Market research has indicated that the global advanced wound care field will be worth $16.3 billion in a decade, more than doubling its current size. Due to this immense potential, Smith & Nephew (SNN), a global medical technology leader, has made multiple attempts to expand its advanced wound care division through its own product pipeline and acquisitions. To reinforce its position in a competitive industry comprised of giants like 3M Company (MMM) and KCI, Smith & Nephew management plans on enhancing growth in emerging markets by using smaller deals that aim to improve performance going forward. Sanuwave (OTCQB:SNWV), a promising regenerative device company, would be a budding counterpart that could contribute to SNN's expectations of achieving above market growth in the fast growing advanced wound care market.
Smith & Nephew's development in advanced wound care
Smith & Nephew gained access to a series of chronic wound treatments in 2007 with its BlueSky acquisition. Towards the end of 2012, the company acquired Healthpoint Biotherapeutics for $782 million in cash giving it a strong position in bioactives, the fastest growing area of advanced wound management, while also adding to its series of wound treatment products. Going forward, SNN aims to improve performance on the backing of strong product pipelines and higher acquisition investments. In the recent quarterly conference call, management revealed that it expects to achieve above market growth in advanced wound treatment for upcoming quarters, which will, in turn, drive overall company operations. Focusing on emerging markets, the company plans to enhance growth with smaller acquisitions. This is where Sanuwave comes into play.
Sanuwave is a late stage medical device company that utilizes shockwave therapy for treatment of wounds with the Pulsed Acoustic Cellular Expression (PACE) technology. This PACE technology could prove to be the new standard of care for advanced wound treatment, thus replacing the conventional Negative Pressure Wound Therapy (NPWT) due to being a cheaper and more time effective alternative. If history serves us right, wound therapy companies tend to get gobbled up by bigger players in the event of encouraging treatment results (as shown here, here and here). SNWV's platform technologies are already approved internationally and marketed in Europe, Canada, Australia and Asia. Such a broad geographical reach makes the company that much more appealing, especially to an industry leader looking to expand in international markets such as Smith & Nephew, mentioned above.
Ongoing trials for US market approval
Aside from the availability in international markets, SNWV is undergoing a supplementary Phase III trial in the US for the use of dermaPACE technology in diabetic foot ulcers. Following its original FDA rejection in December 2011 due to not meeting the primary endpoint, the company was granted further research to build upon its strong initial data, showing greater than 90% closure of wounds (primary end point being 100%). This supplementary trial will allow SNWV to incorporate the positive results from the original trial which showed effective healing in diabetic foot ulcers when using dermaPACE, therefore making this second trial shorter and cheaper to conduct.
The supplementary trial will include 90 patients, commencing enrollment by early Q2 2013 at a rate of 8 patients a month. Consequently, the company believes that with the doubling of dermaPACE treatments during the 10 weeks of administration, wound closure will improve in favor of the company to reach the statistically significant primary endpoint of 100% cured. Additionally, safety is less of a concern for dermaPACE due to its compelling earlier results and the fact that the device is externally applied to wounded areas instead of ingested.
The FDA's confidence in allowing SNWV to incorporate the positive results of the initial trial and the important changes that the company is including take a lot of risk off the table. These points indicate that Sanuwave can provide a positive outcome in early 2015, around the time the FDA will have made its decision. The approval of dermaPACE technology for diabetic foot ulcers will open a door to a broad range of medical market opportunities for SNWV in the US. As a long-term goal, the platform technology can also be applied to markets outside healthcare such as oil recovery and water cleaning, both of which the company has commenced preliminary discussions with third parties.
How is Sanuwave valued?
Sanuwave's market cap hovers around the mid-high teen area. A late stage device company with strong indications of market realization, mentioned above, would be considered extremely undervalued at a $18 million cap figure. To compare, the company was trading at a price 5x ($4.00s) its current price in the summer of 2011, before it submitted its original dermaPACE application for FDA approval. At that level, SNWV possessed a $100 million market cap. It can be argued that the dermaPACE technology is more validated now than it was back in 2011, yet the market valuation is priced at a fifth of the 2011 figure.
A further comparison that underscores how undervalued SNWV is the above chart that matches up each company, their respective market cap, the ongoing company phase and potential market size of the drug tested. Early stage companies such as Invivo (OTCQB:NVIV) and Verastem (VSTM) have market caps 8x and 10x greater than SNWV, respectively. To put into perspective, these budding companies are multiple years (5+) away from hitting market with their products, yet are valued at market caps 10 fold Sanuwave, a company with a potential product less than two years from market. Not to mention the countless risks involved in getting a drug to market from early phase I stages. Clearly, there remains a discounted imbalance with Sanuwave's valuation.
For Smith & Nephew, Sanuwave presents a low risk high reward company that has established international operations and an indicative upcoming US market decision for its promising dermaPACE platform technology. At a market cap valuation of roughly $20 million, SNWV signifies a discounted wound therapy business with lucrative potential that would fit the "smaller deal" depiction SNN is targeting.
With a new leader at the helm, whose compensation is heavily contingent on performance (more here), the company continues to implement cost containment for leaner operations. Additionally, existing investors were satisfied with Sanuwave's direction enough to overfund the latest equity financing by 60%. Interested investors should keep an eye on the Sanuwave supplementary trial update releases as they could prove to add significant value to one's portfolio.