PolarityTE Inc (PTE) 2019 Q4 法說會逐字稿

Good day, and welcome to the PolarityTE, Inc. Fiscal Year 2019 Earnings Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Rich Haerle, Vice President of Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning, and thank you for joining PolarityTE's call to discuss fiscal year 2019 results. I'm Rich Haerle, Vice President of Investor Relations. With me today are members of the executive team, which includes David Seaburg, President; Richard Hague, COO; and Paul Mann, Chief Financial Officer.

Before we begin, I'd like to remind everyone that today's discussion will include statements about the company's future expectations, plans and prospects that constitute forward-looking statements for the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. We caution that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated.

These forward-looking statements are based on our current expectations and may differ materially from actual results due to a variety of factors that are more fully detailed under the caption Risk Factors in our filings with the SEC, including our annual report on Form 10-K for the year ended December 31, 2019, filed with the SEC today. Any forward-looking statements made on this call speak only as of today's date, Thursday, March 12, 2019 (sic) [March 12, 2020], and we disclaim any obligation to update such statements to reflect events or circumstances that occur after today's call, except as required by law.

I'd like to highlight to participants that the call is being recorded. We are making it available to investors and the media via webcast, and a replay will be available on our website in the Investor Relations section shortly following the conclusion of the call. Additionally, it is the property of PolarityTE and any redistribution, retransmission or rebroadcast of the call in any form without PolarityTE's expressed written consent is strictly prohibited.

I would now like to turn the call over to David Seaburg, President.

Thanks, Rich. Good morning, everyone, and thank you all for joining us today. 2019 was a transformative year for PolarityTE, which we believe has positioned the company for an exciting 2020. The executive team remains committed to the 3 strategic priorities we outlined on our third quarter 2019 earnings call, namely the commercialization of SkinTE, prioritization of our pipeline and fiscal discipline. The focus of this call will be on our progress during the fourth quarter and the second half of 2019 to execute on these priorities and then discuss some important strategic changes being made to help accelerate the adoption of SkinTE.

After my opening remarks and commercial update, our Chief Operating Officer, Richard Hague, will provide details on our R&D and clinical trials efforts, followed by Paul Mann, our Chief Financial Officer, who will review PolarityTE's fourth quarter 2019 and fiscal year 2019 financial highlights. I will then return and open the call up for questions.

I'd like to start by reminding everyone that we took over this leadership in June of 2019. We then spent the next 8 months evaluating and making important strategic changes to our commercial effort for SkinTE. Although we still have a lot to do to take full advantage of the market opportunity for SkinTE, we are pleased with our progress. Our commercial effort is significantly stronger than it was just 8 short months ago, and our collection of scientific evidence through case studies, posters and presentations continues to grow.

We are excited by the number of potential near-term catalysts such as interim data from our DFU clinical trial, additional publications, growth of our intellectual property portfolio and the initiation of additional studies that we believe will support our commercialization efforts. We are building a strong sales force and arming them with the appropriate tools to be successful in the field. We have made great strides to create awareness of SkinTE through educational programs, which will continue to be a big focus for us in 2020.

Last quarter, we said we are focused on increasing market awareness in trauma through conferences and newly implemented trauma-focused speakers program. And in the fourth quarter, we strategically invested in regional and local trauma conferences. In aggregate, we attended 7 national industry conferences in 2019 and hosted 7 peer-to-peer educational speakers programs during the fourth quarter where physicians were able to share their experiences. We continue to believe these efforts will contribute to the accelerated adoption through better market awareness.

Additionally, we refined the focus of our marketing messages and sales targets to drive growth in trauma and have leveraged the pilot evaluation data in our DFU and VLUs to provide incremental evidence for our sales force that supports the adoption of SkinTE in chronic wounds. I'm happy to address this in more detail during the Q&A portion of this call, but we believe we are well positioned in trauma and chronic wounds as we move forward in 2020.

Let's move to the next slide and discuss our fourth quarter commercial metrics. The commercial metrics for SkinTE in fourth quarter of 2019 compared to the third quarter of 2019 were as follows: Total paid cases grew 10% to 89. Repeat users grew 26% to 29. Paid users were down 4% to 23, and SkinTE revenue was down 15% to $714,000.

While the number of SkinTE paid cases continues to grow quarter-over-quarter, the ramp in the number of paid cases is in its infancy, which causes a higher sensitivity to wound size treated from quarter-to-quarter in relation to revenue. Consequently, Q4 revenue was lower than Q3, even though paid cases were higher in Q4, which is attributed solely to the size of wounds treated. To the extent the number of paid cases increases over time, this wound size sensitivity in relation to revenue should decrease.

It is important to note that since the leadership changes in June of 2019, SkinTE revenues grew 94%, while paid cases grew 95% compared to the first half of '19. Our focus remains in driving case end user growth in both traumatic and chronic wounds. We are striving for consistent growth in new users and then converting them to repeat users. We continue to believe that our biggest opportunities are with multi-hospital networks where we have already gained momentum with a number of system-wide approvals.

As we mentioned on our last earnings call, driving adoption takes time, particularly when you are introducing an innovative product in wound care. For this reason, and as we have stated in the past, we continue to expect quarterly variability in these metrics due to a number of factors such as seasonality, pricing and reimbursement. We also acknowledge that SkinTE is a unique and differentiated product. So establishing a well-defined process to educate providers is critical.

So what have we learned to be the headwinds to faster adoption and what are we doing about it? First, pricing. Midway through the fourth quarter, we noticed a decline in usage rates in large wounds. While we believe seasonality played a role, the feedback we received from providers was that despite positive outcomes and their desire to treat more patients with SkinTE, the cost of treating larger wounds was identified as the main reason for hindering reuse. Although several large wounds were treated with SkinTE during the quarter, many of them were unpaid product evaluation cases. As a result, we are finalizing a new pricing structure to address this issue, which will be rolled out soon. As you may recall, in June of 2019, we modified our pricing structure to address a similar issue in smaller chronic wounds. This resulted in more consistent adoption and repeat usage of SkinTE in these wound types. We believe our new pricing structure for larger wounds can yield similar adoption benefits in that segment of the market.

Two, coding and reimbursement. In order to provide more clarity in guidance to our providers, we engaged with diplomat level coding experts to assess SkinTE reimbursement. These certified coding experts independently determined that SkinTE is appropriately reimbursed using existing codes for full thickness skin grafts with appropriate modifiers for staging and reducing -- reduced services. We see this as a very positive development as it should provide more certainty for providers as to how they will be reimbursed for SkinTE. Consequently, we recently introduced new materials to assist our sales force in navigating the reimbursement landscape for SkinTE.

Health economic data. We understand and appreciate the value showing the cost benefits of using SkinTE to health care systems, payers and providers. To that end, cost effectiveness is a secondary endpoint in our ongoing DFU and VLU clinical trials. Additionally, we are working with large customers to identify total cost per patient care savings through shortened length of stay and operating room time as a result of using SkinTE. We believe addressing these headwinds should help support faster SkinTE adoption.

Now I'd like to turn the call over to Richard Hague to provide an update on current and future clinical trials as well as key milestones we have achieved and expect to achieve as an organization in the near future. Richard?

Thanks, David. As David described, the generation of clinical data to support the use of SkinTE in various wound types remains a top priority for us. Our goal is to continue to validate the clinical utility of SkinTE in order to drive broad physician and payer adoption and to ultimately position SkinTE as the standard of care for hard-to-heal chronic wounds and complex surgical, traumatic and burn wounds. This will be accomplished through a strategic combination of peer-reviewed published results of RCTs, prospective and retrospective data and physician-driven real-world data. I'm very pleased to share the following updates.

Starting with chronic wounds, our ongoing DFU RCT has now enrolled 48 of the 50 patients we targeted for our prespecified interim analysis, and we expect the remaining 2 patients to be enrolled before the end of March. We plan to present the results of this analysis at the spring SAWC meeting in mid-May in San Diego, and our goal is to submit this data for publication soon after. We expect full enrollment for this study to be reached by year-end.

Our VLU RCT currently has 23 patients enrolled, and we believe we are on schedule to achieve our interim enrollment target of 50 patients by year-end. Additionally, our previously reported DFU pilot data was recently submitted for publication, and we expect the VLU pilot data to be submitted very shortly.

To support expanded use in traumatic and surgical wounds, we are working with key health care providers and health centers to generate valuable efficacy and health economic data. As a result, I'm pleased to report the following. A combined pediatric case series of SkinTE patients generated by 2 well-known medical centers was recently submitted for publication. We were recently informed that another major university hospital has independently submitted a paper to a prestigious journal highlighting their experience with SkinTE in a number of trauma patients.

An active duty soldier case report was submitted for publication recently. This deep traumatic wound was particularly compelling due to the fact that the soldier was injured in the line of duty and initially failed to heal utilizing a competitive product. With SkinTE, his wound closed in 9 weeks and he is expected to return to active duty when he recovers from other injuries sustained in the initial incident. Lastly, we have finalized a protocol for a prospective lower extremity trauma study and expect enrollment to begin in the second half of the year.

In burns, data from our head-to-head trial and the related abstract was accepted for a podium presentation at the American Burn Association meeting which was scheduled to take place in mid-March in Orlando. However, we were recently informed that this conference canceled, but may be restructured as a virtual conference. We will provide updates in due course. Separate from the conference, we plan to submit a final abstract from this study for publication in Q2. To further our efforts in the burn space, we continue to work with several KOLs to finalize a single-arm prospective burn study protocol, and we expect it to be submitted for IRB review soon.

Finally, we are very excited to share that 7 SkinTE abstracts were accepted for presentation at the Spring SAWC conference. The 7 abstracts are listed on the current slide, but most notably, I'd like to highlight the following. First is a randomized controlled trial to evaluate the treatment of diabetic foot ulcers with a novel autologous homologous skin construct presented by Dr. David Armstrong. Second is pressure ulcers treated with a novel autologous homologous skin construct in a retrospective multicenter case series presented by Deana Shenaq, M.D.

Overall, we are extremely pleased with the volume and quality of SkinTE data that is being generated and ultimately recognized by our industry and peers. We believe that the data generation strategy we implemented in the second half of 2019 is clearly paying off. And we are confident that this and other supporting data, expected to be published in the near future, should allow us to drive broad physician and payer adoption of SkinTE in the coming quarters.

I would now like to transition to our research and development activities. As reported last quarter, we had 2 SkinTE-related development projects that are top priorities. First is our SkinTE cryo project, which is progressing as planned. This line extension will allow us to cryopreserve a certain amount of final SkinTE product from a single harvest to allow for additional deployments on the same patient at any point up to 6 months from the original harvest date. We expect to introduce this new concept to existing and new customers in the third quarter. We anticipate this being a valuable offering for patients susceptible to multiple chronic wounds or noncompliant patients where SkinTE may become damaged during their normal course of healing and in patients with wounds that due to size, location or patient circumstances, a physician may prefer a stage deployment regimen. We do not plan to charge for the cryopreservation process, but do expect that incremental revenue will be generated due to the ease of future deployments without additional harvest.

Secondly, we continue to make progress on the development of a SkinTE point-of-care device. The main objective of this project is to move SkinTE processing to the bedside, allowing for the deployment of SkinTE immediately following the initial harvest. We're in the midst of our first phase of development in which our in-house engineering and design team is collaborating with an outside firm to finalize prototype designs that will be used to gather user attribute data. We expect to complete this phase of the development in Q3 of 2020.

Lastly, I would like to provide a brief update on the progress of our manufacturing node in Augusta, Georgia. We are in the final phase of construction and will then begin validating equipment and processes. Our goal is to go live by early Q3. In parallel, we will be collaborating with area hospitals and HCPs to ensure a smooth transition to the use of the new facility.

Overall, I remain very encouraged with the progress we are making related to SkinTE patient data and product development. I strongly believe that we have the appropriate strategy in place to maximize the full potential of SkinTE.

Now I'd like to turn the call over to Paul Mann for a financial update.

Thank you, Richard, and good morning, everyone. For the fourth quarter of 2019, we reported approximately $1.47 million in total revenues, which includes revenues from SkinTE, which we refer to as products in our 10-K, and revenues from contract service organization, which we refer to as services in the 10-K.

Revenues from products during the quarter were $714,000 and revenues from services were $753,000. Wound size and, therefore, revenue are the most variable metrics in these early growth stages. With our current user base and case volume, quarter-to-quarter fluctuations in traumatic wound admissions within our accounts can significantly change the average wound size treated with SkinTE. We expect these quarter-to-quarter fluctuations in average wound size and revenue per case to gradually begin to reflect the broader seasonality of trauma care and become less dictated by individual accounts as adoption continues to grow in that space.

For the fourth quarter of 2019, cash used in operations was $16 million or approximately $5.3 million per month, which is higher than the cash used in operations during the third quarter. As I highlighted during our third quarter call, a number of nonrecurring items accrued to the income statement during the third quarter that related to the severance payments to our former CEO. His employment with the company ended on August 26, 2019. The cash payments relating to these accrued expenses were made during the fourth quarter.

During 2020, we'd expect quarterly cash flow from operations to look more like what we witnessed during the second and third quarter 2019 rather than the first or fourth quarters of 2019.

As previously mentioned, one of the 3 key mandates of the executive team is fiscal discipline. During the second half of 2019, we completed a number of initiatives to reduce cash burn without impacting the core components of the business. We are currently evaluating additional cost reduction measures. We'll provide an update on these during the Q1 call in May.

We finished the fourth quarter of 2019 with $29.2 million of cash, cash equivalents and short-term investments on our balance sheet. On February 14, we completed an underwritten public offering of our securities. We raised an additional $22.7 million after estimated offering expenses. Following this capital raise, we believe there's sufficient liquidity on the balance sheet to fund operations beyond the next 12 months.

Many investors have asked why we chose to raise capital at the time we did. While we aren't going to try and predict the near medium or long-term direction of the financial markets, we did recognize there were a number of potential events during 2020 that could create volatility in stock markets and we believe that it would be prudent to maintain a strong balance sheet during these potentially turbulent times.

I'll close by saying that we remain steadfastly focused on fiscal discipline and the commercialization of SkinTE, and we're encouraged by the process (sic) [progress] we have made during the second half of 2019.

I would now like to turn the call back over to David Seaburg for some concluding remarks.

Thank you, Paul. I'd like to recap 3 of the most important points discussed on today's call. First, we believe we are in a stronger position today to commercialize SkinTE based on steps we have taken to identify opportunities for increased adoption. Second, we look forward to several potential near-term catalysts namely the upcoming presentation of interim results for our DFU clinical trial, the continued execution and expansion of PolarityTE's patent portfolio in several publications which we expect will continue to build upon the market awareness to support increased adoption for SkinTE. Third, we believe the initiation of additional studies will be constructive for our discussions with payers and providers.

Hundreds of patients were treated with SkinTE in 2019, adding to our growing body of successful clinical outcomes, strong scientific evidence and numerous industry awards and recognitions. We are most grateful for the positive impact that we believe SkinTE has had on so many patients' lives, delivering a solution in hard-to-treat wounds where other treatments have sometimes failed. We believe SkinTE will continue to deliver positive outcomes for patients and has the potential to provide considerable savings to payers and providers, while generating significant returns for stakeholders.

I don't measure our long-term success by any given quarter. Instead, I'd measure it on the incremental steps we are taking to support the efficacy and commercial adoption of SkinTE. I'm proud of our accomplishments and believe we are on the right path to generate long-term value to our shareholders.

Finally, I just want to add that I am incredibly proud of all our determined and hard-working employees. Thank you all for your dedication to PolarityTE. Thank you for joining our call today. I'd now like to open it up for questions.

(Operator Instructions) Our first question comes from Kevin DeGeeter with Oppenheimer.

Can you just comment on sort of what wound size threshold, which you see -- you tend to see some resistance under the current pricing model?

Kevin, it's David. Thank you for joining the call. I don't think it's necessarily just there's a threshold. I'd say larger wounds, up or towards the over 200 or 300 square centimeters. I think that pricing, Kevin, and we really emphasized on this call, is a really important catalyst for us. When we polled our customer base and we really went through and did a deep dive into the providers that we are in constant contact with and asked some questions around what the hindrance was, the overwhelming response was price. And we really believe that we're going to be rolling out a plan within the next several weeks. It's going to be a staged rollout. So it won't be national all at once, but we're going to do this strategically. And we believe, just based on the early feedback and the conversations we're having with them, that this is going to really help drive adoption.

And as we think about sort of average revenue per SkinTE implant, that was down around $8,000 in the quarter. Is that a good way to think about potential trends, at least through the first half of 2020? Or under the new pricing plan, do you think, in terms of revenue per wound size, that metric could go lower through the course of 2020?

Well, I think it all depends on wound size. If we do see adoption in larger wounds or more adoption in larger wounds, we can see -- we could see that go higher. But I think over the long term, the expectation is that, that number, as we see adoption really pick up in the chronic wounds that we treat, that over time, that's obviously going to reduce. But in the near term, based on this pricing structure, I can't imagine that we have a lot of variability in it. But again, it is predicated on wound size.

Great. And then just one last one for me, then I'll get back in the queue. Can you just provide a little bit more details of how you're thinking about study design for the lower extremity trauma study that you called out?

Yes, sure. I'm going to put Nik Sopko on. He's right on the line here with us. Nik?

Kevin. Yes, it's a great question. And for the lower extremity trial, we're specifically looking at more complex wounds. So these aren't necessarily chronic wounds that might be treated in some of our other trials, but these are acute traumatic wounds with exposed complex structures such as tendon, bone and muscle, and typically require quite a bit more extensive reconstruction. And so for the design of that trial, we're focusing on those patients and not only looking at the ability of SkinTE to close those wounds but to really cover those complex structures, which oftentimes can require multiple treatments or complex surgical treatments such as flap reconstruction to do so.

We'll take our next question from Kristen Kluska with Cantor Fitzgerald.

The first one is, can you further discuss some of the considerations in place for pricing for the larger wounds? And is the feedback here that surgeons are used to typically trying numerous products where the pricing is spread out over time as some could fail versus using a product that may work initially and not require future applications with the higher price upfront?

Kristen, it's Richard here. I appreciate the question. And yes, you're exactly right. What we're looking at is really looking at DRG pricing. And when you look at certain wound sizes and certain patient types, each facility has a DRG reimbursement schedule. And there's 2 things that we're trying to address. One is to ensure that the facility is coding that patient appropriately so they can get the maximized reimbursement from the appropriate DRG and that's an education process that we're working with them on. And second is to obviously make sure that when we price our product, that it fits appropriately in that DRG pricing for that size wound. So that's #1 in terms of how we're approaching this.

And second, to your point about multiple -- products that require multiple applications, it really -- different facilities are more sophisticated than others. We certainly believe we have a great story to tell in terms of being a single-application product and the total cost of care per patient is certainly going to be lower, we believe, with SkinTE. However, initially, our upfront price on a per application was higher than competitive products. So there was a bit of a sticker shock that we were facing with some facilities. But now we're addressing that, but we're also, as I said, having more sophisticated conversations with the facilities around ensuring that we're looking at the whole total cost of care, which is certainly favorable for SkinTE.

Okay. And as you prepare to announce some of your trial data within the next few months, particularly DFUs, based on the conversations you've had with various surgeons and the VAC committees, what are the most important measures they are looking for? And in your view, what do you think that they'd view as compelling results?

Kristen, thanks for the question. We do anticipate presenting our interim analysis for our diabetic foot ulcer trial, that's planned for the SAW (sic) [SAWC] Spring conference. However, we are concerned about the coronavirus and that, that conference might get rescheduled, like many of the other recent medical conferences. But with that data, which is really designed to show the clinical efficacy and ability to use SkinTE in the outpatient setting, we've had a lot of favorable feedback from providers about seeing that data and its ability to be used effectively in that setting.

And I think the key there, too, is that we're basically building our library of published data. That's our goal here. And the more that we can do that across various wound types, the easier the VAC process will be and that's the #1 goal here.

Okay. Great. And you've been tracking the number of repeat and new users. But I wanted to see if you've been collecting any data on the number of institutions using the product and how that number has changed, including those currently in the trial stage? And then can you discuss the different specialists who are using the product? And if you've seen any particular trends observed in that?

In terms of number of institutions, we certainly track that information, but we mostly focus on the provider level because that's the -- that really drives the total adoption of the product. So institution, while we're definitely growing that number, we really care about the number of physicians within that institution. As David mentioned about it earlier in the call, our real goal is to go deep into these hospital networks. So we don't expect that we'd add the same number of hospitals as we would the number of physicians that we want to grow. So that's -- I think that's number one. And I'm sorry, the second part of your question?

Just any trends as it relates to the particular different specialists who are using the product?

Well, certainly, as we -- we're focusing more, as David said, on the trauma space. So we're going to see a broader group of specialists there. Right now, we're seeing, I'd say -- we're looking at about a 70-30 split with chronic versus trauma right now, chronic being 70, in terms of number of cases. So in that space, you're going to see podiatrists and vascular and general surgeons for the most part. And obviously, when you move into the trauma space, you're going to see vascular, general and more plastic in that space as well. So right now, it's a pretty broad range that we're seeing, and we're certainly trying to continue to broaden that as we go into the trauma space.

Our next question comes from Carl Byrnes with Northland Securities.

With regards to looking to come online relatively imminently, I think you said third quarter, would you anticipate or how would you anticipate a bump in terms of the size of wounds treated out of that facility relative to the overall business? I mean, I guess, another way to frame the question is, how do you expect that to roll out? And I would imagine it would be way to treat larger wounds.

Yes. So -- I mean in real time, we are addressing this pricing situation and we've actually engaged, in the last couple of weeks half a dozen of our larger medical centers and networks. And they've actually been extremely productive conversations. And physicians have told us, specifically, as we've engaged in those conversations that this has been the main hindrance, if you will, for repeated reuse. So we've had several doctors call out specific examples in which they had patients lined up that they could treat if the pricing was more favorable. So we do expect this to be a relatively near-term inflection in terms of wound size, but it's always very, very hard to predict. But we do expect to see that in Q2, hopefully, where that wound size will start to increase.

We'll take our next question from Sean Lee with H.C. Wainwright.

With a lot of data expected to be presented at SAWC, have you made alternative plans in case the conference gets canceled as well in light of the epidemic that we have going on?

Yes, Sean, that's a great question, and it's something that we're obviously very concerned about. They just canceled the ABA for next week, and they let us know that just a couple of days ago. It's unclear how soon in advance we'll know about SAWC, but there's already been several discussions about potentially having sort of a virtual conference that the conference organizers themselves would help put together so that all the exciting data that we have and others can get out there. But additionally, we're looking at sort of contingency plans to be able to provide our own virtual data presentation, if needed, if the conference is, for example, just postponed until later this year.

Also, have you made any changes to your marketing efforts in light of many of these cancellations?

Yes, certainly, I mean we're -- the conferences that are being canceled. We did have, obviously, plans to be present at those. And as Nik described, there's 2 different approaches to this that we're doing in parallel. One is to have the sales reps be as active as possible in the field given some of the restrictions. So that's certainly an important point. So as many touch points as we can get with the health care providers directly in the territory is critically important. And the second, as Nik described, is unlike -- like other companies, we're certainly going to be having to engage in virtual marketing efforts. And so we're looking at what that might look like and how we could have a broader impact across the country in terms of putting on programs like that in a virtual setting.

And we will now take a web question. Mr. Haerle, please go ahead.

Thank you, operator. The next question we have is from RK from H.C. Wainwright. The question is, with travel disruptions that could happen with the way things are progressing, how are you prepared for supply chain issues if that were to happen?

It's David. I think the supply chain issues for us, I mean when you look at our product and the way we process SkinTE, it's really people and making sure that the people that are trained to process this product or our product are safe. So we're taking the necessary steps to make sure that we separate our processors and don't allow them to interact at this current time, keeping them at a very safe distance to make sure that there is no hiccups from that perspective. And as far as just general supply issues from the standpoint of necessary medical supplies needed to process, we haven't really had disruptions there, but we are definitely making sure that we are ahead of the curve to prevent any issues that could occur.

And at this time, there are no further questions. We thank you for your participation. You may now disconnect from this call. Thank you.