Seeking Alpha
Growth, momentum, long-term horizon, newsletter provider
Profile| Send Message|
( followers)

Shares of SanuWave Health (OTC: OTCQB:SNWV) have about doubled in the time span of just a few days - after already having tripled since the beginning of the year - with volume growing methodically higher along the way. No significant news has been released along the way to fuel the rally, but with some trial catalysts pending that could thrust SanuWave's Pulsed Acoustic Cellular Expression (PACE) technology directly into the middle of a booming subsector of the healthcare industry, investors may have again become aware of the company's potential as a short term rebound play and a longer term growth play. The PACE technology, known as a 'shockwave therapy' has been employed into the dermaPACE and orthoPACE medical devices and have already received CE Mark Approval in Europe for the treatment of chronic wounds, where revenue is already rolling in. In America, a Phase III trial is expected to begin enrolling patients within the current quarter for dermaPACE in the treatment of diabetic foot ulcers and improved trial designs devised in conjunction with FDA guidance has many investors enthusiastically expecting more definitive results than those seen in a previous trial, where efficacy was demonstrated, but an endpoint was not met and market approval was not achieved.

With a new round of trial catalysts pending, and given the size, scope and rapid growth of the diabetes and chronic wound markets, it could be argued that this latest rally was based on the SanuWave market cap catching up to its speculative potential. If that is in fact true, and if the pending trial progresses in a more defined manner under its new design, then both interim and actual results have the potential to rally shares even further than what has already been realized since the beginning of 2013. By comparison, SanuWave shares approached the six dollar mark in early 2011 at the height of previous anticipation regarding the thermaPACE therapy, and it's reasonable to believe that another push towards FDA approval could fuel a similar share price run. Such action is expected and routine in the developmental sector, although heavy volatility should also be expected, given the fair amount of day, swing, momentum and catalyst traders that move in and out of stocks in search of quick returns.

As described above, the dermaPACE device is founded on the idea of 'shockwave therapy,' which encompasses the sending of 'shockwaves' through damaged cells. The shockwave action, in turn, stimulates the cells to heal themselves, in similar fashion to the process in which muscle tissue heals itself after workout sessions - the 'breakdown' in tissue that results from the shockwaves, as with weightlifting, stimulates cell recuperation and - often times - results in the cell tissue coming back stronger. That is the desired effect of the 'shockwave therapy' applied by SanuWave and although the last Phase III failed to result in an approval, success and efficacy have been demonstrated thus far in development - enough to warrant numerous approvals overseas.

It's always the case, however, that the US market is any company's primary target for approval, given the sheer strength, power and dollar signs of America's healthcare industry. Because of the 'fast food' culture and (lack of) exercise among the population, the diabetes sector is growing at an alarming rate, as well, and that is also becoming the trend globally. Over Twenty-three million people in the United States have been diagnosed with diabetes and it is speculated that millions more have it, but are yet-to-be diagnosed. It is also assessed that fifty seven million people in the US are pre-diabetic, according to statistics posted by the American Diabetes Association. Globally, the diagnosed numbers are much more severe and it's also estimated that a higher percentage of cases go undiagnosed. The burdens placed on the healthcare industry as a result of this growth is obvious.

In relation to SanuWave's initial application of dermaPACE in America, fifteen percent of diabetics will acquire "non-healing" ulcers in their lifetime, including the indication of diabetic foot ulcers. According to the above-linked statistics, this market is quickly approaching two billion dollars annually, which - as mentioned in the open - positions this company nicely to take advantage of a swiftly-growing market. Even when considering the already-registered and impressive price gains of early-2013, it could be argued that there still remains room for share price growth over the short to mid term, especially as trial catalysts continue to unfold and investors digest the market potential of dermaPACE.

As discussed above, SanuWave expects to enroll its first patient into the foot ulcer trial within the current quarter. The FDA has already given the green light to start the trial, a key milestone met earlier this year, and also had an influence in the trial design since an earlier trial proved successful, although a missed endpoint kept it from receiving an approval. In the earlier trial, overall success was eventually achieved, just not in the time frame expected by the company. This miscalculation, however, was more due to inconsistencies in patient follow-up than it was to the efficacy of the dermaPACE device, a variable that was factored into the new trial design.

The new trial design, as noted in a publicly-available analytic report, will more stringently monitor the desired guidelines and - as part of an agreement with the FDA - will build on the results from the earlier trial. That fact could greatly enhance the efficiency and speed of the new trial, which is currently expected to enroll its last patient in just under a year from now, and also potentially hasten the approval path through the FDA. If all current milestones are met, then it's highly likely that dermaPACE could see market in the United States by early 2015.

With the initiation of the new trial, SanuWave made some changes at the top to usher in the next era of the company's development. Industry veteran Joseph Chiarelli was appointed as the new CEO earlier this month and will look to reverse the trends of his predecessor, who burned cash at an unexpected and unsustainable rate. That especially became a problem for SanuWave when money and funding dried up for developing companies through the depths of the recession. To ensure a new era of goal-oriented responsibility, Mr. Chiarelli's contract is based nearly exclusively on incentives, a heavy sign of his confidence in the technology and on his ability to bring it through development and to market.

In conjunction with the signing of the new CEO, SanuWave also announced the securing of a bridge financing deal worth two million dollars, significantly higher than the intended cash raise.

As with all still-developmental companies, there is no guarantee that SanuWave will not, at some point in time, conduct a fund-raising event to further fuel the advancement of its technology. Although money from international approvals is coming in to help offset funding, as discussed below, losses remained heavy during the most recent reporting period and are expected to remain so for the foreseeable future, barring and very significant upswing in international revenue. Additionally, the ramp-up after approval in the United States takes time, too, so an approval alone does not initially trim losses. These notes heavily factor into an investor devising a strategy based on trading a handful of trading shares while also holding onto a core group of shares for the long term. That action, in conjunction with solid entry and exit strategies, could help put an investors on 'house money' long before the full story plays out.

Helping to alleviate some investor concern in regards to future financing, however, is the above-mentioned international revenue stream, which for the year 2012 was over three quarters of a million dollars. That number was slightly down from the year prior, mainly due to the extensive economic recession in Europe. International growth is expected during the current year, though, as approvals in Australia and New Zealand can help to augment European sales, although even the most enthusiastic of investors should expect overall losses to continue, although the trend has been to see the losses shrink, according to most recent report, which also showed that the company is returning solid gross profit numbers, too, at seventy one percent.

The standard wild card of the sector revolves around the landing of a partner, which is one of the key incentives in the new CEO's contract. Solid results will also lead to speculation regarding a potential buyout of the company, which could add to the volatility and trading opportunities of the stock, should those discussions come up. Such talk should not be expected, however, until at least the latter stages of the trial when interim results and trends may be known, but more likely those discussions will take place after a positive Phase III trial is completed, at the soonest.

In the meantime, investors should expect some profit taking and volatility to dominate trading during share price spikes as we've seen with SanuWave, and Tuesday may have provided a demonstration of such, given the mid-day stall at around the $1.50 mark. By comparison, however, when the focus is on a particular company or a hot sector as a whole, then increasing investor interest and growing volume could enable speculative rallies to push through resistance and profit taking. For example, Keryx Biopharmaceuticals (NASDAQ: KERX) has on numerous occasions over the course of its developmental phase has rallied and sank behind unfolding catalyst events. In similar fashion to SanuWave after its failed trial, KERX hit rock bottom for a while before once again positioning as a nice rebound play as its 'Plan B' product of Zerenex started to look attractive to investors. Ultimately, shares rallied and held their gains when final Zerenex Phase III results came back positive and subsequent buyout talk fueled the run higher yet. Such a success story brings light to SanuWave's potential to come back from the brink, too.

Another case similar to that of SanuWave's is the history of Titan Pharmaceuticals (OTC: OTCQB:TTNP). Titan, on the heels of failed trials and investor uncertainty had dropped to a penny at one point before rebounding heavily on the late-stage results of its subcutaneous treatment of opioid addiction, Probuphine. A positive recommendation of approval by an FDA advisory committee last month has shares pushing the two dollar mark again. Again, the volatility and successes of these two companies over their history is a testament to the ups-and-downs of the developmental sector and provides a nice insight into the fact that companies that look to be down, as SanuWave did following the last trial, may not be out.

In terms of getting an idea how attention on a hot sector as a whole can influence trading for individual companies, take the examples of the 3D Systems Corp (NYSE: DDD) and Organovo Holdings (OTC: ONVO). Both are heavily involved in the present day and future of 3D printing technology, respectively, and both companies enjoyed dramatic share price rallies when investors caught on to the booming nature of the sector. Even when the hype settled, these companies still saw their share prices trading at significantly higher levels than when investors originally caught the trend. Given the huge growth rate of diabetes over recent years and the boom in revenue related to treatment of the disease, investors have been taking notice of this sub-sector's potential to become the next hot 'rally market.' As such, companies like Mannkind Corporation (NASDAQ: MNKD) and AntriaBio, Inc. (OTC: OTCQB:ANTB), for example, have benefited from increased investor attention and a spurt of speculative money as both have significant milestones pending over the course of the year. SanuWave, too, may be the most recent example of investor interest in the sector.

Some will likely remain skeptical until positive results - interim or actual - are returned from the upcoming trials, while others will be hesitant to take a position in a company whose share price has already rallied as significantly as SNWV's since the beginning of the year, but as outlined above, the potential for rebound or continued upwards movement remains, given the attention paid to the sector and the market potential of dermaPACE in the US, should approval be warranted this time around. Additionally, the overseas market continues to return revenue and new avenues for growth are opening, too, as demonstrated by the recent approvals in Australia and New Zealand. Over the longer term, investors may be able to trade into the opportunities created by any volatility resulting from news and catalysts - 'buy the dips,' for example while selling a few trading shares into significant spikes. That could allow investors to come out on 'house money' well before the longer term story plays out.

With a new trial design, new skipper at the helm and new found investor interest, a rebound year of excitement and milestones is shaping up for SanuWave.

Happy Trading!!!

Disclosure: I am long OTCQB:SNWV, OTCQB:ANTB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Source: SanuWave Health: A Price Run With Legs