Polynovo: Market Appears Overly Optimistic; Initiating With Fair Value Estimate of AUD 1.00

We initiate coverage on Polynovo PNV with a fair value estimate of AUD 1.00 and with shares currently appearing overvalued, trading at a 26% premium. We suspect the market is likely too optimistic on the speed and extent of Polynovo’s commercial rollout and is underestimating competitive pressures. We think the market is also overly excited about potential new indications of Polynovo’s NovoSorb technology. While broader indications including hernia repair and breast augmentation and reconstruction are being considered and would expand Polynovo’s addressable market, these are still very early in the development phase. Our Uncertainty Rating for Polynovo is Very High, and we assign a Standard Capital Allocation rating.

Polynovo’s main product, NovoSorb BTM, is a patented biodegradable synthetic scaffold to support the regeneration of the dermis when lost through surgery, trauma, burns, or other causes of tissue loss. Polynovo’s current strategy revolves around increasing its sales staff, expanding its geographical footprint, and exploring new uses for its NovoSorb technology beyond the dermal substitute market. With its geographical reach, the firm estimates its products are available to 800 million people as of fiscal 2023, but highlights that the global market is underserved.

We do not award Polynovo an economic moat given low switching costs for clinicians to adopt competing products and concerns over the durability of intangibles related to NovoSorb. We think Polynovo will have little to defend its position when faced with stronger competition in the coming decade, particularly when its key patents expire in fiscal 2028. Financial success in medical devices is also dependent on distribution networks, hospital relationships, brands, and marketing expertise that larger competitors may already have and can utilize more effectively.