Bonesupport Holding AB

STO:BONEX

Earnings Call Transcript 2023-Q1

[Operator]

Welcome to BONESUPPORT 2023 Q1 Report presented by CEO, Emil Billback and CFO, Hakan Johansson. [Operator Instructions]Now I will hand the presentation over to the speakers. Please go ahead.

[Emil Billbäck, executive]

Good morning. Good morning, everyone. Thank you very much operator and welcome to the BONESUPPORT's Quarter 1 2023 results call. My name is Emil Billback and sitting next to me is Hakan Johansson, our CFO.So we will use the next 20 to 25 minutes to guide you through the presentation of the first quarter results 2023. And then open the line for a question-and-answer session.Before starting the presentation, I would like to draw your attention to the disclaimers that might be covering any forward-looking statements that we will do today. We'll go to Slide 3 in the presentation. So first, I would like to begin by sharing some condensed highlights on the report that we released this morning.Overall quarter 1 sales were SEK 120 million, which corresponds to a growth of 80% year-over-year. In constant exchange rate the growth was 66%. The operating results before incentive provision was SEK 4.6 million. This is an improvement versus last year of SEK 17.1 million.The reported EBIT was at SEK 0.8 million making quarter 1, 2023 our first quarter of profitability. The main highlight of the quarter was of course the ongoing launch of CERAMENT G in the U.S. CERAMENT G reached sales of SEK 35 million in the U.S. for the quarter, driven by increasing use and a good pace in hospital system approvals.As an example, we have signed the very prestigious Johns Hopkins Hospital during the quarter and have immediately seen strong interest and orders from their surgeons. We were also granted access to the Veterans Affairs Administration. This concludes about 171 hospitals.In Europe, we're now finally seeing a gradual recovery of procedures after the pandemic. And I will come back and describe these highlights further in my presentation, but let's get into it and go to the next slide.So Slide 4, please. This is one of our standard charts or the quarterly report. I think many of you have seen it before. It shows the last 12 months sales every quarter since early 2016, split by segment and product category. I think purely graphically it's visible that a new chapter of sales acceleration has been entered.Sales growth is strong in all segments, with the largest driver being CERAMENT G in the U.S. reaching a sale of SEK 35 million in the quarter. We're starting to see some cannibalization between CERAMENT G and CERAMENT BVF in the U.S., but despite this sales of CERAMENT BVF in the U.S. grew with 25% in the quarter versus quarter 1 2022. In EUROW antibiotic eluting CERAMENT, that is the G and V version combined, grew with 40% in the quarter versus last year.So in the next slides, we will look at the details of each region or segment as we call them, as we will share additional observations on CERAMENT G in U.S. So let's turn to the next slide and start with the U.S.So Slide 5. Sales of SEK 86 million corresponds to a reported growth of 109% year-over-year. At a constant rate, the growth would have been 87% sequentially growth was 17%, and that means the comparison to quarter 4, 2022. The strong sales traction with both products is attributed to CERAMENT gaining strong preference of the customers and hence taking market share from all other treatment options.Let's turn to the next slide and cover some more details on CERAMENT G. Slide 6. So first, just a few words about the market dynamics. A small clinic or a small practice -- a small orthopedic practice in the U.S. have large discretionary selection in the authority of sourcing new therapies.For medium and large clinics and for medium and large hospitals for that matter, a regular and continuous use of a new product is preceded by a contract inclusion and hospital system approval.In our case, with a breakthrough device, the hospital system approval process is usually running in parallel with a few prominent surgeon pilot users. These surgeons are building concrete experience with CERAMENT G that is being fed into the hospital system approvals process.As reported earlier, we have succeeded with GPO inclusions slightly above our initial expectations. We've also seen more hospital system approvals and many more ongoing pilot trials. CERAMENT G has a clear positioning as well as unique, appreciated and recognized benefits.In the U.S. there are 420 hospital systems relevant for orthopedic procedures. Up to the end of March CERAMENT G has received approval at 50 of these with a gravity towards the medium and large ones.Were approved, we can see that the use of the product is taking off at a steady pace, yet at a low level since it's very early days of the launch still.We have sales registered in 26 states and all sales that we have reported is related to consumption. There have been no bulk sales. The average selling price, we can again confirm to be around USD 5,700. So far we have had positive feedback on product handling, as well as the transition to a one-stage-procedure. All-in-all, the recognition of the clinical benefits have been positive.The surgeons have had the first follow ups of patients treated in November and December last year. Outcome is positive, in line with the clinical studies on which the FDA approval is based. This also, of course expected, but it's nevertheless positive to get a strong validation from the surgeons that have decided to switch to CERAMENT where they see that the clinical benefits are also as promised by previous clinical studies.We are progressing the data collection with our label extension application and expect to submit our 510(k) in quarter 3 of 2023. So that's on the U.S. on CERAMENT G.Let's go to Slide 7 and cover Europe. So for the quarter we saw sales of SEK 34 million, which corresponds to growth of 34% year-over-year, which is then 32% at constant exchange rates. We have seen a steady recovery in general surgical procedure and volumes in quarter 1 when comparing with quarter 2 and quarter 4 last year. However, healthcare staffing shortages remain challenging, and capacity is still some 5% to 8% below pre-pandemic levels.Even though surgical capacity increased during the quarter, the inflow of patients seeking care remains higher than what the healthcare system can cope with. In the U.K. and Sweden we have access to public data, making them valuable data points in understanding the market dynamics. In the last 12 months, the U.K. backlog increased with 1.2 million people, meaning that 1.2 million people were waiting to get their surgery done to more than 1.2 million are waiting this year in March 2023 versus March 2022.With CERAMENT playing an important role to influence and reduce this specific backlog, with especially those people in line for waiting to get procedures on skeletal injuries with favorable market dynamics ahead as the health care systems have a need to catch up and reduce the backlog.We have now filled all previous vacancies in the sales team and we've also shown them to increase our marketing and sales activities to further drive market penetration as we are anticipating a continued pickup in surgical capacity going forward.We've just received information from the French CRIOAc network regarding the CONVICTION study. And as with many other studies that started during the pandemic, there has been slow onset in the recruitment pace. We have received information that the last patient into the study will be in quarter 4, 2024 with a follow up of 24 months the study is then expected to close in quarter 4, 2026. So the study is somewhat delayed.I would also like to provide a brief update on the SOLARIO study. This study was launched in 2019 to address the growing threat of antibiotic resistance. Despite delays in recruitment caused by the pandemic, we are pleased to report that the recruitment phase is now almost complete. There is 464 patients of the targeted 500 that have already been randomized and included in this study.The study objective is to determine whether the use of local antibiotic eluting bone grafts as an adjunct therapy can help to shorten the duration of systemic antibiotic treatment, reduce antimicrobial resistance, minimize adverse events, and lower cost. If successful, this research could have significant impact on regional and global treatment guidelines. Completion is expected or early summer 2024, so that patients have a 12 month follow-up.Now with that, I hand over to Hakan for a bit more of a deep dive into the financial statements. Hakan on over to you.

[Håkan Johansson, executive]

Thank you, Emil. So let's move to Slide #9, the net sales improved from SEK 66.3 million to SEK 119.7 million, equaling a growth of 80% or 66% in constant exchange rate. Emil has already spoken about the strong performance in the 2 segments and the major drivers behind the sales acceleration, so let me comment on the currency.Change in currencies, measuring year-to-date averages in 2023 versus 2022 had a positive impact in total SEK 9.5 million, of which SEK 8.9 million relates to a stronger U.S. dollar. The depreciation of the Swedish currency versus other currencies also drives expenses, as you will see in the later slides.Let's move to the next slide. So the contribution from the segment North America improved with SEK 18 million and was reported to a regional contribution of SEK 24.9 million. The improved contribution relates to increased sales after effects from increased costs.Sales and marketing expenses during the quarter amounted to SEK 55.7 million compared with SEK 30.1 million previous year. Of which sales commission to distributors and fees amounted to SEK 29.5 million compared with SEK 14.3 million the same period last year. The increase or SEK 10.4 million excluding sales commission and fees was driven by currency effects of SEK 2.6 million and an increased activity level.As we have announced previously, the U.S. booster positions are up and running and there is a strong focus on medical education and increased market presence also contributing to the cost in the quarter.The contribution was also charged by R&D costs related to studies. These decreased from SEK 1.9 million last year to a SEK 1 million this reported quarter.From the lower graph showing net sales as bars and gross margin as the orange marker, it can be noted that the gross margin is improving compared to previous quarters following a favorable product mix.In Europe and rest of world, the table on the graph to the right, a contribution of SEK 7.3 million was reported to be compared with SEK 5.6 million previous year. The improved contribution relates to increased sales after effect from increased costs. Sales and marketing expenses increased with SEK 4.2 million. The increase is attributable to filled vacancies and to a generally higher level of market activity.As Emil mentioned, we are pushing for a higher market penetration in the anticipation of the healthcare systems clearing backlogs eventually.From the lower graph and orange marker, you can see a drop in gross margin following market mix, but also minor increase in manufacturing costs. The latter is anticipated to be mitigated by increased sales price, having gradual effect during the remainder of the year.Let's move to the next slide. Selling expenses increased with SEK 13.8 million versus last year, of which SEK 2.6 million relates to currency effects. As we mentioned before the U.S. booster is up and running, and we'll start to see the first results on top line.In EUROW, we have increased with two headcounts on the sales side and our total EUROW commercial organization. It's now 30 people. The increase in the quarter relates to ramp up in activity level at congresses medical education and of course, the launch program for CERAMENT G in the U.S. We see strong customer response to our programs, as apparent from the top line development.R&D remains largely in line with previous year and administration remaining on a stable level excluding effects from the long-term incentive programs, equaling SEK 11.7 million compared with SEK 10.6 million previous year and SEK 12.1 million in the previous quarter.Next slide. The operating profit was reported to SEK 0.8 million compared with a loss of SEK 16.5 million for the same period previous year, a SEK 17.3 million improvement following a strong sales performance. The profit also includes expense provisions regarding long-term incentive programs amounting to an expense of SEK 3.8 million this year compared with SEK 3.9 million previous year.Of the total cost of SEK 3.8 million in the period, only SEK 0.3 million is cash flow impacting in the future. The operating profit improvement before the long-term incentive programs was SEK 17.1 million, confirming a strong underlying positive trend. The reduced provisions for incentive programs in the quarter compared with the end of 2022 relate to the share saving program, LTI 2019 that closed in the end of 2022 and reported a cost of SEK 9.3 million in the second half of 2022.And with this, I hand back to Emil.

[Emil Billbäck, executive]

Thank you very much, Hakan. So we're going to wrap up this morning presentation. And we go to Slide 14, please. So I think for everyone seeing our report this morning or listening to this call that it's obvious that there is a strong acceleration in our sales growth, and that BONESUPPORT is only in the beginning of a very exciting journey.The sales uptake in the U.S. for CERAMENT G is faster than what we saw when the product was launched in Europe a couple of years ago. The clinical evidence available now that are displaying superiority in outcome are many more than what existed at that time point. The fact also that CERAMENT G is the only approved antibiotic eluting bone graft on the U.S. market, that helps.We also see that there's a very strong match between the health economic benefits that CERAMENT G offers and the immediate prioritization in the U.S. health care system and the U.S. orthopedic clinics.2023 and 2024 are going to be a very exciting year. We have several milestones coming and there are more solid evidence on the way, which we are confident will support the therapy standard transformation that is taking place in the U.S., in Europe and in other markets.So with that, I would like to conclude our presentation for the first quarter of 2023 and open the line for questions.

[Operator]

[Operator Instructions] The next question comes from Kristofer Liljeberg from Carnegie Investment Bank.

[Kristofer Liljeberg-Svensson, analyst]

I have 3 questions, 2 on cost and one related to the cash flow. First, selling cost level in the first quarter, would you say that's a good proxy for the coming quarters? Or were they higher than normal number of trade shows impacting this figure?

[Håkan Johansson, executive]

Again, as we mentioned, Kristofer, it's been a high activity level in the first quarter, and we assume this to continue also in the quarters to come. So yes, I would say that the quarter is going to be a good reference point going forward as well.

[Emil Billbäck, executive]

Do you have additional questions, Kristofer?

[Kristofer Liljeberg-Svensson, analyst]

No.

[Emil Billbäck, executive]

Okay.

[Operator]

The next question comes from Mattias Vadsten from SEB.

[Mattias Vadsten, analyst]

Coming on from another call, so sorry if I missed these parts during the presentation. But first one would be on the gross margin. It is falling quarter-over-quarter despite sort of higher sales -- share of sales in North America and higher share of sales of CERAMENT G in the mix as well. That's true for both regions. So yes, just some clarification there maybe.

[Håkan Johansson, executive]

Thank you, Matthias. And as we mentioned during the call, we've seen increasing manufacturing costs in the later '22 that has got impact in the first quarter. As these are impacts that will be mitigated by price increases having a gradual effect in the remainder of the year.

[Emil Billbäck, executive]

So someone is typing frantically, we appreciate it. But it's difficult to hear. So, if someone is typing, please keep it that on mute.

[Mattias Vadsten, analyst]

Sorry, I guess, that was me.

[Emil Billbäck, executive]

Yes, you're welcome again.

[Mattias Vadsten, analyst]

As last time around. The next one would be demand seems obviously be significant for you. Maybe as a short question. Is capacity constraints, anything that is holding you back whatsoever in terms of CERAMENT G sales in the U.S., just to make that clear.

[Emil Billbäck, executive]

Well, the answer is no. There's no capacity constraints holding us back. But at this accelerated pace, we will also have to look at our entire capacity infrastructure and potentially expand it further and increase our capacity more in the future than we probably earlier had anticipated. So it takes -- it will take planning, but there's no constraints right now.

[Mattias Vadsten, analyst]

That's good. And the last one would be for CERAMENT G in the U.S., if you could single out the delta to think of when we enter Q2, if you could say anything about the number of customers purchasing the product. When John (sic) [ Johns ] Hopkins and those major counterparties were online and so on, timing of that. Yes, this kind of question.

[Emil Billbäck, executive]

Yes. So the [ beat rate ], of course, on CERAMENT G is a very, very interesting and important number for us as it is for you when you build your models. And we keep -- emphasize also that it's -- can be difficult to give a full year market penetration pace predication.What we saw in quarter 1 was an unprecedented high number of pilot use, and this pilot use from the prominent and KOL surgeons is done in parallel to many of the hospital system processes. If those hospital system processes turn out into approval, yes, well then we can look forward to a very strong sales development on CERAMENT G. And if that process drags out the time, well, then it will be this kind of staircase model that I've displayed before.So it all comes down to how that metric develops. But that's what we did also different in this presentation. We released to the market for the first time that we have 50 approvals so far out of the 420. And the way to look at that is that 50 is a very impressive number that is far from the number we had when we went independent with Zimmer Biomet on the BVF. It took longer to reach at that stage.So I think that gives you a hint at least on how many doors have been opened. But then, of course, the sales has to come by converting procedure by procedure. That's all we can say. We don't have more insights on that ourselves really to make any predictions.

[Mattias Vadsten, analyst]

I really appreciate that. I think it helps. Then on Europe -- last question. It's good to see that it's picking up the pace. If you could just speak about the maybe trading activity in March, April, how you think about it going forward. It seems like the activity is becoming a little bit better at least. And if you could shed some light on where we are versus pre-pandemic. I guess we're still below in terms of activity. But yes, that would be the last one.

[Emil Billbäck, executive]

Sure. So I think in activity level, we are back at pre-pandemic level. we are really fueling up the engine in EUROW. And I have a really good team there. They are launching a lot of activities, congresses, individual meetings, approaching new hospitals. So we're actually having attempt active right now to increase our market presence. All the vacancies have been filled. And we do this because we see that the market dynamics is about to move going forward. It's about to change going forward.The capacity with the hospitals are still between 5% to 8% below pre-pandemic levels. But we think that our activities should ramp up before the capacity starts to rise and not the opposite around. So that's why you see also slightly higher cost in EUROW because we are taking the opportunities where we see them.

[Operator]

The next question comes from Sten Westerberg from Analysguiden.

[Sten Westerberg, analyst]

Just wondering if you could attempt to break up the procedures in any way at this very early stage. Are we primarily looking for patients with existing infections in long bones. Is it may be also related to treatment of diabetic foot. And of course, if you see any use at all outside the current approval.

[Emil Billbäck, executive]

Yes. Of course, so bone infection is a very difficult and problematic indication. And those surgeons where we have good, strong use so far is with some of these hospital structured, big university hospitals, structures and systems and Johns Hopkins, for example, and the Cleveland Clinics. Most of the patients that have received CERAMENT G have had, as cycle as you said, existing infection and condition in the long bones, mostly as the result of previous fracture or previous trauma. The other part is the diabetic feet.There are also observations. There are quite some feedback that surgeons have used it also on other indications that are not approved. There is no way that we are endorsing this or encouraging this. We've heard about it, and we tell the doctor that this is not the intended use, but that the doctor has the discretionary right. But to quantify this would be impossible. You can just think that a clear, clear majority of the sales are in those first 2 indications that you mentioned.

[Operator]

The next question comes from Kristofer Liljeberg from Carnegie Investment Bank.

[Kristofer Liljeberg-Svensson, analyst]

I actually have 3 more questions. The first one of these is the sales commission line, it was 25% of sales this quarter was 27% in Q4. Is there some form of seasonality here and how to think about that percentage going forward?

[Håkan Johansson, executive]

And it's a valid question. And again, somehow the commission is somewhat dependent on also what distributor is performing the sale in each quarter, et cetera. So there is a certain underlying volatility in that. It's been on a higher level in the final quarters 2022, giving a strong performance with certain distributors, enable them to reach a higher commission level due to an underlying [ incentivization ] in the structure.So a commission level can continue to show a certain variety over the period. Maybe what I'm mentioning is that in commission and fees, we see a reduced freight cost in percentage of sale in the first quarter. And this is related to some of the average selling price in the U.S. increasing. So the cost for freight as a percentage of sales is going down. So that's also supporting the lower level in the quarter.

[Kristofer Liljeberg-Svensson, analyst]

And on the topic of that it depends on how distributors are performing, does this mean that you will always have a higher level in Q4? Or do you estimate already how the type of bonuses or how I should call it -- the estimate that --

[Håkan Johansson, executive]

Yes, not necessarily, Kristofer, because they quote us that is the measurement of where the distributors are measured is made on a quarterly basis.

[Kristofer Liljeberg-Svensson, analyst]

Okay. That's helpful. Then the tied up working capital you have here. Is that related to the increased number of products you must have on the shelf at hospitals or the --

[Håkan Johansson, executive]

The increase in capital tied up is purely on accounts receivable layer, you could say. So it's totally related to the sales growth.

[Kristofer Liljeberg-Svensson, analyst]

Okay. And finally, the price increases you talked about, is it possible to quantify that?

[Håkan Johansson, executive]

Again, we have announced price increases in the market -- in the European market of between 3% and 5%. And all of that will come to effect. It will take some time to get the effect. And we also have certain underlying contracts where we have longer commitments. So over time, we estimate the gross margins to be stable and some of the gap that we see in this quarter to be closed.

[Operator]

The next question comes from Erik Cassel from ABG.

[Erik Cassel, analyst]

On. So first off, the monthly cadence of CERAMENT G sales in the U.S., up roughly 6% Q-on-Q. Is it possible to say how much of that is driven by new customers versus increased use of the ones you already had in Q4?

[Emil Billbäck, executive]

It is possible to say it, it doesn't mean we're going to say it. No, I mean, just joking with you, Erik. It's -- I mean it's important, of course, question you raise. Here is the dynamic we see.With CERAMENT G coming to market, the recruitment of new accounts has accelerated. CERAMENT BVF is a fantastic product, but CERAMENT G is even more special and have unique benefits. So that also drives the attention of new customers that we can acquire.The majority of the sales that we see, though, is with customers that were already existing because those new customers take longer before they reach a certain value to have impact on us. But the interesting thing is that with those customers that we -- that are existing, CERAMENT G comes in new use. So you see there is not a one-to-one replacement of CERAMENT BVF at those accounts.When we look at those big hospitals individually, where we have introduced CERAMENT G and they are using it at a steady state, CERAMENT BVF is also growing. And as I mentioned in the presentation, CERAMENT BVF in the quarter compared to a quarter a year ago, grew with -- with the same quarter a year ago, grew with 25%. And I think that's slightly higher maybe than what we thought before we launched CERAMENT G. Eventually, there will be some cannibalization, but I think time will tell exactly how much that will be.

[Erik Cassel, analyst]

Okay. Interesting points. Then you talked about pilot approvals and if you get approvals for the ones all the pilots as processing now, you're going to have good results. But the pilots still have -- has been around and the 50 sites that you have now, as I sort of understood it, what has the so-called success rate been so far from pilots converting?

[Emil Billbäck, executive]

Right. It has been a strong success rate higher than what we saw in Europe when we launched CERAMENT G and also higher than what we saw with CERAMENT BVF when we went independent in 2019. I mean, one can quickly do the math, looking at how many hospital system approvals we have? How many pieces that SEK 35 million would correspond to? And someone can conclude that we have maybe taken between 1% and 2% in the market.So I think there's plenty of room for penetrating the market, both those 50, where we have the approval, which is by the way, a number which is constantly increasing even as we speak today. And then also to expand that further. So as an indication, CERAMENT BVF that has been available since 2019 under our own direct control. We have about 247 hospital system approvals. So that gives you a good flavor.

[Erik Cassel, analyst]

Perfect. And then for the label extension into trauma, given that you can now do the 510(k), the normal pathway instead of the de novo extension, you get a short review time. But does this decision from the FDA also signals some sort of change to likelihood of approval in your view?

[Emil Billbäck, executive]

It doesn't. It shows that FDA clearly see that CERAMENT G in the first instance of approval for the bone infection has provided a very strong set of documentations. So that we now can use the extended label application with predicate device to the CERAMENT G that is now on the market. So we use ourselves as predicate device. I think that's a strength and it shows the solidity of the data that we already have provided.Now theoretically, yes, it would mean a slightly faster and a slightly more straightforward process with 510(k) versus de novo. The unfortunate thing with FDA is that as we've seen, it depends very much on their workload and who is actually in charge of driving it within the organization. So -- but theoretically, you're correct that that's also how FDA themselves describe it. 510(k) is the slightly less complex process of the three that are available for this kind of product.

[Erik Cassel, analyst]

Perfect. And would you say that it also kind of implies that you can get basically all lab business that you're going to do through the either 510(k) with 90 days review?

[Emil Billbäck, executive]

I have not made that conclusion. But I see -- I hear your point, and I understand why you think that's a fair assumption.

[Erik Cassel, analyst]

Okay. And then lastly, can you give any information on the timing of the submission. Is it early or late Q3?

[Emil Billbäck, executive]

Yes. So it depends. You know my team already. I mean I have some -- I would say, some of the best people in the entire industry working on this. But it's not just up to us. There's -- the data that has to be collected just as when we got the first approval is collected externally. So we're working with several different partners and have to dig through quite extensive loads of patient material. So if it will be 1 month earlier or 1 week later back and forth, it totally depends on how we can extract this data.So for now, I know it's not fully satisfying, but for now, I prefer to say that it will be in quarter 3. And as we come closer, I will give more details on exactly when we expect that submission to leave the office in Lund and show up at the FDA.

[Erik Cassel, analyst]

Okay. Perfect. That's all I have. Also I guess, congratulations on placement.

[Emil Billbäck, executive]

Thank you.

[Operator]

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Emil Billbäck, executive]

Very good. Well, thank you. Well, we don't have much more that we would like to add. And we believe that we have delivered a very strong quarterly result. It shows an accelerated sales growth, and it shows that BONESUPPORT is in early stage of a very exciting journey ahead. I would like to thank everyone for taking the time to come to this presentation call. I know it's a busy reporting season. So thanks everyone and take care and have a good day. Bye-bye.