Bonesupport Holding AB

STO:BONEX

Earnings Call Transcript 2019-Q2

[Operator]

Welcome to Bonesupport Q2 Report 2019. [Operator Instructions] Just to remind you, this conference call is being recorded. Today I am pleased to present CEO Emil Billbäck and CFO Håkan Johansson. I'll now hand the word over to Emil Billbäck. Please go ahead with your meeting.

[Emil Billbäck, Chief Executive Officer]

Thank you very much, Operator, and welcome everyone, to Bonesupport's Quarter Two 2019 Result Call. My name is Emil Billbäck, I'm the CEO of Bonesupport and sitting next to be today is Håkan Johansson, our CFO. This morning we'll take about 20 minutes to run through the presentation of the second quarter results and then open up the line for a question and answer session. I apologize to everyone that we are having our reporting in the middle of Swedish vacation. Before starting the presentation, I would like to draw your attention to the disclaimers covering the forward-looking statements we will make today. You will find those on Page 2 in our presentation. If we can go to Slide 3 please, I'd like to begin this presentation with some highlights on the strong figures we released in this morning's report. Overall, quarter 2 sales were at SEK37.3 million which is up 32% versus previous year. Sales wise, this is the better quarter ever in Bonesupport's history and I find this especially pleasing given that it's only 8 months ago since we started implementing the new distribution model for the US. Overall, our performance in this quarter is a confirmation that the strategy that we launched in 2018 is taking the company in the right direction and the results are now becoming visible in our performance. The segments Europe and Rest of World grew with 59%, reaching SEK22.5 million. I think it's worth highlighting that this strong sales development has come from comparable markets. No new markets have been opened in the period to achieve this growth. The strong growth continues to be driven by broader and more frequent use of CERAMENT G and CERAMENT V, mainly among the existing customer base. The antibiotic eluting products grew with 64% in the quarter. In the segment North America, we also saw a strong continued progress with sales reaching SEK14.8 million. Our distribution setup in the U.S., which was initiated in October last year, enables us to address the entire market potential and we can conclude that this strategy is working. In regards to operating results, the quarter was affected by an SEK11 million provision position which relates to product returns from Zimmer Biomet. Operationally, I would like to highlight that we have done some adjustments to our U.S. distribution network within the quarter. But despite the finetuning, sales in the U.S. rose both quarter-over-quarter and year-over-year. We're seeing strong progress in our market access in the U.S. and we have closed a number of GPO contracts on which I especially would like to highlight the contract with Kaiser Permanente. This is one of the most well renowned medical organizations in Europe. In Europe, our sales organization has been finetuned during the quarter with some replacements as well as management changes. Sales growth has accelerated further compared to previous quarter. When it comes to our clinical development, we have decided to focus on CERAMENT plus Bisphosphonate and CERAMENT plus DBM as we think this will give us best leverage from CERAMENT’s unique features. Last but not least, a study was published in the quarter in the Journal of Orthopedics showing impressive results for our antibiotic eluting product, CERAMENT G, and more on all of this will come later in the presentation. Go to Slide 4. Now I would like to provide you with some more details on our quarterly sales development. This slide shows sales in the last 12 months with the dark blue part of the bar representing Europe and the light blue, and also purple part on the bar displaying sales in the U.S. The purple part, visible in quarter 4 2018, quarter 1, 2019 and quarter 2, 2019, shows sales achieved in the new distribution setup in the U.S. All the LTM, last month 12 sales, in Zimmer Biomet is now gone and replaced with growing sales with the new distribution setup. The decline in the U.S. sales from quarter 4 of 2017 to quarter 3, 2018 can be attributed to Zimmer Biomet's internal struggles, certain inventory depletion, as well as the effect of our termination of the contract. This chart also confirms the steady growth in Europe and Rest of World. To the left of the bar, you can see the buildup in momentum from 14% growth in the first half of 2018 to an impressive plus 59% growth in quarter 2 of 2019. This gives a good confirmation that the business is on the right track.Go to Slide 5, so focusing a bit more on the details of segment Europe and Rest of the World, I have already mentioned the strong momentum in the segment in total and especially with the antibiotic eluting product. With a growing base of strong clinical data and the release of the topline results from CERTiFy at the end of last year, we are experiencing strong and accelerating acceptance of CERAMENT in favor of other treatment modalities. Last year we announced that we will close to double the sales team in Europe, and during the second quarter, we still had some finetuning to do. We decided to separate from the Executive Vice President of Europe and Rest of the World and we have also done replacing of staff in a few territories and recruited people to territories that previously were empty. So especially we have filled now positions in Germany and in the U.K., which is our priority markets, and I can say that now finally we have closed all the vacancies in the sales team and we have a strong sales coverage in all the important and previously underpenetrated areas. This is especially true for areas such as Berlin and Fuxin in Germany as well as the Midlands in the U.K. It is encouraging that the strong growth in the quarter was achieved even without being fully staffed. Recruitments have also been made to strengthen our Regulatory Department and enable us to eventually open up new markets. We'll go to Slide 6 please. Turning to North America, sales in the quarter was SEK14.8 million which is up 28% sequentially. Sales continue to be made up of a good mix of new accounts and legacy accounts. The average number of orders has steadily increased during the year as has the number of reordering accounts. Since October last year, the new distribution network is up and running, now with 40 distributors which together deploy more than 500 sales reps. Distributors work on a commission basis and our best distributors are making great progress with CERAMENT. And in order to get the best possible leverage out of the network, we place great emphasis on education, often through webinars and follow-up on distribution as well as selling systems. In the quarter, we had done some finetuning to the distribution network. We have replaced a handful of less successful distributors and it's very positive to see how fast our organization has acted when distributors have not delivered according to plan. Out of the 40 distributors, 6 have in total been replaced. I would say from previous experience I dare to state that it takes about 10 to 12 months before a new distribution structure has completely settled. And we will continuously adapt our network in the U.S.Our commercial team is making great progress on market access, and in the quarter, we closed a number of important GPO contracts. In this context, I would like to highlight Kaiser Permanente which is one of the most well renowned medical organizations in the U.S. The contract gives us further access to almost 700 hospitals, 40 medical centers, and 23,000 physicians. The finding of further GPO contracts is an important part of our future growth and should have a significant impact on sales in 2020. Please go to Slide 7. At previous calls and at previous presentations, I have mentioned that we would come back with a firmer view on where our focus will be in regards to R&D efforts. Our clinical development focuses on further developing CERAMENT’s properties, broadening clinical application areas, and utilizing CERAMENT’s unique drug-releasing properties through the development of combination products that promote bone healing. In the quarter, we have made a careful evaluation of market potential, clinical benefits, therapeutic innovation, and preclinical results when deciding on where to put our focus of R&D resources and efforts. So after this careful evaluation, we have decided to prioritize CERAMENT plus Bisphosphonate and CERAMENT plus DBM. DBM is demineralized bone matrix. Bisphosphonate is a very well-established substance in the treatment of osteoporosis as it improves bone regeneration as well as bone density. CERAMENT plus Bisphosphonate has the potential to add an important therapeutic dimension in the treatment of low healing bone defects and fractures induced by low bone density. Demineralized bone matrix, DBM, is passed on autografts and it has been, autograft has been reduced on minerals and the material is often used in cases where weak, natural regrowth of bone is present. So as an example, following an injury or a trauma. The total market for DBM is about $250 million U.S. dollars of which the United States represents $180 million U.S. dollars. The combination of CERAMENT and DMB gives rise to a product with both osteoconductive and osteoinductive properties, which is suitable especially in the trauma segment which is one of our focus areas. We have previously announced research done on CERAMENT plus BMP and BMP stands for bone morphogenic protein. This combination product will still be available for partnering, but we are not prioritizing this candidate with current resources at the moment. Let's go to Slide 8 please. As I have said on many previous occasions, strong clinical evidence and health economic data are cornerstones of our strategy. In this quarter, a new study was published in the Journal of Orthopedics showing significant outcome improvements with CERAMENT G. But this study is a prospective study on 51 patients with Type 3B open tibia fractures. So Type 3B means that this is an open fracture with extensive injuries to skin and to muscles and visible bone. These factors are associated with massive contamination and infection rates have been reported in several newer publications to be up to 52%. Amputation rate for these kinds of injures has been reported to be up to 16%. Open fractures of the tibia are the most common open, long bone fractures reported in the literature and these are usually caused by road traffic accidents. All patients in this study were followed up until the fracture healing and wound healing had been completed. And the mean follow-up time was almost 14 months. The impressive results on this study showed a deep infection rate of 0%, which in turn means that these patients had significantly lower reoperation rate. There was only one amputation in this group, meaning a limb salvage rate of 98.1%. It also concludes that CERAMENT G provides a high local antibiotic concentration at the fracture site which could be beneficial in local prophylaxis to reduce the risk on biofilm formation on metal work. While the hydroxy appetite of the product and the scaffold that it creates could improve union rates. This will lead to improved outcome and to reduce healthcare costs. Studies like this equip our sales team with yet another unique set of arguments for promoting CERAMENT. So that concludes my introduction and with this brief update, I would like to hand over to Håkan who will cover the financial overview.

[Håkan Johansson, Chief Financial Officer]

Thank you, Emil. So let us move to Slide 10 please. This is a graph presenting net sales per quarter as past and all 12-month net sales line. Net sales amounted to SEK37.3 million compared to SEK28.2 million for same period last year. This is an increase of 32% compared with the previous year. The quarter was our best ever in terms of sales. Net SEKs for the last 12 months amounted to SEK108 million compared to SEK190 million last year. It's a decrease of 10%. At the same time, an increase of 9% from the first quarter this year. Segment Europe and Rest of World increased last 12 months revenue with 40% and net sales and the same with North America, decreased with 50%. This being an effect of very low sales in the third and fourth quarter of 2018 as impacted by the terminated distribution contract with Zimmer Biomet. Next slide please. Sales for the period in North America reported an increase of 6% compared with the corresponding period last year and a continued sequential increase of 28% from the previous quarter from SEK11.5 million in the first quarter to SEK14.8 million in second quarter. The distribution rights for the former distributor Zimmer Biomet ceased on May 23 and Bonesupport's own organization is working to accelerate market penetration and enter into agreement that gives contracted hospitals access to CERAMENT. The contribution in the segment was minus SEK23.4 million compared to SEK5.9 million last year. The increase in loss is mainly attributed to the provision made for the product return from Zimmer Biomet, but also an effect of ongoing commercial investments, where sales and marketing expenses increased to SEK28.9 million compared to SEK10.1 million last year. And this related to the expansion of the organization in the U.S. Next slide please. Sales in Europe and Rest of the World increased by 59% compared with the corresponding period last year and amounted to SEK22.5 million with SEK14.2 million last year. Sales in our direct key markets accounted for 84.7% of the segment sales and reported an increase of 60%. Sales of CERAMENT G and CERAMENT V, our antibiotic eluting products, increased by 64% compared to the second quarter last year. The contribution from the segment was SEK3.8 million compared to a loss of SEK1 million second quarter last year. The improved contribution has been achieved in spite of increased commercial investment and is the result of increased sales and gross profits. Sales and marketing expenses increased with SEK2.1 million to SEK15.1 million compared with the corresponding period last year and mainly has been an effect of new recruits made to the sales organization in our key markets. Next slide please. Net sales with the strong growth in Europe and Rest of the World, as well as the gradual recovery in the U.S. is reaching the highest level in 6 quarter net sales and reached an all-time high in the second quarter this year. Gross margin continued to show recovery with favorable effects from product mix and the strong growth in the antibiotic eluting products CERAMENT G and CERAMENT V as well as the gradual U.S. recovery. Operating profit in second quarter amounted to SEK47.8 million, a loss compared to SEK37.8 million last year, but the increased loss was mainly due to the reported provision of SEK11 million of the product returns from the previous U.S. distributor, Zimmer Biomet. Bonesupport remains funded to realize its commercial strategy and to reach profitability and positive cash flow. Next slide please. Total expenses in the last quarter is up with SEK50 million compared to the same period last year, of which SEK11 million relates to the product returns from Zimmer Biomet. Selling expenses and commercial investments less the provision for the product returns are up by SEK10 million. Our research and development is remaining on a stable level and showing continued support in line with our commercial strategy and administrative expense is stabilizing on a lower level for the last 3 quarters. And cost saving programs have enabled savings such as lower spend on consultancy employment. And with this, I hand back to Emil.

[Emil Billbäck, Chief Executive Officer]

Thank you, Håkan. So we should be then on Slide 16, to start the wrap up of this presentation. Since the beginning of last year, we have undertaken several important strategic initiatives to enable an accelerated market penetration of our product, both in the U.S. and in Europe. Above all, our new strategy has driven commercial discipline as well as commercial decisiveness and the results are now showing. For the rest of the year, we continue to expect an increasing trend sequentially in both Europe and in the U.S. which will lead to significant uplift in sales in 2019 versus 2018. This growth is built on several factors. With the new U.S. commercial platform, we are able to pursue the full potential of CERAMENT. Our market access is improving every day and our monthly sales numbers are pointing in the right direction. In Europe, our expanded sales organization will continue to grow sales by a combination of better geographic reach and increased penetration of important indications markets such as trauma. With the new salespeople coming onboard, we expect to increase the rate of new customers towards the end of the year. With strong clinical evidence, we believe that we have the key to transform the treatment standard for the 650,000 procedures every year that it's addressing in sufficient bone healing. The clinical evidence base that we are building supports our quest and paves also the way for further market penetration In the quarter, or in quarter 3 which we are in now, we expect the publication of the CERTiFy study to come which will show that CERAMENT BVF is as good as autograft. The topline result of this study was released formerly end of last year. In our mission to transform the treatment standard, our antibiotic eluting products play a key role and we have increased the growth that continues to reach an impressive 64% in this latest quarter. So all in all, I believe that we are well positioned to have a strong 2019 and beyond that, we have high confidence in our corporate target of annual growth of 40%. We are funded to reach profitability and I'm confident that we can deliver significant shareholder value on the journey ahead. On my final slide, which is number 17, you can see the calendar of value-generating milestones, many of which I have mentioned today in the presentation. And with that, I conclude my presentation and would like to open the line for questions.

[Operator]

Thank you. [Operator Instructions]. Our first question is from Kristofer Liljeberg from Carnegie. Please go ahead, your line is open.

[Kristofer Liljeberg-Svensson]

Yes, thank you. Two questions. The first one is on the U.S. side, the sequential improvement we could expect there. Saw a little bit of slowdown in the second quarter versus the first quarter of course coming from very low levels. But should we expect accelerating sequential growth in the U.S. now in the coming quarters? And if so, what will drive that? Then my second question relates to costs and how we should think about them going forward, where they have been quite stable now in the last 3 quarters which is positive. But I could believe also with more efforts to drive sales that we should maybe expect operating costs to increase a little bit going forward. Thanks.

[Emil Billbäck, Chief Executive Officer]

Yep, okay. Thank you very much, Kristofer, thank you for your questions. So when it comes to the U.S. sales, we had in the quarter some changes in the distribution setup. My experience having done this exercise a few times in the U.S. is that over a period of 12 months you have to evaluate distributors and some of them need more training, some of them get replaced. And we replaced 6 of them that we were not happy with. So this of course causes a little bit of disruption. We don't give specific guidance in what to expect for the quarters to come. We can only say that the sales development that we had in quarter 2 was perfectly aligned with our expectations and that if we look also historically quarter by quarter, there is a little bit of movement usually where quarter 1 and quarter 4 are stronger than quarter 2 and quarter 3. So I don't think you should interpret quarter 2 specifically as a slowdown. And then there was a question on costs and I think I'll let Håkan comment on that, what we can expect going forward.

[Håkan Johansson, Chief Financial Officer]

Thank you, I will do that. As noted, looking at the quarter of development, the last 3 quarters has been sustainable. Saying that, we mentioned that in terms of sales and marketing, we do have left a few vacancies in the period. And we will also see a cost development following increased US sales as we also have commissions that will impact going forward.

[Kristofer Liljeberg-Svensson]

But when it comes to the other lines, so R&D costs with the FORTIFY study now well underway, could we expect R&D costs to be stable? And also administrative costs, are they also going to be rather stable here in the next 1, 2 years? Thanks.

[Håkan Johansson, Chief Financial Officer]

I would say that again, the development over the last 3 quarters give you quite a good guidance on expected levels.

[Operator]

[Operator Instructions]. Our next question is from Niklas Elmhammer from Carlsquare. Please go ahead, your line is open.

[Niklas Elmhammer, Senior Equity Analyst]

Hello, thank you for taking my question. One follow-up regarding U.S. Maybe you could give us some idea were any sales in the quarter under the GPO contracts so far? Also, regarding GPO contracting, you have already made contracts with some good names. How important is it going forward to get the really big organizations, i.e., the health trusts and so on, onboard to support the sales growth you're aiming for? Thank you.

[Emil Billbäck, Chief Executive Officer]

Thank you, Niklas. Your question relates to the GPO contracts and first how much of our sales is coming from GPO contracts. So where I have been positively surprised and impressed by our U.S. team is the ability for how the have secured GPO contracts. That has gone a little bit better than I anticipated I must say. And we don't release data exactly how our sales are split between old or new accounts or GPOs and standalone. But what I would say is that traditionally in general you can say that about 70% of the U.S. market for this type of product is controlled by GPOs. And so this shows me the importance of securing these contracts and I think if you use a 70/30 rule, that's not too far off also on what to expect to say in [consignment] sales. We are working also with trying to secure the ones you mentioned like health trusts. The health trust of course is the absolutely biggest of the GPOs, the most prestigious. And if we look at the track record we have so far with Ascension and with Kaiser Permanente most recently, I think there is good indication that we are on a very good way to secure a stronger GPO position than we even had under the custodian of Zimmer Biomet. So this is one of the benefits we mentioned of going indirect and it seems to be playing out very nicely.

[Niklas Elmhammer, Senior Equity Analyst]

Okay, that sounds encouraging. Just to be clear, have you reported some sales already out of your GPO contracts? I mean because you signed them, Ascension in the spring, so I guess maybe you would not expect any sales from that channel already?

[Emil Billbäck, Chief Executive Officer]

Right. So usually signing a GPO contract, getting the first sale takes somewhere between 3 to 5 months. So to get sales before let's say 3 months is very unusual and happens only in rare circumstances. And we signed, we mention only the big contracts that we win. There is also smaller contracts that we win which we don't announce to the market because we think it's part of regular business. But I can confirm that yes, indeed, we have quite some sales with GPO contracts that we signed end of last year and beginning of this year.

[Operator]

Our next question is from Alice Nettleton from Edison. Please go ahead, your line is open. Alice Nettleton: Hi, Emil and Håkan. Thanks for taking my questions. I was interested in the kind of breakdown of the U.S. sales. I don't know if you can give any other forms of breakdown? Like geographical or any other types of breakdown of how the U.S. sales are developing.

[Emil Billbäck, Chief Executive Officer]

We don't specifically give that data. We're contemplated if we, at the Capital Markets Day, we haven't released the date yet, but it will sometime in late autumn, if we by then have enough data maybe to share a little bit more on trending. So the only thing I can really tell you is that Zimmer Biomet, when we were under their distributorship had access to about 1/3 of the U.S. market where they had their contracts on metal ware. With going to an independent structure of distributors we're getting access to all states, all customers, and all indications. And we made this decision because believe that the technology is so strong and the technology has proven itself so strong, both in the U.S. and in Europe, that we are willing to do this big investment. So if you compare our sales now, even though it's very, very early with the one we had at Zimmer Biomet, we have a better geographic coverage. We have a better coverage of indications. So we're not just selling it for one indication, but we are broadly looking at more indications. So we've opened up a bigger potential. But that's as much as we can say about this topic right now and we'll see in the near future if we will be able to give a little bit more details.

[Alice Nettleton, Healthcare Analyst]

Okay, thank you very much. Regarding the kind of finetuning you said you were doing with the U.S. distribution model, did I hear you say you had some management changes as well? I was wondering if you could talk us through the changes that have happened in the quarter with the U.S. commercial structure.

[Emil Billbäck, Chief Executive Officer]

There's 2 things. When we established the distribution structure, the network of independent distributors in the U.S., we also set up monitoring systems, every distributor had to come with a marketing and promotion plan, so there are clear obligations on what the distributor has to deliver, not only in sales, but also in terms of activities. And during then say 2019, we have followed up, we follow the metrics, we have specific dashboards that indicates how each distributor is performing. And the ones that do not deliver the sales nor the activities agreed upon, there is corrective action taking place. There is conversations and discussions and support given and eventually if the performance doesn't pick up, then the distributor is replaced. And this is of course one of the great benefits versus working with one distributor. You cannot all of a sudden disqualify them in one state and go to someone else if you are locked into like what we had with Zimmer Biomet. So here we have the chance to then replace, maybe disengage distributors in one state and instead get distributors in place that are excited and eager to sell our products. There hasn't been any major management change in the U.S. Those relate to Europe where we had separated from our previous Executive Vice President of Sales. And we're doing a replacement here.

[Alice Nettleton, Healthcare Analyst]

Okay, thank you very much for the clarification. And then finally, I was just wondering if you could talk a bit about the health economic data that is going to be released in Q3.

[Emil Billbäck, Chief Executive Officer]

Yes, absolutely. So the last 12 months, we have been working on data to put in numbers what it means with all the benefits that CERAMENT with antibiotic eluting capabilities will bring not only to the patient and the surgeon, but also to society and to the healthcare costs in total. We know by let's say anecdotal evidence that if you do one procedure instead of 3, 4, 5 procedures, then of course there should be also a health economic benefit. But we haven't before been investing in actually showing this in numbers. So what you will see in quarter 3 is where we can also put dollars, Euros and pounds and Swedish krona benefits on using the new CERAMENT products versus more traditional treatment such as autograft for example where you take tissue from the patient's own hip, or where you use plastic capsules with antibiotics which are placed into the injury but then has to be removed and replaced. I think it's quite obvious that if you have one procedure, there should be some benefits and this what we intend to show.

[Operator]

[Operator Instructions]. Our next question is from Erik Cassel from ABG. Please go ahead, your line is open.

[Erik Cassel, Analyst]

Hi, thank you for taking my question. So for CERAMENT drug eluting, you did mentioned 64% growth year-over-year. However, it seems to have only grown by 4% in EU quarter-over-quarter in Q2. And the growth rate has been trending now for a couple of quarters. Is there any particular reason for the slowing growth rates?

[Emil Billbäck, Chief Executive Officer]

So you are absolutely right, and that's because also each quarter has its own sales based on seasonality. So if there is fewer surgeries in the quarter, that means there's less use of CERAMENT. And that's why usually quarter 2 and quarter 3 have less sales than quarter 1 and quarter 4 in comparison. So that's why we compare always quarter over the same quarter last year, the exception would be the U.S. because we're in a ramp up phase. So if we look at what I have presented, Slide 16, there's a steady and strong growth rate of the antibiotic eluting product. And I think that can be subscribed to the fact that these products are completely unique in the market. One of the worst scenarios when trying to heal an injury to the skeleton is to have an infection. And despite all the precautions, there is always a risk for infection. We saw this with severe fracture like the study that was recently published, the infection rate can be as high as 52%. And this study also from Hungary shows that when you use CERAMENT V, there was stable infections. So since there is very few side effects, actually no side effects of using local antibiotics, the surgeons are more and more prone to use a product just as CERAMENT G or CERAMENT V to be absolutely sure that they are preventing an infection and have a problem-free healing of the patients. There is no other product that can do this and that's why we have such strong acceptance and such strong growth.

[Operator]

As there are no further questions, I will hand the word back to the speakers for any final comments.

[Emil Billbäck, Chief Executive Officer]

So, thank you, everyone, for joining the call this morning. We are very pleased to have reported the quarter 2 numbers. I think once again, it's a strong confirmation on that the company is on the right track and that performance is now starting to show. I also would like to thank everyone for joining despite the fact that it's in the middle of Swedish vacations of course. So I wish you all a great summer and look forward to talk to you soon again. Thank you, everyone. Bye-bye.

[Operator]

That concludes our conference call. Thank you for attending, you may now disconnect your lines.