SNWV: Updated FDA Plan Makes Sense - Analyst Blog

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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 page at http://scr.zacks.com/ .


 
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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 The NASDAQ OMX Group, Inc.



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