Q4 RESULTS / FDA APPROVAL PLAN
Brian Marckx, CFA
On March 14, 2012
SANUWAVE Health (
SNWV
)
announced financial results for the fourth quarter ending December
31, 2011 and provided an update on their planned path forward for
getting dermaPACE through FDA. Financial results continue to
be very much in-line with our estimates. We view the update
on the regulatory approval plan as a positive development - both
from the perspective of clearing up some of the lingering
uncertainty of how management expected to proceed following the
disappointing FDA action in late December and, in our opinion, it's
a plan that makes sense from a risk/return
standpoint.
Q4 revenue came in at $225k compared to our $205k estimate.
Operating expenses were $2.55 million, about 16% lower than our
estimated $3.04 million, mostly due to lower than modeled R&D
expenses ($563k A vs. $805k E).
Q4 EPS was ($0.12), two cents ahead of our ($0.14) estimate as a
result of the lower operating expenses.
Cash
Cash used in operations was $1.84 million during the three months
ending December 31, 2011. Excluding
changes in working capital, cash used in operations was $1.60
million, down slightly from the $1.74 million used in Q3 and $2.04
million used in Q2. SANUWAVE exited Q4 with $3.91 million in
cash and equivalents.
While SANUWAVE has already started trimming expenses to conserve
cash and streamline for the (hoped for) initiation of new clinical
studies, the current cash balance only represents about 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 did note in the earnings release that they have
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 it is now,
our model assumes that SANUWAVE raises financing through the
regular sale of equity - although, again, we have no particular
insight.
Supplemental Trial Data
As a reminder on 12/21/2011 SANUWAVE announced that the FDA issued
a major deficiency letter in response to the company's PMA filing
seeking approval of dermaPACE in the treatment of DFU.
SANUWAVE noted that the FDA cited the failure of dermaPACE to meet
the primary endpoint of statistically significant superiority in
100% wound closure compared to sham-control (i.e. - standard of
care) as one of the deficiencies. Among the FDA's
recommendations to potentially remedy the deficiencies was for
SANUWAVE to conduct another clinical trial - the design, size,
duration, etc. of which would be decided upon after further
discussions between the two parties. At that time we put out
an updated report on SNWV (see our discussion under "FDA Response"
below which is from our 12/22/22 report update which provides more
detail on the FDA action and our assumptions at the time) but given
the minimal insight at the time, we used best-guesses as how
management may proceed. With the Q4 earnings/10-K release
yesterday the company provided a more concrete plan forward.
The plan, which was developed following "non-binding" discussions
with the FDA and still needs to be approved by the agency, includes
supplementing the original pivotal trial results with additional
clinical trial data under the existing IDE. The IDE
supplement and proposed study plan was submitted to the FDA in
March (i.e. - within the last 2 weeks). If approved to move
forward by FDA, additional trial data 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.
SANUWAVE did not provide specific details of their proposed new
trial but we think it's likely that it would be smaller than the
pivotal 206-patient trial but very similar in design and patient
profiles. Importantly, safety was excellent in all studies to
date and, as we've noted in the past, this could open up the door
for more aggressive treatment within the standard 12-week treatment
window which may very possibly increase efficacy. SANUWAVE
noted in the Q4 earnings press release that this is exactly what
they hope to do in a supplemental trial - specifically to use
treatment "boosts" between weeks four and 10 of the treatment
period. Very important is that the 12-week treatment window
used in the initial trial will also be used in the supplement trial
(assuming its approved). In the pivotal trial, patients were
randomized to either treatment with dermaPACE plus current standard
of care (n=107) or sham (i.e. - placebo) plus standard of care
(n=99). dermaPACE treated patients received four 20-minute
procedures over two weeks (i.e. - two 20-minute sessions per
week). The pivotal trial data already indicated dermaPACE was
effective in healing DFUs - 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 - SANUWAVE cites the recent clinical data that has shown
the benefits of treatment "boosts" in tissue regeneration. If
this supplemental study is approved to move forward and 100% wound
closure can be obtained with the help of these treatment boosts,
that would be an obvious major positive for SANUWAVE. We
expect the FDA will make a decision on the supplement to the IDE
within the next several weeks. If approved to move forward,
SANUWAVE would likely look to the clinical sites where the pivotal
studies were done for this supplemental trial. The company
ballparks about two years from initiation of enrollment to a
supplemental FDA filing. Assuming it gets that far, we think
the FDA could have an answer back to SANUWAVE by mid-to-late
2014.
Following the December 2011 FDA action, we had already updated our
financial model to incorporate assumed significant delays in
getting dermaPACE approved and launched - we had guessed fairly
accurately that SANUWAVE would look to run a supplemental trial -
which would push the delay to launch towards the 2014
timeframe. As such yesterday's update on the proposed path
forward only had us modestly tweak our launch assumptions.
VALUATION / RECOMMENDATION
We use 2015 P/S comparables to value SNWV. Smith & Nephew
currently trades at approximately 2.0x analyst's 2015 forecasted
revenue. Kinetic Concepts was acquired in November 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 $2.00/share.
FDA RESPONSE
(FOR BACKGROUND INFO: from our 12/22/2011 update
report)
Despite compelling phase III trial data that we believe
strongly supports dermaPACE as an effective therapy for diabetic
foot ulcers, U.S. regulators have said it's not necessarily strong
enough to merit FDA approval. Yesterday (12/21/2011) SANUWAVE
announced that the FDA issued a major deficiency letter in response
to the company's PMA filing seeking approval of dermaPACE in the
treatment of DFU. SANUWAVE noted that the FDA cites the
failure of dermaPACE to meet the primary endpoint of statistically
significant superiority in 100% wound closure compared to
sham-control (i.e. - standard of care) as one of the
deficiencies. Among the FDA's recommendations to potentially
remedy the deficiencies is for SANUWAVE to conduct another clinical
trial - the design, size, duration, etc. of which would be decided
upon after further discussions between the two parties.
As a reminder on dermaPACE's phase III trial data, while
superiority of dermaPACE over sham on the primary endpoint (100%
closure) was not statistically significant, a higher percentage
(21% for dermaPACE and 15% for sham-control) of dermaPACE treated
patients achieved full closure within twelve weeks (supplemental
data did show dermaPACE did achieve statistical significance in
complete wound closure at 20 weeks, however). In addition
(and of considerable importance), of the patients that did achieve
complete wound closure at twelve weeks, only 4.5% of the dermaPACE
cohort experienced wound recurrence, compared to 20% in the sham
cohort.
Although superiority on full closure was not statistically
significant, based on the strict protocol of the study restricting
closure through surgery, a 90% or greater closure rate was
considered to be clinically meaningful. When
looking at wounds that had reduced in size by > 90%, dermaPACE
was shown to be significantly (p = 0.0161) more effective than sham
with 48% (51 of 107) dermaPACE patients meeting this endpoint
versus only 31% (31 of 99) of sham control patients. Median
wound closure was over 99% for dermaPACE treated patients in this
composite analysis and dermaPACE patients were twice as likely to
achieve 90% - 100% wound closure compared to sham patients.
We believe that the composite data is especially impressive
considering that dermaPACE treated patients started with wounds 58%
larger than those in the sham-control group. Safety data was
also good, with no difference in the rate of adverse events between
the study and control groups.
While FDA's recent action by no means dooms dermaPace's chances of
eventually gaining FDA approval, it does mean the journey towards
that end will now be longer and likely more costly. The
near-term game plan is to meet with the FDA, evaluate their options
and formally respond to the letter - which is expected to be
completed during Q1 2012. While another clinical trial may
not be the only path towards securing FDA approval, it would be the
least arbitrary and provide SANUWAVE with definitive metrics to
meet in order to reach that goal. We hope to get a better
idea of the scope, length and cost of another trial as well as
SANUWAVE's decision whether to go that route over the next ~90
days.
And while we view this recent FDA action as a surprise and a
meaningful setback for dermaPACE and SANUWAVE, we remain positive
on both and continue to believe in dermaPACE's chances in
eventually gaining FDA approval. There is a long list of
medical devices and pharmaceuticals that endured regulatory
setbacks that eventually received FDA's stamp of approval - we
think dermaPACE will be one more.
Prior to the December FDA action we had expected dermaPACE to
receive regulatory approval and launch in the U.S. near
mid-2012. It is clear that that will now not happen.
And while the direction that SANUWAVE will take in order to
continue to move towards FDA approval is just conjecture at this
point, we need to incorporate certain assumptions into our outlook
and related financial model in order to place a value on the
company. Some of these assumptions are very general in scope
and little more than just blind guesses at this point - we will
update these assumptions if necessary when there is more clarity on
the updated regulatory approval pathway. The most significant
"blind-guess" assumption is that SANUWAVE runs another clinical
trial - which delays approval until early 2014 and, in-turn,
requires the company to raise a material amount of additional
capital. We currently have absolutely no insight, however, on
if the company will run another trial or what the design, scope,
cost, size or duration might be of this hypothetical
trial.
To view a free copy of our most recent research report
on
SNWV
or
subscribe
to our daily morning email alert, visit Brian Marckx's coverage
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.
SANUWAVE HEALTH (
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