SNWV: Remaining Positive Despite FDA Letter - Analyst Blog

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Brian Marckx, CFA


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 (SNWV) 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.


Prior to the FDA major deficiency letter we were valuing SANUWAVE based on 2015 P/E comparables (to Kinetic Concepts and Smith & Nephew). Our updated outlook, which incorporates an assumed significant delay in the U.S. launch of dermaPACE, results in SNWV posting negative EPS through at least 2015 - as such our prior valuation methodology is inappropriate. Instead we now use 2015 P/S comparables to value SNWV. Smith & Nephew currently trades at approximately 1.5x 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 $23.8 million in 2015 - based on the two comp 2015 P/S multiples values SNWV at between $36 million ($1.71/share) and $55 million ($3.20/share). For simplicity, we use the average of the two, which values SNWV at about $2.50/share. We think it bears repeating, however, that our model is highly subject to change once there is more clarity on the updated regulatory approval pathway that SANUWAVE expects to pursue. As it is now, we value the company at $2.50/share, down from $6.00/share prior to the recent FDA communication.

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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.

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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