Polynovo (ASX: PNV) is a medical device making company that designs, develops and manufactures dermal regeneration solutions using its patented biodegradable polymer technology. The technology which looks a bit like a foam sheet or a sponge, helps the body use its own mechanisms to repair damaged tissue. Commonly used to treat burns and traumatic wounds. Main points

• The half-year sales update failed to impress with slower than expected sales in October drowning out quarterly sales growth of 75%. November numbers fared better in the US, NZ and Taiwan, although pre-empting what could be an uninspiring HY result.
• Managing director Paul Brennan said predicting the sales trajectory in the US, its key market was “challenging”. Understandable given COVID headwinds and the difficulty of getting the technology into hospitals. On a positive note, half-year sales were up 41% on the year in the US.
• Recently entered Poland with the appointment of Hortho Medical Innovations as its exclusive distributor. PNV entered new markets in Greece, Belgium, Netherlands, Luxembourg, Sweden, Finland and Taiwan during the first half. A commendable effort.
• Another hiccup for PNV was lower than anticipated revenue due to the delay in obtaining US FDA investigation device exemption (IED) approval for its NovoSorb BTM product. Pushing out the recruitment of patients for this trial now scheduled for late third quarter.
• Revenue last financial year was $22m with earnings of -$3.2m. Full-year sales of $24m forecast back in August for FY21. Results in mid-February will clarify that trajectory. Whatever the result, it is not likely to be an impressive number given obvious COVID difficulties.

Main Observations:

• First impression, not the most appealing company on a fundamental basis, some ugly numbers in the mix
• ROE this year expected to be -9.9%. That said, brokers anticipating that number to dramatically bounce back in FY2 and FY3.
• For a company with negative earnings, there are a lot of people willing to pay top dollar. PNV sits on a PE of -837.6x. There is a lot of hope in future earnings built into the share price. Analysts forecasting a far more palatable level of 14.4x in FY4. That said, the further out the forecast, the less accurate it is.
• Revenue and EPS growth far more appealing if the forecasts are to be believed. Solid earnings in the next few years predicted.
• Of the brokers surveyed by Thomson Reuters, 42% have a BUY or STRONG BUY recommendation. It is also trading at a 17% discount to the average broker target price

WHAT SORT OF INVESTMENT IS PNV? PNV Is a growth play. Product take up by hospitals, referrals and expansion into new geographies are the key points that typically drive the share price. Chairman David Williams remarked that while PolyNovo had experienced “a few bumps from COVID-19”, the company had built a significant base of new customers that held it in a strong position. In the first half it opened 35 new accounts across all direct markets. That said, the primary investment thesis that will drive the share price higher is hospitals/customer base expansion once the pandemic eases. We must not forget that in Europe and the US, the pandemic is still raging. The death toll in the US surpassed 400k last Thursday. It may be some time before the vaccine rollout creates enough space for PNV’s technologies. Revenue likely to be depressed until that time. TECHNICAL VIEW ‘Volatile’ is the word that would best describe the PNV chart over the medium term. More recently, the price action has fallen sharply from a high around 400c, to a recent swing low around 250c. The most appealing thing about sharp selloff is that it has pushed the RSI into sharply oversold territory and there appears to some support around this region – although stronger support exists towards 200c. In order to be a buyer from a technical standpoint, we would probably want to see a further bounce from the 250c level, perhaps back up through 275c, in order to confirm the bounce. BROKER STUFF Macquarie the only broker with a recommendation back in August last year. An improving operating cash flow the takeaway from an announcement regarding sales of its NovaSorb BTM. The broker considered it well positioned to increase market share, with expansion into new geographies presenting additional upside. Target price implying downside of 3.8%. The company has had a few updates since Macquarie’s commentary so its target is likely a bit dated. Not to mention a significant change to the investment landscape given vaccine, US election and stimulus influences. TOP INVESTORS Nothing exciting to take away from the top investors. Will be interesting to see if there are any bargain hunters given the recent share price weakness. SHORTING Short interest just below 3% is not something to shrug off, although, it is much better than the near 7% shorted back in October last year. The small pickup through the start of January likely driven by the first-half sales numbers. CONCLUSION There is no denying PNV has been a success story. The last two years have seen the share price skyrocket. It’s pathway forward, however, appears much more opaque than previous years. Not surprisingly, COVID has made it difficult to expand and attract new customers. With results coming up in February, PNV hasn’t set itself up well to surprise to the upside. A weak technical picture, negative price reaction to its recent half-year sales update and little direction from the broking front not selling the success of the last couple of years. For those who think there might be value at these levels, it would be prudent to wait until the results reaction next month before making a decision. Until then, we would want to see a bounce from the 250c level perhaps back up through 275c to confirm a more attractive technical picture before taking a bullish view.