Haemonetics Corporation (HAE) Earnings Call Transcript & Summary

Well, good morning, everyone, and welcome to day 2 of the Morgan Stanley Healthcare Conference 2020. My name is David Lewis, medical device analyst at Morgan Stanley. It's my pleasure to start off this morning with Haemonetics. As many of you know, Haemonetics, under the leadership of Chris Simon in these last few years, has really gone through a significant transformation from both a growth technology and cost perspective. We're going to talk about some of that this morning. And then there's been some recent debates on Haemonetics we're also going to focus on as well. Before we begin, as I've said time and time again, please go to the Morgan Stanley website under Research Disclosures, morganstaley.com/researchdisclosures to see all of my disclosures. And with that, we're going to get right into it with Chris this morning.

So Chris, I want to start sort of with the key debate of the hour. We've talked about COVID-19 recovery across all of our corporates so far in day 1. Your business is a little different admittedly, but I want to give you the opportunity as we talk about the dynamics of COVID recovery. You said plasma volumes were down 25% or 30%. A lot of companies saw recovery. It wasn't clear based on your last quarter, whether or not the company had seen recovery. Can you maybe talk to us about what you're seeing in the channel? We heard from Grifols yesterday. They are talking more about recovery suggesting that maybe collections are down more like 10% now versus a trough that could be 25% to 30%. So broad open-ended questions. So far COVID-19 recovery, what have you seen here in the intermediate term these last few months?

David, thanks for the time today. Delighted to be here talking with you and your investor base. Brief disclaimer upfront. Please be aware, as I know you are, that statements made today may be considered forward-looking. And refer to SEC filings that discuss risks and uncertainties that could cause results to differ from those that are projected here today. But so as it pertains to plasma collection, as you point out, it differs meaningfully from many other medical device segments, including our own hospital business. Volumes are not tied to hospital access or procedures. And for our own hospital business, it hit its trough back in April and then began a meaningful recovery through May and June, consistent with what you see in other med tech segments. So conversely, plasma collection stayed low because of the dynamics impacting collection center and donors. And there's a lot of noise in daily, weekly and even monthly collection trend data. So we don't think it's necessarily predictive in this current environment. And instead, we strive to look at structural, attitudinal and meaningful customer factors to forecast the recovery. And if I might, let me just touch upon a few of those. Structurally, donor traffic, particularly along the Mexico border, remains limited. And newly opened centers across the country continue to struggle to build donor loyalty in this environment. Many, but certainly not all, college students have returned to campus. And public transportation in most cities is running, albeit with reduced service and significantly reduced ridership. All the centers have now adapted to social distancing. And it's not currently a rate-limiting factor, although we clearly watch that going forward. I think in parallel is the attitudinal issues. And don't want to lose sight of the reality that COVID-19 hit our donor population communities disproportionately hard, heightening concerns about safety and risk. Concurrently, right, we -- many would-be donors received federal stimulus. And now COVID case counts appear to be falling in the hardest-hit areas, federal stimulus checks and unemployment benefits are hung up in Congress. So the donor attitudes appear to be shifting and we're watching that closely. I think the third dynamic is with our customers. Fractionators now have an opportunity to better understand the root drivers and take targeted action to encourage donors to return to their collection centers. What's really important through all of this is the end market demand for plasma-based pharmaceuticals has not changed due to the pandemic, in fact, if anything, it's increased. And our customers are acutely aware of this. They've stated repeatedly that they do not intend to incur drug shortages. So we fully expect collection volumes will rebound and go, in fact, beyond pre-pandemic levels. They must enable -- in order to enable our customers to rebuild their inventories and build back and replenish their safety stocks. So the big question is timing and extent. And that has everything to do with the confluence of these factors. And we're watching carefully and doing our part to help where we can. We'll be prepared to talk more explicitly about results in the second quarter earnings call.

Okay. But there's no reason to believe, Chris. If Grifols is seeing some improvement in collection volumes, at some point, you have to be a derivative to that. So if they're seeing an improvement, it seems to be -- it's rational that you have seen some type of month-over-month improvement.

Yes. Again, we don't talk about individual customers, there are always puts and takes. As I said, it's a major factor. Our customer response to this. There are clearly regional and local differences that play out in terms of COVID hotspots previously, for example, but the interplay of structure and the donor attitude and the plasma fractionator response, we look at as cautiously optimistic that volumes will build as we appropriately address COVID factors.

Have you seen -- not speaking on specific customers, but fractionators in general, you have seen them take action either an either -- it could be promotional activity, it could be donor fee activity, but you have seen a proactive response from fractionators to get collections up. Has that begun?

Yes, absolutely. Our customers are taking a variety of actions. I won't comment on the specifics, but what we are seeing is they've reconfigured, they've instituted new safety protocols. I feel quite confident in the assertion that these collection centers present a very safe environment for our donors. And we now see the companies coming forward with meaningful advertising campaigns, et cetera. We developed something called the Donor 360 app, which we've made available regardless to the entire industry, which will help safely facilitate donor track through the centers, it allows the donor to go online remote and complete their medical survey and then they can work on queuing capability that allows them to wait outside the center at a safe distance for their appointed time. So I think there's a bunch of good things going on that really will lay the foundation for the eventual success here.

Okay. And you said look, near-term maybe environment is recovering, but it still remains sort of choppy by region. But one of your companies or one of your fractionator customers has said is we think collection volumes could be up 30% next year if you just do some comp-adjusted math, it sort of implies that they expect to get back to that underlying 8% to 10% like plasma growth in a year. And that sort -- it supported what you're saying is that short term will evolve, although we have every confidence the business gets back to normal in the intermediate term. Just kind of confirm me, is a year from now, in your mind, a fair estimate to when this business can get back to that trend we'd expected, which is 8% to 10%?

Again, we feel very confident in 8% to 10% as a long-term forecast for IG demand in the market and our ability to deliver against that. I think there's a series of good things going on. It really comes back to the progress against the COVID and the pandemic. We're not going to guide for '22. We haven't provided guidance for '21 and given the confidence factors here. But I will say that the back-of-the-envelope math is not wrong in order to return to high single or low double-digit growth, you would need to see about 30% improvement off of what we put forth in the first quarter. So in that regard, it's directionally correct for sure.

Okay. Do you think it's too soon this [ quarter, Chris, for M&As ] to guide for the year? Is that likely to be too soon? Or is it a possibility?

We're going to watch the trends carefully. I do get nervous about the vagaries. When you think about these attitudinal factors, August was really the first month where we had no additional stimulus in the market and that cleared the way for our customers to respond more directly to donor attitudes. And I think we're watching and waiting. And as we see that play out, there's a set of externalities that could factor in here. But from our vantage point, it feels like there's been meaningful progress. And we'll continue to observe and see how it plays out. But it's too early to call. Again, we strongly desire to be transparent and will be wherever we can. I don't want to try to be certain about things that are inherently uncertain.

Yes. Look, the stimulus is sort of resolving a little bit. It sounds like that's had an impact in August, fractionators are taking efforts as well. You talked about this fear factor, Chris? We've heard this due diligence as well on the specific donor population and the fear of COVID. Does that mean that the vaccine, in your mind, is a very important catalyst for your business? Or do you think you could have improvement regardless to the vaccine?

I think we need broad-based control and to date, there are a lot -- more folks more knowledgeable than this -- than I, but the epidemiology of COVID-19 would suggest the vaccine is a major part of getting this under control in a lasting fashion. So yes, that's a -- that is the most powerful lever. Can we do other things? Do we see other things in other markets? Absolutely. For example, and some of our customers have talked explicitly about this in some of our European markets, where the outbreaks have been well controlled for a longer period of time. We do see meaningful improvement in foot traffic back into the centers.

Yes. Okay. So one of the things this has raised is the NexSys technology platform like a lot of clients call me and they say, look, they have a technology that increases utilization, increases plasma per patient if fractionators having trouble getting plasma, why isn't NexSys now sort of front center? So in your minds, I'm kind of curious, why do you think centers or fractionators have not adopted, certain customers have not adopted NexSys that the value proposition is so clear? And how do you think those dynamics change in line of COVID?

Again, look, it's multifactorial. We're in negotiations with all of the customers who have not yet adopted. And I think with greater than 11 million YES collections now yielding in excess of 250,000 incremental leaders of plasma, we're more confident than ever in the 4 pillars of the NexSys value platform, right, yield, cycle time, e-compliance and donor sat continue to be our hallmark. And I think to your point, the pandemic has exacerbated the importance of these, certainly, safety and reliability concerns as inventories windle is an important factor. And so we've taken extra steps to demonstrate both the value prop and our ability to safely and reliably convert centers to NexSys. So the discussion is ongoing and we feel good about the value proposition and the message that that's delivering.

Would you agree with the statement that given the dynamics that are going on inside fractionators adopting NexSys today in immediate term, 1 to 3 months, that's more challenging but over the -- sorry, that's the near term, over the intermediate term, let's say, 6 to 18 months, the value proposition has gone up, so it's hard to adopt NexSys today, but in 6 to 12 months, the rationale for NexSys has gone up fairly dramatically because of COVID?

I think it's probably more true at the outset of the pandemic. I think folks were understandably concerned. You didn't want to, in any way, compromise the safety of the center and then I think as collection volumes diminished, the reliability and the importance of not missing a beat for the donors that we're turning up, became critical, I think we're beyond that. I think we have demonstrated in the midst of the pandemic our ability to safely convert centers and I feel like we asked an answer to that question with demonstrated results in our conversion activity.

Interesting. So the safety issue is answered. They were just out to the dynamic of getting more plasma, which would certainly argue for NexSys conversion, at least in my mind?

Particularly given the yield enhancement and the cycle time, perhaps the most valuable will ultimately be the donor satisfaction, donors like the NexSys platform. It's a more donor and user friendly environment.

Okay. So we all know about the YES technology and sort of the FDA labeling, we've seen some recent data from studies on PPN, right? So it's a different way of sort of calculating these nomograms. How much of a game-changer, Chris, in your mind is sort PPN relative to the YES technology?

So we're really excited about PPN. We think it's, first and foremost, a testament to our team's growing data and analytic capabilities. Brief definition, PPN was essentially a calculation that uses body mass and hematocrit in combination to enable a more tailored collection target for each individual donor, it's very different than the current industry-wide nomogram, which was established back in the early '90s, which is based solely on donor's weight. So you're referring to, David, is the IMPACT study, which we announced back in early August. It's a multicenter perspective, double-blinded randomized controlled trial, 3,400 donors, over 23,000 donations and we compared our NexSys PCS with YES technology to NexSys PCS with PPN enablement on top of it and talked about the results. But we're very excited by it. And I think it's a meaningful advance forward for us and the industry at large.

Sure. So we -- the whole nature of our operator to the stock tiers you gave us tied to some of the YES technology and the value of NexSys. And we thought you could extract some of that value in terms of enhanced pricing. If I think about the potential opportunity of PPN versus YES, it's obviously increased value to the customer, how do you think about the pricing algorithm for customers in line with PPN data and pending approval?

Yes. Our work to date has been focused on the clinical trial and preparing for a successful regulatory submission, which has really been our focus, right? We've put the press release out there to be transparent where we could. It is very early days in our customer discussion. What I would say is they are genuinely excited to learn about safely increasing plasma yields. And again, YES was roughly a 3% improvement. PPN will be 8% additional on top of that or better as we continue to advance the individual nomogram characteristics. So our customers are keen to understand that. And that's where we're really focused. We're not in a position to talk about pricing at this point.