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SNWV: U.S. Roll-Out May Be Stronger Than Previously Anticipated

By Brian Marckx, CFA

OTC:SNWV

READ THE FULL SNWV RESEARCH REPORT

Q3 Results, Operational Update: U.S. Roll-Out May Be Stronger Than Previously Anticipated…

SANUWAVE (OTC:SNWV) reported financial results for their third quarter ending September 30th and provided a business update. As it relates to the financials, while revenue remains uninspiring, it has yet to reflect any substantive contribution from the U.S. dermaPACE business – which represents the majority of the long-term upside potential in SNWV’s revenue and equity value. Importantly, it appears that swift and critical progress continues to be made as it relates to putting the various pieces of the domestic dermaPACE roll out puzzle together. Given the number of moving parts, not insignificant regulatory and reimbursement challenges and SNWV’s tight budget, we have been pleasantly surprised by the speed and apparent near error-free successes of their early U.S. commercialization strategy.

Management’s comments, including those related to accelerating utilization, progressively improving reimbursement picture, growing clinician (including KOL) interest and initial positive provider feedback, are encouraging and suggests that demand-pull may not only already be present but also meaningfully benefitting the initial U.S. dermaPACE commercialization efforts. The steepening unit placement rates despite carrying just a skeleton crew of a direct sales force may suggest the same. But while anecdotal at this point and much too early for us to have any confidence in the validity of that supposition, an inability to reasonably discredit over the coming quarters would likely significantly bolster our confidence that clinical utility of dermaPACE, as opposed to more capitalistic influences, are driving interest in the product. ‘Significant’ clinical utility could be a home run for SNWV.

As we discuss in our valuation section, below, we have made some slight yet meaningful updates to our installed base projections. While our 2019 ‘base case’ estimate of 75 systems remains constant, the recent addition of third-party distribution and positive (albeit perhaps largely anecdotal at this point) comments related to reimbursement, initial utilization and clinician feedback may be reflective of a market with greater and/or earlier appetite for adoption of dermaPACE than we had previously anticipated. Our projected ‘base case’ installed base has moved from 188 in 2020 to 263, from 281 in 2021 to 394 and from 360 to 504 in 2022.

Financials

Q3 revenue was $198k ($16k U.S., $182k OUS), down 67% yoy, down 38% from Q2’19 and barely one-half of our $396k estimate. Revenue through the first nine months was $693k, $167k, or 24% of which relates to sales in the U.S. YTD revenue is down 50%, from $1.4M through the first nine months of 2018. We note, however, that $435k, or 62% of the yoy YTD decrease relates to lower licensing fees in the current period. Licensing fees mostly relate to upfront (or otherwise lumpy) JV / distribution agreement receipts which are typically amortized to revenue over several quarters (and are not necessarily reflective of historical or projected operational performance).

Q3’U19 U.S. sales were just $16k, accounting for 8% of total revenue. $148k, or 89% of total U.S. revenue through the first three quarters of 2019, came from product sales – just better than flat from $141k in U.S. product sales in the comparable prior-year period.

With the installed base and number of clinicians trained on dermaPACE continuing to grow (and largely tracking management’s guidance), utilization-related revenue now begun, positive reimbursement-related comments from management and expansion of the sales force and support infrastructure, we should see U.S. revenue begin to significantly accelerate.

Approximately 200 clinicians had been trained on dermaPACE as of early November with another ~100 potentially learning the system by year-end. Clinician training is a necessary prerequisite to utilization and with 200 or more now versed on dermaPACE, we expect to see procedural volume and related billings and collections meaningfully increase. SNWV noted that more than 1,500 treatments had been performed and that they have had at least some success with insurance billing and claims.

As of the end of Q3’19, 58 dermaPACE systems had been placed and (as of SNWV’s Q3 earnings call in mid-November) 85 devices were anticipated to be in place by the close of November. SNWV continues to guide for 110 placements by year-end 2019 and for another 300 units to be in the field by the close of 2020. SNWV is now supplementing their direct sales force with third-party domestic distribution including the Ametus Group (with ~50 sales reps dedicated to the wound care space), which was brought on in November to facilitate increasing the device placement rate.

Meanwhile, international sales were $182k in Q3 and $526k through the first nine months of 2019 – while down 69% and 57% from the respective prior-year periods, the majority of the decreases relate to lower licensing fees in the current year. As we noted in a prior recent update, the distribution license agreements had not worked out as planned. MundiMed defaulted on their JV agreement with SNWV (for commercialization in Brazil) which was followed by Johnfk Medical Inc. (covering Taiwan, Singapore, Malaysia, Brunie, Cambodia, Myanmar, Laos, Indonesia, Thailand, Philippines and Vietnam) bowing out and defaulting on their agreement earlier this year.

Per management, these and others like it, were expected to bring in potentially many millions of dollars in license fees and sales-related revenues and reduce the company’s reliance on external capital to fund operations. However, given recent history, we think there’s enough writing on the wall to suggest these types of agreements were either too early, poorly crafted or otherwise highly susceptible to failure. That prompted us to subsequently remove all assumed contribution from these agreements from our model.

However, in November of this year SNWV announced a new JV agreement that is expected to pay them $600k cash, including $500k upfront at closing (management anticipates that to happen this month) and $100k upon ANVISA (Brazilian regulatory) approval of dermaPACE (which is currently anticipated in Q3 2020). If and when the JV generates revenue and related income from commercialization of dermaPACE in Brazil, profits will be shared equally between SNWV and their partner, IDIC Group (located in Sao Paulo, Brazil). Per SNWV’s November 7th PR announcing the deal, completion of the Medical Device Single Audit Program (MDSAP), which was announced in late-October, is expected to help facilitate faster ANVISA approval.

As we have detailed in prior reports, given the high prevalence of diabetes, lack of sufficient and cost-effective options for treating DFUs in that country and other characteristics that potentially make that region of the world particularly receptive to dermaPACE adoption and utilization, SNWV’s continued pursuit of that market is encouraging. However, given SNWV’s historic lack of significant success in monetizing these types of agreements, we are taking a more cautious approach to modeling this IDIC deal. We currently apply a 50% risk discount to projected financial contribution from this JV agreement – which will be adjusted accordingly over time.

And while licensing revenue accounted for the majority of the YTD yoy decrease in international revenue, OUS product sales have also been disappointing. International product sales fell $86k, or 37%, for the quarter and by $266k, or 47%, YTD, as compared to the comparable prior-year periods. While approximately $113k of the decrease in international sales (in Q3 and YTD’19) relates to credits to Johnfk Medical (for equipment returns), there is clearly a lack of significant traction in the OUS business as a whole.

SNWV recently brought in Alira Health to lead its European commercial efforts. And, we reiterate that recent expansion of SNWV’s OUS footprint, expanding ‘label’ from orthopedics-only to, more recently, 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. New clinical studies have also recently commenced, positive results of which could also aid in adoption and utilization. Among these are a dose-optimization study in Poland (as well as a U.S.-based perfusion study), which commenced in April 2019 and is expected to complete in early 2020.

We should provide some context, however, as while we have been disappointed by the lack of consistent growth in international sales, we have always viewed the U.S. market as representing the vast majority of the commercial opportunity for dermaPACE. Management has indicated that the OUS business is (or at least has been in the past) profitable (in at least some countries) and that they believe it will grow. But OUS product sales have all but stalled and the international growth that was supposed to materialize years ago, didn’t. While we do believe that there are reasonable reasons why OUS could pick up, given the developing U.S. opportunity (particularly following the update by NGS) and the resources (capital, time, leadership, etc) required to take advantage of it, we wonder if another serious strategic review of OUS operations is warranted.

Cash balance was $403k at Q3 quarter-end.

Cash used in operating activities was $1.3M and $4.7M ($2.2M and $5.9M ex-changes in working capital), compared to $673k and $2.3M ($1.0M and $3.5M) in the prior year periods. Management is guiding for monthly cash burn of ~$275k - $350k per month through the end of 2019.

U.S. roll-out underway, comments are encouraging…

SNWV noted that they had 58 (up from 35 in August 2019) units placed in the U.S. at the end of Q3 and are shooting for 110 by the end of the year. Also, as of November ~200 users (up from ~116 in August) had been trained and certified to use dermaPACE and over 1,500 treatments performed on more than 200 (up from 130 in August) patients. They continue to expect to have 300 clinicians trained by year-end.

As a reminder, SNWV places the devices for free and generates revenue when they are used – which means it is critical that not only are devices placed, but that users are trained. Management noted that their main focus for 2019 has been on steepening the placement rate, while a more determined focus on driving utilization will happen in 2020 – although the (favorable) NGS coding change, effective July 1, 2019, likely resulted in procedural volume beginning slightly sooner than expected.

A CPT III tracking code became effective January 1, 2019. Clinicians will use this to submit for reimbursement (which they may or may not receive) and most payers will use it to monitor usage and for making policy, reimbursement and rate decisions (this is not as applicable to NGS as reimbursement should eventually be relatively seamless). As we have noted in prior updates, novel medical devices, such as dermaPACE often initially go to market in the U.S. sans-dedicated Medicare reimbursement. While we think that providers (perhaps, particularly influential KOLs) may have some success billing under this CPT III, 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.

SNWV mentioned that they have brought on consultants to help with their initial reimbursement strategy – which will include picking certain regional payers and engaging with an evidence-based approach. Initial discussions with private insurers and MACs (i.e. regional Medicare) are underway – which presumably helped facilitate the favorable change by NGS. We will continue to be eager to hear updates about the outcome of discussions with payers.

As it relates to NGS, given that reimbursement claims will be ‘individually reviewed to determine medical necessity’, payment is not guaranteed. But we expect it should provide much more certainty than if the procedure was considered not medically necessary. And while, ‘individually reviewed to determine medical necessity’ may mean that most or all initial claims are looked through with a fine toothed comb, we think it is reasonable to believe that as each provider builds trust with a history of valid claims that it will speed and ease the billing and review process and reduce risk of claim denials. Assuming that proves to be true, it will directly benefit procedural revenue and, given its validation of the economics of dermaPACE DFU treatment in the U.S., should almost certainly benefit adoption as well.

SNWV has indicated that they will conduct an initial pharmacoeconomic study and that results will be used to help support their case to these regional payers. Importantly, a manuscript of the two pivotal (initial and supplemental) studies used as primary support for SNWV’s application seeking FDA clearance of dermaPACE was published in the peer-reviewed Journal of Wound Care in December 2018. This is a significant event in our opinion, particularly in the context of communicating the benefits and utility of dermaPACE in treating DFUs at the clinician level. Other post-marketing studies, aimed at clinician adoption and utilization, are also planned in the U.S.

In fact, a skin perfusion study, being conducted in New Jersey and California, commenced in April 2019. The study will evaluate the effects of their dermaPACE technology on local skin perfusion (blood flow) and its effect on healing DFU’s. Additional studies, aimed at supporting the U.S. roll-out, are expected to happen in the near-term. These are topics that we will be eager to hear updates on given their potential outsized influence on whether a provider chooses to use, or a payor chooses to reimburse for, a particular modality or therapy.

SNWV’s initial commercialization territories in the U.S., which they chose due to their potential receptiveness to adoption and use of dermaPACE (under a CPT III code), are Texas, California, North and South Carolina, Pennsylvania and Illinois (these are the initial territories and are in addition to the 10 NGS states). The criteria under which these areas were chosen includes population density, presence of doctors with high volume of DFU patients and payors that have shown to be more amenable to reimbursing for novel technologies.

Ametus was brought on in November 2019 to supplement SNWV’s direct sales efforts. Ametus has ~50 reps dedicated to the wound care space with a presence in the U.S. Midwest, Texas and the West coast. Management noted that their U.S. roll-out strategy has Ametus initially focusing on NGS territories – including those in Illinois, Minnesota and Wisconsin – and subsequently moving to the western portion of the country. Meanwhile, SNWV’s direct sales team will focus on NGS’s northeastern coverage including New York and parts of New England.

Management indicated on their recent earnings calls that initial feedback from U.S. clinicians has been positive. Among the feedback were comments from doctors of ‘great results’ with using dermaPACE for chronic wounds, that safety of the device was noteworthy, plans to use dermaPACE for DFUs in conjunction with other therapies and use of dermaPACE when other therapies have failed.

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