SNWV: Trial Timelines Intact, Enrollment 50% Completed

Zacks Small Cap Research
November 13, 2013

By Brian Marckx, CFA


On November 12th SANUWAVE (OTC BB:SNWV) announced financial results for the third quarter ending September 30, 2013.  Revenue came in lower than our estimate but stronger than modeled gross margin and an in-line level of operating expenses netted out to operating income just about dead-on with our number.  SNWV also did some balance sheet cleaning during the quarter, converting the $2.2 million principal and interest of senior notes to equity.  Highlights on the operational side include the dermaPACE supplemental trial continuing to track previous announced timelines with 50% of the minimum number of patients now enrolled and completion still expected in Q1 2014.

Q3 revenue came in at $148k compared to our $205k estimate.  Gross margin, which jumped to 85% in Q2 (for reference, GM was 71.4% in 2012), remained very healthy in Q3 at 80% and was substantially better than our 70% estimate.  GM has benefitted from increased sales of higher margin applicators.  Operating expenses of $2.0 million were in-line with our $2.0 million estimate.  Operating income was ($1.9) million, compared to our ($1.9) million estimate.

Net income and EPS were ($4.4) million and ($0.14).  Excluding $2.0 million in non-cash expense, which is mostly related to the conversion of debt to equity, net income and EPS were ($2.4) million and ($0.08), compared to our ($2.3) million and ($0.08) estimates.

Timelines relative to patient enrollment and estimated completion of the supplemental dermaPACE trial continues to track earlier expectations, which we view as a major positive and a testament to efforts of the clinical trial team, CRO and the initial leg-work done in design of the trial and site selection as well as in ensuring continued high-quality patient enrollment.  With 45 patients now enrolled and initiated treatment, the minimum patient enrollment is now at the halfway point.  Of significance and for reference to the swiftness of enrollment, as management pointed out on the call, is that this supplemental trial has reached the 45-patients enrolled point at about 4 months after initiation while the initial pivotal phase III study took 9 months to hit the 45-patient mark.  Inclusion of high-quality patients, low drop out rates and adherence to the strict trial protocol should also help facilitate FDA review and, assuming eventual regulatory approval, provide a compelling message of utility and efficacy of dermaPACE in the treatment of DFU to the medical community.  Management noted on the call that patient drop out has been minimal, which can be key to hitting the Q1 2014 estimated completion date.

The first patient was enrolled in June and through early November, 45 of the minimum 90 patients have been enrolled.  All enrolled patients have started treatment.  Anticipated trial timelines remain intact including; final patient expected to be enrolled in Q1 2014, last patient follow-up in Q2 2014, submit PMA in Q4 2014, and FDA approval in 2015.  As we've noted in the past, we believe the trial design, including using treatment boosts to improve on efficacy, the use of Bayesian statistics, and the detailed preparatory work in putting the study together and executing the study (experienced CRO and Chief Medical Officer, investigator meetings, strong relationships with trial sites, detailed selection of patients, etc.) bode well for the chances for hitting the primary endpoint.

Management also provided an update on other aspects of the business during the conference call.  Relative to derivative applications of the PACE technology (all of which are likely somewhat back-burner projects as they dedicate most of their focus and resources towards dermaPACE for the <_st13a_country-region _w3a_st="on">U.S. market), work continues on building a scale model for application in cleaning frack water.  Management noted that they already have early interest in such an application.  As we noted previously, we view this as a potentially attractive market given the recent explosion in hydrocracking for natural gas extraction and concerns over toxicity of frack water.  Blood sterilization is another area that the company has investigated and noted that they recently began working with a "major university" to collect data for this potential application.

Relative to commercialization outside of the <_st13a_country-region _w3a_st="on">U.S., SANUWAVE continues to make headway in their quest to expand their international footprint.  In September orthoPACE received regulatory approval in South Korea where SANUWAVE has penned an agreement with KOVE Ltd for distribution.  Management again noted on the conference call that continued growth OUS is priority and discussions with distributors in various parts of Europe are ongoing.

Cash used in operations in Q3 was $1.4 million but excluding changes in working capital, cash used in operations was $1.3 million.  SNWV exited Q3 with $334k in cash and equivalents.  In addition the balance sheet was cleaned up with the conversion of all of the senior secured notes which were issued in late 2012 and early 2013.  Including accrued interest, $2.2MM was converted to common stock.  Management continues to expect monthly cash burn to average about $575k - $625k during the course of the trial.  They have estimated that direct costs of the trial will be about $3.8MM through 2014 and that they will need about $8.5 million total to get them through FDA approval.  They will be looking to opportunistically raise additional capital in the near term and expect the next raise to occur in Q4.

We are maintaining our Outperform rating and $1.60/share price target.  See below for access to our full updated report on SNWV.

A copy of the full research report can be downloaded here >> 

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