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NAOV: Zacks SCR Initiates Coverage of NanoVibronix

By Brian Marckx, CFA

NASDAQ:NAOV

READ THE FULL NAOV RESEARCH REPORT

Zacks SCR Senior Med-Tech analyst and Director of Research Brian Marckx, CFA has initiated coverage of NanoVibronix, Inc. with a $9.00/share price target. See below for free access to his 29-page report on the company.

SNAPSHOT

NanoVibronix, Inc. (NAOV), develops, manufactures and commercializes proprietary low intensity low frequency wearable ultrasound medical devices for the treatment of pain, reduction in bacterial colonization and biofilm disruption, and for wound healing. Their specific focus within each of these applications represents current unmet clinical needs and substantial commercial markets. NAOV employs a razor/razor blade revenue model.



Built on surface acoustic wave (SAW) technology, NAOV’s products utilize a small, thin (3mm) proprietary transducer to transmit low intensity low frequency (~100 kHz) ultrasound (LILFU) over a relatively large area and up to 10cm beyond the footprint of the transducer. The relative safety of low intensity, low frequency ultrasound and compact size and simple operation of NAOV’s technology lend themselves to at-home use. This not only eliminates the inconvenience and cost of treatment at a hospital or clinic, but also provides the opportunity for longer duration and/or more frequent treatment sessions.

With the vast majority of therapeutic ultrasound consisting of high frequency (i.e. 1 MHz and above), relatively large devices which require a trip to the hospital or clinic and a trained technician to operate, NanoVibronix’s technology represents a potential paradigm shift in the treatment of chronic pain, difficult-to-heal wounds and biofilm eradication. The safety profile and lack of invasiveness of NAOV’s products also means that they can be used as a complement to or in conjunction with existing therapies, thereby mitigating competitive headwind risk and potentially affording opportunities to partner and collaborate with already established industry players.

NanoVibronix has been active in conducting clinical studies and compiling additional clinical data demonstrating the effectiveness of their products in each of their respective indications. They have also been busy in driving awareness, regulatory activities and in building out their distribution capabilities.



NanoVibronix’s low intensity low frequency ultrasound technology consists of a small, handheld reusable driver unit which is connected to their relatively tiny proprietary disposable transducer. This transducer is connected to either a clip (UroShield) or patch (PainShield and WoundShield) which attaches to the area to be treated. The company’s current product suite includes;

UroShield: for the prevention of bacterial colonization and biofilm in urinary catheters. Currently CE Marked, an FDA De Novo filing for UroShield is anticipated in 1H 2019. If all goes to plan, the device could make its U.S. introduction later this year. The target market is big (24M indwelling catheters sold in the U.S. each year) and largely underserved (antibiotics are first-line treatment yet “…often prove to be ineffective…”)1. Indwelling catheter induced urinary tract infections are commonplace and, given that they cost the healthcare system billions of dollars each year, hospitals have an economic interest to adopt novel technologies (potentially such as UroShield) that can prevent them.


View Exhibit I

PainShield: for the treatment of pain, muscle spasms and tendon diseases. The product has U.S. 510(k) clearance, CE Marking and Health Canada regulatory approval. At-home use for trigeminal neuralgia (TN), a neurological condition characterized by extreme pain along the trigeminal nerve in the face, is the main focused market for PainShield. First-line treatment of trigeminal neuralgia, which causes such severe pain that it has been called the “suicide disease”, are anticonvulsants. Surgery and opioids may also be used. While medications can be initially effective, their ability to control the disease usually wanes over time. Estimated U.S. incidence of TN is between ~40k and 140k. General soft tissue pain represents a less-defined but relatively enormous market and potent opportunity for PainShield, as does the recent crackdown on opioid overprescribing.


View Exhibit II

WoundShield: to speed the healing of hard-to-treat wounds. WoundShield is CE Marked and has Health Canada approval. The chronic wound market is large and encompasses diabetic foot ulcers (U.S. prevalence is ~5.5M with recurrence rate of 66%), venous leg ulcers (U.S. prevalence is ~600k with one-third recurring four or more times) and pressure ulcers (U.S. incidence of ~2.5M). An estimated $25B or more is spent each year on treating chronic wounds. While there are several modalities of advanced wound therapies available with varying degrees of effectiveness, almost all require operation by a trained clinician and a trip to the hospital. By contrast, WoundShield is designed for at-home use by an individual patient. Another potentially potent, and largely unique, advantage of WoundShield is the ability to use it as an adjunct, or complement, to existing advanced wound care modalities.


View Exhibit III

‣ Earlier stage pipeline, which is also built on the SAW technology, includes LungShield and RenooSkin;

LungShield: similar in form to UroShield but different in its application, LungShield is designed to reduce the risk of endotracheal infection in a hospital setting. It is currently being evaluated in a human pilot study in patients undergoing mechanical ventilation to determine its effect on development of bacterial colonies on endotracheal tubes

RenooSkin: to facilitate rejuvenation of facial skin. Unlike the NAOV’s other products in which the transducer is enclosed in a patch or clip, RenooSkin consists of a head band-like applicator which houses two transducers near each ear. In vitro studies have indicated RenooSkin may be as effective as Retin-A (tretinoin, which generates ~$300M in annual sales) in its ability to rejuvenate skin. Target market is the non-prescription skincare space. Skin care is a very large market, generating ~$8B in annual sales in the U.S. Facial skin care is the fastest growing subcategory within skin care with sales of products such as face masks, facial moisturizers and facial sprays increasing by as much as 39% annually

While sales have been largely immaterial to-date, that could soon change as new management has been busy implementing a multi-pronged strategy aimed at accelerating revenue growth. We believe the key components of this include;

- 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

OUTLOOK, MODEL ASSUMPTIONS and VALUATION

New management was recently brought on board in order to accelerate growth and while revenue has been largely immaterial to-date, we think that soon changes as a result of the effects of one or more potential near-term catalysts and other recent events aimed at facilitating growth. Included among these are;

Prescription opioid crackdown: 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.

OTC approval of PainShield: NAOV has pointed to the prescription requirement as an impediment to adoption, use and overall availability of PainShield. Given the documented safety of low intensity low frequency ultrasound and simplicity of use of PainShield – which minimize potential safety risks – we think it is reasonable to assume that NanoVibronix can and will attain OTC approval. Based on feedback from FDA, the company has implemented a multi-step plan (including conducting usability study, redesign of product, manuals and users guide, and more) to precede an expected eventual regulatory filing seeking OTC FDA approval. We would view completion of each of these steps as positive tangible progress towards that goal and, given that retail access to the device would significantly increase the available target market, believe market value of the company should benefit from incremental progress in this regard.



Expanding distribution: along with working to expand regulatory-related availability of their devices, NAOV has also been busy expanding geographical reach – and we think this will continue. Distribution agreements were recently signed for UroShield covering Canada (April 2018), India (December 2018), Israel (December 2018) and Switzerland (December 2018).

Beefing up U.S. distribution for PainShield has been a recent priority and now includes Fritz Clinic (as of January 2019), Golfballs.com (Q3 2018) and Fabrication Enterprises, Inc (May 2019). We expect further expansion of PainShield’s U.S. footprint will remain a priority. OUS sales of PainShield should benefit from recently penned distribution agreements in the U.K. (December 2017), India (December 2017) and Israel (June 2018).

Similar to PainShield, WoundShield is also distributed via MDS Pharma in Israel (as of June 2018). While management has indicated that they are focused on broadening their distribution capabilities and footprint of WoundShield, we think the device also lends itself to partnership/collaborations opportunities. U.S. regulatory clearance could open up significant opportunity for WoundShield. The low-intensity, non-invasive nature of WoundShield and the ability to place the treatment patch adjacent to the wound also lend use of it as an adjunct to various other advanced wound care therapies (which is a novelty for advanced wound care devices).

Clinical data: given the proven ability of compelling clinical data to generate positive ROI, we are encouraged that NAOV’s growth strategy also relies on an evidence-based approach. We think NAOV’s strategy of educating providers and consumers through clinical data (which applies to all of their products) and not one that solely relies on selling to them through a beefed-up sales effort has the best chance of ultimately succeeding. Expanding their clinical trial database and growing the list of published clinical studies is among the most potent influences to drive awareness and accelerate physician adoption and utilization.

Exploit unmet needs: we think NAOV has ripe opportunities to exploit unmet therapeutic needs as it relates to CAUTI, chronic pain and chronic wounds with UroShield, PainShield and WoundShield, respectively. Competition to UroShield is represented by antibiotics, which are considered first-line therapy for CAUTI yet often prove ineffective, the overuse of which has been a major contributor to the emergence of resistant bacterial strains and resulted in antibiotic failure-to-cure rates of 50% or more.

While medications can often initially control Trigeminal Neuralgia, their effectiveness falls to 50% or less over time. Surgery and opioids may also be used – both of which come with major drawbacks. While surgery is also usually effective (~90% of the time), the pain often returns. Opioids often results in long-term addiction. And it is not just TN that represents unmet need for pain relief. Soft tissue pain is often addressed with NSAIDs, opioids, antidepressants and anticonvulsants – yet physicians report that available options are insufficient in about 50% of cases.

Chronic wounds are a costly financial burden to the U.S. healthcare system and current treatment options are often less than completely effective. With roughly two-thirds of chronic wounds recurring and ~12% of DFUs ending in amputation, there is an obvious unmet need for more effective options.

Adjunctive, not necessarily competitive, use: the safety of LILFU affords the use it as an adjunct to existing therapies. This, we believe, is of significant benefit to NAOV as their products are not necessarily competitive threats to already established players and products. This means that larger industry participants such as CAUTI antibiotics or silver alloy (bacteria-resistant) catheter manufacturers may not view UroShield as a threat. Similarly, opioid, anticonvulsant and NSAID drug manufacturers (which includes many of the ‘Big Pharma’) may not need to worry about PainShield being positioned as a replacement for their products. And, WoundShield, being that it might be used in conjunction with NPWT, bio-engineered skin (i.e. skin substitutes), growth factors and hyperbaric oxygen therapy (HBOT), is not necessarily competing with ~90% or more of the advanced wound care market.

And it’s not just the lack of risk of competitive retaliation that adjunctive-use affords. It also potentially offers the opportunity to partner with others in the industry. So, if for example, WoundShield reduces healing time of DFU’s when used in conjunction with V.A.C, there may be an opportunity to license NAOV’s product to Kinetic Concepts (or KCI, which generates billions in U.S. sales of their V.A.C. NPWT device). Management’s prior experience at the likes of KCI, ConvaTec and MiMedx may help in this regard. Similar opportunities might present themselves for UroShield and PainShield as it relates to the CAUTI and pain markets, respectively.

Pay-for-performance vs Fee-for-service reimbursement: more payers are moving away from a fee-for-service reimbursement model to one where they pay-for-performance. While fee-for-service financially incentivizes providers to have a revolving door of patients which are never fully cured – which essentially defines “chronic” conditions, pay-for-performance does just the opposite. Pay-for-performance reimburses healthcare facilities a set amount to address a particular condition and therefore incentivizes them to provide more efficient, more effective and less costly care. So, for chronic conditions such as DFUs, providers may find the relatively low cost of WoundShield (whether used in isolation or to complement other advanced wound therapies) particularly attractive. Similarly, with insurers no longer reimbursing for hospital-acquired infections, including CAUTI (which cost the U.S. healthcare system tens of billions of dollars annually), healthcare facilities and providers have an economic interest to use the most efficacious and cost-effective means to prevent them – potentially including UroShield (either alone or in conjunction with antibiotics).

Pipeline product candidates: while we believe most of the near-term growth opportunity lies with UroShield, PainShield and WoundShield, NAOV’s earlier-stage pipeline, namely LungShield and RenooSkin, offer potential incremental long-term upside to both revenue and market value of the company. Given the difficulty in valuing these relatively early-stage assets, they are not included in our initial (i.e. current) valuation – but that could change with substantive development progress of either.

Leadership with relevant experience: Brian Murphy was brought on as CEO in October 2016 and tasked with accelerating revenue growth. He comes with a 25-year background in sales and management at medical technology companies, largely with a focus on the advanced wound care market. This includes his most recent prior position where he was in charge of the commercial sales efforts at MiMedx Group, Inc. an innovative advanced wound care company. Earlier in his career Mr. Murphy worked at KCI and ConvaTec – both major players in the advanced wound care space.

Chairman of the Board, Chris Fashek was former Vice Chairman and President of KCI and is credited with leading the introduction of their NPWT technology (which proved to be wildly successful). Mr. Fashek also has prior experience at other wound care focused healthcare companies including as CEO at Atteris Healthcare, Chairman at Systagenix and President/Chairman at Spiracur.

Harold Jacob, NAOV’s Chief Medical Officer (and Director and prior Chairman), is board-certified in internal medicine and gastroenterology and was also a former director at Given Imaging.

Manufacturing optimization and scale-up: NAOV recently brought on Quasar, a China-based contract manufacturer of medical devices and electronics, to facilitate its expected commercial ramp-up. Quasar will manufacture PainShield, UroShield and WoundShield at its Shenzhen, China facility. We anticipate this will be bring down production costs, enhance gross margins and afford NAOV the ability to rapidly build inventory as demand dictates.

Reimbursement: NanoVibronix has indicated that securing reimbursement for UroShield, PainShield and WoundShield is a near-term goal and one that we think that, if successful, could be a significant catalyst to both generating awareness and facilitating adoption of these products. We think dedicated reimbursement could be particularly beneficial for uptake of PainShield and WoundShield given the reliance on insurance in these treatment categories.

Target markets are massive: while we think the initial rather narrowly-focused market segments such as Trigeminal Neuralgia for PainShield and chronic wounds such as DFUs for WoundShield represent some of the low-hanging fruit and where initial adoption may be the most brisk, eventual use among the more general respective patient populations could represent relatively massive upside. As the ‘general pain’ (such as myofascial pain) market is hundreds of times the size of the TN population and the CLI population is ~20x the size of the DFU market, even 1% adoption among these broader segments would represent significant revenue for NAOV. Nonetheless, even the relatively narrowly-focused markets are substantial in size, with single-digit penetration in these populations potentially representing tens of millions of dollars of revenue for NAOV.

Model Assumptions
Our model assumptions include:

- Average selling price of the hardware and disposables of approximately $300 and $50, respectively
- Market sizes represent North America, developed Europe and, in some cases, Israel and other countries
- PainShield
     ◦ TN
          ∙ Target market size of ~400k people
          ∙ Target market worth an estimated $130M
          ∙ Once adopted, use is indefinite and each patient uses 12 patches per year
          ∙ One percent penetration by year 2020, 2.5% penetration by 2024
     ◦ “General pain’
          ∙ Market size is ~235M people
          ∙ Target market worth an estimated $30B
          ∙ Much more sporadic use relative to TN
          ∙ Less than 1% penetration through 2024
- WoundShield
     ◦ Chronic wounds/DFU
          ∙ Market size ~3M people
          ∙ Target market worth an estimated $500M
          ∙ Each patient requires 12 weeks of treatment and uses 3 patches
          ∙ One-half of one percent penetration by 2022, 2.5% penetration by 2024
     ◦ CLI / other wounds
          ∙ Market size ~60M people
          ∙ Target market worth an estimated $7.5B
          ∙ Each patient requires 1 month of treatment and uses 1 patch
          ∙ One-half of one percent penetration by 2022, less than 1% penetration by 2024
- UroShield
     ◦ CAUTI market size of ~50k catheters
     ◦ Target market worth an estimated $1.4B
     ◦ One-half of one percent penetration by 2022, 2.5% penetration by 2024

Valuation
We think our above assumptions are reasonable and, arguably, conservative. We value NAOV using P/S multiple methodology applied to our forecasted revenue in 2024, representing a five-year growth runway from today. Based on the above assumptions, we look for revenue of approximately $105M in 2024. We apply a 3.5x multiple and discount back at a risk-adjusted 30% per year to arrive at calculated current fair market value of ~$62M, or $9.00/share. Our risk-adjusted discount rate is subject to change and could narrow with substantive operational and product development progress or could widen with operational and product development delays or failures.

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1 Roger C. L. Feneley, Ian B. Hopley, Peter N. T. Wells. J Med Eng Technol. 2015 Nov 17; 39(8): 459–470. Urinary catheters: history, current status, adverse events and research agenda