Bonesupport Holding AB

STO:BONEX

Earnings Call Transcript 2019-Q3

[Operator]

Welcome to the BONESUPPORT Q3 report for 2019. [Operator Instructions] Today, I am pleased to present CEO Emil Billbäck and CFO Håkan Johansson. Please begin your meeting.

[Emil Billbäck, Chief Executive Officer]

Thank you, operator. Good morning, and welcome, everyone, to BONESUPPORT's Quarter 3 2019 Result Call. My name is Emil Billbäck. I'm the CEO of BONESUPPORT. And sitting next to me here today is Håkan Johansson, our CFO. This morning, we will take around 20 minutes to go through the presentation of the third quarter, and we will then open the line for a question-and-answer session. Before starting the presentation, I would like to draw your attention to the disclaimers covering the forward-looking statements that we will make today, Slide 2. So please, operator, if you will take me to Slide 3. I would like to begin the presentation with some highlights of the strong figures that we have released in this morning's report. Overall, quarter 3 sales were at SEK 39.1 million. Sales-wise, this is the best quarter ever in BONESUPPORT's history. This is especially pleasing given that it's not even a year ago that we started implementing the new distribution model in the U.S. Overall, our performance in this quarter is a culmination of the strategy that we launched in mid-2018, is taking the company in the right direction. Segment Europe & Rest of the World grew with 45%, reaching SEK 20.7 million. I think it's worth highlighting that this strong sales development has come from comparable market. No new markets have been opened in the period to achieve this growth. In segment North America, we also saw strong continued progress with sales reaching SEK 18.5 million, up 25% sequentially versus quarter 2. 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 [indiscernible] margin. With regards to earnings, we delivered strong gross margin of 88% in the quarter. This is the fourth quarter in a row with material gross margin improvement. Moving on to the operational highlights. In the period, we signed a contract with HealthTrust. This is the largest and most important medical organization or group purchasing organization in the U.S. HealthTrust has more than 1,600 affiliated hospitals. Furthermore, I would like to highlight that we're seeing strong progress in our market access in the U.S. We're gaining ground fast in the territories that we have previously been underserved in. Sales growth quarter-over-quarter is made up by more frequent use of existing customers as well as adding new customers. As a supplement to our strong clinical data, we released the first and very positive health economic evidence for CERAMENT G and CERAMENT V in the treatment of osteomyelitis patients. This newly released data is an important confirmation of the benefit of our antibiotic-eluting product, and this will help us to further drive sales penetration. More on all of this later in the presentation. Next slide, please. So 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 & Rest of the World. And the light blue and purple part of the bar is displaying the U.S. The purple part specifically, which is visible after quarter 4 2018, shows sales achieved in the new distribution setup. The decline in the U.S. from quarter 4 2017 to quarter 3 2018 can be attributed [ by the ] internal logistics struggle, certain inventory depletion as well as the effect of our termination of the contract, which was done in May 2018. The chart confirms the steady growth in Europe & Rest of the World that even has an accelerating trend since the introduction of the new strategy in mid-2018. I believe this gives a good confirmation that the business is on the right track. All in all, our total sales are now back above the previous all-time high we had in the third quarter of 2017. Next slide, please. Focusing a bit more on the detail of segment Europe & Rest of the World. I have already mentioned the strong momentum in the segment in total. But on a growing base of strong clinical data and the release of the top line results from the CERTiFy study that we did at the end of last year, we are experiencing strong growth and accelerating acceptance of CERAMENT in favor of other treatment modalities, especially autograft. We are now awaiting the publication of the CERTiFy study in the well-reputed journal of Bone and Joint Surgery American. So this is the JBJS magazine, where the study has been approved for publication. Due to a very strong European labor market, it has taken a bit longer than expected, but we have finally managed to fill all new territories in focus regions [ across. ] In total, we have 25 salespeople in our own sales organization in Germany, the U.K., Switzerland, Sweden and Denmark. At the annual meeting for the European Bone and Joint Infection Society Meeting in Antwerp that was held in September, there were as many as 10 combined posters and podium presentations in which the clinical benefits of CERAMENT was presented. This congress is specifically focused on the issues with orthopedic infection, with over 600 European specialists on this subject participating. The rapid acceleration of acceptance of CERAMENT was clearly visible with this group. It was also at this congress that new and favorable health economic data was presented. I will cover more of that later in my presentation. Within Europe & Rest of the World, 88% of the sales come from the direct market, where we have our own sales force. We have started an effort to revitalize the current market managed by distributors, with clear performance criteria for our selected partners as well as more disciplined planning and execution of activity. We're also looking to partner up with distributors on new markets with the ambition of seeing incremental sales materialize in 2020. If we look at the bottom-right graph on Slide 5, you see that in Europe, the third quarter is seasonally relatively weak as there are fewer planned operations for, for example, chronic bone infection or osteomyelitis, and this is especially during the summer months. The comparative quarter sales from the previous year were relatively strong. And despite this, sales rose by a robust 45% in quarter 3 2019. Next slide, please. Turning to North America. Sales in the quarter were SEK 18.5 million, which is up 25% sequentially. 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 the agreement closed with HealthTrust. HealthTrust is one of the most well-renowned medical organizations in the U.S. and for BONESUPPORT, it is one of the most important contracts we have signed. This will give us access to more than 1,600 affiliated hospitals. The contract goes into effect on December 1 of this year, and this will mean a step-change in terms of market access for year 2020. Since October last year, the new distribution network is up and running now with 4 key distributors, which together, deploy more than 500 sales reps. By having our own distribution network, we can capture historically under-penetrated territories, and we are succeeding in quickly establishing customers in areas where our former partner, Zimmer Biomet, was not successful. The average number of monthly orders has steadily increased during the year as well as the number of accounts that are reordering the product. We see a pickup in legacy accounts following the expiration of Zimmer Biomet's non-exclusivity period in May 2019. Our customer base year-to-date is about 50-50 between completely new accounts and legacy accounts. In the quarter, we recruited yet another regional sales manager for New England. And in total, we have now 9 regional sales managers nationally. To handle strong customer demand in a region that has been significantly under-penetrated under Zimmer Biomet, we have also hired a therapy specialist for direct sales promotion and customer training in the New York City area and New Jersey area. In our own commercial organization, we have now 22 people. Slide 7, please. As I have said on many previous occasions, strong clinical evidence and health economic data make up a cornerstone of our strategy. In 2013, the Nuffield Orthopedic Center started to use CERAMENT G in their treatment algorithm. CERAMENT G's unique ability to elude high concentrations of local antibiotics, together with the osteoconductive capabilities to form a scaffold to encourage new bone [ on growth ] and remodeling is ideal for the management of osteomyelitis in a one-stage procedure. In 2016, Professor Mark (sic) [ Martin ] McNally presented the clinical outcomes from his first 100 treated patients, showing an impressive 56% reduction in reinfection rates compared to previously used treatment machine. The impressive clinical data led to questions about how such strong outcomes could translate into patient and societal benefits. To answer that, we partnered with Nuffield on a study using real-world data from the English NHS Hospital Episode Statistics database. This is called the HES. This database shows the entire care history and expenses for each patient diagnosed and treated under NHS. The study analyzed over 25,000 patients who had an osteomyelitis surgery during 2013 to 2017. Patients were then followed 2 years after surgery. A comparison was made of patients treated at Nuffield with CERAMENT G or CERAMENT V in a single-stage procedure versus patients treated at all other hospitals in England. The first preliminary results of the study were presented at the European Bone and Joint Infection Society Meeting in September. The data showed that the hospital admission in connection with osteomyelitis surgery was reduced by 1/3. This means a discharge of, on average, 5 days per patient. The first number communicated to the market by us was 6 days. This was due to a rounding error. We apologize. The correct number that we would like to state is 5 days. The data also revealed that patients treated at Nuffield spent on average 11 days less in hospitals in the following 2 years after surgery. So less days in hospital means freeing up space and resources in the crowded public hospital. With an average daily cost for hospital care of GBP 437 per patient, the calculated savings per patient between the 2 groups was around GBP 7,000. Now we're awaiting the publication with the final findings, but this preliminary yet very high-quality data shows that if all osteomyelitis patients in England would receive a single-stage procedure with CERAMENT, the potential and theoretical savings could be a stunning GBP 44 million for the U.K. health care system. So with that brief update, I would like to hand over to Håkan, who will cover the financial overview.

[Håkan Johansson, Chief Financial Officer]

Thank you, Emil. Let us move to Slide 9, please. This is a slide and a graph that presents net sales by quarter as bars and the last 12-month net sales as a line. As you can see, net sales amounted to SEK 39.1 million to be compared with SEK 14.2 million same period last year. It's an increase of 175%. And net sales for the last 12 months amounted to SEK 132 million compared to SEK 101 million end of the third quarter last year, an increase of 32% and an increase of 23% compared to the second quarter this year. Next slide, please. Sales in North America for the period amounted to SEK 18.5 million compared with no sales for the same period last year. The contribution from the segment was minus SEK 9.8 million compared to minus SEK 20 million last year. Reduced loss relates to increased sales. Sales and marketing expenditure during the third quarter amounted to SEK 20.4 million compared to SEK 13.9 million last year. The cost increase of SEK 6.5 million mainly relates to an increase of sales commission of SEK 6 million. Next slide, please. Sales in the segment Europe increased by 45% compared with the corresponding period last year and amounted to SEK 20.7 million. Sales in our direct markets amounted [ to 8% ] of the segment sales. And sales of the antibiotic-eluting products, CERAMENT G and CERAMENT V, together increased by 44%. As already said, in Europe, the third quarter is seasonally relatively weak after our fewer planned surgeries during the summer months. The contribution from the segment improved to SEK 0.6 million compared to minus SEK 3.9 million same period last year, and the improved contribution is an effect of increased sales and gross profits. Sales and marketing expenses increased by SEK 1.3 million compared to the corresponding period last year and was mainly attributable to increased commercial activities. Next slide, please. And this is a slide showing the quarterly profit and loss for the last 8 quarters. And as you can see, net sales continued to deliver all-time high for the second quarter in a row. The third quarter is seasonally relatively weak as there are fewer planned surgeries, and 2019 was no exception to this. [ U.S. ] continued to grow quarter-by-quarter and [ was 25% ] compared with the second quarter this year. Gross margin is continuing to show recovery with a favorable effect from the sales growth in the U.S. Operating profit in the quarter was reported to SEK 32.7 million, a loss -- an improvement of SEK 11 million compared to the same second quarter this year. And BONESUPPORT remains funded to realize a commercial strategy and to reach profitability and positive cash flow. Next slide, please. This is a drill down of our operating expenses and selling expenses in the last quarter is down by SEK 13.2 million compared with the previous quarter. That's the quarter was charged with [indiscernible]. Research and development is remaining on a stable level, continuing to support our long-term aspirations. And administrative expenses is stabilized on a lower level for the last 4 quarters, where a large cost-saving focus have enabled saving after slower spend on consultants. And with that, I hand back to Emil.

[Emil Billbäck, Chief Executive Officer]

Thank you, Håkan. So operator, if you'll please take us to Slide #15. So since the introduction of the updated strategy, which was introduced in mid-2018, the business has adopted a stronger commercial discipline and commercial decisiveness. The result that we see today are confirming that the leverage of our effort is working. For the rest of the year and heading into 2020, we expect strong growth momentum as well. With the new U.S. commercial platform, we're able to pursue the full potential of CERAMENT. Our market access is improving gradually, and the GPO contract signed with HealthTrust is a confirmation of our unique offering. In Europe, our expanded sales organization will continue to grow sales by a combination of better geographic reach and increased penetration of important indications in, for example, trauma. With our new salespeople on board, we expect to increase the recruitment rate of new customers. In our mission to create a paradigm shift in the treatment standard of care, solid evidence is a key lever. With the upcoming publication of CERTiFy in the well-reputed journal JBJS, we believe that the benefit of CERAMENT will gain further recognition. Improved treatment outcome and reducing the consumption of scarce hospital resources should be the target of all innovative health care solutions. The data that we have presented in the quarter, while preliminary, shows a very large saving per patient using antibiotic-eluting CERAMENT in the management of osteomyelitis. All in all, we believe that we are well positioned to have a strong quarter 4, and we can confirm our corporate target of an annual growth of 40% in year 2020 and forward. We are funded to reach profitability, and I'm confident that we can deliver significant shareholder value on the journey ahead. Final slide, which is Slide 16. On the slide, you can see the calendar of value-generating milestones, many of which I have mentioned today in this presentation. And with that, we conclude our presentation and open up for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Viktor Sundberg from ABG.

[Viktor Sundberg, Research Analyst]

Just a question on CERAMENT G. Could you explain more in detail why we saw some slower growth in -- year-over-year in Europe for that product segment? And also for the trauma market in Europe, are you seeing increased penetration in that indication?

[Emil Billbäck, Chief Executive Officer]

Yes. Thank you, Viktor. The sales of the antibiotic-eluting product in quarter 3 match management's expectation. The chronic bone infections usually are scheduled surgeries in contrast to trauma surgery, which happens, if there has been, for example, an accident. And always during the summer months, July and August, if it's, quite frankly, if it's really warm and dry nice weather, there are less planned surgeries for chronic bone infections. And this could, from year-to-year, influence the antibiotic-eluting product. We had a cash [ profit ] [indiscernible] [ '18 ]. So I believe that our growth rate of close to 45% on the antibiotic-eluting product is to be considered a strong sign of the good recognition in the market. We are making good headways in trauma. I think since we released the top line results of CERTiFy, CERTiFy is a trauma study made in Germany at the 20 biggest trauma centers. And since we came with the data from CERTiFy, we see that the penetration in the trauma segment is picking up gradually, and we expect it to continue.

[Viktor Sundberg, Research Analyst]

Okay. And just a follow-up on the gross margin profile in this quarter. That was better than before. What is driving that?

[Håkan Johansson, Chief Financial Officer]

I would say that primarily it's related to the geographical mix, so the improvement in the U.S. having a higher gross margin than we have in [ Europe ] is driving that.

[Operator]

Our next question comes from the line of Niklas Elmhammer from Carlsquare.

[Niklas Elmhammer, Senior Equity Analyst]

Regarding the North American segment, good to learn about your progress with the major GPOs. And I guess the contribution from that channel will increase going forward. And maybe if you can elaborate a little bit on how your sales to that GPO channel has been so far. And also, what, if any, contribution you have seen from BONIFY so far?

[Emil Billbäck, Chief Executive Officer]

Thank you, Niklas. Yes, and we're very happy, of course, to have landed the contract with HealthTrust. We see that clearly as a gold-star appointment. I would say that in the U.S. market in total, the GPO contracts represent about 70% of the market, means that 30% is outside of GPOs. When it comes to our sales year-to-date, it is significantly less with GPOs. And the reason for that is that while we have been more successful winning GPO contracts than we anticipated, there's a time lag. And so the HealthTrust contract, for example, will go effective December 1, but we expect the first sales only to be visible in quarter 2. And that's why if you look at our sales year-to-date, there's a much higher proportion of outside GPO sales than what the market would represent. But that number, we haven't released, but just to give a feeling for it. Sales of BONIFY is still very small. Our salespeople are not focusing specifically on BONIFY. We launched BONIFY as a service article. So that those orthopedic surgeons that have a procedure pending where they need and they want to use both CERAMENT and the DBM, they do not have to request support from 2 different companies, but they can be speaking only to BONESUPPORT, and we can be a full-service provider for this indication. And that's how I think BONIFY will continue to be, a service article that over time, will get some significant sales. But currently, the focus is, of course, on CERAMENT.

[Niklas Elmhammer, Senior Equity Analyst]

Okay. That's very helpful. And regarding the health economics study, obviously, the final results of the study has not yet been published. But how do you see -- how do you expect to use it going forward? I know you have stated before that you don't believe that CERAMENT G is getting the proper reimbursement. So will this study sort of help you obtain any incremental codes for CERAMENT G in the major markets?

[Emil Billbäck, Chief Executive Officer]

So the CERAMENT G has -- I will say, CERAMENT G has a very good [indiscernible]. So I would like to correct whatever statement I've done before. I think that CERAMENT G presents such a unique treatment benefit that long term, it actually deserves its own reimbursement code, yes. So completely with you there. We have currently to accept how the health care system is constructed. And many times, the reimbursement is defined by the specific indication that the patient has. So the procedure -- the surgical procedure would determine which code that is given. I think that the results that have come from this health economic study is very strong. And I -- while I don't think that the study itself will be able to get a different and higher reimbursement for CERAMENT G, I think it will be a piece -- a very important piece of the puzzle of eventually getting there. So how would we use [ CERTiFy ]? We will use this study to discuss not only with the clinically responsible person at the department, the surgeon ultimately is responsible for healing the patient, but we have now also strong ammunition to speak with department heads and speak with purchasing managers at the hospital and show them that the use of CERAMENT will not only bring them better treatment outcome for the patient, but could also mean reduced cost for the department. So it gives us another layer or another dimension to our argumentation, which we feel is very up-to-date being in 2019, where expenses for total health care system is constantly being debated.

[Operator]

[Operator Instructions] There are no further questions registered at this time. So I hand back to the speakers for any closing remarks.

[Emil Billbäck, Chief Executive Officer]

Thank you very much, operator. So then I would like to close this call. I would like to thank everyone for their participation, and thank you for calling in this morning. We believe that we have released a strong report with very nice growth rates, both in Europe and in the U.S. We have registered our best quarter ever, and as you saw on the last 12-month development, again, a new all-time high. So we believe this is a strong confirmation of the implemented strategy and that the company is right. Thank you, everyone. Bye-bye.