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Still Lots Of Unknowns But U.S. FDA Clearance Is Major Win For SNWV

01/08/2018
By Brian Marckx, CFA

OTC:SNWV

FDA Approval of dermaPACE: Still lots of unknowns but U.S. regulatory clearance is major win for SNWV

It was a long time coming but U.S. regulatory marketing clearance of dermaPACE finally came on December 28, 2017 with FDA’s classification of SANUWAVE’s (OTC:SNWV) flagship product as a Class II device under the (now new) generic classification name, “extracorporeal shock wave device for the treatment of chronic wounds”.  

Per FDA’s document, dermaPACE’s indicated use is “to provide acoustic pressure shockwaves in the treatment of chronic, full-thickness diabetic foot ulcers with wound areas measuring no larger than 16cm2, which extend through the epidermis, dermis, tendon, or capsule, but without bone exposure. The dermaPACE System is indicated for adult (22 years and older), diabetic patients presenting with diabetic foot ulcers greater than 30 days in duration and is indicated for use in conjunction with standard diabetic ulcer care.”  

Quick summary of the company’s journey;

- Initial Phase III PMA Study: In July 2011 SANUWAVE submitted the third and final module of their PMA application seeking FDA clearance of dermaPACE for the treatment of diabetic foot ulcers.  The filing was supported by data from what was then expected to be a pivotal regulatory trial – a phase III randomized, controlled, double-blinded study which included 206 patients (99 dermaPACE, 107 sham).  Data showed dermaPACE was significantly more effective than sham (standard of care) in wound area closure within four weeks following the last treatment and continued to be so throughout the 12-week evaluation period.  In addition, 36% more dermaPACE treated patients achieved full closure within 12 weeks and of the patients that did achieve complete wound closure at 12 weeks, only 4.5% of the dermaPACE cohort experienced wound recurrence, compared to 20% in the sham cohort. And finally, 100% wound closure was found to be statistically significant at 20 weeks (see Appendix for more detail).  Despite the compelling data, in December 2011 FDA issued a major deficiency letter citing failure to meet the primary endpoint of 100% wound closure at 12 weeks as the reason that they would not clear the device for sale.  Among FDA’s recommendations to potentially remedy the deficiency was for SNWV to conduct an additional clinical study  

-Supplemental Study: In May 2012 FDA approved SNWV’s IDE supplement for another study which was designed similar to that of the initial study except for this time it allowed for up to four treatment "boosts" delivered during weeks four and ten – the boosts were aimed at improving upon efficacy (i.e. primary endpoint of 100% wound closure at 12 weeks).  FDA agreed to the use of Bayesian statistics which applies sequential analysis allowing for the supplemental data to build on the positive results from the initial larger study.  Initially expected to enroll 90 patients, it was subsequently expanded to 130 (1:1 randomization).  Results of the combined data from the initial and supplemental study, announced in May 2015, showed that the primary endpoint of 100% wound closure at 12 weeks was still not met.  The good news was that safety was still not an issue and secondary data, such as 100% wound closure at weeks 20 and at 12 weeks within certain sub-groups such as patients with higher BMI, was positive.  SNWV and MCRA at that point decided to pursue the De Novo FDA pathway which (as compared to PMA) places a greater emphasis on the safety profile.     

- FDA Clearance:  SNWV made their De Novo filing in July 2016.  After months of review and some back and forth between SNWV and FDA regarding certain questions and clarifications, the U.S. regulatory agency finally granted marketing clearance and classified dermaPACE as a Class II device on December 28, 2017.  

Initial Comments on Relevant Topics
While FDA approval answered the most important question (i.e. will dermaPACE be allowed to be marketed in the U.S.?), it elicits a lot more – many of which will take time to answer.  We hit the highlights (in no particular order) below and hope to know more about each topic (as well as likely other topics) as time passes and SNWV progresses along its U.S. commercialization journey – so stay tuned for future updates.

Reimbursement: novel devices often initially go to market in the U.S. sans-dedicated Medicare reimbursement. That’ll be the case with dermaPACE.  Initially, providers (perhaps, particularly influential KOLs) may have some success billing under a more generic CPT III code – although we expect spotty reimbursement, at best, initially or at least until there is more usage data and perhaps, until following conclusion of supportive post-approval clinical utility and pharmacoeconomic studies.  Eventual issuance of a CPT I code will likely be the goal, although that could be a years-long process and will undoubtedly require sufficient usage and economic data.

- Launch / Initial Roll-Out: management noted on the (FDA approval) call that they expect to initially roll-out to certain of the ~36 investigators that participated in their FDA clinical studies.  Presumably those that are considered more influential KOLs and can benefit with both awareness-building and, perhaps, have greater success on the reimbursement side.  SNWV indicated that they expect a soft launch and related revenue in Q1.  In Q2 they will be building awareness at several wound care-focused conferences and then in 2H hope to have a more substantial initial commercialization push.   

- Sales / Marketing / Distribution: we expect the marketing team to be pretty lean, at least during the first 12 months or so given that that period will mostly focus commercialization efforts on already established relationships and attendance at industry events.  As it is now, we assume additional incremental hiring in sales/marketing, particularly going into 2019.  We think SNWV may also look to bring on some form of third-party partner or distributor for the U.S. – essentially, we think management is keeping their options open. 

- Revenue Model: as was always expected to be the case – even way back in 2011 when SNWV hoped to get FDA clearance on their first pass, the revenue model will be to place the console for free (or at cost) and to charge on a per-treatment basis.  A radio frequency identification (RFID) card will be required to activate the device. Similar to the classic razor / razor-blade business model, the "razor-blade" portion of SANUWAVE's sale is expected to carry high margins (approaching 90%).  Clinical studies indicated that between four and eight treatments of dermaPACE are appropriate.  Management noted that they have a financing partner lined up that will finance the first lot of consoles (we estimate 50 to 100) in order to not overburden working capital at the get-go.    

- Margin: expected margin is a major unknown given ambiguity over accessibility and amount of potential reimbursement.  And while dermaPACE treatment can be performed at a much lower cost than competing advanced DFU therapies such as negative pressure wound therapy (NPWT) and skin substitutes, economics, along with patient outcomes, drive clinicians’ choice of treatment modalities.  For now, our conservative, base and liberal cases use per-treatment margins (to SNWV) of $50, $75 and $100, respectively – this is a metric that has significant chance of changing, however, given the reasons cited.  We assume that, on average, each patient receives six treatments.        

- U.S. DFU Market Opportunity: Approximately 25M adults in the U.S. have diabetes, roughly 8% of which have (at any given time) a DFU.  Of these ~2M with a DFU, about 12%, or 240k will undergo an amputation every year.  Amputation usually results because all available therapies failed to heal an ulcer.  So, what is the market opportunity for dermaPACE?  If we assume 50% of DFUs heal with standard of care (i.e. prior to the employment of advanced therapies), then on the liberal side the market is about 1M people per year (i.e. every American adult with a DFU).  On the conservative side it’s about 240k people per year (i.e. assumes dermaPACE is last in line after standard of care and all other advanced therapies failed and the only other option is amputation).   

- Competitive Considerations: there are several types of advanced DFU wound therapies approved for sale in the U.S.  The most common are NPWT (such as KCI’s VAC) and skin substitutes, such Apligraft and Dermagraft.  Growth factors (i.e. topicals), matrices and stem cells are other therapies that have been used in the treatment of DFU.  Ultrasound and electrical stimulation have also been employed as has hyperbaric oxygen therapy.  

Given that NPWT has been used for decades in the treatment of chronic wounds and much of the clinical evidence surrounding chronic wound therapy lies with it (i.e. NPWT) as well as the skin substitutes, these are the modalities which we view as the most meaningful competition to dermaPACE.  All of these are more invasive, require greater skill to employ and are much more expensive than is treatment with dermaPACE.  SNWV estimates cost of full treatment regimen with dermaPACE is approximately $3k, as compared to ~$15k for NWPT and ~$10k for skin substitutes. 
  
We also note that while all of three of these other products did achieve 100% wound closure in their respective FDA pivotal trials, the practical efficacy difference as compared to dermaPACE may be much less meaningful.  In their initial IDE trial, median closure in dermaPACE treated ulcers achieving > 90% closure was over 99% and anything greater than 70% indicates that the wound is well on its way to being completely healed.  In addition, ulcers treated with dermaPACE were almost 60% larger than those in the control group (making achieving significance that much more difficult).  Also noteworthy is that trial protocol in V.A.C.’s FDA study allowed for full closure of ulcers to be completed with surgery - this was not allowed in the dermaPACE study - had it and it's conceivable that dermaPACE would have shown statistical significance in 100% closure over standard of care.  See our Appendix for more detail on our comparison of dermaPACE vs. these other therapies.  

Also important is that dermaPACE will not necessarily need to compete directly with these or any other advanced DFU therapies given that wound healing is often a trial and error approach – if one modality fails, the clinician will move to the next, and so on.  While the initial goal is to heal the wound as fast as possible, the ultimate goal is to at least eventually heal it and avoid amputation.  But, the more competitive the product, likely the better chance it has to be closer to the front in the continuum of care.           

- Ancillary Benefits: FDA approval should afford other ancillary benefits including greater awareness and adoption in overseas markets and help facilitate regulatory clearance in certain other countries as well.  

Updates to our model as a result of the FDA decision have resulted in our price target moving from $0.25 to $0.55/share. See below for free access to our most recent Investor Note on the company which includes our modelling assumptions and valuation methodology. 

READ THE FULL RESEARCH REPORT HERE

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