Q4 2019 Earnings Call

Please standby.

Good day and welcome to the polarity T E ink fiscal year 2019 earnings call. Today's conference is being recorded at this time I would like to turn the conference over Rich Hurley Vice President of Investor Relations. Please go ahead Sir.

Thank you operator good morning.

Joining 30 to east called to discuss fiscal year 2018 results arbitrarily Vice President Investor Relations with me today are members of the executive team, which includes David Seabird, President Richard take CEO, and President and Chief Financial Officer.

Before we begin I'd like to remind everyone that today's discussion may include statements about the company's future expectations plans and prospects. They constitute forward looking statements for the purposes or the safe Harbor provisions or 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 50 children, but caption risk factors in our filings with the FCC.

Including our annual report on form 10-K for the year ended December 31st 2019 filed with the FCC today.

Any forward looking statements made on this call speak only as of today's date Thursday March 12, 2019, 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, but the code is being recorded.

Making it available to investors and the media via webcast a replay will be available on our website the investor Relations section shortly following the conclusion of the call.

Additionally, it is the property of clarity <unk> any redistribution retransmission or rebroadcast of the call in anything they felt clarity to ease expressed written consent is strictly prohibited.

Now I'd like to turn the call every case, it's cheaper president.

Thanks, Rich good morning, everyone and thank you all for joining US today 2018 was a transformative year for polarity G, which we believe is positioned the company pretty exciting 2020 <unk>.

The executive team remains committed to the three strategic priorities, we outlined on our third quarter 2019 earnings call, namely the commercialization of skin Ci prioritization of our pipeline in fiscal discipline.

The focus of this call will be on our progress during the fourth quarter in the second half of 2018 to execute on these priorities and then discuss some important strategic changes being made to help accelerate the adoption of skin to you.

After my opening remarks in commercial update our Chief operating Officer, Richard Hague.

Details on our R&D in clinical trials efforts fell by time in our Chief Financial Officer, who will review polarity cheese fourth quarter 2019 in fiscal year 2018 financial highlights.

I will then maturity to open the call for questions.

I'd like to start by reminding everyone that we took over his leadership in June of 2019.

We then spend the next eight months evaluating it making important strategic changes to our commercial effort for skin Ci.

Although we still have a lot to do take full advantage of the market opportunity for skin Gee, we are pleased with our progress.

Our commercial effort is significantly stronger than it was just eight 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 D.F. you clinical trial.

For the publications growth of our intellectual property portfolio in the initiation of additional studies that we believe will support our commercialization efforts.

You're building a strong sales force in arming them with the appropriate tools to be successful in the field. We've made great strides to create awareness of skin t. through educational programs, which will continue to be the big focus for us in 2020.

Last quarter, we said, we are focused on increasing market awareness and trauma through conferences in newly implemented trauma focused speakers program.

And in the fourth quarter, we strategically invested in regional and local trauma conferences.

Aggregate, we said, it's seven national industry conferences in 2018 and hosted seven 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 leverage the pilot evaluation data in or D.F. you in values to provide incremental evidence for our sales force that supports the adoption of skin T in chronic wounds.

Did you addressed this in more detail during the Q and a portion of this call, but we believe we are well positioned in trauma in 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 skin T in fourth quarter 2018, 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 cents skin Ci revenue was down 15% to 714000.

While the number of skin cheap hate 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 one size treated from quarter to quarter in relation to revenue. Consequently, Q4 revenue was lower than Q3, even though.

Cases were higher in Q4, which is attributed solely to the size of loons treat it.

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 2018 in T. revenues grew 94%, while Pete cases grew 95% compared to the first half of 19.

Our focus remains in driving keys and user growth in both fanatic in chronic wounds, we're 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 were introducing innovative product in care.

For this reason and as we've stated in the past we can change you expect quarterly variability in these metrics due to a number of factors such as seasonality pricing and reimbursement.

We also acknowledge that skin cheesy unique and differentiated product to establishing a well defined process to educate providers is critical.

So what do we learned to be the headwinds to faster adoption and what are we doing about it.

Pricing midway through the fourth quarter, we noticed the decline in usage rates in large means while we believe seasonality played a role the feedback we receive from providers was that despite positive outcomes and their desire to treat more patients with skin T. The cost of treating larger wounds was identified as the main reason for him.

During regions.

Although several large wounds were treated with skin t. during the quarter. Many of them were unpaid product evaluation cases.

As a result, we're finalizing a new pricing structure to address this issue, which will be rolled out sue.

As you May recall in June of 2018, we modified our pricing structure to address a similar she was smaller chronic wounds. This resulted in more consistent adoption in repeat usage of skin t. and easement types, we believe our new pricing structure for larger ones can yield similar adoption benefits in that segment.

The market to coating and reimbursement in order to provide more clarity and guidance to our providers, we engaged with diplomat level coating experts to assess skin Ci reimbursement.

These certified coding experts independently determined that skin tea is appropriately reimbursed using existing codes for full thickness skin grafts with appropriate modifiers for staging and reducing produce services.

We see this is a very positive development as it should provide more certainty for providers as to how they will be reimbursed for skin chief.

Consequently.

We recently introduced new materials to assist our salesforce in navigating the reimbursement landscape for skin tea.

Health economic data.

We understand and appreciate the value of showing the cost benefits of using skin T to health care systems payers and providers to that end cost effectiveness is a secondary endpoint in our ongoing D. A few NGL you clinical trials.

Additionally, we are working with large customers to identify total cost per patient care savings through shouldn't length of stay.

Operating run time as a result of using skin TV, we believe addressing these headwinds should help support faster skin t. adoption now.

Now I'd like to turn the call over to Richard hate 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 skin T. In various types remains a top priority for us.

Our goal is to continue to validate the clinical utility of skin TV in order to drive broad physician and payer adoption and the ultimately physicians can see as the standard of care the hard to heal chronic wounds and complex surgical dramatic and burn warrants.

This would be accomplished through strategic combination of peer reviewed published results of RC cheese perspective in retrospective data and physician driven real world data.

I'm very pleased to share the falling updates.

Starting with chronic wounds are ongoing DFI RCT has now moved 48 of the 50 patients we targeted for pre specified interim analysis.

We expect the remaining two patients enrolled before the end of March.

We plan to presented the results of this analysis at the spring as a w. see 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 yearend.

Our deal you RCT currently has 23 patients enrolled and we believe we are on schedule to achieve our interim enrollment target of 50 patients by yearend.

Additionally, our previously reported de if you'd probably data was recently submitted for publication and we expect the deal you pilot data to be submitted very shortly.

To support expanded use and dramatic in surgical wounds were 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 K series of skin T. patients generated by two well known medical centers was recently submitted for publication.

We were recently informed that another major University hospital has independently submitted a paper two prestigious journal highlighting their experience, which can be a number of trauma patients.

An active duty says your case report was submitted for publication recently.

This cheap dramatic wounds is particularly compelling due to the fact that the soldier was injured in the point of duty and initially failed to heal utilizing a competitive product.

Skin T. He is won't close in nine weeks is expected to return to active duty when it recovers from other injury sustains initial incident.

Lastly, we finalized the protocol for perspective, lower extremity trauma study and expect enrollment to begin in the second half of the year.

And burns data from our head to head trial and the related abstract was accepted for 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 was cancelled, but maybe restructured as a virtual conference we will provide updates in due course.

Separate from the conference we plan to submit a final abstract.

This study for publication in Q2.

To further efforts in the burn space, we continue to work with several care wells to finalize the single arm perspective Dawn study protocol, we expected to be submitted for our be review soon.

Finally, we're very excited to share that seven skimpy abstracts were accepted for presentation at the spring as Pwc conference.

Seven abstracts are listed on the current slide.

But most notably in like the highlight the following.

First as a randomized control trial to evaluate the treatment of diabetic foot ulcers with a novel autologous homologous can construct presented by Dr. David Armstrong.

Second is pressure ulcers treated with a novel autologous homologous skin construct in a retrospective multi center K series presented by Deanna CNHTC Andy.

Overall, we're extremely pleased with the volume and quality of skin de data that is being generated and ultimately recognize bar industry and peers.

We believe that data generation strategy, we implemented in the second half of 2019.

It's clearly paying off we're confident that this and other supporting data expected to be published in near future should allow us to drive brought physician and payer adoption is compete in the coming quarters.

I would now like to transition to our research and development activities.

As reported last quarter, we have to skin t. related development projects that are top priorities.

First is our skin T E Cryo project, which is progressing as planned.

This line extension will allow us to cry preserve a certain amount of final skin t. product from a single harvest to allow for additional deployments and the same patient at any point at the six months from the original harvest state.

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 noncompliant patients for skin T. may become damage during their normal course of healing.

And in patients with wounds that due to size location or patient circumstances. They position may prefer stage deployment regiment.

You 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 any additional harvest.

Secondly, we continue to make progress on the development of the skin to eat point of care device.

The main objective of this project is the moves can t. processing to the bedside, allowing for the deployment of scanty 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 and finalize prototype designs that will be used together user attribute did you expect to complete this phase of development in Q3 2020.

Lastly, I would like to provide a brief update on the progress of our manufacturing noted in Augusta, Georgia.

We're 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 HCP is to ensure a smooth transition to the use of the new facility.

Overall I remain very encouraged with the progress, we're making related to skin t. patient data in product development I strongly believe that we have the appropriate strategy in place to maximize the full potential scanty.

Now I'd like to turn the call over to pull man for financial update.

Thank you Richard a good morning, everyone for the first quarter 2019 were built approximately $1.47 million in Turkey revenues, which in turn revenues from skin see refreshments products in our 10-K and revenue from contract service organization, which reflect your services in the 10-K.

Revenues from products during the quarter were $714000 revenues from services the $753000.

When size and therefore revenue in the most badly metrics in these 30, Greg stages with our current user base and caseload, you quote unquote or fluctuations in for Magic wand admissions, but then all accounts can significantly change the average wound size treaties and skin tea.

We expect these cost a quarter fluctuations average wound size and revenue per case to gradually begin to reflect the seasonality from a cash I become less dictated by individual accounts because it doesn't continues to observe in that space.

For the fourth quarter, 2019, parachutes and operations $16 million approximately $5.3 million per month, which is higher than the cash used in operations during the third quarter.

I'd now like to general third quarter cool and number of nonrecurring items accrued income statement during the third quarter there related to the severance payments to offer Missy is appealing to the company ended August 26 2019.

The cash payments relating to these accrued expenses made during the fourth quarter.

During Twentytwenty would expect quarterly cash flow fluctuations.

We witnessed during the second and third quarter 2019 loving the first quarters since 19.

As previously mentioned one of the Threeq mandates executive team its fiscal discipline. During the second I'll turn to 19, the complete the number initiatives to reduce casper without impacting the cool competitors the business.

Tony evaluating additional cost reduction measures.

No updates on these during the Q1 core in May.

We finished the fourth quarter, it's worth, noting the French and German intelligent cash cash equivalents and short term investments a lot balance sheet.

Before turning to compete and underwritten public offering about security raised an additional 22.7 million debt as well to estimate still from expenses.

But I missed capital outlays gives us sufficient liquidity and the balance sheet to fund operations beyond the next 12 months.

Many investors about what we chose to raise capital at the time, we did.

Good to talk to protect the near to medium and long term direction of the financial markets would recognize there's a number of potential events. During two centstwenty. The could create the majority instead buckets, we believe that would be prudent imitated sometimes sheet journeys potentially turbulent times.

Our first by saying, we remain steadfastly focused on fiscal discipline and the commercialization of skin T. I'm encouraged by the process. We have made during the second our French 19th.

Now, let's turn the call bucket to take the feedback for some concluding remarks. Thank you Paul I'd like to recap three the most important points discussed on today's call.

First we believe we're in a stronger position today to commercialize skin T. beeston steps, we have taken to identify opportunities for increased adoption.

Second we look forward to several potential near term catalysts, mainly the upcoming presentation of interim results for our D.F. you clinical trial.

The continued execution and expansion of polarity cheese patent portfolio.

Several publications, which we expect will continue to build upon the market awareness to support increased adoption for skin tea.

Third we believe the initiation of additional studies will be constructive for our discussions with payers and providers.

Hundreds of patients were treated with skin T. 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 skin Ti has had on so many patients lives delivering a solution in hard to treat wounds were other treatments have sometimes sales.

We believe skin T. 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 a long term success by any given quarter instead I measure on the incremental steps, we're taking to support the efficacy in commercial adoption of skin T. I.

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 wanted to add that I'm incredibly proud of all our determined in hard working employees. Thank you all for your dedication to polarity TV.

Thank you for joining our call today I'd now like to open it up for questions.

Thank you if you look like to ask a question. Please signaled by pressing star one on your telephone keypad.

You are using the speakerphone. Please make sure your mute function is turned off till I signaled to reach our equipment again press star one to ask a question.

Our first question comes from debt, Kevin Degeeter with Oppenheimer.

Hey, good morning, guys. Thanks for taking my questions.

Can you just comment on sort of what wound size rational with your me you see you tend to see some resistance under the current pricing model.

Hey, Kevin It's David how are you. Thank you for efforts during the call.

I think it's necessarily just you know there's a threshold I'd say larger larger wounds you know on you know upper towards the over two or 300 square centimeters.

I think that pricing, Kevin and we really emphasized on this call is there is a really important catalyst for us on when we pulled our customer base that we really didn't through and due to a deep dive into the the providers that we are in constant contact with an asking 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 strategic way and we believe just based on the early feedback into conversations we're having within that this is going to really help drive adoption.

We think about sort of average revenue per person he and plant that was down around 8000 corridors that.

Yes.

Good way to think about potential trends at least through the first time 2020 are under the new pricing plan do you think.

In terms of revenue per well inside that metric can go lower during the course of 2020.

Well I I think it all depends a little size and if we do see adoption and larger wounds were more adoption larger ones. 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 you know that we treat.

Over time, that's obviously going to reduce but in the near term basin. This pricing structure I can't imagine that we'd have a lot of variability in it but again it is predicated on wound size.

Right and then just one last one from me that get back in queue. I can you provide a little bit more details of how you're thinking about study design for the lower extremity common study that you called out.

Yeah, sure I mean, I'm going to put Nick Sop go on he's.

Right and one here with us Nick I Kevin.

Yeah, It's a great question and for the lower extremity trial were specifically looking at.

More complex wounds. So these aren't necessarily chronic wounds that might be treated and some of our other trials, but these are acute dramatic wounds with exposed complex structures, such as tendon bone and muscle.

And typically require quite a bit more extensive reconstruction.

So for the design of that trial.

Seeing on those patients and not only looking at the ability of skied close those wounds, but to really cover those complex structures.

Which oftentimes can require multiple treatments are complex surgical.

Treatments, such as flap reconstruction to do so.

Great. Thank you for that.

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Well take our next question from Christian across Scott with Cantor Fitzgerald.

Hi, good morning, and thanks for taking my questions. The first one is can you further discuss some of the considerations in place for pricing for the larger burn 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 tell versus using a product that may work initially.

And not required future applications with the higher price up front.

Hi, Chris and it's Richard Hey, Good appreciate the question and yeah, you're exactly right.

Looking at is.

Really looking at DRG pricing and when you look at certain wound sizes and certain patient sites were each facility has a a DRG reimbursement schedule.

And there's two 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 our 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 is.

Fits appropriately in that DRG pricing for that size wounds. So that's that's number one in terms of how we're approaching us and second to your point about.

Products require multiple applications.

It really different facilities are more sophisticated in 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 for patients.

Is certainly going to be lower we believe with which can be however, initially our upfront price on a per per application was was higher than competitive product. 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 concerns around ensuring that we're looking at the whole total cost of care, which is certainly favorable for skin.

Okay. Thank you and as you prepare turned down some of your trial data within the next few months, particularly diffuse based on the conversations you've had with very surgeons in the Vac committees. What are the most important measures they're looking for and in your view what do you think that they view is compelling results.

Hi, Chris and begs the question.

And we do anticipate presenting our interim analysis for diabetic foot ulcer trial, that's planned for the CW Spring conference.

However, we are concerned about the grown virus and at that conference might get rescheduled like many other recent medical conferences, but with that data.

Which is really designed to show that the clinical efficacy and ability to use screen TV in the outpatient setting.

We've got a lot of favorable feedback from providers about seeing that data and its ability to be TV used effectively in that setting.

I think the key there too is there were basically.

Building, our library of published data that's our goal here and the more that we can do that across various loan types. The easier the none of the vac process will be a and that's that's number one 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.

I'm not.

In terms of number of institution, we certainly track that information.

But we mostly focused on on the provider level, because that's the that really drives the.

Total adoption of the product so.

Susan while we you know we definitely growing that number we really care about the number physicians within that institutions as David mentioned earlier in the call a real goal is to go deep into these hospital networks.

So we don't expect that we'd add.

Same number of hospitals as we would.

The number of physicians that we want it we want to grow so that's I think thats number one.

And I'm sorry, the second part of your question.

Just any trends as it relates to the particular different specialist who are using the product.

Well certainly as we were focusing more as David said on the on the trauma space. So we're going to see a broader.

Group the specialists there.

Right now we're seeing I'd say you know we're looking at about a 70 30 split with chronic versus trauma right now chronic being 70.

Terms of number of cases, so in that same answer than assumed podiatrist and.

You know vascular and general surgeons for the most parts and obviously when you move into the Thomas space, you're going to see faster general and more more plastic in that space as well so.

Right now it's a it's a pretty broad range that we're seeing them certainly trying to continue to broaden that as we go into the to Tom's space.

Great. Thank you for taking my question.

Thank you.

Our next question comes from Kyle Carl Burns with Northland Securities.

Great. Thanks for taking my question.

With regards to.

Looking to come on line relatively immediately said third quarter would you anticipate.

How would you anticipate a bump in terms of the size of wounds treated on that so the relative to.

The overall business and I guess, another way to saying the question is how do you expect that's rollout and I would imagine that would be weighted towards larger wounds. Thanks.

Yes, so in real time, we are addressing this pricing situation and we've actually engaged in the last couple of weeks of 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 the main.

Hindrance, if you will for repeated reuse so.

We've had several doctors Paul out specific examples in which they had patients lined up that they could treat at the pricing was more favorable. So we do expect us to be a a relatively near term.

Inflection in terms of wound size, but that's no it's always very very hard to predict.

But we do we do expect to see that in the in Q2, hopefully or without that one size will start to increase.

Great. Thank you.

Well take our next question from Sean Lee with H.C. Wainwright.

Hi, guys and thanks for taking my question.

With a lot of.

That's good to be because sensitive I say doesn't see have you begun tend to times in case, the coffins gets cancelled as well in light of via.

He has got involved.

Yes, Hi, John that's a great question and it's something that we're obviously very concerned about they just cancel the ABT for next week.

And they let us know that just a couple of days ago.

It's unclear.

How soon as advance multiple know about as pwc, but the theres already been several discussions about potentially having sort of a virtual conference.

That the conference organizers themselves would help put together so that's 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 if the conferences for.

Sample just postponed until a later this year.

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

Yeah, certainly I mean were.

The conference is that are being canceled we did have.

Yes, he plans to be presence at those and as as Nick describes it.

There's two different approaches to this that we're doing a parallel one is too.

Have the sales reps is active as possible in the field given some of the restriction. So thats certainly an important point so as many touch points as we can get.

The health care providers directly in the territory is critically important in the second is next described is.

Unlike.

Like other companies 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 across the country in terms of putting on a programs like that in a virtual setting.

Thanks for the additional color that's all you have.

Thank you.

And we will now take a web question Mr. Hurley. Please go ahead.

Thank you operator next question. We have is from RK from H.C. Wainwright now 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 in the way we process skin to its really.

People and making sure that the people that are trained to process. This product.

Our products are.

Our safe so we're taking the necessary steps to make sure that we.

We separate our processors and don't allow them to to interact you know at this current time on keeping them is a very safe distance to make sure that theres no hiccups from that perspective, and as far as just general supply issues from the standpoint.

This is Jerry medical supplies needed to process, we havent really had disruptions there, but we are definitely.

Making sure that we are ahead of the curve to prevent any any issues that could occur.

Thank you and at this time there are no further questions.

We thank you for your participation you may now disconnect from this call. Thank you.

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Yeah.

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