Bonesupport Holding AB

STO:BONEX

Earnings Call Transcript 2020-Q1

[Operator]

Welcome to the BONESUPPORT Q1 Reports 2020. [Operator Instructions] Just to remind you, this conference is being recorded.Today, I'm pleased to present CEO, Emil Billbäck; and CFO, Håkan Johansson. Please begin your meeting.

[Emil Billbäck, Chief Executive Officer]

Thank you very much, operator. Welcome, everyone, to the BONESUPPORT's Quarter 1 2020 Results Call. I am Emil Billbäck, the CEO of BONESUPPORT. Also with me here today is Håkan Johansson, our CFO.So this morning, we'll take around 20 minutes to run through the presentation of the first quarter, and then we will open the line for a question-and-answer session. Next slide please, operator.So before starting the presentation, I would like to draw your attention to disclaimers that are covering any forward-looking statements that we will do today. Next slide, we will start the presentation.I would like to begin by giving some highlights from this morning's report. So overall, quarter 1 sales were SEK 43 million, up 32% year-over-year. Sales has been negatively influenced by the COVID-19 pandemic, which I will get back to later in my presentation. Despite these challenging times, we are seeing confirmation that our strategy is working and that the company is continuously moving in the right direction.Segment Europe & Rest of the World grew 4%, reaching SEK 22 million. Growth of our antibiotic eluting products grew only with 2%. This is a direct effect of the pandemic and the deferred surgeries of chronic osteomyelitis that has been done in the key European markets.In segment North America, we saw a strong continued progress with sales reaching SEK 21 million, up 84% year-over-year. The gross margin in the quarter was 89%.Speaking a bit about operational highlights. During the latter part of 2019, we finally filled the vacant sales territories in Germany as well as the newly established direct territories in New York City, New Jersey and the region we created in New England. We saw increasing use of CERAMENT, and hospital contract awarded in these new territories being off to a very promising start before the influence of the corona pandemic became visible at the end of February.We're now revitalizing our distributor market following a similar methodology as used when selecting distribution partners in the U.S. We have an established and effective matrix for partnership selection and performance engagement. This work has resulted in the appointment of new distributor partners in Italy and in France, 2 of the biggest European markets, where our sales so far has been very low but where there has been a very attractive market potential.In March, we released the very exciting news that a breakthrough device designation for CERAMENT G was received from the FDA, which makes us -- which made us also confident in submitting a De Novo application in April. The application is aimed at the indication osteomyelitis, also called bone infection, and can potentially result in an approval at the later end of 2020.I will come back to some details on the operational highlights. But first, I would like to talk about the pandemic and its effect on the company.Slide 4, please. We saw the impact of the coronavirus outbreak in mid-February for several of the European markets and on the U.S. East and West Coast, about 1.5 weeks later. Hospitals were then freeing up resources in anticipation of need for critical care of infected pensions -- sorry, infected patients. The outbreak of the pandemic has led to temporary adjustments and reprioritizations within the entire health care system, especially in the countries that have been the hardest hit by the virus outbreak. With hospitals redistributing resources to the intensive care unit, elective surgeries have been given a lower priority. Noncritical orthopedic surgeries has gotten deferred to later dates. However, nonelective procedures, such as acute orthopedic surgery related to trauma or severe bone infections, have been influenced to a lesser extent.The regional lockdowns and geographical quarantines can be expected to lead to a smaller number of trauma surgeries for as long as the restrictions are in force. We also see that the pandemic could delay recruitment of new customers as the interactions between potential customers and company representatives are restricted.Meanwhile, we have launched a series of webinars and facilitated electronic communication to conduct training, education sessions and customer interactions. We have had several key opinion leaders host webinars on our platforms, sharing experiences of CERAMENT and presenting case studies and clinical studies of CERAMENT. The webinars have had, on average, more than 80 participants each.In addition, we have taken proactive measures to minimize the risk to our employees and to ensure our business continuity. We have an internal task team that is monitoring and responding to the evolving situation of the pandemic. BONESUPPORT has good inventory coverage and is shipping product without any disruptions.We have taken measures to reduce expenses without interfering with business or our ability to quickly scale up our activities on the pandemic, so permit. As an example, we have made work time reductions, mainly for salespeople, and also made voluntary and temporary sales -- sorry, salary reductions across the entire organization. These measures will be visible at significantly lower cost in quarter 2.I would like to emphasize that COVID-19 has no impact whatsoever on the underlying need for CERAMENT nor the influence on the need to treat skeletal injuries. We are certain that the number of elective orthopedic surgeries will return to normal as the pandemic wears off. All in all, all previously communicated, we have predicted sales in the first half of 2020 to be impacted by the COVID-19 outbreak. And as the impact on the full year sales for 2020 is, at this stage, unpredictable, we cannot give any guidance for 2020. That said, we're not making any changes to our long-term outlook and still expect growth of 40% per year as of 2021 and forward.Slide 5, please. So now I'd like to provide you with some more details on our quarterly sales development. So this slide, you will recognize, shows the last 12 months, with the dark orange part of the bar representing Europe and the light blue and dark blue part of the bar displaying sales in the U.S. The dark blue part visible from quarter 4 2018 shows sales achieved with a new distributor setup. And all LTM, all last 12-month sales of Zimmer Biomet is now gone and replaced by growing sales from our new distribution setup.Quarter 1 2020 represented a new all-time high despite influence from the corona pandemic. This chart also shows and confirms the steady growth in Europe & Rest of the World. But of course, you can see a slowdown in growth in quarter 1 attributable to COVID-19. Antibiotic eluting CERAMENT represents now 85% of total sales in Europe and is one of the biggest growth driver of the business.Going to the next slide, Slide 6. We will focus more on the detailed segment of Europe & Rest of the World. The segment delivered SEK 22 million of sales, corresponding to growth of 4%. The antibiotic eluting product grew 2%. In the quarter, our direct markets, which are Sweden, Denmark, U.K., Germany and Switzerland, represented 86% of sales. Now this is a strong indication of the enormous potential we see in the rest of Europe. Large markets such as France, Spain and Italy have very low sales penetration. Even countries like Netherlands, with similar market dynamics as our direct market, is far away from its full potential. Following the successful geographical coverage by ramping up sales resources within our direct markets, we are now gradually steering our focus towards revitalizing our distributor market and the large part of Europe that has a low penetration.We have installed strict criteria for engagement, specific CERAMENT market promotion criteria and performance criteria. Early in the quarter, we appointed new distributor partners in Italy and in France. This gave a slight short-term disruption on sales. But we are confident in the longer term that we will see great potential from these changes as we have engaged with partners that can promote CERAMENT more decisively and better.In the quarter, we also recruited a direct sales director in the Netherlands to accelerate sales penetration by working with a present distributor and direct with key customers. This person is reporting directly into our European sales management. And by having a dedicated person in place in one of the key geographies, we believe we will increase focus and secure the implementation of our proven and successful marketing strategies.In the quarter, we received a large order from Australia. This order relates to several procedures conducted by 3 orthopedic surgeons that all have applied for and been granted specific authorization to use CERAMENT ahead of registration. This order underlines the market need and the unique benefit with CERAMENT. And we are anticipating to receive regulatory approval soon in Australia, giving us the ability to provide access to CERAMENT for all patients in need.Slide #7 please. So we go then to the segment North America. Sales in the quarter was SEK 21 million, which is a growth of 84% year-over-year. Sales was reduced with 9% versus quarter 4 of 2019. This is due to regular and usual seasonality but also from the COVID-19 pandemic.During the late autumn/winter of 2019, we had a dialogue with the FDA to investigate whether CERAMENT G could obtain market approval for osteomyelitis, also known as bone infection, through a De Novo application. Such an application can be made when there is no comparable established alternative on the market. The dialogue with the FDA resulted in a breakthrough device designation for CERAMENT G, and encouraged by that strong recognition, we decided to file the submission for de novo in early April. The breakthrough device categorization can be assigned to products that are considered to provide more effective treatment of severe patient conditions. The purpose of this designation is to provide an expedited review for the application of market approval.Osteomyelitis, as a reminder, is a severe condition where the infection damages and prevents the natural bone from healing. Bone infection is estimated to account for about 50% of all nontrauma-related amputations in the U.S. Each year, approximately 60,000 patients with osteomyelitis are treated with bone graft, and this market for this treatment is estimated at around USD 100 million. CERAMENT G enables local antibiotic release, which protect the bone healing process and efficiently reduces the risk of reinfection and amputation. Being able to provide high local delivery of antibiotics may also decrease the volumes of systemic antibiotics and thereby reduce the risk of developing antibiotic resistance, which is a very important aspect. We see a very large potential for CERAMENT G in the U.S.The corona pandemic could have influence on the recruitment and follow-up compliance to our studies. It is too early to give a firm statement of what the impact and consequence of this impact could be.With regards to the FORTIFY study, this study that will be the foundation of our PMA application, we have now recruited 196 out of 230 patients. We intended to have -- we intend to have a dialogue with the FDA to determine how the final stage of this study should look like given different scenarios of pandemic influence.Despite the disruption from the ongoing pandemic, our commercial team has made great progress in increasing CERAMENT's market presence, the geographic coverage and building a rapidly expanding customer base. Leading the U.S. team starting from June 1 of this year will be Michael Roth, who will be BONESUPPORT's General Manager and Executive Vice President in the U.S. Mike has extensive experience from the field of orthopedics, and he is a strong commercial leader. I really look forward to having Michael on the team as we take our journey into the U.S. to the next level.So with that brief update, I will now hand over to Håkan, who will cover the financial overview from the quarterly report.

[Håkan Johansson, Chief Financial Officer]

Thank you, Emil. Let us move then to Slide 9. This is a graph that presents net sales by quarter as bars and last 12 months of sales as a line. Net sales in the fourth quarter amounted to SEK 43.4 million compared with SEK 32.3 million (sic) [ SEK 32.8 million ] in the same period previous year, equaling an increase of 32%. In March 2020, COVID-19 reached a pandemic level, and BONESUPPORT was affected in both the U.S. and Europe due to a decline in mainly elective surgery.The Europe & Rest of the World segment reported a growth of 4% compared to the same period last year. North America segment reported an increase in sales of 84% as an effect of the transition to the new distribution model and thereby low sales in previous year.Net sales for the last 12 months amounted to SEK 166 million compared to SEK 98 million last year, an increase of 69%. The segment Europe & Rest of World increased last 12-month sales with 28%. And last 12-month sales in the segment North America increased with 163%, being a strong confirmation of our strategy to reach the U.S. market more efficiently with a new distributor structure.Next slide, please. In the segment North America, sales for the period amounted to SEK 21.2 million compared with SEK 11.5 million previous year. The low level last year were explained by the new distributor structure initiated in the fourth quarter 2018. As a result of the ongoing COVID-19 pandemic and the decline in mainly elective surgery, sales decreased by 9% compared to the previous quarter.The contribution from the segment was minus SEK 12.2 million compared to minus SEK 15.7 million last year. The reduced loss is related to increased sales. Sales and marketing expenses in the period amounted to SEK 24.5 million compared with SEK 19.4 million in the same period last year. This includes cost for sales commission growing from SEK 3.5 million to SEK 7.1 million.Next slide, please. Despite the effects of the COVID-19 pandemic, sales in the segment Europe & Rest of World increased by 4% compared to last year and amounted to SEK 22.2 million compared to SEK 21.3 million. Sales in direct key markets accounted for 86% of the segment sales. And sales of the antibiotic eluting products, CERAMENT G and CERAMENT V, increased by 2% compared to the corresponding quarter last year.The contribution from the segment was SEK 3.9 million compared to SEK 0.9 million last year. The improved contribution is a combined effect of an improved gross profit of SEK 1 million and a decrease in selling and marketing expenses by SEK 2 million compared with the corresponding period last year.Next slide, please. Net sales performed despite influence from COVID-19 with a slowdown in sales as mainly led to surgeries on down, however, with lesser impact in achieved surgeries. Gross margin confirmed the high level from the gradual improvements made during previous year following the sales growth in the U.S. and a favorable product mix with the growth in the antibiotic eluting products, CERAMENT G and CERAMENT V.Operating loss improved by SEK 9.8 million to minus SEK 29.2 million compared to SEK 39 million previous year, where the decreased loss is mainly explained by higher sales, both in Europe & Rest of World, but above all, in North America. Liquidity is supported by the agreement signed with SEB in January on a SEK 60 million working capital facility.Next slide, please. Total expenses in the last quarter is up with only SEK 0.6 million compared with the same period last year despite an increase in sales commission of SEK 3.6 million. Selling expenses in the quarter is impacted by the COVID-19 pandemic by marketing activities being canceled due to social distancing orders, less travel expenses and initial impact of implemented cost savings. R&D expenses are down due to quarterly variations related to projects and clinical studies, and administrative expenses remained stable on a reduced level since mid-2018.With this, I hand over back to Emil.

[Emil Billbäck, Chief Executive Officer]

Thank you, Håkan. So we'll go to Slide 15. So apart from the effect of the pandemic, I'm glad to say that the quarter has further confirmed and validated the strength of our strategy. Our strategy has driven commercial discipline and commercial decisiveness in the direct markets and the U.S., and we're now revitalizing our distributor markets in Europe.With strong clinical evidence, we believe that we have the key to transform the treatment standard for the 720,000 procedures per year addressing insufficient bone healing. The clinical evidence base that we are building supports our quest and paves the way for further market penetration. Strong health economic data of the kind that we now have are important confirmation of the benefits of our antibiotic eluting product and equip our sales team with a unique set of arguments for promoting CERAMENT.The U.S. is the largest and most important market in the world for bone grafts and bone infections. If we are successful with our De Novo application in the U.S. for CERAMENT G, we could have a market clearance in late 2020, which is at least 1.5 years earlier than what was previously planned. We have already communicated that we intend to submit a premarket approval, a PMA, for CERAMENT G in 2021. So while the De Novo application applies to the indication osteomyelitis, the PMA application is intended for additional and broader indications, including trauma. The FORTIFY study will form the basis of our PMA application at the end of 2021, and we are about to initiate a dialogue with the FDA to determine how the final stages of the study should be conducted.All in all, I believe that we are well positioned for strong market growth. We are weathering the storm that the pandemic has brought on all of us, and we keep working on our strategy execution and clear objectives. The impact of the coronavirus is making the outlook for 2020 hard to assess. Beyond this, we are in firm confidence that our corporate target will be an annual growth of sales of 40%.On the final slide, Slide 16, you will see our calendar of value-generating milestones that I have mentioned today in the presentation. There are 2 boxes added in dark orange that marks important milestone for the de novo pathway.And with that, I wrap up my presentation, and we'd like to open the call for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Rickard Anderkrans of ABG Sundal Collier.

[Rickard Anderkrans, Research Analyst]

So my first question is could you possibly break out the approximate split between elective surgeries and more acute surgical procedures in terms of 12-month rolling sales?

[Emil Billbäck, Chief Executive Officer]

Thank you, Rickard, for your question. Well, that is, of course, a bit difficult as sales is constantly evolving, and we have presence in quite a few markets. But what we have done before is we have shared, of course, how the market looks like for bone graft and which indications where bone grafts are applicable, where you have bones that do not heal by itself. So if you look at, let's say, slide that we've shown previously with acute trauma, for example, chronic osteomyelitis, revision arthroplasty, which means replacing hip joints or knee joints, I would say revision arthroplasty, close to 90% of the surgeries are elected. And this is what we see across the health care system that all joint replacement, more or less, are deferred to a later date, while acute osteomyelitis and trauma are surgeries that still take place. So if we use that as a rough sketch, I would say that around 50%, 5-0, of the surgeries where CERAMENT is used can be considered elective and 50%, nonelective.

[Rickard Anderkrans, Research Analyst]

Excellent. That's very helpful. And could you provide some more details on -- obviously, it's an extremely -- it's a moving target at this point. But could you provide some more details on the magnitude of the sales drop in late March? And potentially, even if you could comment on as we went to the dynamic into April, just to get an understanding of the dynamics as we move into Q2 in terms of sales, that would be excellent.

[Emil Billbäck, Chief Executive Officer]

Yes. Thank you, Rickard. Well, I know that this is information that every analyst, of course, is keen on understanding at BONESUPPORT. What makes it difficult is that sales is changing every week. There's no clear trend to be read out. What we see is that when there is a complete lockdown, as we have seen in Italy, for example -- now we also changed distributor in Italy so sales dropped significantly in quarter 1. But when there's a lockdown and a quarantine of that nature, of course, the level of procedures go down dramatically. So you can almost look at a map over the world and predict, let's say, where sales will be influenced, but we cannot give any guidance for quarter 2. There's been a few of the big orthopedic companies giving guidance, let's say, how April has started, but we have decided not to do so.

[Rickard Anderkrans, Research Analyst]

Right. I understand. And just as a final question, we've seen some reports of elective surgeries gradually opening up in quite a few states in the U.S. and that the German health care system has managed well so far, given their overcapacity of ICU beds. Could you comment on how these markets in general, just as a general market observation, progressed in March and perhaps in April as well? Not digging into the details, but just the elective surgery status progressing going forward?

[Emil Billbäck, Chief Executive Officer]

Yes. U.K. has definitely been hit the worst of the direct markets that we are present in. And it's related to chronic osteomyelitis, meaning where you've had a bone infection for more than 5, 6 months. The health care has clearly decided that having -- continuing, let's say, your condition for another 2 months possibly is not going to make a life or death difference. So all of that has been shut down.In Germany, as you say, with a much better also capacity for intensive care, there has been a higher degree of also these kind of surgeries. So exactly what you anticipated is also what we have seen in our sales.As the businesses, societies and health care systems are gradually opening up, we expect that end of quarter 2, a lot of these surgeries will start to return. And also with societies opening up, people will be more engaged, active in traffic, in industry, construction sites, which also will have effect on the trauma surgeries required. So that is probably as much as I can share on my insight right now on what we have seen at the end of quarter 1 and what we can anticipate for quarter 2.

[Operator]

Our next question comes from the line of Kristofer Liljeberg of Carnegie.

[Kristofer Liljeberg-Svensson]

Related to the last question here about starting elective surgeries again. The signals you get from your customers is that this will happen very late in the quarter? Or do you expect June, for example, to be better than May?

[Emil Billbäck, Chief Executive Officer]

Yes. Thank you, Kristofer. I wish I could answer your question. I'm not -- I don't have that knowledge and holding it back from anyone, it's simply so difficult to say. I spoke to a couple of physicians earlier this week. And they anticipated some increase in surgery already this week, and they had specifically scheduled some surgeries where CERAMENT would be used. One of them also said that as societies opens up, there's a high likelihood that more people will get infected. And there could be a rebound that, again, suppress these surgeries. So it's very difficult to say, but what we can see is that a few key states in the U.S. are opening up this week and next week: Texas, among others, Georgia, Arkansas, the Carolinas, parts of Florida. We also see that several of the European countries are opening up. I think the pace that they will open up and the surgeries will return has everything to do with how the infection might be increasing in prevalence as society opens up. So almost impossible to predict right now.

[Kristofer Liljeberg-Svensson]

I totally understand that. Something you could control is, of course, the cost. And you said you expect quite a bit lower cost in the second quarter. Is that something that you could quantify?

[Håkan Johansson, Chief Financial Officer]

It's not something we're quantifying at the moment. And so we're expecting the savings in the second quarter to be material as much of guidance as we give them. And as Emil mentioned as part of the presentations, I'd say a wide set of activities and support from all parts of the business in achieving those savings, they are partially related to the lower activity levels in the market due to the pandemic but then also by the mitigating actions made by the company.

[Emil Billbäck, Chief Executive Officer]

Yes. We -- yes, I mean, we have asked also the organization to say, "Here's what the situation looks like." We know that there will be canceled surgeries in quarter 2, but we are equally confident that it will come back. And the entire organization has done a voluntary salary reduction that will have a material impact in quarter 2.

[Kristofer Liljeberg-Svensson]

And looking at the selling cost, is it possible to split that into salaries and/or personnel-related -- more employee-related costs? And how much is other external call conferences, marketing activities, et cetera?

[Emil Billbäck, Chief Executive Officer]

Thank you, Kristofer. Well, it's in the quarter report as part of the financial statements. And the explanation behind the different lines of expenses, you would find such a split.

[Kristofer Liljeberg-Svensson]

Okay. And another thing. Yes, you said you're going to discuss with the FDA about FORTIFY. Is it -- it sounds sort a bit like you're trying maybe to include less patients in the study. But if that's the case, wouldn't that also increase the risk considering -- the statistical risk considering the rather difficult threshold that you need to reach?

[Emil Billbäck, Chief Executive Officer]

Yes. Both yes and no, I would say. So the FDA did proactively make statements in March already that they are going to look at current clinical studies running and wanted to discuss with all medtech, pharma companies across the world how they could potentially look like in different infection scenarios. Basically, meaning if recruitment is compromised or a follow-up is compromised, where do you go with the different studies? And they will do that on a study-by-study judgment. So we are waiting, let's say, to have our conversation. We have displayed now for the first time how many patients we have recruited. And as you can see, the recruitment in the last couple of months before corona has been good. So we are at 196 patients. The target of 230, of course, also includes a certain buffer.So we feel pretty strong about the results we have, even though we haven't seen any results yet. So what we now need to discuss with the FDA is should fewer patients be included in the study. That would be one scenario. Or should we try to do an accelerated recruitment? Should we put measures in place to secure a follow-up? All those topics are things we will discuss with FDA. And they're very similar to some of the conversations that have been released only by pharmaceutical companies that have also devices that -- or pharmaceuticals that fall in categories of breakthrough.

[Kristofer Liljeberg-Svensson]

Okay. Just one last question. This large order in Australia, how much did it impact growth -- or how much weaker would Europe have been without that?

[Emil Billbäck, Chief Executive Officer]

We don't release country data, but probably you can say that the actions we took in France and Italy, appointing distributors there, harmed sales, probably slightly more than what the Australian order brought in.

[Operator]

[Operator Instructions] There seems to be no further questions coming through at this time, so I'll hand back to our speakers for the closing comments.

[Emil Billbäck, Chief Executive Officer]

I would like to thank everyone for calling in this morning. We have presented our quarter 1 2020 results. And we believe that despite some challenging circumstances in the middle and the end of the quarter that, again, we have shown with the results that our strategy is sound and is delivering the expected results. We are weathering this storm, I think, very strongly. We are confident that the market is fully coming back, and we look forward to talk to you all in July when we present our quarter 2 results. Thank you, and goodbye.