On Monday this week, wound care company Polynovo (ASX: PNV) released its H1 FY 2025 results to the market, boasting revenue growth of 22.8% to $59.9m and a profit after tax of $3.3m (before the impact of currency changes). Unfortunately for shareholders such as myself, this profit result fell well short of what some broker analysts were expecting. After the results were released, some analysts made large downgrades to their FY 2025 profit forecasts.
For example, Bell Potter reduced their full-year profit estimate from $11.9m to $6.3m and Wilsons reduced theirs from $11.43m to $6.75m. As broker downgrades hit inboxes around Australia, the PolyNovo share price plunged more than 30% from around $2 prior to the results to below $1.50 as I write today. On top of that, we can now see that short sellers had become very active in the stock just prior to these results, suggesting that they correctly bet that the Polynovo earnings announcement would disappoint shareholders.
On the earnings conference call, Polynovo CEO Swami Raote made it clear that Polynovo is more focussed on revenue growth than profit growth at the moment. As a result, you could argue that this first half revenue growth was a little bit on the disappointing side. However, a large part of the declining revenue growth has to do with the lower revenue growth from the company’s contract with the Biomedical Advanced Research and Development Authority (BARDA) in the USA. If you consider sales of product (and not BARDA revenue), then the company achieved “Record 1H FY25 sales of A$54.1m up 28.1% on STLY of A$42.2m.”
Generally speaking, we would be pretty impressed by a company growing organic sales by 28% per year, and indeed, it is somewhat of a funny feeling to see the share price crash on such a result. But it just goes to show that in the short term, markets compare results to expectations and react accordingly. In terms of my own expectations, this result showed weaker revenue growth than I had hoped for but seems to show a fairly healthy increase in profit, in my view. This is consistent with my view that Polynovo can achieve very long-term revenue growth and improve net profit margins over time.
The worst part of the report was definitely the free cash burn of $21 million, which might be one of the key reasons the share price plunged after the results. At the end of the half, Polynovo had just over $30m of cash remaining, so these results definitely raised the spectre of a potential capital raising. That often weighs on a share price, since it disincentivises buyers who think they might be able to buy discounted shares in the future.
On the Polynovo results conference call, the Polynovo CEO Swami Roate said:
“We ended the period with $30.5 million cash on hand. The ending cash on hand is lower than expected, but this is due to slower U.S. customer payments in the second half, particularly between September and sort of November. This improved significantly in December, where we achieved positive cash flow from operations in that month, and we’re seeing an increasing rate of collections from the U.S. customers since then. And in regards to capital expenditure of $5.1 million, we commenced construction of our new manufacturing facility and new innovation center for research and development activities in Port Melbourne, which is exciting to see the progress there.“
Now, I’m not for a moment suggesting that investors should ignore this extraordinary cash burn, but I do believe the CEO when he says it is extraordinary. We should therefore see cashflow improve next half.
Good News In The H1 FY 2025 Polynovo Results
While the numbers underwhelmed, the CEO believes there are years of solid growth ahead. He said the said “it will be a multiyear journey for us in the US,” and “this is a multiyear growth
story in the making,” and “PolyNovo is a multiyear growth story,” and ended the call by saying, “I just want to reemphasize that PolyNovo and NovoSorb are a multiyear growth story.” One of the main reasons Roate believes in this multiyear story is the increasing traction of the company’s newer Novosorb MTX product, which is allowing the company to expand its addressable market beyond that addressed by its original Novosorb BTM product.
On the subject of Novosorb MTX, Roate mentioned that “if we do our job well, connecting a recognized clinical need with surgeons, we expect MTX as a platform to outpace BTM in the next 3 to 5 years.” You can see from this H1 FY 2025 results presentation slide that this would imply that total revenue would at least double.
In terms of its impact on the patients — the ultimate end users of Polynovo products — Polynovo actually had a great half with the number of patients up 72% compared to the prior corresponding period.
While this doesn’t translate directly into profit, it does show how the Novosorb technology is experiencing strong growth. This is consistent with medical professionals holding the opinion that the product delivers superior clinical outcomes; a key driver of the long-term demand growth that we must see if the investment thesis is to prove true.
Conclusion
When I first explained why I like Polynovo, I concluded that “all the evidence I can find suggests it is a great product. So that is why I like Polynovo.” This remains true after these results, and you could argue that the valuation is now more attractive.
While I did buy some more shares on the day the results were released, I still only have a small amount of my portfolio allocated to this stock because the popularity of the stock could mean that we see further downside to sentiment if short-term expectations are disappointed. Furthermore, it is possible that the company could be impacted by tariff policies in the USA.\, and this risk may already be impacting the share price.
Despite the fact I am currently sitting on a loss, my interest in owning the stock over the long term is not really reduced by this set of somewhat underwhelming results. My view is that there is no doubt that management are currently neglecting the profit line in favour of driving growth, but that in the medium or long term the business will be able to both drive sustained revenue growth and increase profit margins.
I continue to like Polynovo for the simple reason that it seems to have a great product, and I note the CEO mentioned that “The ability to change the mortality metric in India continues to drive the India team,” indicating that Polynovo’s drive for growth is having positive impacts on humanity. Since Polynovo is a profitable growing company with strong organic growth, I am currently willing to take a risk on the stock. However, it is very important to me that I see much improved free cashflow in the next half, because if the company were to need to raise further capital, it could have a significant dilutive impact on future returns.
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Disclosure: The author of this article owns shares in PNV and will not trade PNV shares for at least 2 days following the publication of this article. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Ethical Investment Advisers Pty Ltd (ABN 26108175819) (AFSL 343937).