Brian Marckx's  Instablog

Q2 RESULTS / SUPPLEMENTAL TRIAL ON TRACK ONCE GET FINANCING

On August 9, 2012 SANUWAVE (SNWV) announced financial results for the second quarter ending June 30th. Aside from operating expenses continuing to come down faster than what we anticipated, results remain very much inline with our expectations. There also were no surprises relative to our outlook in either the earnings release nor on the conference call. Management remains very upbeat about the chances of dermaPACE hitting the endpoint in the upcoming supplemental trial, which is expected to commence once financing is in place - which management indicated could happen towards the end of Q3. We have made no meaningful changes to our model or otherwise to our outlook for SANUWAVE and we remain believers in both dermaPACE and management.

Q2 revenue came in at $210k compared to our $254k estimate. Operating expenses, which dipped $457k or 25% from Q1 2012, reflect management's tight control on costs and cash. Operating expenses were $1.4 million in Q2, much better than our $1.9 million estimate. As a reminder, following the December 2011 FDA major deficiency letter, when it was evident that dermaPACE would not make it to the market in the near-term, management announced that they were implementing cost-cutting initiatives to preserve capital. These initiatives started bearing fruit immediately, with Q1 2012 expenses falling 25% sequentially and, as noted, they fell another 25% in Q2. Management noted on the call that total employee headcount as been cut from 28 to 18 as part of this eye on costs and cash.

Q2 net income and EPS were ($1.4) million and ($0.07) compared to our ($1.8) million and ($0.07) estimates. The favorable difference in net income due to the beat on operating expenses. Our estimated share count was also higher due to our placeholder assumption (as we noted in a previous update) that financing would come in Q2 in the form of an equity sale (which didn't happen - although we carry this assumption forward).

Cash

Cash used in operations was $1.01 million in Q2, down from $1.49 million in Q1 and $1.84 million in Q4 2011. SANUWAVE exited Q2 with $1.4 million in cash and equivalents, down from $2.4 million at the end of Q1.

We think management has done a commendable job minimizing cash burn and cutting expenses where possible. Nonetheless the company will need to raise additional capital in the very near-term and indicated on the call that they think they could have something in place by the end of Q3 (9/30/2012). The supplemental trial will be on hold until financing is consummated.

SANUWAVE has retained Canacoord Genuity and (per the Q2 call) is also in discussions with other investment banks for a near-term capital raise. As we noted in our previous update, as a placeholder in our model we use the assumption that SANUWAVE raises financing through the regular sale of equity. At the current stock price and market cap ($0.22, $5MM), we think it's more likely that financing comes in the form of some sort of convertible (debt or preferred), but we think that will roughly wash with our equity placeholder with a (eventual) conversion assumption.

Management noted that their current best-guess estimate for cost of the supplemental trial is about $2 million - which is right in-line with our rough estimate. SNWV is currently burning ~$400k of cash per month - and management expects this to increase to ~$500k/month during the term of the supplemental trial.

Supplemental Trial On-Track Once Financing Is In Place

On May 8, 2012 SANUWAVE announced that the FDA approved its IDE Supplement for an additional clinical trial for dermaPACE. Aside from being smaller than the than the initial 206-patient trial and also incorporating treatment "boosts", the trials will be very similar. The statistical methods (Bayesian) apply sequential analysis allowing for the supplemental data to build on the positive results from the initial larger study. Importantly, the FDA typical approves Bayesian methods when there's already compelling data to build upon (the totality of which will presumably show statistical significance on the primary endpoint). This is a key point and underscores that this is not a replacement trial but is instead a supplement in every sense of the word - this supplemental data will be in addition to and build on the already very strong and compelling initial trial data.

As we've noted previously, the pivotal trial data already indicated dermaPACE was effective in healing diabetic foot ulcers - the hurdle to clear hitting the primary endpoint (100% wound closure), while not attained in the pivotal study, may very well be able to cleared with additional dermaPACE treatments. Safety was also excellent in the initial study, which was obviously a consideration of the FDA in allowing for more aggressive (i.e. - treatment "boosts") treatment with dermaPACE.

SANUWAVE believes the new trial can be completed (including data analysis) in as early as 20 months following initiation (management reiterated this timeline on the Q2 call). Enrollment is projected at 90 patients (~45 treatment / ~45 control). Similar to the initial study, the treatment group will receive four dermaPACE procedures during the first two weeks. In order to improve on the efficacy from the initial trial (which just missed statistical significance on the primary endpoint) up to four treatment "boosts" can be delivered during weeks four and ten. The primary endpoint, 100% wound closure at week-12, will be the same. Assuming statistical significance is met on the primary endpoint, the data will support an amendment to SANUWAVE's existing PMA which could potentially happen sometime in mid-to-late 2014 with FDA approval possible before the end of that same year.

SANUWAVE hopes to initiate enrollment in the coming weeks. They are currently finalizing selection of clinical sites and getting IRB approvals. However, before anything significant can move forward, SANUWAVE will need to raise additional capital to fund the trial. As noted, management thinks they can have financing in place by the end of Q3.

As we noted in our prior updates, the supplemental trial should provide a much less ambiguous decision-point for the agency than if SANUWAVE had decided to just use the original data to go in front of an advisory panel - a final decision from which can end up being a long, drawn-out affair which may not have come out in SANUWAVE's favor. Clearly avoiding the potential pitfalls of an advisory-panel review played a major role in management's decision to pursue a supplemental trial.

Importantly, safety was excellent in all studies to date which opened up the door for more aggressive treatment within the standard 12-week treatment window in this supplemental trial. These treatment "boosts" may very possibly increase efficacy and get them over the primary endpoint hurdle. Also very important is that the 12-week treatment window used in the initial trial will also be used in the supplement trial. If this supplemental study achieves 100% wound closure with the help of these treatment boosts, that would be an obvious major positive for SANUWAVE.

As best-guesses regarding size, costs and timelines of a supplemental trial as well as estimates in regards to when dermaPACE could be FDA approved and launch in the U.S. remain unchanged from our prior assumptions, we have made no material changes to our outlook or financial model since our last update (5/16/2012).

VALUATION / RECOMMENDATION

We use 2015 P/S comparables to value SNWV. Smith & Nephew (SNN) currently trades at approximately 2.0x analyst's 2015 forecasted revenue. Kinetic Concepts was acquired in November 2011 for $6.1 billion, or about 2.8x estimated 2015 revenue. We currently model SNWV to generate revenue of $16 million in 2015 - based on the two comp 2015 P/S multiples values SNWV at between $1.60/share and $2.20/share. For simplicity, we use the average of the two, which values SNWV at about $2.00/share.

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

On March 14, 2012 SANUWAVE Health (SNWV.OB) announced financial results for the fourth quarter ending December 31, 2011 and provided an update on their planned path forward for getting dermaPACE through FDA. Financial results continue to be very much in-line with our estimates. We view the update on the regulatory approval plan as a positive development - both from the perspective of clearing up some of the lingering uncertainty of how management expected to proceed following the disappointing FDA action in late December and, in our opinion, it's a plan that makes sense from a risk/return standpoint.

Q4 revenue came in at $225k compared to our $205k estimate. Operating expenses were $2.55 million, about 16% lower than our estimated $3.04 million, mostly due to lower than modeled R&D expenses ($563k A vs. $805k E).

Q4 EPS was ($0.12), two cents ahead of our ($0.14) estimate as a result of the lower operating expenses.

Cash

Cash used in operations was $1.84 million during the three months ending December 31, 2011. Excluding

changes in working capital, cash used in operations was $1.60 million, down slightly from the $1.74 million used in Q3 and $2.04 million used in Q2. SANUWAVE exited Q4 with $3.91 million in cash and equivalents.

While SANUWAVE has already started trimming expenses to conserve cash and streamline for the (hoped for) initiation of new clinical studies, the current cash balance only represents about six months of operating funds. We had fully anticipated (especially following the December FDA letter) that SANUWAVE would need to raise additional financing - although we only speculated on when, how, how much, or what kind of financing it might be. While we still don't have any concrete answers to most of these questions, SANUWAVE did note in the earnings release that they have retained Canacoord Genuity to "explore capital fund raising and/or strategic options for SANUWAVE to fund the Company while we complete this additional clinical trial work". As it is now, our model assumes that SANUWAVE raises financing through the regular sale of equity - although, again, we have no particular insight.

Supplemental Trial Data

As a reminder on 12/21/2011 SANUWAVE announced that the FDA issued a major deficiency letter in response to the company's PMA filing seeking approval of dermaPACE in the treatment of DFU. SANUWAVE noted that the FDA cited the failure of dermaPACE to meet the primary endpoint of statistically significant superiority in 100% wound closure compared to sham-control (i.e. - standard of care) as one of the deficiencies. Among the FDA's recommendations to potentially remedy the deficiencies was for SANUWAVE to conduct another clinical trial - the design, size, duration, etc. of which would be decided upon after further discussions between the two parties. At that time we put out an updated report on SNWV (see our discussion under "FDA Response" below which is from our 12/22/22 report update which provides more detail on the FDA action and our assumptions at the time) but given the minimal insight at the time, we used best-guesses as how management may proceed. With the Q4 earnings/10-K release yesterday the company provided a more concrete plan forward. The plan, which was developed following "non-binding" discussions with the FDA and still needs to be approved by the agency, includes supplementing the original pivotal trial results with additional clinical trial data under the existing IDE. The IDE supplement and proposed study plan was submitted to the FDA in March (i.e. - within the last 2 weeks). If approved to move forward by FDA, additional trial data should provide a much less ambiguous decision-point for the agency than if SANUWAVE had decided to just use the original data to go in front of an advisory panel - a final decision from which can end up being a long, drawn-out affair which may not have come out in SANUWAVE's favor. Clearly avoiding the potential pitfalls of an advisory-panel review played a major role in management's decision to pursue a supplemental trial.

SANUWAVE did not provide specific details of their proposed new trial but we think it's likely that it would be smaller than the pivotal 206-patient trial but very similar in design and patient profiles. Importantly, safety was excellent in all studies to date and, as we've noted in the past, this could open up the door for more aggressive treatment within the standard 12-week treatment window which may very possibly increase efficacy. SANUWAVE noted in the Q4 earnings press release that this is exactly what they hope to do in a supplemental trial - specifically to use treatment "boosts" between weeks four and 10 of the treatment period. Very important is that the 12-week treatment window used in the initial trial will also be used in the supplement trial (assuming its approved). In the pivotal trial, patients were randomized to either treatment with dermaPACE plus current standard of care (n=107) or sham (i.e. - placebo) plus standard of care (n=99). dermaPACE treated patients received four 20-minute procedures over two weeks (i.e. - two 20-minute sessions per week). The pivotal trial data already indicated dermaPACE was effective in healing DFUs - the hurdle to clear hitting the primary endpoint (100% wound closure), while not attained in the pivotal study, may very well be able to cleared with additional dermaPACE treatments - SANUWAVE cites the recent clinical data that has shown the benefits of treatment "boosts" in tissue regeneration. If this supplemental study is approved to move forward and 100% wound closure can be obtained with the help of these treatment boosts, that would be an obvious major positive for SANUWAVE. We expect the FDA will make a decision on the supplement to the IDE within the next several weeks. If approved to move forward, SANUWAVE would likely look to the clinical sites where the pivotal studies were done for this supplemental trial. The company ballparks about two years from initiation of enrollment to a supplemental FDA filing. Assuming it gets that far, we think the FDA could have an answer back to SANUWAVE by mid-to-late 2014.

Following the December 2011 FDA action, we had already updated our financial model to incorporate assumed significant delays in getting dermaPACE approved and launched - we had guessed fairly accurately that SANUWAVE would look to run a supplemental trial - which would push the delay to launch towards the 2014 timeframe. As such yesterday's update on the proposed path forward only had us modestly tweak our launch assumptions.

VALUATION / RECOMMENDATION

We use 2015 P/S comparables to value SNWV. Smith & Nephew (SNN) currently trades at approximately 2.0x analyst's 2015 forecasted revenue. Kinetic Concepts was acquired in November for $6.1 billion, or about 2.8x estimated 2015 revenue. We currently model SNWV to generate revenue of $16 million in 2015 - based on the two comp 2015 P/S multiples values SNWV at between $1.60/share and $2.20/share. For simplicity, we use the average of the two, which values SNWV at about $2.00/share.

FDA RESPONSE(FOR BACKGROUND INFO: from our 12/22/2011 update report)

Despite compelling phase III trial data that we believe strongly supports dermaPACE as an effective therapy for diabetic foot ulcers, U.S. regulators have said it's not necessarily strong enough to merit FDA approval. Yesterday (12/21/2011) SANUWAVE announced that the FDA issued a major deficiency letter in response to the company's PMA filing seeking approval of dermaPACE in the treatment of DFU. SANUWAVE noted that the FDA cites the failure of dermaPACE to meet the primary endpoint of statistically significant superiority in 100% wound closure compared to sham-control (i.e. - standard of care) as one of the deficiencies. Among the FDA's recommendations to potentially remedy the deficiencies is for SANUWAVE to conduct another clinical trial - the design, size, duration, etc. of which would be decided upon after further discussions between the two parties.

As a reminder on dermaPACE's phase III trial data, while superiority of dermaPACE over sham on the primary endpoint (100% closure) was not statistically significant, a higher percentage (21% for dermaPACE and 15% for sham-control) of dermaPACE treated patients achieved full closure within twelve weeks (supplemental data did show dermaPACE did achieve statistical significance in complete wound closure at 20 weeks, however). In addition (and of considerable importance), of the patients that did achieve complete wound closure at twelve weeks, only 4.5% of the dermaPACE cohort experienced wound recurrence, compared to 20% in the sham cohort.

Although superiority on full closure was not statistically significant, based on the strict protocol of the study restricting closure through surgery, a 90% or greater closure rate was considered to be clinically meaningful. When looking at wounds that had reduced in size by > 90%, dermaPACE was shown to be significantly (p = 0.0161) more effective than sham with 48% (51 of 107) dermaPACE patients meeting this endpoint versus only 31% (31 of 99) of sham control patients. Median wound closure was over 99% for dermaPACE treated patients in this composite analysis and dermaPACE patients were twice as likely to achieve 90% - 100% wound closure compared to sham patients. We believe that the composite data is especially impressive considering that dermaPACE treated patients started with wounds 58% larger than those in the sham-control group. Safety data was also good, with no difference in the rate of adverse events between the study and control groups.

While FDA's recent action by no means dooms dermaPace's chances of eventually gaining FDA approval, it does mean the journey towards that end will now be longer and likely more costly. The near-term game plan is to meet with the FDA, evaluate their options and formally respond to the letter - which is expected to be completed during Q1 2012. While another clinical trial may not be the only path towards securing FDA approval, it would be the least arbitrary and provide SANUWAVE with definitive metrics to meet in order to reach that goal. We hope to get a better idea of the scope, length and cost of another trial as well as SANUWAVE's decision whether to go that route over the next ~90 days.

And while we view this recent FDA action as a surprise and a meaningful setback for dermaPACE and SANUWAVE, we remain positive on both and continue to believe in dermaPACE's chances in eventually gaining FDA approval. There is a long list of medical devices and pharmaceuticals that endured regulatory setbacks that eventually received FDA's stamp of approval - we think dermaPACE will be one more.

Prior to the December FDA action we had expected dermaPACE to receive regulatory approval and launch in the U.S. near mid-2012. It is clear that that will now not happen. And while the direction that SANUWAVE will take in order to continue to move towards FDA approval is just conjecture at this point, we need to incorporate certain assumptions into our outlook and related financial model in order to place a value on the company. Some of these assumptions are very general in scope and little more than just blind guesses at this point - we will update these assumptions if necessary when there is more clarity on the updated regulatory approval pathway. The most significant "blind-guess" assumption is that SANUWAVE runs another clinical trial - which delays approval until early 2014 and, in-turn, requires the company to raise a material amount of additional capital. We currently have absolutely no insight, however, on if the company will run another trial or what the design, scope, cost, size or duration might be of this hypothetical trial.

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