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SANUWAVE Health (OTCQB:SNWV) has developed what could be a very effective, yet significantly lower cost alternative to current treatments for chronic diabetic foot wounds, an annual market worth $2 billion - $3 billion. Top-line data from a pivotal Phase III trial, announced in late-2010 looked very encouraging. The final PMA module filing is expected in Q2 2011. FDA approval and a U.S. launch could happen in H1 2012. DermaPACE complements recent health care reform measures emphasizing cost-efficient care for chronic conditions.

We think SANUWAVE has a very compelling story. Based on the current share pricem we think the stock is near fair value but believe valuation should expand as certain risks abate. Our current target price is $6.00/share. We are initiating coverage with a Neutral rating.


Headquartered in Alpharetta, Georgia, SANUWAVE Health, Inc. is developing non-invasive medical devices using its proprietary Pulsed Acoustic Cellular Expression (PACE™) technology to aid in the body’s repair and regeneration of tissue, musculoskeletal and vascular structures. PACE works by creating shock waves which, in-turn, elicit a biological response and help the healing process.

Recent clinical studies have indicated the company’s lead product, dermaPACE®, is more effective than current standard of care in the treatment of serious life-threatening diabetic foot ulcers (DFU). SANUWAVE expects to submit the third and final module of a three-tiered PMA application seeking FDA approval of dermaPACE for the treatment of diabetic foot ulcers during Q2 2011. If all goes well, dermaPACE could launch in the U.S. in early 2012. The device is already CE Marked for sale in Europe for the treatment of skin and subcutaneous soft tissue.

The global market for wound healing is estimated to be approximately $10 billion, with the U.S. market for diabetic foot ulcers (a subset of the larger wound healing segment) at over $2 billion and growing rapidly. dermaPACE looks like it could be a game-changer for the treatment of chronic wounds as it appears to be at least as effective (and potentially more effective) as other advanced wound closure instruments. Yet it has significant other benefits, such as lower cost (less than ½ the cost of others), is non-invasive and has a lower treatment burden (i.e. - number of procedures and time per procedure). A competing product currently generates in excess of $1 billion in U.S. sales for the treatment of wounds (DFU and other wounds).

Chronic conditions such as non-healing DFUs are a tremendous burden on the health care system (10% of all health care dollars are spent on direct costs related to diabetes) and have been a catalyst in public and private insurers moving towards a "pay-for-performance" reimbursement model. This payment model incentivizes healthcare providers to offer more efficient, more effective and less costly care, which should help drive demand for highly efficacious and lower cost devices such as dermaPACE.

SANUWAVE’s patent-protected technology is also being applied for derivative applications including for other chronic wounds and as an aid in orthopedic and spine bone healing. SANUWAVE will incorporate a razor/razor-blade business model, utilizing card readers which activate the device for each procedure which will generate a recurring revenue stream. Sales will be handled by a direct sales force in the U.S. and by third-party distributors in Europe and Asia.


Our key assumptions

  • Final PMA Filing: Third and final PMA module is filed in Q2 2011

  • FDA approval: FDA approval comes in the first half of 2012

  • dermaPACE Launch: DermaPACE launch commences in the first half of 2012

  • Reimbursement in the Early Years: Some regional private insurers provide reimbursement following dermaPACE launch

  • Widespread reimbursement: CPT I (relative value) code is established by the end of fiscal 2014, triggering widespread public and private insurance coverage of dermaPACE

  • Pipeline: Development of the pipeline (for orthoPACE as well as for additional wound indications for dermaPACE) is slow-going until dermaPACE sales begin to ramp

  • No Pipeline Contribution: Our model (which goes out to 2015) does not incorporate any contribution from any pipeline indications or products

Our outlook: Pre dermaPACE Launch

We model relatively little revenue growth prior to the dermaPACE launch. While both dermaPACE and orthoPACE are CE Marked for sale in Europe, we do not expect either to generate much in the way of revenue until well after they enter the U.S. market. Cash operating expenses during 2011 should also remain relatively in-line with the prior year.

For 2011 we model revenue and EPS of $940k and ($0.56), compared to the $728k and ($1.15) posted in 2010. We caution not to read much into our modeled improvement in EPS for 2011 as this is driven mostly by our estimated decrease in non-cash compensation expense, lower (non-cash) loss on extinguishment of debt and a higher share count.

Our outlook: Post dermaPACE Launch

We expect the dermaPACE launch to represent the first of two inflection points for SANUWAVE. Prior to gaining Medicare reimbursement, success of dermaPACE will largely be predicated on the degree of interest from private insurers. As the private insurance "majors" typically follow Medicare's lead, SANUWAVE will initially be calling on more regional payers. We have no specific insight into the degree of formulary coverage that dermaPACE may enjoy in the early years. However, based on efficacy seen in the top-line results, cost advantages over competing therapies and the potential to leverage relationships built during the Ossatron years, we think it is reasonable dermaPACE can gain some level of reimbursement prior assignment of CPT relative value codes.

We expect revenue growth will likely be somewhat moderate until widespread reimbursement comes on-line (~ 2014?), however. Nonetheless, SANUWAVE's small size and the high margins expected from the procedure kits (eventually approaching 90%), combined with the large size of the DFU market, means positive cash flow and EPS could potentially be attained in short order - and possibly prior to gaining Medicare reimbursement.

We currently model dermaPACE to launch in the U.S. towards the back half of Q2 2012 and for the bulk of our $2.5 million revenue estimate for 2012 to come during the second half of the year. We also model roughly one-half of this $2.5 million in revenue total to come from continued international sales of orthoPACE.

We assume SANUWAVE places just under 70 dermaPACE units through the end of 2012 and utilization (i.e. - patients treated per device) is initially relatively low but increases over time. SANUWAVE could be detailing dermaPACE with a sales force of up to 25 by the end of that year, which is expected to grow to approximately 50 by year-end 2013. As the instrument will be loaned free of charge (with related depreciation running through COGS), revenue (from sale of procedure kits) and profitability will lag growth in the installed base, especially initially. As utilization increases, this lag will narrow and margins should widen. For 2013 we model revenue of $16.6 million which reflects an estimated installed base of approximately 240 units and average utilization per device at about five patients per month.

Medicare reimbursement is the second major expected inflection point for SANUWAVE. We currently model this to come sometime during 2014, at which time growth in the installed base and utilization should substantially steepen. Leveraging a greater installed base and the high margins afforded by the procedure kits should result in rapid improvement in cash flow and profitability.

We think the installed base grows to about 490 units by year-end 2014 and model revenue and EPS of $56 million and $0.09 in that year. Our 2015 revenue estimate of $117 million represents an installed base of just under 800 units and equals less than 5% of the total expected direct expenditures for DFU treatment by that time. This is based on what appears to be significant advantages of dermaPACE over other therapies for DFU, our revenue (and EPS) estimates could prove conservative.

To put our revenue estimates into context, Dermagraft's sales (entirely U.S.-based) grew from just $9 million in 2007 to $147 million in 2010. KCI's V.A.C product generated $1 billion in U.S. revenue in 2010 (for a variety of wound types, including DFU).

For a free copy of our full 25 page initiation report on SNWV, please e-mail with SNWV as the subject.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.