By Brian Marckx, CFA
READ THE FULL NAOV RESEARCH REPORT
Q1 2019 Results / Business Update
NanoVibronix (NAOV) filed their 10-Q for Q1 2019 ending March 31st and released a corresponding business update. Relative to the financials, revenue was $79k, largely inline with our $63k estimate and up 3% and 44% from the prior year ($77k) and prior three-month ($55k) period, respectively. Increased sales of PainShield accounted for all of the yoy growth and approximately 93% of the qoq growth (UroShield contributed the remaining 7% of growth from Q4’18). PainShield contributed 91% of total sales in Q1’19, compared to 81% in Q1’18 and 90% in Q4’18 – UroShield contributed the remainder of sales in each of the same periods.
While consumables sales remain relatively minimal, accounting for just 7% of total revenue in the most recent quarter, we continue to expect this to grow. We continue expect to see utilization grow with further expansion of NAOV’s distribution footprint and greater awareness of the clinical benefits (and safety) of their low intensity low frequency ultrasound technology.
Q1’19 gross margin of 67% compares to 71% in Q1’18, 36% in Q4’18 and an average of 50% throughout fiscal 2018. While we continue to expect some variability in gross margin based on product and distributor mix, we also continue to look for GM to widen over the long-term. NAOV’s recently-announced agreement with an Israel contract manufacturer with facilities in China is expected to result in margin enhancement and potentially reduce cost of goods sold of some products by as much as 50%. The company notes that they have completed a manufacturing test run at this facility with “favorable results”.
Meanwhile, operating expenses were $2.3M, up nearly 170% from Q1’18 ($845k) and +65% from Q4’18 ($1.4M). A portion of the increases relates to personnel additions (largely in sales and marketing functions) and higher professional and consulting fees. Most of the difference is reflected by a significant increase in non-cash stock compensation – which increased by $1.2M from the prior year period and by $1.1M from the previous three-month period.
Relative to the operational update…
Among NanoVibronix’s most exciting announcements as of late was today’s press release surrounding their plans to develop and ultimately launch a cannabidiol patch and cream to be used in combination with PainShield. The CDB patch and cream will be developed using a proprietary nanoparticle infusion process (aimed at providing for enhanced absorption and sustained pain relief). NOAV has teamed up with Saralex Group which will lead the regulatory and launch activities. Canada and Europe, where CBD has favorable legal status, are the intended initial target markets. We expect we will hear more about NAOV’s development and clinical plans for ‘PainShield CBD’ as this program gets further underway – and hope to have an approximate timeline for when we may see initial clinical data.
Other very recent noteworthy events (per the company’s May 24th Q1’19 Business Update) relate to progress of NAOV’s quest for OTC approval of PainShield by FDA. NAOV notes that the usability study has completed and they have made progress on product redesign – both of which are prerequisites for an eventual submission to FDA seeking OTC approval of PainShield. OTC approval, if and when achieved, would be a major milestone as it would allow for purchase and use of PainShield without the need for a doctor’s prescription – which has been a major impediment to sales to-date. Submission to FDA for OTC approval of PainShield is one of NAOV’s anticipated 2019 milestones.
The company is showing no signs of slowing down as it relates to their focus on accelerating adoption and utilization of their three main product platforms; namely PainShield, UroShield and WoundShield. The company’s strategy includes;
- a focus on leveraging clinical evidence to facilitate awareness-building, sales and marketing, and regulatory efforts
- publishing existing clinical data and generating new data through commencement of additional clinical studies
- expanding the distribution footprint and overall sales capabilities
- label expansion (including OTC use for PainShield) and additional regulatory clearances for their existing product suite and initial approvals for their product pipeline
- optimize manufacturing to increase production efficiencies and scalability
- obtaining reimbursement
- licensing to category-specific companies with significant distribution
As it relates to clinical trials and driving awareness of the evidence supporting the utility and efficacy of their technology…
‣ PainShield Trigeminal Neuralgia Study Published in of the Journal of Anesthesiology and Pain Research…
The previously-announced clinical study of PainShield as a treatment for trigeminal neuralgia was published in the January 2019 issue of the Journal of Anesthesiology and Pain Research. The U.S.-based double-blinded cross-over study (n=59), titled “The Effect of a Surface Acoustic Wave (SAW) Device on the Symptomatology of Trigeminal Neuralgia”, compared PainShield to a sham device on the following outcome measures; pain (as assessed by Visual Analog Scale, or VAS), quality of life (based on a number of QoL questionnaires) and breakthrough medications taken (breakthrough medications included Percocet, oxycodone, hydrocodone, codeine, and morphine patches).
Participants were instructed to use PainShield or the sham device each night for 30 nights while they slept. Each day they completed a Visual Analog Scale (indicating pain severity) and medication logs (reporting how much pain medication they took). QoL questionnaires were completed at the end of the 30-day treatment period.
Results, which were first announced in July 2018, showed that patients in the PainShield group (n=30) experienced a 55.2% improvement in baseline pain scores versus a 2.3% improvement in the control cohort (n=29). In addition, while control saw a 1.5% decrease in breakthrough pain medication use (including opioids), PainShield patients used 46.4% less. Moreover, there was an improvement in uninterrupted sleep favoring the PainShield group. The improvements in VAS scores as well as in the amount of pain medications used (both favoring PainShield) were statistically significant (charts below). There was also an improvement in overall quality of life favoring PainShield, although the difference was not statistically significant.
View Exhibit I
‣ Interim results of new study supports effectiveness of PainShield in tennis elbow…
In March 2019 NAOV announced interim results of a new study supporting the effectiveness of PainShield in the treatment of lateral epicondylitis, or tennis elbow. Results of "The Effects of the NanoVibronix's PainShield Surface Acoustic Waves on the Symptoms of Lateral Epicondylitis" showed seven of ten patients with tennis elbow using PainShield plus physical therapy had complete pain resolution or significant improvement in pain. This compares to just five of twelve patients in the control group that had similar outcomes. No adverse events or complications were reported.
The randomized, double-blinded study evaluated PainShield over 30 days on patients suffering from lateral epicondylitis. Symptoms included pain, discomfort and loss of mobility. A total of 24 patients (12 in each treatment cohort) were enrolled. The interim results were from 22 of the patients that completed the study (two others did not complete). While NAOV’s press release announcing the results does not specify the expected total enrollment, it does note that the study is ongoing and additional patients are enrolling. Upon completion of the study, the company expects to have the results published later this year.
‣ Usability Study Completed, Is FDA Submission for OTC Approval of PainShield Upcoming?...
NAOV notes in their Q1’19 Business Update (May 24th) that the usability study has been completed. As a reminder, NAOV had previously mentioned (in a recent investor presentation) that their usability study (or ‘human factor study’) was underway. The study is one of several prerequisites needed to support an application to FDA seeking OTC approval of PainShield. Among others are product redesign, updated product packaging and redevelopment of Quick Reference guides. NAOV indicates in their Q1’19 Business Update that they have also made progress on one or more of these areas. OTC approval, if and when achieved, would be a major milestone as it would allow for purchase and use of PainShield without the need for a doctor’s prescription – which has been a major impediment to sales to-date. Submission to FDA for OTC approval of PainShield is one of NAOV’s anticipated 2019 milestones.
‣ UroShield Sheep (safety) Study Completed, One Step Closer to FDA Submission…
NAOV mentions in their Q1’19 Business Update that they have completed the sheep study for UroShield. As a reminder, FDA asked the company to conduct this study to address certain of their concerns related to safety of the device. The goal of this large sheep study was to establish local tissue response from a urinary catheter with UroShield attached as compared to a control group. This is in addition to a comparative leachables study aimed at establishing that use of UroShield does not exceed toxicological safety limits. With the sheep study completed, NAOV is potentially one step closer to finalizing an eventual submission to FDA seeking U.S. regulatory clearance for UroShield – a filing which the company hopes to make later this year.
NAOV’s has also made recent progress in building out their sales and distribution capabilities as well as on the awareness-building efforts…
‣ VA-focused Distribution: NAOV notes in their Q1’19 Business Update that they signed an agreement with a service-disabled veterans organization (SDVO) for access to U.S. Department of Veteran’s Affairs facilities. This could afford a supplemental source of demand for PainShield (and potentially UroShield) and one that is likely not to be as reliant on specific reimbursement as other (more traditional) U.S. commercialization channels.
‣ Letters of Intent: NAOV also notes in their Q1’19 Business Update that they have entered an LOI for PainShield for private label sale on a worldwide basis and an LOI for private label sale into the Gulf Coast countries. Additional information, including the identity (ies) of the counterparty (ies) or potential timing of consummation of these agreements, was not disclosed.
‣ Italy distribution: in March NAOV announced an agreement with N.B.A. Medica Srl to market and distribute PainShield and UroShield in Italy.
‣ “Very Positive responses from potential distributors of UroShield”: NAOV noted in their year-end business update (April 2nd) that they “are getting very positive responses from potential distributors of UroShield on the heels of our recent trials and publications.” As a reminder, distribution agreements were recently signed for UroShield covering India (December 2018), Israel (December 2018) and Switzerland (December 2018).
‣ PainShield distribution: beefing up U.S. distribution for PainShield has also been a recent priority and now includes Fritz Clinic (as of January 2019), Golfballs.com (Q3 2018) and Fabrication Enterprises, Inc (May 2018).
‣ New website: in early March NAOV announced the launch of a new website “designed to highlight the advantages of the Company’s proprietary and patented low intensity surface acoustic wave (SAW) devices, including PainShield, UroShield and WoundShield.”
Importantly, NAOV has also made substantive progress on the reimbursement front. This includes;
‣ In late-March NAOV announced that they have been receiving reimbursement approvals from commercial and worker’s compensation insurance plans. Specifically, NAOV announced that reimbursement for PainShield has been spurred by programs advocated by American Health Insurance Plans and the Centers for Medicare and Medicaid Services designed to encourage adoption of non-opioid pain management therapeutics. NAOV’s press release notes that this has aided in securing approval and reimbursement for the use of PainShield.
‣ In May NAOV announced that they have entered an agreement with Protrade in order to access reimbursement programs for sports programs and made progress towards obtaining reimbursement by the U.K. National Health System and The National Institute for Health and Care Excellence (NICE)
Prescription opioid crackdown…
The announcement that payers are encouraging use of novel pain management technologies such as PainShield comes as little surprise to us as we had all but anticipated that PainShield adoption and reimbursement would benefit as a result of a crackdown on the use of opioid pain medications.
As we initially wrote in our initiation report, U.S. state and federal regulators recently announced new measures aimed at stemming the oversubscribing of opioid pain medication. This includes a goal of the Trump administration to reduce opioid prescriptions by one-third over the next three years and more than 30 states enacting legislation limiting the number of opioid prescriptions for all conditions except cancer and palliative care. Insurers, both private and Medicare, have also placed limits on the number of prescriptions that they will now cover. These measures, coupled with a reaction by some doctors to do away with prescribing opioids altogether, has not only resulted in a significant decrease in the availability of these drugs for recreational purposes (and solely to feed addictions), but has also reduced access for patients that rely on them to control chronic pain.
This, we think, has created a potentially potent opportunity for NAOV with PainShield, particularly given that, in the face of the crackdown on opioids, the U.S. government is encouraging (and in some cases sponsoring) the development and use of alternative pain therapies (in fact, Mariano Rivera, per NAOV’s March 21, 2018 press release, recently approached President Trump about PainShield). Fritz Clinic, which treats thousands of patients per month and will use PainShield as an alternative to opioids, is the first of potentially more collaborations which could expand use and build awareness of the utility of the device to reduce reliance of these highly addictive medications.
Major milestones and accelerated revenue growth expected later this year…
Management recently indicated that, having laid the foundation in 2018, that they anticipate growth to materialize in the latter part of the current year. Specifically, as it relates to growth catalysts, NAOV points to the completion of clinical trials as an important milestone towards expanding regulatory approvals and in further validating the effectiveness of their technologies in addressing chronic pain (PainShield), catheter associated urinary tract infections (UroShield) and in facilitating the healing of chronic wounds (WoundShield).
NAOV notes that they are in the final stage of updating their products to improve their appearance and performance. In addition, the company expects to continue to refine and bolster their sales, marketing and commercial infrastructure. Outsourcing of manufacturing should provide the benefits of production efficiencies, scalability (relative to both operating leverage and manufacturing volume) and margin enhancement (and/or pricing flexibility).
Anticipated near-term milestones, per their Q1’19 Business Update, includes; finalizing updated product design, launching contract manufacturing, reducing cost of goods sold, FDA submission for PainShield for OTC use and for UroShield, securing additional licensing/distribution agreements, establishing licensing and private label partnerships and launching PainShield CBD in Canada.
We cover NAOV with a $9.00/share price target. See link for free access to our updated report including valuation methodology and financial model.
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