No-moat Polynovo’s PNV CEO has stepped down following reports of certain interactions between the chairman, David Williams, and management, which has not instilled market confidence.

We do not foresee significant changes in strategy or risk in the business transitioning to a new CEO. We leave our estimates unchanged, including our forecast five-year revenue compound annual growth rate of 16%. Shares are currently trading close to our unchanged fair value estimate of AUD 1.15 per share.

The company has appointed Robyn Elliott, who has served as a nonexecutive director on Polynovo’s board since October 2019, to replace Swami Raote as interim CEO, effective immediately. A search for a permanent replacement will commence soon. We expect Raote to assist Elliott until he exits on June 10, 2025.

The transition to a new CEO will be made easier given Raote’s efforts over his tenure of almost three years and the underlying business being left in a solid position. Raote oversaw a period of growth in the firm’s global operations, enabling Polynovo’s maiden profit in fiscal 2024. The firm is now self-sufficient, with AUD 27 million in net cash as of Dec. 31, 2024. Roate also managed significant improvements in Polynovo’s manufacturing and R&D capabilities.

The timeline of events, as we see it, was a formal complaint made by Raote and CFO Jan Gielen in 2024 regarding alleged bullying from Williams. The board then engaged independent lawyers in October 2024, which substantiated the complaint enough to recommend Williams step down as chairman.

The board also received training and assistance on workplace behavior, governance matters regarding the interaction between management and the board, and succession planning. Regrettably, after failing to make an agreement, Raote was asked to resign while Williams stays for now. With the current board, there remains risk of dysfunction among senior management, but also an opportunity to strengthen governance and the working environment.

Polynovo shares appear expensive despite maiden profit

Polynovo’s strategy revolves around expanding its geographical footprint to increase access to its products and open new hospital accounts. With its geographical reach the firm estimates its products are available to 800 million people as of fiscal 2023, but highlights the global market is underserved. The firm entered several new markets in fiscal 2023 including India, France, Spain, Canada, and Hong Kong, Polynovo intends to enter more geographies with new regulatory approvals, particularly with a focus on China and Japan through distribution partners. While the US market is key for Polynovo, representing roughly 80% of sales in fiscal 2023, new geographies would diversify the sales mix.

To support its organic top-line growth in existing and new markets, the firm invests heavily in expanding its sales staff as well as its in-house R&D. Product sales are largely through direct distribution, but Polynovo appointed distribution partners in select geographies including Germany, France, Spain, and Canada. Its R&D efforts center around exploring and receiving regulatory clearances for applications of NovoSorb products beyond the dermal substitute market.

Polynovo launched NovoSorb MTX in May 2023 to complement its main product NovoSorb BTM. NovoSorb MTX is like NovoSorb BTM but without the sealing membrane outer layer, and used in broader applications where it is not required. This is expected to drive sales with existing customers as sales staff can cross-sell products, with surgeons able to carry both products. Near-term, the firm is aiming to receive regulatory approval for full-thickness burns in the US and planning to complete recruitment of 120 patients for its associated US pivotal trial in fiscal 2024. The firm is also conducting clinical trials to receive reimbursement support for chronic diabetic foot ulcers and wounds. We think these efforts are likely to support growth.

We expect Polynovo’s NovoSorb products to pose a significant challenge to the traditional skin graft. We believe Polynovo will be successful based on the technology’s clinical performance and ease of use backed by a growing number of surgeon-led research and publications.

Polynovo bulls say

  • NovoSorb BTM is a sound alternative treatment option for dermal regeneration given it is synthetic, and its ease of use and clinical performance.
  • The company requires little invested capital and is expected to generate very high returns once it ramps up its commercial rollout.
  • Polynovo plans to expand its geographical footprint and shows promising signs to utilize NovoSorb technology for other indications.

Polynovo bears say

  • Polynovo is still burning cash and there is very high uncertainty on the success and timing of entering new geographies or potential new indications for NovoSorb.
  • There appears to be no significant switching costs associated with training and adoption by clinicians.
  • The existing patents do not provide extended cover for the NovoSorb technology and expire in fiscal 2028.

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