The latest on PolyNovo

Paul Brennan is the CEO of PolyNovo. PolyNovo has a technology that came out of the CSIRO. It is a wound and burn dressing that's synthetic. It's a polymer, what they call scaffold, that goes over the wound. The blood vessels and so on grow into the polymer and so the result is much better than a skin graft or what they call an auto graft.

The shares have been moving up in the last few weeks because they've just had approval in the Malaysian market for the product and Paul, as he explains in the interview, says that the Malaysian approvals are very similar to Europe. Now they've already been approved in the US and are starting to get some success there and they’re in a number of other countries which he lists. I think the best way to understand and to see how the product works would be to go to the website and click on the most recent presentation that they gave which was back in... just last year there was a presentation that's worth looking at. It shows pictures of how the thing works and what the end result is for a burn victim. It's pretty dramatic, pretty graphic pictures but really worth looking at to understand how it works.

The company's capitalised at about $450 million and as I say, the share price has been moving up. They seem to have the market at this stage for synthetic wound dressings of this sort to themselves around the world and starting to kick some goals. Paul says that they're still burning cash, still losing money, but he expects them to be breakeven next year. 

Here’s Paul Brennan, the CEO of PolyNovo.

Listen to the podcast or read the full transcript below:

Paul, you announced in January you've got Malaysian regulatory approval and that that's a big deal.  Tell us why it's a big deal?  Is that the first time you've had a country approve the BTM product?

No, Alan, we've had several countries give us regulatory approval and we're on sale in many and I'll cover those in a minute.  The reason Malaysia is good is that the Malaysian regulatory process is very similar to the European CE mark process and we're currently going through that procedure now and we anticipate getting our CE mark in April so it bodes well for our progress in Europe but it also is the first Asian country for us to enter in the South East Asian region.  It provides an opportunity for a near neighbour for us to provide this revolutionary product.

Currently we're on sale with regulatory approval in South Africa, Saudi Arabia, Israel, India, the United States, New Zealand and here in Australia.

Okay, I didn't realise you were on sale in the United States.  How are sales going there?  Bring us up-to-date on the sales.

Sales are going very well.  Last financial year we sold $1.74 million which was our first year of sales.  In the first half of this year we've sold $3.75 million.  We've got a very nice ramping trajectory there.  The US sales team is only a small team currently of eight sales people and we're in the process of expanding that further to meet demand.

I take it those were dollars that you said?  $3.75 million dollars?

Yeah.

Okay.  Could you perhaps take us through how much you charge for each product or how the thing is charged for and what the actual volume sales are looking like.

The price of the product varies per market.  If we're direct, we obviously get to retain more of the margin whereas when we're using distributors then we have to do a margin sharing.  The price varies a little bit depending on the reinvestment structures of each market.  There's not one price but the margins for us are very healthy.  The US market, we go direct with our own sales people and retain that margin and we're significantly cheaper than the main competitor in the market but the market being what it is we're price sensitive to competitors at the moment as to giving away what our actual pricing is.  Volume wise, most of our product is selling in the larger sheets which are quite a few thousand dollars per piece.  Over time we're seeing the increase in the smaller sizes which is to do more chronic wounds such as diabetic foot, ulcers or limb salvage etc.

You mentioned your competitor in the US.  Who is that and what's their product?

Our main competitor in the US is a company and product by the same name by Integra.  They're based in Plainsboro, New Jersey.  They make a product that's made of bovine collagen and shark fin cartilage, so not exactly environmentally friendly.  It's a very good product and it's been on the market for about 20 years and it's saved many thousands of lives.  It's just that our product is completely synthetic and less likely to become infected than a biological product and much easier to use and better clinical outcomes for patients whilst being significantly cheaper.  We've addressed all the value proposition pain points that surgeons in hospitals have been expressing to us about the cost of treatments and the effectiveness of the outcomes.  We do have something significantly different to the current market leader.

The other significant competitor we've got is what you'd call auto grafting.  If you get a large burn for example then the standard might be to take as much donor skin off another area of the patient and close the wound but you end up with a high degree of contraction and scarring and a very woody outcome.  We're demonstrating that we get a significantly better outcome for patients that in the long term is much more cost effective in health economic terms for the hospitals and the patient.

Is there much inertia in this market in the sense that these hospitals need to be set up for the Integra products and are set up for that and that they have to change their processes in some way to accept your product?

No, the actual procedure of applying it and caring for it post-operatively is very similar but just last week at a conference in the US one of the surgeons presenting on our product said somebody with minimal training can apply this product versus Integra being quite complex to apply and to manage.  They’re familiar with the techniques of how to apply it, but the product is so much more robust and simple to use that it's easy.  Even the interns and registrars can very easily care for a patient with this product.  You don't need many years of experience to use it.

What's the relative market shares?  Have you got much market share?  Have they got the whole market at the moment?

They've got a significant portion of burns, reconstruction and trauma.  They sell around about US$150 million of biologic products into that segment.  As I've said, we're on track for...  we sold $3.75 million in the first half of the year so we don't have a lot of market share.  We've got a lot of headroom to grow but we are growing at a significant rate at the moment. In the next three years we anticipate taking a significant portion of Integra's market share but after that it's also the expansion of the total market to address the shortcomings of auto grafting and that is the area where we'll see the true expansion of the potential market.  The total market is somewhere between US$880 million and US$1.5 billion on a global scale, so plenty of headroom for us to grow.

What do you mean by auto grafting?

That's where you take donor skin off the person and move that to an area where you've got a wound defect.  You might do that say for what you'd call a pre-flap which is where they take a muscle out of your forearm and make a tongue for you with head and neck surgery for cancers instead of just putting a skin graft over that hole in your arm you can then put the NovaSorb BTM into that and regenerate the dermis in full and retain full function of the arm and the tendon movements and everything else and get minimal degree of scarring so that the patient has a very good outcome.  It's addressing areas like that.  Any time you see anybody with a skin graft somewhere on their body or their face that looks a little bit like a pie dish effect and very wooden and stiff, we can resolve that by having a very supple normal dermis which is the underlying layers of your skin and stretching and flexibility so that they don't have that woodiness and that contraction and scarring.

I just wonder when you talk about the size of the market and the potential for expansion beyond burns, do you include open wounds and also ulcers from diabetes and other things?

Not fully in that size of the market.  There are potentials for further growth.  The diabetic foot ulcers are included in that $800 to $1.5 billion and some of the venous leg ulcers but there are some chronic wounds that aren't treated today with dermal scaffolds that in the longer term could be and that could further expand that market.  For us, one of the reasons why investors are happy with the product is that you've actually got a platform technology in the NovaSorb polymer so we're releasing hernia products in 2020 so they'll be on sale in the US, Australia, New Zealand, Europe starting from middle of 2020.  Again, that's a biodegradable polymer that will regenerate the tissue in the defect area of where a hernia is.  We've got an exciting platform that's got many arms to develop yet.

What's the competitive situation in Europe?  Does Integra LifeSciences also sell into Europe or is somebody else doing that?

No, Integra sell into Europe in a mix of direct and distributor models.  They haven't penetrated the market very well in Europe, it's a different reimbursement system and different hospital drivers.  The main competitor in Europe is a product called Metroderm which is a German developed product and it's got a reasonable sort of hold in the market but it doesn't have much share outside of a few European countries.  We see that as an easy replacement for us to change the European market.  The European market will be smaller than the US but it's still a significant opportunity for us.

And when you quoted those numbers for the potential size of the market, did that include Europe or are you talking just US?

No, that includes Europe.  That's a global number or estimate.

You're saying that the Malaysian approval or the Malaysian process is similar to Europe.  Can you just explain to us what is similar about it?  What do they do that Europe does?

Regulators for each country, so for us in Australia it's the TTA and in Malaysia and Australia and Europe they go through a very similar process of looking at the science behind your product, your quality management system, your manufacturing processes and your risk analysis to see if your product is safe for human use and whether it meets all the relevant standards.  For South East Asia in the main, Australia and Europe have been working for many years on harmonising a lot of the regulatory processes.  The US has a very different regulatory pathway as does Canada, China, Korea and Japan.  But having a similar process to Europe makes it easier for businesses to get the registration because you compile very similar dossiers and run a very similar process within your quality management system.

What's the story with the Chinese market?

China is a very different market.  We registered our trademarks in China.  We're in the process of registering our patents in China.  Once we've done that we can then apply for regulatory approval within China.  That will take many years and require a clinical trial within China.  They don't, in the main, accept foreign clinical evidence as appropriate for use in China on Chinese people.  We've still got some way to go before we start the regulatory process in China but we're getting all of the structural and legal protections into place before we go down that regulatory pathway to ensure that we maintain complete control of our IP and our production etc.  It's a market to enter slowly and with caution.

Right.  There's a slide on the recent presentation that you gave talking about the current focus being BTM but them you say that the next phase is breast and hernia, a $2 billion market and a $1 billion market respectively and then bone void filler and then bladder so there's this sort of a trajectory of different focuses.  Can you explain to me what the breast, hernia, bone void and bladder projections are about?

Yeah, with the hernia and the breast products as I said they'll be based on the NovaSorb polymer that bio-reabsorbs.  They’re specific devices to repair defects in areas where there's a lack of tissue or a weakness in the tissue.  Say for hernia it will repair the abdominal wall and for the breast products there's a range of products that we’re developing in partnership with Establishment Labs who's a breast prothesis manufacturer and those products will be around how to position breast protheses better and stop what's called capsular contraction which is where the body builds a hard wall around an implant.  We will regenerate the tissue around the implants in a way that reduces the risk of that scarring and contraction so that you get a better cosmetic outcome.  Then we're also developing some products for breast reconstruction after mastectomies.  Those are a little further off whereas the hernia product will be on the market in 2020.

For the bone void filler, we make the polymer into a two-part set system.  A little bit like an araldite and that's put into a bone defect where you're missing enough bone to repair a significant gap in a shaft of the bone and you can mend effectively that bone with this polymer and as the bone grows back into the polymer itself, the polymer will dissolve and go away.  We do have a licensing agreement with Smith & Nephew Orthopaedics globally for that however Smith & Nephew have done very little with polymer so that's something for us to look at how we address that with Smith & Nephew in the longer term.

Sounds like you should take it off them.

Yeah, it's not always that easy when predecessors have written contracts that didn't have excellent exit clauses.  There's some legal work that needs to be done there and at this stage we're focused on generating our revenues and becoming a profitable company rather than looking at legal cases and things so we will negotiate with Smith & Nephew over their performance with that but we also need to construct solid legal support behind that negotiation process.

When do you think you will become a profitable company?

Hopefully in financial year 20 we should be breakeven.  It would be nice if we do that before then but we expect that we will be breakeven in financial year 20 and profitable after that.

I suppose one of the questions that you and the board will face is at what point do you sell a business to big pharma or perhaps one of your competitors.  You've got to pick the moment I suppose because it's at what point are you going to maximise the return?

Yeah, Alan, that's not the focus of what we're doing.  We're looking at how do we develop and commercialise and make profits out of our own product which was developed by the CSIRO.  Cochlear and CSL are very successful Australian multi-nationals as is Ansell.  There's no particular reason why PolyNovo couldn't follow a similar path and be another successful Australian multi-national.  The best way to run your company and the best way to get value in your company is to run it as your own commercial entity as effectively and aggressively as you can.

Can you tell me whether you've had any approaches up to this point that you've knocked back?

We haven't had approaches at this stage.  We've had parties having cursory inquiries but that's more people wanting to learn what's this product about and what's the technology about.  There hasn't been any serious merger or acquisition discussions at all at this stage and that’s not our focus.

I suppose if there had been you would have had to tell the market, wouldn't you?

We would.  There's no activity on that front at this stage.

I suppose the final line of questioning concerns to what extent there is anybody coming up with something similar in terms of a synthetic wound covering and burn covering.  Are you seeing anything in the market?

No, we look very regularly at all of the patent filings including where our patents may be quoted.  There's nobody developing a polymer similar to ours.  B. Braun in the hernia space have a polymer which is based on what you call a PLA polymer and it's significantly different and inferior to a NovaSorb polymer.  The CSIRO really developed something exciting and novel in NovaSorb as a biodegradable polymer and nobody else in the market has looked at this segment to date.  But we keep a very close eye on that.  We do have over 38 patents on the NovaSorb family and we meet with our IP lawyers every three months to look at expansion of our patent portfolios as well.

You are obviously confident you're pretty well covered now?

Yes, I think we've got a very robust portfolio of IP with patent protection and trademarks.  We're making enough noise in the market.  At the end of the day you need to be first to market and you need to be successful in that market place.  I've just come back from the US at the Boswick conference where we had seven surgeons presenting on NovaSorb BTM to the point where many surgeons in jest were sort of saying, "Have you people just got this conference to yourself?" And it was very enjoyable to see the very good outcomes surgeons were getting across the US with our product but also to see that it is very much an exciting product for them that so many of them want to get up on a podium and talk about the success they're having.

Thanks very much for talking to us again Paul.  Great to talk.

Pleasure Alan, any time.

That was Paul Brennan, the CEO of PolyNovo.