Q1 Including Initial U.S. dermaPACE Revenue

05/24/2018
By Brian Marckx, CFA

OTC:SNWV

Q1 Results, Operational Update: Several Milestones in Q1, Including Initial U.S. dermaPACE Revenue….

SANUWAVE (OTC:SNWV) reported Q1 2018 financial results and provided a business update. Coming off a strong close to FY 2017, revenue not only remained robust but actually picked up some momentum through Q1 – up 130% yoy and 9% better than Q4 ’17. The sequential growth is particularly encouraging given that the prior period was relatively strong – equal to about twice the average through the first three quarters of 2017.

Q1 ’18 marked a milestone for SNWV - or more accurately, marked three milestones. The $344k of revenue is the highest Q1 revenue in company history and it included U.S. dermaPACE revenue – which is another first. U.S. dermaPACE revenue relates to the first shipments to Premier Shockwave. In addition, Q4 ’17 – Q1 ’18 represents the only consecutive six months in SNWV’s history with both quarters posting greater than $300k in revenue.

Encouragingly, management expects revenue to continue to grow through the remainder of 2018 and benefit from shipments to and demand from Romania, SE Asia, Italy, Benelux region and Australia. In early May SNWV announced that AMBIENSYS SRL will handle distribution in Romania (with expected revenue of $400k over 3 years). The Middle East may soon present an opportunity as well – SNWV brought on MenaCare (consultants) to help with their commercialization strategy in that part of the world. ANVISA (Brazil) approval is expected by year-end and as a result, could begin to generate meaningful contribution by early next year. Management also reiterated their expectation to consummate more JV-type relationships.

Canada represents a fairly new opportunity and, with a KOL now ‘onboarded’, dermaPACE could begin to generate meaningful interest there. Earlier this month SNWV announced that Dr. Perry Mayer, principal of The Mayer Institute, joined the company’s Clinical Advisory Board. SNWV’s PR notes that TMI is “one of Canada’s prominent preventative diabetic foot care, advanced wound care and diabetes education clinics”. Management noted on the Q1 call that TMI treats 80 to 90 wounds per day. While we do not expect significant revenue from Canada in the immediate term, having a resident-KOL in place is a key piece of SNWV’s initial commercialization strategy and one which should afford relatively efficient means of building early awareness of dermaPACE to the Canadian wound therapy community. Case studies as well as, potentially, post-marketing studies are also key components of initial awareness-building efforts.

In terms of the U.S., management indicated that Premier has already been busy at trade shows and visiting military bases. SNWV continues to expect the roll-out to build momentum throughout 2018. Depending on initial rates of VA-related adoption and utilization as well as (likely more incremental) OVA (i.e. outside VA in U.S.) interest, we could see material growth in U.S. revenue later this year.

But, with (effectively) no reimbursement, we continue to think 2018 will be more important as an opportunity to build additional awareness and clinical evidence and to educate wound-care KOLs about dermaPACE. We are encouraged by the reasonableness of management’s initial U.S. strategy – which, essentially, clearly recognizes challenges posed by lack of reimbursement and addresses those challenges by what appears to be a systematic approach towards both initial commercialization (via already established Premier relationship targeting non-insurance providers) and evidence-based approach to encourage adoption.

SNWV dedicated much of 1H ’18 to initial awareness-building – essentially ‘introducing’ dermaPACE to the U.S. wound community with attendance at numerous industry events. 2H ’18, as explained on the Q1 call, is the next step – that is, educating wound experts and KOLs on how and when to use dermaPACE. This timeline sets up early 2019 for a more dedicated commercialization push – which corresponds to when SNWV expects to have a CPT III (‘tracking code’) in place (Jan 1, 2019).

Financials

Q1 revenue was $344k, up 130% yoy, up 9% yoy and inline with our $347k estimate. As noted, this was the highest Q1 revenue in company history. We looked back and also found that Q4 ’17 – Q1 ’18 represents the only consecutive six months in SNWV’s history with both quarters posting greater than $300k in revenue. SNWV did not disclose the amount of U.S. revenue in the quarter but did note that it was all related to Premier.

Most of our forecasted 2018 revenue is still OUS. dermaPACE is still awaiting ANVISA approval in Brazil – assuming that happens, MundiMed related revenue contribution could be material – but likely not until later in 2018 or early 2019. Meanwhile, recent expansion of SNWV’s OUS footprint from 9 to 14 countries, expanding ‘label’ from orthopedics-only to now include wound treatment in several territories and new distributor relationships are all potential catalysts that could have a positive impact on international revenue growth. Certainly, FDA clearance, while largely meaningless from an OUS regulatory standpoint, can act as a proxy ‘stamp of approval’ and prove an important and influential marketing message and help drive adoption. Clinical studies are also expected to initiate outside of the U.S. – including in Canada. And, finally, as it relates to potential international catalysts – SNWV noted that they are in discussions with four potential partners, one of which they expect to announce an agreement with by mid-August.

OpEx was $1.3M, compared to $708k and $1.5M in the prior year and quarter periods. SG&A has ticked up considerably since Q3 of last year. With some incremental headcount additions planned throughout 2018 – which could include positions in R&D/clinicals, reimbursement/billing, sales and accounting – as well as implementation of the initial U.S. strategy, we think operating expenses will increase during the year. But, also expecting meaningful sales growth, we think at least a portion of the incremental cost will be offset.

Cash balance was $154k at Q1 quarter end. Cash used in operating activities was $1.9M ($1.3M, ex-changes in working capital), compared to $115K ($750k, ex-changes in working capital) in Q1 ’17. SNWV raised $1.3M (net) via debt and warrant exercises in Q1. Additional cash could come from more warrant exercises – as of the close of Q1, 107M common shares worth of warrants were in-the-money (with exercise prices of $0.11 or less) and represent over $9.5M in potential new cash. In addition, if and when SNWV inks another JV agreement, similar to that of MundiMed, upfront fees could be another source of funds.

We cover SNWV with a $0.75/share price target. See below for free access to our updated report.

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