Q2 2011 Financial Result
SANUWAVE announced financial results for the second quarter ending June 30, 2011 on August 10th. Similar to Q1, results were again very much in-line with our estimates and there were no surprises in the 10-Q.
Revenue came in at $164k compared to our $225k estimate. Operating expenses were $2.39 million, slightly lower than our $2.51 million estimate. We continue to model operating expenses to edge up very moderately in the second half of the year.
Q2 EPS was ($0.17), dead-on with our estimate.
Cash used in operations was $3.0 million during the three months ending 6/30/2011. Excluding changes in working capital, cash used in operations was $2.0 million.
SANUWAVE exited Q2 with $7.8 million in cash and equivalents which includes $8.5 million net proceeds from the April 2011 private placement of 2.8 million shares of common stock.
Our outlook for the remainder of 2011 (and beyond) remains largely unchanged. For 2011 we look for revenue and EPS of $921k and ($0.53). Our outlook for 2012 and beyond is also affirmed and supported by SANUWAVE recently hitting significant milestones including the announcement of positive 24-week trial data for dermaPACE in DFU and the company making the third and final FDA module filing. We continue to look for dermaPACE to launch in the Q2 - Q3 2012 timeframe.
Moving Recommendation to Outperform
We are maintaining our $6.00 price. Despite what we would characterize as only positive news since we initiated coverage of the company in May of this year with a Neutral recommendation, SANUWAVE's stock price has sold off from $4.90 on our initiation date to $3.10 where it currently trades. Based on the large discrepancy between what we believe to be fair value and the current share price, we are moving our recommendation from Neutral to Outperform.
OUR KEY ASSUMPTIONS
- Final PMA Filing: Filed July 2011 - in-line with our expectations.
- FDA approval: FDA approval comes in the first half of 2012.
- dermaPACE Launch: dermaPACE launch commences in Q2/Q3 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.
For 2011 we model revenue and EPS of $921k and ($0.53), 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. While we have no specific insight into the degree of formulary coverage that dermaPACE may enjoy in the early years, 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. around Q2/Q3 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 5 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 - 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, (as noted earlier in this report) Dermagraft's sales (entirely U.S.-based) grew from just $9 million in 2007 to $147 million in 2010. Kinetic Concepts' (KCI) V.A.C product generated $1 billion in U.S. revenue in 2010 (for a variety of wound types, including DFU).