Polynovo (ASX:PNV): Interview with Chairman David Williams

 

Polynovo (ASX:PNV)

We spoke with David Williams, Chairman of Polynovo (ASX: PNV), about the massive growth that the business is currently enjoying with its NovoSorb products, featuring more active clinical sites and more uses for the products.

We talk in particular about the growth the company is enjoying in markets outside the US.

See full transcription below.

 

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Transcription

 

Stuart: Hello, and welcome to “Stocks Down Under.” My name is Stuart Roberts and I’m one of the co-founders of our service. And joining me today from Melbourne on the morning of Friday the 9th of June 2023 is an old friend of our firm, Mr. David Williams of Kidder Williams. David, good morning.

David: And good morning to you, Stuart.

Stuart: We’ve had you on this program before talking about one of the companies that you’re involved in called RMA Group. That’s not the purpose for today’s meeting. Today, we’re gonna talk about a company you’ve chaired since early 2014, PolyNovo, (ASX:PNV). David, well done to you and your team on your stewardship of this company at board level. It was a science experiment back in 2014. It’s now a $1 billion company growing sales quite strongly. That’s happened under your leadership as chairman. Well done.

David: Well, thank you. I’m standing on the shoulders of giants, though, as usual, so I can’t take too much of the accolades.

Stuart: Right. Let’s talk about the origins of this company. The product originated from some CSIRO-developed technology that developed a product called NovoSorb, a new generation skin substitute, probably one of the best scaffolds that medicine has discovered, where surgeons can use it. The original approved application was in burns, in serious burns. 2022, big step up with NovoSorb MTX to broaden the applications in all sorts of other indications beyond burns. And now sales are up and running. What’s been the biggest step forward, in your opinion, over that journey from NovoSorb being approved originally and where we are today?

David: Well, I think the efficacy and ease of use of the product is the biggest driver of it. I mean, it clearly works. So, it’s really just been about putting more people on the ground in the U.S. in particular, in Australia and New Zealand, and now starting to expand that geographically. But I don’t know exactly today, Stuart, how many people we’ve got selling in the U.S., but let’s say it’s 60. And we’ve got staff there of 80 odd, you know, supporting those people and so forth. But that could easily be 150. And so there’s big parts of America we haven’t touched yet. We’re in most of the major burn centers, but there’s still, let’s say, there’s 130 of them, we’re probably in 105. So, there’s still a bit to go there.

But what’s really happened, Stuart, is because the product is so easy to use and surgeons have jumped onto it wherever they see tissue loss, even though we might not have ever thought we’d be in some of these things, you know, they jumped on it. We’re sort of playing catch up in a way with the surgeons. So, you know, we started with a product that was working. We thought it would change the world in many ways, and it has. But what we didn’t anticipate, I think, was how big that market might be for all sorts of tissue loss. And, you know, as I said, we’re catching up with the surgeons because they’re using it for oncology burns, they’re using it for venous leg ulcers, they’re using it for necrotizing fasciitis, they’re using it for limb salvage, anywhere where there’s tissue loss.

And it’s very, very exciting. And it’s a very easy sell in a way. I don’t say this lightly, but, you know, if a financial institution or investor comes to us and they say, “Look, you know, where can we do some DD?” I say, “Well, you can go and go and do it yourself, but if you want me to give you some surgeons, here’s one at Mayo, here’s one at Harvard, here’s one at UCLA. Go talk to them.” And one of the things they get told when they talk is, the surgeon will say, “Look, I’m using it all the time. I don’t use the alternative anymore. But in addition to that, this is changing the way in which surgery is done.” And that’s about as much as any financial institution needs to hear before they go away and go, “I might buy a few of this.” But there’s still large parts of those hospitals. So, when I send somebody into a hospital, he might be talking, two years ago, he was only talking, let’s say, the burn surgeon. Now he’s talking to all sorts of surgeons and going from floor to floor.

And when you go down the hospital, you know, a lot of the surgeons haven’t heard of it yet because they’re in orthopedics or they’re in heart or either cancer or whatever it happens to be. I’m probably talking too much, Stuart, but I’ll just give you one anecdote. I was talking to a very famous surgeon in New Zealand last week who’s at Auckland Hospital. And he’s probably the biggest user of PolyNovo BTM in the world, believe it or not, in Auckland. That’s because Auckland’s the center of the universe for burns in any…

Stuart: Anyone who gets burned, unfortunately, in New Zealand and the greater Pacific will end up in this particular institution in Auckland.

David: Correct. And I said to him, “Look, what else are you using it for, because I’m always fascinated to how surgeons are adapting to use it?” He said, “I was walking along the corridor yesterday and one of my colleagues was just preparing to amputate a leg below the knee. The patient had significant diabetes, and below the knee had a venous leg ulcer, big gash, wound, and couldn’t be repaired.”

Stuart: That’s treatable now. Just put BTM on it and you can probably save the leg, right?

David: So, the guy’s about to take the leg off. And normally when there’s this sort of wound or sometimes when there’s this sort of wound, not for diabetics, but they’ll do a flap. So, they might even just cut a big piece of, you know, flesh and skin out of your arm, put it in the wound and away you go. But because you’ve got a diabetic patient, that is not vascularized, so they don’t do it. And he thought he had no alternative but to whip the leg off because he just couldn’t solve the ulcer problem.

So, this guy, the surgeon says to him, “Why would you do that? Just put BTM on it.” He goes, “Oh, what’s that?” So, he grabs a piece of BTM, he cuts it out to the size of the wound, he puts it in the hole, he staples it in and he goes, “There it is.” And the guy goes, “What? That’s all there is to it? It’s got to be more complicated than that.” “No, that’s it. Bandage it up, come back in a month, and do a dressing change, and it’ll all be done.”

Stuart: So, this patient saved their leg and you’ve got another loyal customer in New Zealand for BTM.

David: A hundred percent. And there’s a video of this for your readers that are interested. If you go onto our site, there’s a dozen videos of surgeons, major surgeons around the world sitting beside their patient and showing you what they’ve done and showing the flexibility and the outcome of it and so forth. And one of them on there, if they go look, is a guy that fell off a train and the train ran over his foot and it cut off his foot, sort of didn’t take the whole ankle off, but, you know, basically, all the foot was gone and the stump of the ankle. Well, they couldn’t seem to solve it. Now, they were about preparing, again, the same sort of story, preparing to take his leg off below the knee. And again, one of our surgeons in the hospital, I just forget which one it was, in a Carolina or something like that, he said, “Why do you do that? Why don’t you just, you know, clean up the stump and put the BTM on it?” Which they did.

And here in the video, you’ll see the guys. And within months, he’s just riding a bike. He’s lost most of his foot, but that’s easy to sort of replace, you know, in terms of, you know… So, anyway, look, I’ve rambled on a bit. I’m just saying that it’s hard to keep up.

Stuart: The moral of the story is more and more indications keep cropping up for BTM. And if people look at the recent presentation at the Macquarie conference in May, you can see that that pipeline is just deepening and deepening. Company just had its first $7 million month. And the curve of sales is only going in one direction. But what’s interesting to me is the company raised about $52 million in a placement share purchase plan at $1.90 last year. And the aim of the game was then to conquer the rest of the world outside the all-important U.S. market. So, this thing is going truly global now.

David: Look, everybody knows we went into Canada in December on the back of the Canadian Burn Association meeting. We went into Hong Kong in December, and we went into India in December. So, here we are sitting five months later. Now, what happened in Canada is the sales are going through the roof. So, the sales, I think, for May, this $7 million month we just talked about now, I think the sales for May in Canada year-to-date were something like $1.5 million already. The sales in… We haven’t told the market what the sales were in Hong Kong because I didn’t think it was all that important at the time, but we went into… We sent our chief saleswoman up there from here. She just went up for a week. There’s four major hospitals in Hong Kong. She sold into one of them. Then she went back a couple of weeks later and she sold into the second one. And now we’ve got the third hospital out of the four trialing it as well.

And so, we start slowly, you know, we convince one surgeon and they start using it. The next thing there’s a sort of, I wouldn’t call it an avalanche. But I said to her a couple of days ago, I said, “Look, how are those sales going in Hong Kong?” She said, “It’s going kind of great.” She said, “Look, we’ve booked sales, I think in May for over $100,000, and there’s another $40,000 or $50,000 that have been ordered, but we haven’t delivered yet, so I didn’t bring the revenue. But let’s just say roughly $150,000 a month.” That’s $1 million-plus business in Hong Kong that we’ve built since December last year. And the product is a very, very high margin. So, it pays for itself very quickly.

Now, India is the third one. And that’s been a bit slower only because we hired 20… We don’t have anybody in Hong Kong, by the way. We’re looking to put somebody on very soon.

Stuart: So, if you’re a decent salesperson for pharmaceutical product or medical devices and you wanna work in Hong Kong, get your resume to David Williams, right?

David: Correct. If you’re already talking to surgeons, then you know what you’ve gotta do. But in India, we hired 20 people. And about three weeks ago we pulled them all into, I think, New Delhi and we trained them all together, and then we released them back out two weeks ago into the market. So, we gave each of them a territory in India. So, as I said, I think we’ve got 18 salespeople and then 2 in the head office. Well, within a week, we had sales into two different hospitals. And today, and I think I said it in the release we had the other day, we’ve sold into now 15 different hospitals in the space of a couple of weeks.

Now, India is a different market because, you know, we’ve decided to go in at a slightly lower price than what we charge in the West. And so we’re filling our way a little bit in terms of its affordability and so forth. But I asked you to sort of think about this, that the issue of burns, and we’re no longer a burns company, but let’s just take burns. The issue of burns in the West is becoming less and less of an issue.

Stuart: Yeah. Less people get burned every year. The world is a safer place, at least in the Western world.

David: Correct. But also when you think about it, most of the burns victims are men. And a lot of them are industrial accidents and quite a number of them are people trying to top themselves. But it’s essentially a men-centric thing, and the numbers are going down. When you go to parts of Africa, Indonesia, India, you know, rural China, the number of burns is 10 to 20 times per head of population.

Stuart: Often its children as well in that environment too.

David: And women, because a lot of those people are living in huts where they’ve got fires. So, your sari catches fire, your kid falls in it. And so there’s an unbelievable need in the burns side of the business in those countries. So, getting that right is gonna be fantastic. And because we’ve got such a high margin in our product, there’s a lot of fat in the system. So we can afford to, you know, make it acceptable to the market. And we’ve already got immediate traction, as I said, in India and Hong Kong. So, you’ve gotta say, “Well, where can this end?”

Stuart: So, for those who are relatively new to the story, this is turning into a real company now. We’re talking in excess of $50 million a year in revenue with very high gross margins. And as we’ve talked about a lot in this call, the growth curve is fairly strong. What do you hope to have achieved? Let’s say we’re having this conversation at the end of FY-24, what would be an ideal point to have reached to?

David: Well, I mean, we did $40 million in sales last year. You know we just announced that we had our first $7 million month. That’s quite conservative in a way because it was actually about $7.2 million and then we’ve got other revenue that comes from BARDA and so forth. So, it’s closer to $8 million. So, the consensus amongst the analysts is that for this year, FY-23, we’ll do $60 million turnover, give or take. And my best guess is that I’ve got no reason to criticize that. But at a $7 million or $8 million turnover, we’ve got a run rate of $80 million or $90 million. So, you say, “Well, it keeps going up.” It’s still lumpy. So, we did $7.2 million or something this month. June might be $6 million, it might be $8 million, we don’t know just yet.

But the trajectory is in one direction, even though it’s still a bit lumpy. So, I think even just on the basis of what you’re seeing now, the consensus amongst the analysts is that the turnover this year, for ’24, we’re about to start, will be $100 million. But, you know, we just don’t know at the moment.

Stuart: You’ve got some new leadership September of last year. Swami Raote joined you from a few decades working in various Johnson & Johnson businesses over time. How’d you come to pick him working out of Jacksonville, Florida to build this company?

David: Well, we had an acting CEO who was Max Johnson and, coincidentally, same name, but he had been managing director of Johnson & Johnson in Australia, decided to retire and take board positions. And so when we were looking for a CEO, I said, “Look…” He started talking to me about Swami about a board position. He said, “Look, this guy is retired. He could be good on the board. He’s in the U.S.” And so as we’re thinking about that, he then suggested, “Why don’t you think about him for the CEO’s role?” So, that’s really how it came about. He would, otherwise, have been here full-time. That’s what we intended.

But as we got to the sort of the vinegar stroke, as it were, he revealed that he’s going for his green card and that he had 18 months to go on that, and that in order to get a green card, you’re only allowed to be out of the U.S. for no more than 160, 170 days a year. So we split his time between the U.S. and other jurisdictions, by the way, and here. So, he’s in America at the moment doing some work with our team in California, and then he will be here Sunday morning. So, I don’t expect him to be here for a while yet.

Stuart: So, a $1 billion company on ASX, grown to the point where it’s fair to say that the plane has well and truly left the tarmac in terms of this journey. Now, you must be concerned that at some point, a major pharma company wants to get hold of this thing, to get hold of what will be the NovoSorb franchise. What happens at that point?

David: Well, Stuart, we’re both in the market. And I’m an investment banker. Yeah, you can’t stop people doing that. I mean, what I would say to you, though, is that if you look at this wound care and skin care segment in the U.S., there’s a lot of people that are not profitable. We have a synthetic, so the cost of production is minuscule. But if you’ve got a biologic and you have to go to an abattoir and source a piece of pig gut, for example, or a sheep gut, and then clean it and cut it and freeze dry it and sanitize it and so forth and get it to a hospital, your cost base is huge. And so there are a lot of people who are just not making any money. And so it’s easy to say, “Well, gee, somebody’s gonna find you attractive.”

Well, even Integra, who we would think was probably our biggest competitor in the U.S., they just had a product recall, by the way, last week, a product recall of five years’ product. And I’m not sure how many hospitals actually hold five years’ product. But I think their market cap is circa $6 billion, let’s say, but only a part of it is wound care. So, even for them, if they were to look at us now, and we’re going autopsy, as you can see, you’ve gotta be looking at least paying $2 billion, $3 billion for it. So, even for somebody as big as Integra, a $2 billion or $3 billion purchase, it’s a big bite, number one. And number two, it cannibalizes your existing product because everybody else is in organics. And so imagine if you’ve got a pig gut and a PolyNovo product, you go to see the surgeon, you go, “Well, which one are you gonna promote?” The surgeon goes, “Well, which one do you prefer?” And so it’s like, which of your children do you like?

So, I don’t think they’re gonna come easily. But you’re quite right, the product is reshaping surgery, and somebody will eventually come, but it probably won’t be one of the existing players. It probably will be somebody like, say, a Johnson & Johnson, somebody who’s not in this space, but who wants to have a new silo that’s, you know, a very valuable silo. So, I think that’s where the interest will come from. But look, in the meantime, we just gotta grow as quickly as we can because, otherwise, we’ll be leaving too much, you know, value on the table. So, if you imagine, for example, let’s just take J&J. They’ve got a business that has 300 salespeople around the world, I think about 180 in America, 120 elsewhere that are just selling into the breast surgeon market. Now, we haven’t started selling our product in the breast surgeon market yet.

Stuart: But that’s coming, right? And it’s gonna be a huge opportunity when you get there.

David: Correct. But what I’m saying is that somebody who says, “Well, we’ve got 300 salesmen going to every surgeon on the planet already. Why don’t we add another product into it?” There’s some enormous synergies that come from people who’ve got existing distribution channels, which is what we’re trying to build at the moment. But even in things like podiatry, imagine, you know, diabetic foot ulcers. There’s people that have got 100 people on the road in the U.S. just selling to podiatrists. And we’re selling lots of this product now for diabetic foot ulcers and venous leg ulcers and so forth. So, there’s a lot of people who would have, you know, quite a bit of synergistic input into this because they deliver an existing delivery mechanism and channel.

Stuart: David Williams, well done to you and your team and Swami over in the U.S. This is turning out to be a great story. Keep up the good work.

David: Thank you very much. And good luck with your new business as well.

Stuart: Growing strongly too. Thank you so much.