PolyNovo Ltd

Invention:	Synthetic dermal scaffold
Trademark:	Novosorb®
Patents:	49
ASX:	PNV

​EXECUTIVE SUMMARY

PNV represents a cost revolution in the soft-tissue reconstruction space. The cost to manufacture its synthetic polymer product ("BTM") is substantially lower than the incumbent biologic-based technologies. As such, PNV can market its invention at half the price of the incumbents and still sustain a 80%+ gross margin. In respect of performance, surgeons report functional and aesthetic outcomes far superior to substitute technologies. Surgeon willingness to switch to PNV's solution once demonstrated, combined with the company's sales headroom (150 US hospital accounts held, out of 6000 to be acquired), equates to a growth opportunity, even before the addressable markets of future applications of the core invention (NovoSorb) are considered. Concerning sustainability, over 40 patents protect the cost and performance advantages. 

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PNV

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THE COMPANY

PolyNovo Ltd (ASX: PNV) was spun out of CSIRO in 2004 to commercialise a new polymer technology, NovoSorb, invented by the Molecular Science division. 

In 2008, PolyNovo Pty Ltd merged with a listed entity, Metabolic Pharmaceuticals, which subsequently changed its name to PolyNovo Ltd. 

THE INVENTION

NovoSorb is a polymer material that can be placed on a burn or wound for reconstruction of the dermis (the inner layer of the skin). It dissolves within the body and is excreted naturally. This “bioresorbtion” feature is the most novel aspect of the invention. There are many applications in surgery where a controlled disintegration of the material, once in the body, provides substantial benefits. Consider the current standard of care in hernia repair, where a plastic mesh is placed in the gut. The ability of NovoSorb to disintegrate after a specified amount of time would provide a functional advantage in this area of treatment.
           
The company's flagship application of the invention is called BTM, which stands for Biodegradable Temporizing Matrix. The BTM is mostly used as a scaffold in burns trauma for repair of the dermis, but has many other applications. A skin graft, as manufactured by such companies as Avita, may or may not be applied on top of the BTM.

The BTM has a sealing membrane that is removed by the surgeon once applied to the wound. Having received feedback from surgeons, the company has also produced a variant of the BTM, called MTX, which is manufactured without the sealing membrane. This iteration provides additional flexibility to the surgeon in the application of the product.

PolyNovo currently has over 150 Australian hospitals and 150 U.S. hospitals using the BTM in surgery. To provide some sense of the company's headroom, there are 6000 hospitals in the U.S.
 
PERFORMANCE  ADVANTAGE

The NovoSorb technology is 100% synthetic, which provides a competitive advantage over incumbent technologies (such as Integra) and emerging technologies (such as Aroa) that are built from animal proteins and are thus subject to infection and rejection problems. Surgeons consistently report lower rates of infection and rejection for BTM, and aesthetic outcomes that are superior to substitute products. 

​Here is a head-to-head comparison* of BTM with the current market leader (IDRT, marketed by Integra Lifesciences):

​* These data are from a single-centre, retrospective study conducted by The Division of Plastic Surgery at the University of Rochester Medical Center. This trial compared the outcomes of 26 patients treated with NovoSorb BTM (15 cases) versus Integra Dermal Regeneration Template (IDRT) (11 cases). In all cases, a split-thickness skin graft was applied with the aim of achieving definitive wound closure. You can read the fully study at https://pubmed.ncbi.nlm.nih.gov /38556669/.
 
The researchers that carried out the above analysis concluded their study with the following remarks:

“This comparative analysis suggests enhanced clinical efficacy and optimized resource use with BTM. We highlight the functional, aesthetic, and economic benefits of BTM compared with IDRT placement in treating extensive soft tissue defects.”
 
COST ADVANTAGE
 
Existing dermal substitutes are manufactured by sourcing sheep or pig tissue from an abattoir, processing the tissue to remove the animal proteins, and converting the resulting material into a dermal substitute product. In contrast, PolyNovo’s synthetic material is a polymer that is built in a lab, enabling the company to avoid these expensive manufacturing processes.

INBOUND SWITCHING COSTS
 
The costs for hospitals and surgeons to switch to BTM are very low. No substantial additional training is required for surgeons, and hospitals are not required to invest in additional capital equipment.
 
INTELLECTUAL PROPERTY

There are currently over 40 patents registered for NovoSorb. 
 
PRICING AND MARGINS

A 10sq/cm piece of the material sells for USD $900, which is half the price of the animal-protein substitutes, and can be manufactured by the company's Melbourne facility with a 80%+ gross margin. 
 
ROIC
 
Because PolyNovo has been growing so aggressively over the last couple of years, it has been ploughing all its revenue back in to the expansion of its sales teams. As such, it is only now starting to report a profit. Calculating a ROIC with current financial data under these conditions would be a very misleading indicator of earning power.

Instead, let’s consider the yield of the company’s manufacturing plants. It costs PolyNovo around AUD $50m to build a manufacturing facility that can produce $500m to $1b worth of product per year. This is a phenomenal yield for a manufacturing business.
 
COMMERCIALIZATION

The company's primary sales channel for the BTM consists of sales personnel approaching surgeons in hospitals directly. The average sales person is paid $100k/year plus commissions, and has a sales target of $1m/year. On average, a new sales recruit is paying for themselves within 6 months. PolyNovo currently has 5 sales personnel in Australia, and almost 100 in the USA, and continues to recruit sales staff at an aggressive rate. 
 
R&D
 
The bioresorbtion feature of NovoSorb makes it appropriate for indications other than burns and trauma to the dermis. The company’s R&D department are currently exploring applications for NovoSorb, such as:

• Hernia repair – the material supports healing in the abdominal wall over a specified period of time, after which it is absorbed by the body
• Breast reconstruction – the material acts as a sling or pocket for the breast implant, which is eventually absorbed into the native tissue
• Orthopaedic – the material acts as a support in the healing of joint areas such as rotator cuff

Many of these “implant” markets are significantly larger than the addressable market for dermal substitutes (AUD $500m). For instance, the market for rotator cuff repair could be as high as AUD $10b globally. As such, these indications will unlock substantial upside for the company if viable products are developed and approved by the FDA.

​UPSIDE
 
PolyNovo’s market cap of AUD $1.4b makes it the one most expensive companies we cover. However, the stock is also quite volatile despite the relatively large valuation, meaning opportunities to enter the stock are often available. For instance, in the last few months the stock has traded between $1.14 and $2.50.

If the company fails to develop its hernia, breast sling and orthopaedic products, and thus remains a dermal substitute company, you could argue that it is close to being fully priced at its current valuation. However, if one or more of these applications is developed and approved by the FDA, substantial upside will be unlocked because these addressable markets are so much larger. So pay attention to the company’s R&D announcements!