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SNWV: Robust International Revenue Growth, U.S. Should Benefit from Tracking Code

12/03/2018
By Brian Marckx, CFA

OTC:SNWV

READ THE FULL SNWV RESEARCH REPORT

Q3 Results, Operational Update: Robust Int’l Revenue, U.S. Should Benefit from Tracking Code….

SANUWAVE (OTC:SNWV) reported financial results and provided a business update (on two consecutive Q3 earnings calls). Revenue continues to gain momentum and, while slightly below our estimate, it was the second highest quarterly level in company history (Q4’16: $648k). Revenue has now grown on a sequential basis for the fifth consecutive quarter and is trending at an annual run rate of more than $3M. And, what appears to be progress on both expanding the international footprint and in putting the pieces together of the U.S. commercialization strategy puts them in what should be a stronger position for growth going into 2019.

Revenue was up 269% in Q3 and +230% YTD – by far the highest yoy percentage (as well as on a dollar basis) growth rate for each comparison in company history. Per disclosures in the 10-Q, sales to Premier accounted for just $141k of the $1.4M (~10%) total revenue to-date. While U.S. sales in aggregate contributed only 2% in Q3 and less than 12% through the first nine months of the year, with domestic momentum building and a CPT tracking code expected to go into effect on January 1st, U.S. sales should make a much more significant contribution next year.

Meanwhile, revenue recognized from the international business was up 276% in Q3 and 206% YTD and benefitted from distribution license fees, including upfront fees from FKS, a JV agreement with which SNWV entered into during Q2. Excluding these license fees and related revenue, international revenue was up a more modest, although still robust, 64% in Q3 and 63% YTD. While upfront fees from JVs and recently-penned international distribution agreements have bolstered revenue (with upfront license fees recognized on a straight-line basis based on the term of the contract) and provided some badly-needed operating capital, they have yet to result in sticky and obviously-repeatable revenue.

Because of that, coupled with MundiMed, per footnotes in the 10-Q, defaulting on terms of their JV agreement with SNWV, it remains unclear to us just how much of an opportunity there is OUS for dermaPACE. While the international non-license fee revenue growth in 2018 is certainly encouraging, it is important to remember that 2017 saw international revenue dive 46%, making this years’ comparable a very easy one. Compared to 2016 (in which revenue was at more typical historical levels through Q3), we estimate that international non-license fee revenue is flat on a quarterly basis in Q3 and down 14% in the first nine months of 2018. We hope to see international product sales (whether it be through direct distribution or via JVs) begin to gain much more sustainable traction next year.

The not-insignificant upfront fees that SNWV commands for these JVs (and certain distribution agreements) means their partners have reason to be motivated to perform – which has us hopeful that international sales will indeed begin to steepen. As a reminder, SNWV entered into two agreements in Q2 alone. These are expected to expand their reach to 14 more countries in southeast Asia and Latin America.

Recently announced distribution agreements include AMBIENSYS SRL (announced in May), which 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. And while we had hoped that ANVISA (Brazil) approval might also happen sometime next year, with the MundiMed JV now presumably dead, it is unclear if regulatory clearance in that country is likely to happen in the foreseeable future. We have removed all projected contribution from sales via MundiMed.

Canada represents a fairly new opportunity and, with a KOL now ‘onboarded’, dermaPACE could begin to generate meaningful interest there. In May 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”. 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. On the Q3 call SNWV noted that Premier has begun to penetrate both the VA and Indian Health markets and that the first U.S. patient was treated in the quarter. 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 in the near-term. Nonetheless, we continue to think the U.S. market is likely to be one where incremental gains are made over time, particularly pre-reimbursement.

So, with (effectively) no reimbursement, 2018 was largely 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 2018 to initial awareness-building and essentially ‘introducing’ dermaPACE to the U.S. wound community with attendance at numerous industry events. This included educating wound experts and KOLs on how and when to use dermaPACE. Management noted on the Q3 call that they expect to be placing 15 devices in the U.S. for “new technology assessments” (NTAs) in wound care centers and clinics – with a focus on the West coast, where MAC coverage is expected to be more favorable. This 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
Q3 revenue was $596k, up 269% yoy, up 32% qoq and about 13% below our $683k estimate. This was the highest Q3 revenue in company history and follows the same record in Q1 and Q2 – which also means that revenue through the first nine months of 2018 was the best in company history. This is also the only consecutive four-quarter period with revenue in each quarter above $300k.

Contribution from license and distribution fees totaled $334k, or 56% of total revenue, and represented a significant portion of both the yoy and qoq growth. But, international device and applicator sales were also meaningful components of total revenue (44%) and international revenue growth. International device and applicator sales, which increased $99k (+64%) from Q3’17 and $243k (+63%) YTD, is a (rough) gauge of OUS demand.

Meanwhile, U.S. sales were just $12k in Q3’18 and $160k YTD, compared to $6k and $19k in the prior-year periods. While not particularly meaningful, we had expected as much as we expect incremental gains in the U.S. over time.

While license and upfront fees bolstered revenue in 2018 recent expansion of SNWV’s OUS footprint, 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 going forward. 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, Taiwan and S. Korea. And, finally, as it relates to potential international catalysts – SNWV has delivered on its previously announced strategy of new JV agreements – and more could be forthcoming.

OpEx was $3.1M, compared to $742k and $2.4M and $1.3M in the prior year and quarter periods – almost all of the difference relates to non-cash stock compensation (to employees and/or consultants). SG&A has ticked up considerably since Q3 of last year. With some incremental headcount additions happening in 2018 with likely a few more expected following effectiveness of the CPT tracking code in the U.S. But, we also expect sales growth will offset at least a portion of the incremental cost.

Cash balance was just $72k at Q3 quarter-end. Cash used in operating activities was $673k and $2.3M ($1.0M and $3.5M, ex-changes in working capital). SNWV continues to guide for cash burn to average $375k - $675k per quarter. Additional cash could come from warrant exercises. And, as noted, new JV agreements could be another source of funds.

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