SNWV: Q2 Results. Supplemental Trial
By Brian Marckx, CFA
SANUWAVE HEALTH (SNWV): Free Stock Analysis
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On August 9, 2012
announced financial results for the second quarter ending June
30th. Aside from operating expenses continuing to come down
faster than what we anticipated, results remain very much inline
with our expectations. There also were no surprises relative
to our outlook in either the earnings release nor on the conference
call. Management remains very upbeat about the chances of
dermaPACE hitting the endpoint in the upcoming supplemental trial,
which is expected to commence once financing is in place - which
management indicated could happen towards the end of Q3. We
have made no meaningful changes to our model or otherwise to our
outlook for SANUWAVE and we remain believers in both dermaPACE and
Q2 revenue came in at $210k compared to our $254k estimate.
Operating expenses, which dipped $457k or 25% from Q1 2012, reflect
management's tight control on costs and cash. Operating
expenses were $1.4 million in Q2, much better than our $1.9 million
estimate. As a reminder, following the December 2011 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 started bearing fruit immediately,
with Q1 2012 expenses falling 25% sequentially and, as noted, they
fell another 25% in Q2. Management noted on the call that
total employee headcount as been cut from 28 to 18 as part of this
eye on costs and cash.
Q2 net income and EPS were ($1.4) million and ($0.07) compared to
our ($1.8) million and ($0.07) estimates. The favorable
difference in net income due to the beat on operating
expenses. Our estimated share count was also higher due to
our placeholder assumption (as we noted in a previous update) that
financing would come in Q2 in the form of an equity sale (which
didn't happen - although we carry this assumption forward).
Cash used in operations was $1.01 million in Q2, down from $1.49
million in Q1 and $1.84 million in Q4 2011. SANUWAVE exited
Q2 with $1.4 million in cash and equivalents, down from $2.4
million at the end of Q1.
We think management has done a commendable job minimizing cash burn
and cutting expenses where possible. Nonetheless the company
will need to raise additional capital in the very near-term and
indicated on the call that they think they could have something in
place by the end of Q3 (9/30/2012). The supplemental trial
will be on hold until financing is consummated.
SANUWAVE has retained Canacoord Genuity and (per the Q2 call) is
also in discussions with other investment banks for a near-term
capital raise. As we noted in our previous update, as a
placeholder in our model we use the assumption that SANUWAVE raises
financing through the regular sale of equity. At the current
stock price and market cap ($0.22, $5MM), we think it's more likely
that financing comes in the form of some sort of convertible (debt
or preferred), but we think that will roughly wash with our equity
placeholder with a (eventual) conversion assumption.
Management noted that their current best-guess estimate for cost of
the supplemental trial is about $2 million - which is right in-line
with our rough estimate. SNWV is currently burning ~$400k of
cash per month - and management expects this to increase to
~$500k/month during the term of the supplemental trial.
Supplemental Trial On-Track Once Financing Is In Place
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). This is a key point and underscores that this is
not a replacement trial but is instead a supplement in every sense
of the word - this supplemental data will be in addition to and
build on the already very strong and compelling initial trial data.
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 (management
reiterated this timeline on the Q2 call). 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 mid-to-late 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. However, before anything significant can move forward,
SANUWAVE will need to raise additional capital to fund the
trial. As noted, management thinks they can have financing in
place by the end of Q3.
As we noted in our prior updates, the supplemental trial 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. Also 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
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
VALUATION / RECOMMENDATION
We use 2015 P/S comparables to value SNWV. Smith & Nephew
(SNN) currently trades at approximately 2.0x analyst's 2015
forecasted revenue. Kinetic Concepts was acquired in November
2011 for $6.1 billion, or about 2.8x estimated 2015 revenue.
We currently model SNWV to generate revenue of $16 million in 2015
- based on the two comp 2015 P/S multiples values SNWV at between
$1.60/share and $2.20/share. For simplicity, we use the
average of the two, which values SNWV at about
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