Next Science Ltd

ASX:NXS

Earnings Call Transcript 2024-Q3

[Francoise Dixon, executive]

My name is Francoise Dixon, and I'm Head of Investor Relations for Next Science. Today, our CEO, I.V. Hall; and CFO, Marc Zimmerman, will provide an overview of the third quarter results. We will then open it up for questions. If you have a question, please submit it via the Q&A text box at the bottom of the screen.

I'll now hand over to I.V. for the third quarter update.

[Harry Hall, executive]

Thank you, Francoise, and good morning, everybody.

This September quarter was -- we were one of -- definitely mixed results. The September quarter was affected by the recent DME sales restructure and the shift in our go-to-market strategy. While this was a necessary change to ensure we have a sustainable DME business model, we have made good progress during the quarter to further improve revenue quality and believe we are on track to drive future sales growth from an optimized cost base. We also continue to expand our XPERIENCE footprint and have increased our sales of commercial BLASTX into the military and private sectors. We remain focused on cost optimization and expect to be cash flow and adjusted EBITDA positive over the next 6 months by the end of March 2025.

Some highlights from the quarter were third quarter revenue product sales of USD 4.7 million were down 7% on prior period and down 19% on second quarter as DME sales impacted -- were impacted by the recent restructure. Also in the third quarter, direct product sales of USD 3.5 million were down 14% on prior period or 76% of product sales. Year-to-date, product sales in -- for the full year '24 of $15.9 million were up 5% over prior period, where direct product sales of $12.2 million were up 8% on prior current period with being 77% of product sales.

Our gross margin for the third quarter of 81% reflects ongoing focus on DME revenue quality and a shift in our product mix. Cash receipts for the quarter of $4.1 million were 21% lower versus prior period. However, we have carryover receipts of over $900,000 received in the first few days of October of 2024. Closing cash balance of $1 million and debt of $0.5 million following an initial draw of the loan facility during this quarter. And we will reaffirm our full year guidance to be adjusted EBITDA and cash flow positive within the period of fourth quarter of '24 and first quarter of '25.

Drawing your attention into the body of our announcement. We do have new data to share with you. If you look at Chart 2, we have now started sharing a breakdown of our business where we break down the category -- the product categories of Surgical and Wound Care. And we did that in order to give further color to where our business is going and some of the changes and variances we see within each category quarter-over-quarter, period-over-period. So where you can see that now we start to see some Surgical sales continue to exceed our Wound Care market over the last 2 quarters.

So further, if you look down, we continue to bring color on to our cash flow summary, where we continue to show the breakdown of product sales, cash receipts and operating cash flow. And we close the report with an update on our clinical studies, specifically the one in Canada, where we continue to enroll. We have now opened 4 sites in the study. We have now crossed the 1,000-patient line of enrollment, and we continue to focus on signing new sites for enrollment and targeting our midpoint analysis of 3,800 patients to be done towards the end of next calendar year.

So while this was a quarter of very mixed results, we are happy to see that we have established new cost base. We have built the foundation, which we continue to revise to help optimize our cost structure, but also keep our eyes focused on our guidance to achieve cash flow and EBITDA positive by the end of March 2025.

So with those highlights, I would like to open it up to the group for questions and turn it back over to you, Francoise.

[Francoise Dixon, executive]

Thank you, I.V. We have received a few questions via e-mail, so I'll start with these first. Our first couple of questions come from [ Chris Lamont ]. I.V., can you share some information about the current commercial agreement between tbh and Next Science? And as sales in tbh has increased dramatically, is tbh a material contributor to the Next Science bottom line or a small percentage of the EBITDA contribution?

[Harry Hall, executive]

So well, first of all, [ Chris ], thank you for the question. tbh is continuing to be a valued partner. They have completed their merger with York St Brands, and we continue to have a good relationship moving forward with them. We continue to discuss products moving forward, and we are certainly excited to see their growth across their entire portfolio. So we are in good standing, and we continue to work together. And that's due to the confidentiality, that's the extent to which we can update on that contract.

[Francoise Dixon, executive]

Thanks, I.V. Our next question come from [ Andrew Lee ]. Question one, looking at the opportunity for XPERIENCE and with the focus on hip and knee replacement surgeries, do you know the average volume or number of bags of XPERIENCE used in a hip and knee surgery?

[Harry Hall, executive]

Thanks for the question, [ Andrew ]. And what we have been seeing primarily is it depends on the surgeon and it depends on the patient. And when you look at primary total knees as an example, on average, we see about 1 to 2 bottles used for a primary procedure. However, with patients with comorbidities or with a higher risk of infection, that average utilization might go to 2 to 3 bottles. And it's very much the situation where it's less volume is required for a hip procedure because those incisions are smaller and the exposure is much more minimally invasive than a knee. But it is dependent on surgery. It's dependent on surgeon preference. But if we were to generalize for primary total knees, 1 to 2 bottles, patients with comorbidities or higher risks of infection, we would see maybe an extra bottle being used in that case.

[Francoise Dixon, executive]

We have another question from [ Andrew Lee ]. It's great to see the growing body of research and evidence supporting prophylactic use of XPERIENCE to reduce infections. Current evidence around wound irrigation is generally of low quality and surgical guidelines from the American Association of Orthopedic Surgeons suggests the use of betadine with mention of ongoing research into other options. Have you had discussions with the AAOS about the possibility of XPERIENCE or antimicrobial solutions being specifically included in surgical guidelines? How likely is that? And what time frame or additional evidence would be required?

[Harry Hall, executive]

Okay. Thanks, [ Andrew ], for that question. I think the use of evidence is continuing to be a significant driver in orthopedics. I think, in general, current orthopedic evidence, whether it's on implants, instruments, procedures is of a relatively low quality. There's not very many Level 1, Level 2 studies conducted in orthopedics. As a matter of fact, our Canadian study that we're doing will put us up into the category of Level 1 or Level 2 and be one of the more impactful studies with that level of evidence to be referenced. And as you point out, our current studies are somewhere anywhere between Levels 4 and 5. And that is still considered a good amount of evidence for orthopedics.

The association with the AAOS and then putting forward their recommendations is only one option that surgeons consider, especially when we are working with value analysis committees. We need to consider the infection protocols signed at the hospitals, the AORN or the nursing standards that are very prominent in the U.S. at this time. And there's also joint reviews that are done within hospitals that will actually dictate protocols. So while working with AAOS or another one of the surgical societies is something that we continue to have discussions around, it might not be enough to have, what I would call, a guarantee in this space to get product usage. So we will continue to have conversations. We will continue to generate evidence. And we will look forward to utilizing the data that's coming out of our Canadian study to influence some of these larger societies to help with establishing those guidelines to improve the patient care.

[Francoise Dixon, executive]

Thanks, I.V. Our next question comes from [ David Gibbs ]. Are you still confident of reaching your guidance by the end of 2025 -- by the end of March 2025, excuse me?

[Marc Zimmerman, executive]

Yes. We expect to be positive in both EBITDA and cash flow by the end of March 2025. We've improved our cost structure. We'll continue to look at cost optimization, coupled with driving revenue increases to get to breakeven.

[Francoise Dixon, executive]

We've got several questions on the live chat, so I'll go over to that now. Our first question comes from [ Pavley Michael ]. When you say adjusted EBITDA positive, what item are you excluding?

[Marc Zimmerman, executive]

Yes. We're really looking at operational activities. So we're excluding other income and other expenses.

[Francoise Dixon, executive]

Thank you, Marc. Our next question comes from [ Sue Cho ]. We keep being told that Next Science will be cash flow positive. But so far, the last 2 quarters have seen a drop substantially. How can it be possible to be cash flow positive?

[Harry Hall, executive]

So Marc, do you want to handle that one?

[Marc Zimmerman, executive]

Sure. Yes. Sorry. Yes. So we've seen our cost structure improvement. Our cost basis on a quarter-over-quarter continues to go down. We continue to look at optimization. We look to increase revenue and drive top line to get to where we need to be from a cash flow positive position as well as EBITDA positive position.

[Francoise Dixon, executive]

Thanks, Marc. We have another question from [ Pavley Michael ]. Are the staff costs outlined for the quarter of $3.4 million expected to be similar for the quarters to come? Or does this still encompass the restructuring? What could be the expected staffing costs for the quarters to come?

[Marc Zimmerman, executive]

Yes. So third quarter does not include any of the restructuring costs. We exited those in the second quarter. The third quarter, however, does include -- we pay biweekly for the company. So the third quarter does include an extra payroll cycle that doesn't show up in every quarter. So it's a little bit higher as a result of that. So we continue to look again at ways to optimize our cost structure, and we will continue to obviously keep an eye on that as well.

[Francoise Dixon, executive]

Thanks, Marc. Our next question comes from [ James Bishop ]. Have you engaged the insurance sector? My personal surgery -- surgical cost insurance of over $300,000, at least 2/3 of the costs could have been avoided had I had Next Science products in the file of surgery.

[Harry Hall, executive]

So James, thanks for the question, and sorry to hear your experience with your procedure. And we do engage with insurance primarily as a payer, especially in our DME products. So we have talked extensively to get payers on board, and that is something that we work with and continue to try to expand that base. When it comes to reimbursing for surgery or surgical procedures, that is something we are working on putting proposals together. We have not engaged specifically for a reimbursement or a guidance from an insurance company because we need to get on -- we are essentially based on reimbursement. We are considered as part of the DRG line items for reimbursement for the surgery.

There is no specific reimbursement for infection prevention or irrigation per se today. That is something that we will look at as a new code once we have the evidence and data to support that. So as of right now, surgical insurance reimbursement, we have not done. We do have that cost regularly or that conversation regularly for the DME reimbursement. But as I understand your question from a surgical procedure, that's something that we plan to do in the future.

[Francoise Dixon, executive]

Thanks, I.V. We have a couple more questions from [ Pavley Michael ]. The first one is, do you expect gross margins to remain around 81%? Or do you expect to see a drop?

[Marc Zimmerman, executive]

So we've seen a steady increase in our gross margins. We don't really guide to gross margin, but we hope to continue to improve those results. That being said, there's a give and take there. If we can drive specific volumes with lower expense below gross margin expense that provides us an opportunity to drive the top line, that would be an opportunity that we would take advantage of. So yes, we're always looking to optimize our revenue and optimize our cost of sales, cost of goods sold. So that is the goal to improve that, but we'll take advantage of opportunities as they exist.

[Francoise Dixon, executive]

Our next question from [ Pavley Michael ] is, what initiatives are in place to drive top line growth? As sales appear to have been underwhelming in the last 2 quarters, do you expect momentum in top line growth in Q4?

[Harry Hall, executive]

Yes. I think that that's a good question. Thanks, [ Pavley ]. I think the -- or Michael, I think the initiatives in place to drive top line growth. We continue to look at customer targeting. We continue to look at penetration. And we continue to look at productivity from each one of our territories. And we've gone through significant targeting exercises with our sales team to put these targets in place, and we are looking to close on those opportunities over the coming quarters.

So if you remember last year, one of the things that we focused heavily on was getting data in place to drive some of our decisions. And that data is actually being used -- I think the data is actually being used to put these targets together. And it has been one of the things that has helped us put our territories in place and also look at how we can continue to serve these customers, especially on the XPERIENCE side, making good progress there with that data. So really, it's targeting, adding new customers and continuing to change from the high-risk procedures to prophylactic growth is where we're going to see the continued growth come from.

[Francoise Dixon, executive]

Thanks, I.V. We have -- I think it's more of a comment from [ James Bishop ] that's come from the chat. He said, I'm running marathons after the successful surgery using SURGX and BLASTX. I'm not sorry or sad at all, thanks. My 25 years in the medical industry has significant insurance-driven risk-governed processes. Orthopedics insurance costs are massive. If reduced risk drives insurance costs down, Next Science can be the winner besides marathon winners like me -- marathon runners like me.

[Harry Hall, executive]

Yes. Well, we agree, [ James ]. Thank you very much.

[Francoise Dixon, executive]

Before handing back to I.V., I'll pause a moment in case there are any final questions. We don't seem to have any questions, I.V. So I'll hand back to you for closing remarks.

[Harry Hall, executive]

Okay. So thanks, everyone, for your time today and your questions and your support of Next Science, and we look forward to continuing on our journey and bringing forth delivery on our guidance and also continuing to -- on our mission of healing people and saving lives with our products. So thank you very much, and have a great day.