PolyNovo Limited (PNV) Earnings Call Transcript & Summary

Welcome to PolyNovo's half year results presentation. Today, we have presenting, Chairman, David Williams; Managing Director, Paul Brennan; and CFO, Jan Gielen. [Operator Instructions] I would now like to hand you over to Chairman David Williams. Please go ahead.

Thank you, and welcome, everybody, to this call. I don't propose to say too much. I'm going to hand it over to Paul Brennan and Jan Gielen, but we have just come from a Board Meeting, and I thought it might be helpful just to reflect on the progress of the company, the way I see it. As you saw, our growth in the first half in terms of sales was only 31%. I've said ad infinitum that the business is lumpy. And interestingly, while we had a soft October, November, sales in December, for example, in the U.S. were above budget. So I'm not going to sit here and say that COVID is a problem. It's got small issues for us in terms of access to one-and-one meetings with surgeons. It's got small issues for us in terms of hiring new staff in the U.S. But at the same time, we can go from a soft month to an above-budget month in a heartbeat. And at the same time, I've got a super confident head of the U.S. who's very happy with his forecast and with his trajectory. In this half, we've picked up 22 new clients in the U.S. alone. We're now servicing over 100 hospitals in the U.S. And in recent months, we've also signed up several GPOs, group purchasing organizations, and that looks like it's going to bear some fruit for us very quickly in the next couple of months. So even when I look at today compared with our 31% BTM sales year-on-year, it's now over 40%. And as I said, our head of the U.S., in particular, is very confident about where he's going and where his trajectory is. We've now got 22 sales staff in the U.S. A lot of those have only recently come on so we're not seeing the full belt of that either. But it's not all U.S. It's -- if you think about what's happened -- and Paul will go through some detail of this. But since September last year, we've signed up distribution arrangements in Finland, Taiwan, Benelux and so forth, Turkey, Poland, Italy. All of those have happened since September, and many of them were in January, Turkey, Poland. February for Italy, for example. And already, we're starting to see some fruit come out of that. So in Benelux alone, where we didn't sign until -- into November, we've had 4 patients. In Finland, we've had 12 and so forth. So as the year progresses, those sales are going to trick up. And will we get to double our sales on last year? Who knows? But the business is growing strongly, and we continue to pick up new hospitals around the world. I've given the example recently of Germany, which is going particularly well, where we've got 30 hospitals we're servicing. And we've got another 30 hospitals trialing the product. And as I've said before, I haven't seen it yet, where a surgeon trials a product and then doesn't buy the product. So quite rightly, they want to put it on a wound. They know about it. But they want to see how it comes out, and that's a 2, 3, 4 months process depending on what they want to see out of a particular operation. But I'm pretty happy with the way it's going. I wish the sales weren't as lumpy. But as the business grows, a lot of that lumpiness will come out of the business. So I think that's probably enough from me. I think the price, it is what it is. I keep saying to people when we did the AGM in November, I think our share price was $2.20 and then went all the way up to $4, and now we're back roughly probably where we were. I would point out to those of you a bit more sophisticated that the shorts in the market at that stage were 7.5% and went down to 1.5%. So a lot -- I look at a lot of that action as being people covering themselves. And I look at a lot of the action now, where the shorts look like they've come back down to -- back up to 4.5% as driving some of the downside. But I'm very happy with the progress of the company. Surgeons love it. We love it. It's a bit volatile. But if you look at the trajectory over the last 2 years, it's -- there's only one direction. Welcome, everybody. I'd like to introduce you now to Paul Brennan. I'll probably put Paul and Jan Gielen, our CFO, on the screen at the same time and let them talk to the presentation that we put up on the ASX this morning.

Good morning, everybody, and thank you for joining us today. Both Jan and I will take questions, and both of us will be presenting different parts of the deck. If we start up on Slide 2, next slide. This is just giving the highlight numbers as a top line. And as David has covered, we've had the increase of 31.2% in overall notes of BTM sale. But the pleasing thing, in U.S. dollars, so without any currency impacts. We've seen the U.S. increase 41% in the first half, and that's where several challenges in the variability of the states in their response to COVID. So the U.S. is not one market. It's 50 individual markets in effect, and they all behave slightly differently to the challenges. Overall for the group, the pleasing thing also is the decrease in outflow of sort of net cash for the profitability and really tracing our breakeven line, which Jan will speak to a little bit later. The research and development expenditure, $1.28 million during the quarter. It's reflective of most of the investment going on in transferring the hernia devices into a production-ready phase. Capital expenditure is coming to a close, if you like, with the factory build. We've spent $2.3 million in the first half. And that's now in the remaining period, and it has $1.3 million of commitments. And cash on hand is $7.6 million. So when we get to Jan's slides, you'll see the [ applying ] of cash, that, that $7.6 million is fine by us. We've got good cash and good revenue projections in the months ahead. So if we go to Slide 3. We've signed 22 new accounts in the U.S. during this COVID challenge of the first half. And sales in Germany, as David has alluded to, in the DACH region, 30 accounts with another 30 evaluations in progress. The really pleasing thing is that's a very wide clinical indication use uptake that we're seeing in the DACH region. So that is turning into relatively consistent revenue for us from our partner, PMI. We've had very strong webinar referral program. And that's bringing new accounts and increasing the credibility. The BAPRAS, which is the British Association of Plastic Surgeons, conference held recently was classed almost embarrassingly as a NovoSorb BTM show. And there are surgeons from the U.S., Germany, Australia and the U.K. all presenting their cases of BTM. So very strong peer-to-peer referral. The first 2 GPOs and IDN started in the U.S., and we've got further agreements in process at the moment. So we'll have some announcements coming through in the coming months. The GPOs, general purchasing organizations, have groups of hospitals within the purchasing group. So that will give us a faster route to market and a smoother process for inventory management within those groups. Dr. Anthony Kaye joined us as COO from CSL, and Anthony brings enormous production and R&D and engineering experience to the business. And he's already had a significant impact on our hernia program and the quality of the ultrasonic welding. And I think it really stepped up since Anthony has come into the business and added his expertise to the team. The hernia factory build is going well. And there's been some commissioning delays in some of the machines, but we managed to overcome this with video links to our German suppliers of those machines and -- for them to custom-make some cabling to enable dual control of those machines through the Internet. So we were able to commission them. So really good effort on our team, and thank you to all of our staff in R&D and production who were very creative and tolerant through this process. We have the U.S. FDA approve our pivotal trial, which is for the BARDA trial, and that now means that we can begin recruitment of patients in the program. And we also have BARDA committing USD 15 million to support us in that program itself. And we'll now go to the next slide. With our distributors, as David alluded to, we've continued our expansion throughout Europe. We sell direct in the U.K. and Ireland -- the Republic of Ireland. And we use distributors in Finland, Taiwan, Belgium, Netherlands, Luxembourg and Greece. So to achieve that in that first half, our business development manager, who's based in the U.K., has been doing a fantastic job. And we've got some excellent distribution partners, and he's done the training and induction of these companies into how to sell BTM and that looks like it's going to be a good business for us. And [indiscernible] Turkey, Poland and Italy since January, and there will be further countries added to that before the close of this financial year. If we go to the next slide. Just wanted to highlight some of the creativity and digital processes. So Australians on the line, you'll know that we can't travel to New Zealand. And Valerie Young, who's our sales manager, is also the territory manager for New Zealand. So she had a life-size cutout made there, and she had a conferencing system put there and she attended that conference virtually and spoke to many surgeons during that conference session and opened a couple of new accounts post the conference. So we're very creative in how we sort of get ourselves around and how we involve ourselves with our customers. I'll go to the next slide. So revenue has been lumpy, and that's been the reality, that hospitals had varying levels of activity in elective surgery and bed access. So it's been a very strange world for all of us to live in. And for those in hospitals, it's much more stressful than anything that any of us on the outside experience. So I think on the sum of it, we've done very well through about a very challenging period. For logistics, we've had some increasing costs in finding bellies of planes to ship things in and scheduling challenges. However, we've got significant inventory in all of our holding warehouses in all regions. And Catherina and her team in logistics have done an outstanding job of staying on top of not only the production, which is excellent and very efficient, but also in getting into the markets. But the markets themselves, it's been highly variable with how they've treated the lockdown. But suffice to say, within all regions, we've been opening new accounts. And these new accounts mean that as the elective surgery backlog needs to be cleared, we should see a corresponding rise in demand for NovoSorb BTM. So the outlook for us, I think, looks quite strong. And the vaccine rollout globally is accelerating, with the U.K. already at nearly 15 million people and having announced this morning a 4-stage exit plan in 5-week blocks for the U.K. So our U.K. team are very excited because they've already signed 9 NHSs and doing evaluations in several others. So the demand and knowledge of NovoSorb BTM, as I was referring to the BAPRAS conference, is quite strong. So we should see a good uptake in BTM in all of our markets. The next -- and on the side of that slide, you'll see webinars that have been run. And they can be viewed retrospectively on our website under the healthcare professional term. We'll go to the next slide. For the BARDA program, we've had the IDE approved. And there was a bit of a delay in the FDA processing that because they had their own COVID challenges as well. But we've now had the vendor kickoff meeting, which is all of our contractors and suppliers running this program. And we'll be in a position to recruit patients into this trial in March, April. And one of the things that's quite exciting about this program is it's going to be done in Canada as well as the U.S. We'll have between 20 and 25 sites involved in the program, and we'll be making announcements as soon as we get the first patient recruited. And we're judging NovoSorb BTM against what's called the standard of care. So whatever that institution uses within that facility to treat a full-thickness burn is what BTM will be compared to within that facility, and then the aggregate rolled up to give a comparison of NovoSorb BTM's performance, which I'm sure given our commercial success and everything we see from our surgeons, it'll be a very positive outcome for the trial. Next slide. For our employees, we're now at 92 when we had -- June 30, we had 78. So you can see that we're not going slow on the recruitment of talent into the business. And roles such as Anthony's as COO is important to us. We're actively recruiting at the moment for a head of R&D. So that once we've got that head, we can bring in more outsiders underneath. There are ads out there at the moment for the development scientists. We're pleased that we've -- as of a couple of days ago, contracted with a marketer, who will be joining on that global capacity to help with product development to make sure that we're incorporating the patient and surgeon needs within those development programs. For the U.S., we continue to expand that. We're actually at 22 sales managers at the moment. And 4 regional sales managers. We're making further investments. And as we find talent, we'll be constantly bringing them into the business in line with driving revenue opportunities. For Australia and New Zealand, that's been quite challenging with some of the border closures, but you've seen how creative we've been. So as the vaccine now rolls out in Australia, I'm hoping that the border closures might leave -- be left behind, and our team can be more mobile and more face-to-face with their customers. For the U.K. and Ireland, we have 4 sales people in place there, and we'll hold that level of staffing until COVID restrictions have eased and we see some revenue bump. Next slide. For the factory, we thought you might appreciate some photos of what this new factory looks like as shareholders effectively purchased. So we're quite excited that the film extrusion process is well and truly understood by us now and the area that those machines will go in will be finished by the end of March '21. We've been extruding film at Universal Biosensors at Scoresby, been renting some space from them. And that's been fantastic for us to get our skills and talent at such speed before the factory was ready. And we'll bring those machines in the house and install them here at Port Melbourne by May. We're already building the finished product to begin all the laboratory and animal study work required for building the regulatory dossier. So we're quite excited about our achievements in this space. In the forward commitment, we've got some $1.3 million of outstanding capital required. And one of the items of note is a packaging machine, which is a final payment. And we're looking forward to that packaging machine. It's been significantly delayed in its build in the U.K. because of COVID. And when we get that, that will also have significant efficiency improvements for us in our BTM space for packaging. Next slide. So for all of our inventory in the warehouses, we have plenty of inventory in all warehouses. So we can supply any customer very quickly, and we've got no problems in our supply chain. We've got plenty of raw materials. We've got plenty of stock. So we're in a very healthy position. Next slide. Just to take you through this, but I'll hand over now to Jan Gielen, and I'll rejoin you with the new products at the end. Over to you, Jan.

Great. Thanks, Paul. So just running through our financial results for the half. As mentioned, BTM product sales were up 31% for the half. Total sales coming in at $11.25 million versus last year's $8.6 million. Total revenue...

Next slide.

Next slide. Thank you. So total revenue coming in at $12.8 million. That includes $1.3 million of partner sales. Some other highlights. We had really strong sales in Q1. So the first quarter was up 75% on the same time last year. Things slowed down a little bit in October and November, as Paul mentioned, but all COVID-related with restricted access to hospitals and surgeons, and we did see a reduction in elective surgery. But again, that came back strongly again in December, where we actually exceeded budget in the U.S., New Zealand and Taiwan, which was really pleasing. Looking at other markets and growth overall. So in the first half, we opened 35 new accounts across all our direct markets. Quite a few of those in the U.S., followed by Australia and then the U.K. And important to just to look at how we performed in the calendar year during a pandemic, we actually managed to open 109 new accounts, which is nearly double what we did in the prior year. So it's great platform growth and obviously, good stead for the year ahead. Looking at the U.S.A. They're local sales in local currency over there. We've obviously had a depreciation of the U.S. dollar against the Australian dollar. So looking at their sales for the half, they're actually up 41% on the same time last year, which is better than the 31% overall. Moving on to distributors. So as David mentioned at the start of the call, really strong sales in the DACH region to our distributor PMI. It's very -- been very pleasing. We've entered new markets in Greece, Benelux, Sweden, Finland and Taiwan, and some of those with initial stocking orders and also a number of evaluations underway. The U.K. is continuing to build on its customer base despite being in lockdown. We do have further evaluations underway. And we're also pleased to say that we've had our first evaluation performed in Ireland, which is great. Next slide, please. So moving on to our operating loss and OpEx. So you can see from the graph there, our operating loss is down 78.9% on the same time last year. I've excluded noncash items in this just to give a true underlying view of what the operating loss is. The reason why it's getting to that point, which is good to see, we obviously have revenue growth. We've had gross margin improvement of 3.9%, which is great to see year-on-year. And cost management has been minimized. We're actually below budget with our OpEx for the half. In terms of profitability, the U.S. and New Zealand are actually profitable on a stand-alone basis. And you can see from the graph there from an operating perspective, we're actually close to breakeven for the half. In terms of OpEx. OpEx was up 19.8%, but the major driver of that is the increase in head count from 65 staff to 91, so increasing by 40%. And obviously, you get that annualized effect of prior period hires coming through. But all this is planned and was expected so -- but what's also pleasing to see is the corporate admin costs have remained fairly low in terms of the growth only coming up 3.4% compared to the same time last year. So obviously, as we expand our costs in entering new markets and regional operations are setting up in Ireland, we'll continue to invest in growth and monitor our cash flow and OpEx accordingly. Next slide, please. So moving on to cash and cash flow. As you can see, we ended the period there with $7.7 million cash on hand. Our cash burn for the half was negative $1.4 million. But the trend has improved to the same time last year for the reasons I just pointed out on the previous slide. In terms of CapEx, Paul has mentioned about stage 2, which is the last stage of the hernia cleanroom build, it'll be completed by 31st of May, and that's on track. We've got all our equipment on hand. It's just the packaging machine, which will arrive soon, and then that will be complete in terms of equipment CapEx. And I'll put in a forecast there for the half -- second half of $1.5 million. And that will be met by a NAB facility as well. So that's covered. Next slide, please, operator. Let's move on to our P&L and just looking at some highlights. And what I have done at the bottom of the P&L there is just adjust it so you could see the underlying loss and backed out the noncash items and share-based payments, which is expensing share options and also the unrealized ForEx loss for the period just from depreciation of the U.S. dollar against the Australian dollar. So going to the highlights. As mentioned, product sales, 31%. BARDA revenue, up 25%. Product sales gross margin, up 3.9%. So we enjoy a very high gross margin. Employee expenses are up 33% -- 32.6% but -- for reasons we know, increased head count. The R&D spend has been down, but that's mainly due to activity with the BARDA trial switching from a feasibility and transitioning to a pivotal trial. So that will increase as the pivotal trial starts to recruit patients. Corporate and admin overhead, up 3.4%. And the loss in the period after tax, negative $3.5 million. And our underlying loss, and I went back to the breakeven comment earlier, only just under $1 million for the half. Next slide, please. So just wrapping up the finance section. Product sales, again, 31%. We've entered new markets successfully. As Paul indicated, 109 new accounts during a pandemic, 89% growth. So a great effort from our sales team. Improved margin. Underlying loss near breakeven. We ended the period with cash on hand of $7.7 million, which we feel is enough to get through and execute our plans. And we have a net NAB debt facility of $1.5 million. So a bit of headroom there, and that will cover the CapEx for the first half. Next year will be a CapEx-light year with everything in place by 30 June and paid for. So thank you. And thanks, Paul, back to you.

Thanks, Jan. That's excellent. Next slide, please. And the next one. So Syntrel is the name of our hernia device and so we thought we'd give you a bit of an update of the -- any progress where we're at. And there's a picture there, the actual finished device that you can see ultrasonically welded the foam together. That might sound very straightforward. Technically, that's quite an achievement. Our R&D team have been fantastic at being able to achieve this, and many in our production team have brought many of their skills to the table literally. So we're now commercially production ready, making this device. And we also got the opportunity to look at some partnership opportunities to see that accelerated path to market and accelerated penetration. That's too early to get into any detail there. As always, our role is to look at the products we've got and maybe some variations of it and look at how we can generate revenues quickly. So we'll make some further announcements on hernia by July of '21. Next slide. NovoSorb BTM, we've got some additional sizes there. The packaging is really what we need to move forward with this project. So that's arriving and on track. For the SynPath product for the chronic wound space in the U.S., diabetic foot ulcers, venous leg ulcers, we're now open for recruitment for this trial, and we should have some announcements very shortly about the first patient enrolled. And that's a 2-year study to build the economic data for private health reimbursement of the product. Just want to emphasize, it is not a U.S. FDA requirement. It's purely a commercial requirement for the reimbursements. And we'll launch into that market segment as soon as we have our reimbursement from those insurers. NovoSorb, other products. The plastic and reconstructive device effectively is a breast device. But for technical and regulatory points of view, we'll be calling it plastic and reconstruction. And we've made that development in-house and employed a dedicated marketer to help build the product specifications and requirements, and we're recruiting some additional scientists. So we anticipate that it'll be a 3-year-plus development path. Just caution you that with all these things, there are a lot of unknowns as you're developing products and so we'll have a more [ targeted ] plan further into this process. The beta cell diabetes treatment, the Beta Cell Group, with Toby Coates in Adelaide. I still say they're on track for doing a human trial in 2021. So we're just standing by waiting for that. Our role will be to supply NovoSorb BTM. And the longer term is that this would be another market segment, the sales of BTM, albeit unique shapes and sizes into that segment. So that's another exciting opportunity for market expansion. Next slide. Just for the H2 activities, just want to caution, as David has highlighted already, that we do anticipate sales will be lumpy. But there is significant pent-up demand within the hospital networks now globally as elective surgeries resume so we should see that flow-through in demand. We'll continue to expand our R&D team and our product development pipeline. Should have our first patient enrolled in the pivotal trial in March, April. And we'll have the patients in the recruitment for the chronic wound study, and we'll have further market entries into Europe and the Middle East. And that concludes the sort of formal presentation part. And now I'll hand back to the moderator to take questions from the analysts.

[Operator Instructions] Your first question comes from Lyanne Harrison with Bank of America.

Can we talk a little bit in terms of, I guess, the expectations for the second half of '21? I know it's uncertain times because of COVID. And I know that previously, you've been reluctant to talk about month-on-month trends. But given, I guess, the circumstances that you mentioned, first half '21, the United States saw significant improvement there, but then slower October, November and then returning again December. Can you provide some color on what you're seeing for January and February?

Well, I don't want to get into the cycle. As soon as I answer this question, Lyanne, you and others will be asking me each month what the sales were like this month. So on the agreement that it doesn't degenerate into that as [indiscernible]. And as we said, it was very good. January still showed some good performance. And from what we hear in the U.S. at the moment, things are looking reasonable for February. I'm only hesitant on saying anything conclusive on February because the month is not closed. And the last week of each month is when a significant number of purchase orders come through in the administrative processes of hospitals. So I don't want to crow about things that aren't invoiced and banked, but suffice to say that the team activity and what we're hearing on the ground sounds quite positive.

Okay. And if I could ask probably in a different way about -- with the caseload easing, particularly in the United States and the vaccine being rolled out. How is PolyNovo placed to, I guess, ramp up its sales activity in the United States for the second half of financial '21?

Well, we've got sales representatives in a wide spread of geographies and compared to pre-COVID, in many more geographies we had -- before we went into this lockdown. We've been doing significant amount of webinars and peer-to-peer engagements. And you can see that we've signed many new accounts in the past calendar year. And just in the first half, 22 new accounts, plus we've signed GPOs. So I think if you connect all those dots, it's looking positive from where I sit in PolyNovo's preparedness to be able to service the demand in the market. We've got significant inventories sitting in Kentucky so no problems or downsides from my perspective.

Okay. And since you mentioned new customer accounts, am I right -- because you mentioned 35 new accounts for first half '21 and 109 for calendar year '20. Is that like-for-like, showing that first half of '21 was significantly lower?

It is like-for-like. It represents the growth over the prior year. The 109 is 89% greater than the prior calendar year.

Yes. Okay. And then if I could talk about the United States in particular, I guess, the new -- 22 new customer accounts that you signed up in first half '21. Can you talk a bit more about the extent of penetration you've got in different tranches of hospital types, obviously, burn hospitals, large general hospitals and then now as you're working through the GPOs?

Well, there are a wide variety of hospitals, Lyanne. Hospital -- we only target large hospitals. We're not out after the small rural type settings. So the penetration within all of those hospitals is variable depending on the maturity of that account. So whenever you gain entry into, say, a new hospital, you'll be in either through trauma, plastics or burns. And whichever one of those tentacles is your way in, then as a salesperson, you're tasked with growing all the other departments, orthopedics, general surgery and the rest. So depending how long the reps have been in those accounts and the networks they've established, then there'll be a variable depth of penetration. So there's no one answer to give, there's x percent penetration in the accounts. It's territory by territory. But each of those salespeople in their territories have specific goals and targets based on penetration and dollars to achieve. And they're judged and mentored and coached around those numbers weekly by their sales directors.

Okay. And I guess, just one final question. In terms of your new products to market, particularly the alternate sizes for BTM, what's the time frame on that?

Well, we haven't got it hard and fast because it's going to depend on the different markets. For the U.S., for example, as soon as I've got that packaging machine, we can roll out our different sizes as we can here in Australia and Europe. And that filing for the 510(k) covers everything from 4 square centimeters to 800 square centimeters. So we can make any size we like within that. The thing that you need to build into that is that we've got the stability testing accelerated, oven testing if you like, of the packaging. So that takes a couple of months. So we'd be looking at, at least another 4 to 5 months before we roll out those sizes. We had stability testing for the QA system because you've already got your regulatory approval that -- these regulatory approvals are on the condition that if at any point you get audited, you have that data. So you morally, ethically and commercially should not be out there selling a product until you've generated all your data. So there are some normal quality processes that you've got to complete, and we'll be doing those diligently.

Okay. So if we're thinking about first revenues from those new sizes to come through in first half '22, that would be reasonable to factor that in?

That would be reasonable.

Your next question comes from Rachael Harwood with Macquarie.