Cost Initiatives Bearing Fruit - Analyst Blog


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Cost Initiatives Bearing Fruit

Brian Marckx, CFA


On May 14, 2012 SANUWAVE Health ( SNWV ) announced financial results for the first quarter ending March 31, 2011.  Results, including an anticipated meaningful decrease in expenses as a result of cost-reduction efforts, were very much inline with our estimates.  Just days prior to the earnings release SANUWAVE announced that the FDA gave the green light to the company's IDE Supplement for an additional clinical trial for dermaPACE - essentially providing a second, and perhaps better, chance to show statistically significant effectiveness in wound closure of diabetic foot ulcers.  As best-guesses regarding size, costs and timelines of a supplemental trial as well as estimates in regards to when dermaPACE could be FDA approved and launch in the U.S. remain unchanged from our prior assumptions, we have made no material changes to our outlook or financial model since our last update (3/15/2012).  We continue to believe the stock trades significantly cheaper than warranted and are maintaining our Outperform rating and $2.00/share price target.          

Q1 revenue came in at $239k compared to our $285k estimate.  Operating expenses were $1.84 million, just about dead-on with our $1.89 million estimate.  Following the December 2012 FDA major deficiency letter, when it was evident that dermaPACE would not make it to the market in the near-term, management announced that they were implementing cost-cutting initiatives to preserve capital.  These initiatives already bore fruit in Q1 and are expected to continue to do so in the coming quarters.  

Q1 net loss and EPS were $1.84 million and ($0.09), also dead-on with our $1.85 million and ($0.09) estimates.  

Cash used in operations was $1.49 million in Q1.  Excluding changes in working capital, cash used in operations was also $1.49.  Cash burn is down from $1.84 million ($1.60 million ex-changes in w/c) in Q4 2011.  SANUWAVE exited Q1 with $2.42 million in cash and equivalents, down from $3.91 million at 12/31/2011.  

While SANUWAVE has already started trimming expenses to conserve cash and streamline for the initiation of the supplemental clinical trial, the current cash balance represents less than six months of operating funds.  We had fully anticipated (especially following the December FDA letter) that SANUWAVE would need to raise additional financing - although we only speculated on when, how, how much, or what kind of financing it might be.  While we still don't have any concrete answers to most of these questions, SANUWAVE has retained Canacoord Genuity to "explore capital fund raising and/or strategic options for SANUWAVE to fund the Company while we complete this additional clinical trial work".  As a placeholder for now, our model continues to incorporate the assumption that SANUWAVE raises financing through the regular sale of equity - although, again, we have no particular insight.    

FDA Approves Supplemental Trial
On May 8, 2012 SANUWAVE announced that the FDA approved its IDE Supplement for an additional clinical trial for dermaPACE.  Aside from being smaller than the than the initial 206-patient trial and also incorporating treatment "boosts", the trials will be very similar. The statistical methods (Bayesian) apply sequential analysis allowing for the supplemental data to build on the positive results from the initial larger study. Importantly, the FDA typical approves Bayesian methods when there's already compelling data to build upon (the totality of which will presumably show statistical significance on the primary endpoint).

As we've noted previously, the pivotal trial data already indicated dermaPACE was effective in healing diabetic foot ulcers - the hurdle to clear hitting the primary endpoint (100% wound closure), while not attained in the pivotal study, may very well be able to cleared with additional dermaPACE treatments. Safety was also excellent in the initial study, which was obviously a consideration of the FDA in allowing for more aggressive (i.e. - treatment "boosts") treatment with dermaPACE.

SANUWAVE believes the new trial can be completed (including data analysis) in as early as 20 months following initiation. Enrollment is projected at 90 patients (~45 treatment / ~45 control). Similar to the initial study, the treatment group will receive four dermaPACE procedures during the first two weeks. In order to improve on the efficacy from the initial trial (which just missed statistical significance on the primary endpoint) up to four treatment "boosts" can be delivered during weeks four and ten. The primary endpoint, 100% wound closure at week-12, will be the same. Assuming statistical significance is met on the primary endpoint, the data will support an amendment to SANUWAVE's existing PMA which could potentially happen sometime in early-to-mid 2014 with FDA approval possible before the end of that same year.

SANUWAVE hopes to initiate enrollment in the coming weeks. They are currently finalizing selection of clinical sites and getting IRB approvals. As we noted previously SANUWAVE will also need to raise additional capital to fund the trial, which is another prerequisite to full initiation of this study - which we assume is also in the works.

As we noted in our last update, the supplemental trial (which was still in the proposal stage at that point) should provide a much less ambiguous decision-point for the agency than if SANUWAVE had decided to just use the original data to go in front of an advisory panel - a final decision from which can end up being a long, drawn-out affair which may not have come out in SANUWAVE's favor.  Clearly avoiding the potential pitfalls of an advisory-panel review played a major role in management's decision to pursue a supplemental trial.

Importantly, safety was excellent in all studies to date which opened up the door for more aggressive treatment within the standard 12-week treatment window in this supplemental trial.  These treatment "boosts" may very possibly increase efficacy and get them over the primary endpoint hurdle.  Very important is that the 12-week treatment window used in the initial trial will also be used in the supplement trial.  If this supplemental study achieves 100% wound closure with the help of these treatment boosts, that would be an obvious major positive for SANUWAVE.       

As best-guesses regarding size, costs and timelines of a supplemental trial as well as estimates in regards to when dermaPACE could be FDA approved and launch in the U.S. remain unchanged from our prior assumptions, we have made no material changes to our outlook or financial model since our last update (3/15/2012).   

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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