Bonesupport Holding AB

STO:BONEX

Earnings Call Transcript 2020-Q3

[Operator]

Welcome to the Bonesupport Q3 report 2020. [Operator Instructions] Today, I'm pleased to present to you CEO, Emil Billback; and CFO, Hakan Johansson. Please begin your meeting.

[Emil Billbäck, Chief Executive Officer]

Thank you very much, operator, and good morning, everyone, and welcome to the Bonesupport Quarter 3 2020 Result Call. So this is Emil Billback talking, the CEO of Bonesupport, and also joined here in the room by Hakan Johansson, our CFO. We will start off by presenting the quarterly results. And after that, we will open up the line for a question-and-answer session. Before starting the presentation on Slide 2, I would like to draw the attention of everyone to the disclaimers covering any forward-looking statements that we will make today.So operator, if we could go to Slide #3, we will start the presentation. So first of all, I would like to give some highlights from the report that we released this morning. Overall, quarter 3 results, sales were at SEK 48 million, which is up 23% year-over-year. Sales have been negatively influenced by the COVID-19 pandemic, which I will cover later in my presentation.But despite these challenging times, we're seeing strong progress in several areas, providing confirmation on our business model and our strategy. Compared to quarter 2, sales were up 36% in segment Europe & Rest of the World, and 31% in North America, showing a positive trend in the number of orthopedic surgeries compared to the strong negative impact the pandemic had in late spring.Sales in Europe & Rest of the World was SEK 20 million, down 4% year-over-year, with the same year-on-year drop for antibiotic eluting product CERAMENT G and V. In the segment, North America, where we are leveraging a strong increase in customer base, we delivered SEK 28 million in sales, which corresponds to a growth rate of 53% year-over-year, and EBIT was significantly improved over last year as sales grew, while expenses were reduced.Speaking a bit about operational highlights. The direct sales team in Holland is now fully operational, and we are phasing out the previous distributor. We have appointed a well-established distributor partner for Australia. We're making good progress on the path towards CERAMENT G approval in the U.S., and we have recruited a strong project leader within reimbursement and health economic outcomes in order to step up the activities in this area.So all of these highlights, I will come back to in my presentation. But first, I want to speak a little bit more about the impact of the pandemic, which is on Slide 4. As you all know, the pandemic initially made hospitals redistribute resources and many elective surgeries were deferred to a later date. In the quarter, we saw a gradual return of elective surgeries region by region. The capacity within the hospital for orthopedic surgeries is nevertheless limited by the implementation of strict corona safety protocols. University hospitals with resources tied to infection departments have seen an over-proportional reduction in surgeries. In several U.S. metropolitan hospitals, the orthopedic patients have been deferred to specific ortho clinics to keep a patient continuum of care.The incidence of trauma cases have been markedly reduced in regions and geographics influenced by lockdowns, stay at home orders and quarantines. And this is due to the reduced mobility of the population in those areas. The most common reason for severe trauma cases is normally traffic accidents. Minor orthopedic injuries such as sprains and exercise-related injuries has actually increased during the pandemic, but these rarely involve surgery or the use of CERAMENT.There has been a slowdown in the recruitment rate of new customers as the interactions between potential customers and our company representatives have been limited. Our sales process includes physical demonstration of the product at the first 2 to 3 cases. And this is, of course, difficult when the representatives are not allowed into some of the hospitals. Furthermore, there has been an influence on patient recruitment rate and data collection in some of the clinical trials. This has affected the time line for our reply to FDA's questions on our de novo application. We could potentially have an approval for CERAMENT G within osteomyelitis in quarter 1 of 2021 and probably not as early as quarter 4, 2020 as we previously hoped for. I will get back later to the details on this in my presentation.Now, being a company in -- active in commercialization phase, a large part of our operational expenses are related to selling activities. With almost all congresses and physical events being canceled or moved to a later date, our expenses have naturally been reduced. So despite challenging times, sediment continues to take market shares from other options, other treatment options, as we are outpacing the total market development.Several public orthopedic companies has just recently published their quarter 3 results, and we see samples of sales developing with between 2% and 3% positive in the U.S. and sales decline of between 5% and 10% in EMEA. So this -- these reference numbers are for the big public orthopedic companies that have just published their results. So all in all, I would like to reiterate that COVID-19 has no impact on the underlying need for CERAMENT nor does it influence the need to treat skeletal injuries. We are certain that the number of orthopedic surgeries will return as the pandemic wears off. We believe that the benefit of the 1 step procedure that could be enabled with CERAMENT, along with the clinical outcome offered will be valued even greater as health care systems around the world will face even longer queues to surgery and treatment than before the pandemic.Let's go to Slide 5, please. So here, I would like to just shortly guide you through our quarterly sales performance. You will recognize this slide that we update for every call. It shows the last 12 months. With the red and orange part of the bar representing Europe & Rest of the World, and the blue part of the bar is displaying sales in the U.S. Now, you're aware that we terminated the contract with Zimmer Biomet based on a strong vision to bring CERAMENT to its full potential in the U.S., and we are now successfully leveraging our new U.S. distribution model. And I think the result speaks very much for themselves.In Europe & Rest of the World, this strong sales trend has been disrupted by the pandemic, as you can see. And I also would like to pay attention to the split in Europe & Rest of the World between CERAMENT G and V on one hand and CERAMENT BVF, on the other hand. I believe this gives a very nice and strong indication on the potential for antibiotic eluting products that exist in the U.S., once we have the approval.On the next slide, I will focus on the details of segment, North America. So that's Slide 6, please. The strong sales growth that we've seen in the U.S. is to a large part, attributed to leveraging the successful GPO listings, as well as adding several new customers over the last 12 months. The recruitment rate of new accounts during the pandemic has been slightly lower than it was before the pandemic. The restrictions in access to hospitals and customers has been more regional in the U.S. compared to Europe, still allowing salespeople to initiate product trials, product demonstrations and conversions of GPO associated clinics. With the pandemic restrictions and high capacity constraints at major university hospitals CERAMENT has increased its presence in the U.S., with specific ortho clinics to where the patients have been deferred in an effort to secure the continuum of care.On July 3rd of this year, we received several clarifying questions in line with the regular and formal process for the de novo application. From that day, the FDA sends clarifying questions to an applying technology, the company has 180 days to respond. The questions we received have been on a quite detailed level in regards to data from previously conducted clinical trials in Europe. Due to the pandemic, the collection of data from external parties has been somewhat slower than what we first anticipated, and we expect to send our reply to the FDA in mid-December. This is still well within the official time line, as I will show on the next slide.With regards to the FORTIFY study, the last patient was, as you know, enrolled in June 2020. Patient follow-up is progressing as planned. And the centers that have completed all their 12 months follow-up are being closed, and we expect all patient follow-ups to be completely finalized by July 2021. Despite disruption from the ongoing pandemic, our commercial team has made great progress in increasing CERAMENT market presence, the geographic coverage and building a rapidly expanding customer base. And just as in Europe, we have converted a large part of our customer interactions to digital meetings as well as attended interactive webinars that have been hosted by Bonesupport, but led by our key opinion leaders.Slide 7, please. So here you can see the milestones and the detailed view of how we intend to bring CERAMENT G to the market, either through the de novo pathway or the PMA pathway. So as you can see on this slide, de novo is above the big arrow and the PMA is below the big arrow. You can also see that we're only a few weeks away from submitting our answers to the questions that we received from FDA. And what I would like to emphasize on this picture is that from the point of Bonesupport's submitting the answers and FDA confirming that they received them, FDA has 60 days, excluding any saved days from expedited handling in previous steps, to give final response to the application. And this is why we have updated our expectations of the potential approval in early 2021.Next slide, please. I will now go through, shortly, the highlights of Europe in the period. As you can see at the top, the sales performance, I think, I have already covered sufficiently. But what I've mentioned also in the beginning of the presentation, we saw a gradual return of elective and noncritical orthopedic surgeries during the quarter. Even though hospitals and orthopedic clinics are well below the pre-pandemic surgical capacity. Quarter 3 saw indeed a significant increase of number of surgeries compared to quarter 2.Selling CERAMENT requires the ability to present a surgeon with the scientific evidence and to support the surgeon to replace a habit of using, for example, autograft, something which they might have done for many, many years. Our direct pilot markets, where we have dedicated sales specialists, represents around 85% of sales in segment Europe. Sorry -- in segment Europe. But these pilot markets does, for sure, not represent 85% of the European population.On July 1, Netherlands was turned into a direct market to further accelerate penetration in this attractive market. And I'm convinced that our proven and scalable business model will successfully drive market penetration for CERAMENT as we now have 2 direct sales representatives recruited that are visiting both existing and potential customers, new customers, in Netherlands.In the quarter, we also made an initial market establishment in Australia by contracted a distributor and a local service provider, and of course, we don't have the bandwidth, nor do we have the intention to set up our own organization in every market, but we have decided to combine the best out of 2 models by moving into a hybrid structure in Spain and Italy. We have initiated the recruitment of 4 market development managers that will work alongside our value distribution partners locally. And by this, accelerate the market penetrations in these high potential markets. These positions that we have started the recruitment for, will directly assist the distributors in the customer interface and support the implementation of our sales model. And just to put some perspective on this, the sales of CERAMENT in Italy and Spain in year-to-date is actually less than the sales we have in Norway. And this is something that we will definitely change during year 2021.So with that brief update on the performance and the highlights of the segments. I will now hand over to Hakan, who will cover the financial overview.

[Håkan Johansson, Chief Financial Officer]

Thank you, Emil. So let us go to Slide #10, please. And this is a graph representing net sales by quarter as bars and last 12-month sales as a line. Net sales in the third quarter amounted to SEK 48.1 million compared with SEK 39.1 million in the same period previous year, equaling a growth of 23%. The second quarter this year was substantially impacted by the COVID-19 pandemic and a decline in mainly elective surgery, but also from a reduced number of trauma surgeries. This quarter reported a strong recovery and a growth of 33% compared with the second quarter. Net sales for the last 12 months amounted to SEK 173 million compared to SEK 132 million last year, an increase of 31% despite the impact from the pandemic. The segment, North America increased last 12-month sales with [ 199% ], and the segment in Europe & Rest of World reported a minor drop in last 12-month sales with 4%. Both segments impacted by the COVID-19 pandemic, but with a slower recovery in Europe.Next slide, please. In the segment, North America, sales for the period amounted to SEK 28.3 million compared with SEK 18.5 million previous year, a growth of 53%. The new distribution structure has resulted in improved geographical coverage and allows for broader market penetration of different indications. The continuously strengthened customer base together with the large [ debuild ] contracts that were signed during last year, contributed to the sales increase. The contribution from the segment was minus SEK 0.6 million compared to minus SEK 9.8 million last year. The improved contribution is due to increased sales, improving gross profit with SEK 10.3 million, as well as lower costs. Sales and marketing expenses during the quarter amounted to SEK 22.9 million compared with SEK 20.4 million last year of which sales commissions to distributors increased from SEK 6 million to SEK 9.2 million following the sales growth.Sales for the Europe & Rest of World segment decreased, as a direct impact of the COVID-19 pandemic, by 4% and amounted to SEK 19.8 million compared to SEK 20.7 million, previous year. The segment showed recovery from the COVID-19 pandemic in the quarter, reporting a 36% sales growth compared with the second quarter this year. Sales in key markets accounted for 87% of the segment sales and sales of the antibiotic eluting products, CERAMENT G and CERAMENT V followed the sales decline in the segment and decreased by 4%.The contribution from the segment was SEK 1.4 million compared to SEK 0.6 million previous year. The increased contribution is mainly explained by lower costs.Sales and marketing expenses decreased by SEK 1.5 million and amounted to SEK 15.4 million compared to SEK 16.9 million previous year. The decrease is partially due to a transition to cost-effective meetings on digital platforms as a direct effect of the pandemic and the restrictions on physical meetings that we have been applied.Next slide, please. Sales in the third quarter reported a growth of 23% and has already been well covered during the presentation. Increased sales in the U.S. had a positive impact on the gross profit, reaching 91.4% compared to 87.7% previous year. This shows a strong recovery from the second quarter this year that was temporarily suppressed by fixed production costs in combination with the low sales in the second quarter.Operating loss in the quarter improved by SEK 13.5 million to minus SEK 19.2 million compared to minus SEK 32.7 million previous year. The reduced loss is mainly explained by higher sales and lower costs. The third quarter ended with a net cash balance of SEK 378 million, and we remain well funded to execute our strategy after the new share issue conducted earlier in the year, which brought the company, SEK 362 million after issue costs.Next slide, please. Total expenses in the last quarter was down with SEK 3.3 million compared with the same period last year despite an increase in sales commission of SEK 3.2 million. The reduction in selling expenses was driven by lower travel costs as well as by canceled congresses and meetings as an effect of the pandemic. The increase in selling expenses from the second quarter this year mainly relates to the reversals made of reduced working hours and voluntary salary reductions.Research and development reported low expenses in the period as the FORTIFY study has recruited the last patient and thus entered a new phase. And that the pace of implementation in other studies was temporarily affected by the pandemic.So with this, I hand over back to Emil.

[Emil Billbäck, Chief Executive Officer]

Thank you, Hakan. So let's go to Slide 15 of the presentation, operator. And with this, I would like to sum up some key findings from the presentation and also give an outlook on the journey ahead. So apart from the effect of the pandemic, I'm very glad to say that the quarter showed strong progress and further confirmed the strength of our implemented strategy. While most orthopedic companies are in double-digit negative growth in this year-to-date, Bonesupport is growing with 17%. Above all, our organization has shown agility, focus and decisiveness during this pandemic and the strong performance in quarter 3 is fully attributed to the efforts of our great organization.Our distribution structure in the U.S. is now enabling us to pursue GPO contract in a more efficient way than before, and it's also resulted in a better geographic and indication coverage. We are continuously increasing the CERAMENT customer base and have stronger control of market penetration and market segmentation.The U.S. market for bone graft is worth around USD 330 million, where the cases with infections represents around USD 100 million. The de novo pathway for CERAMENT G can potentially bring approval in the indication bone infection in early 2021. And that means that CERAMENT G would be the first ever synthetic bone graft with infection management properties on the U.S. market. A PMA registration will follow and will broaden the indications band versus the de novo pathway.The clinical evidence and patient outcome data for CERAMENT are very strong. We're now ramping up our efforts to show how these can deliver positive health economic effects. Combined, we believe that the current evidence, together with the results from the upcoming FORTIFY and SOLARIO studies, will help to transform the outdated standard of care for treating bone injuries and bone infections.Our strategy is market penetration focus rather than expanding into completely new geographies. We have already a foothold in large markets such as Italy and Spain, and we're now moving towards a hybrid setup to make sure that these markets benefit from our proven business model and will have an accelerated market penetration as a consequence. All in all, we are well positioned for growth and we are navigating with a clear strategy and objectives through the challenging market conditions that we see that this pandemic has brought. As you can understand, our confidence in our corporate target of an annual growth of 40% remains very high.And finally, as usual, I will leave you with all the milestones of our journey ahead as the final slide of this presentation. But as there has been no changes to this slide, I will not go through it.And with that, we can conclude our presentation and open the line for questions.

[Operator]

[Operator Instructions] Our first question comes from Rickard Anderkrans, ABG Sundal Collier.

[Rickard Anderkrans, Research Analyst]

So first question here on the de novo application for CERAMENT G in the U.S. Should we think of first sales contribution in Q2 rather than Q1 next year, realistically, from what you see today?

[Emil Billbäck, Chief Executive Officer]

Yes. Thank you, Rickard. It's difficult to give an exact date. But as you see from the time line, FDA has 60 days, which means we expect the approval to come early in 2021. And from there, what I've said, we need a maximum 3 weeks before we get started. So it will be somewhere between quarter 1 and quarter 2. So quarter 2, I think, is a fair guess, yes.

[Rickard Anderkrans, Research Analyst]

And I noticed that the gross margin in North America came in at an all-time high of 96%. What was the driver there? Has there been any change in pricing? And how should we think going forward?

[Håkan Johansson, Chief Financial Officer]

And there has been no change in pricing. That's purely up to [ smart ] products, market mix and so on. And probably also somehow -- it's within the [ destines ], somewhat but no major changes.

[Rickard Anderkrans, Research Analyst]

And can you talk a bit more about the Dutch registry study here that you co-financed with the financing with 2 university hospitals. So you're targeting roughly 400 patients here over the next 4 years? Will you be able to use interim data in your sales process? Or will the data only be valuable once the study is completed, if you understand my angle there.

[Emil Billbäck, Chief Executive Officer]

I cannot answer that question, unfortunately, because that -- we haven't had that conversation with the 2 university hospitals yet. The ambition is that we will be able to get an early readout of some of the results, but I have to refer to a later date to give a confirmation on that point. As you can imagine, during COVID to start up an initiative like this, it has -- all physical meetings has been replaced with digital meetings, and there are a few details still to be fleshed out here.

[Rickard Anderkrans, Research Analyst]

And how should we think about the cost structure for that study, in relation to other trials such as CERTiFy and FORTIFY, just to get a sense of the cost impact in the coming years here?

[Emil Billbäck, Chief Executive Officer]

Yes. The -- I mean, we never give exact cost figures, of course, on the investments we do in the clinical studies. But a registry study is significantly cheaper than if a similar study will be done with the same amount of patients as a randomized controlled trial. Registry study rather means that each patient is treated with a 1 step procedure for fracture-related infections, will be -- all the data will be captured and then aggregated at the end of the study. So it's cost, overall, significantly less, but the value of the study, we believe, to be very big, given that it will answer the questions on health economic effect also on one of the most commonly caused infections. Which is after a [indiscernible].

[Rickard Anderkrans, Research Analyst]

And how should we think about pricing for CERAMENT G in the U.S., the months before you receive a potential add-on DRG reimbursement in September next year, just to get a sense of that?

[Emil Billbäck, Chief Executive Officer]

Well, we can only rely on what we see in Europe that pricing for CERAMENT G and V is significantly higher than BVF, simply because it is perceived also to have a much higher value to the surgeon and the consequences in patient outcome. And I think it's -- a similar perspective should be applied on the U.S. when you guys populate your models.

[Rickard Anderkrans, Research Analyst]

And just a final 1 from my side. So are clinics and surgeons open to trying and buying new products such as CERAMENT during COVID-19, are you -- you alluded to it in your presentation here. But how should we think about new contracts and your ability to communicate the benefits in terms of saving time and resources, compared to other treatment alternatives and such here in the coming quarters?

[Emil Billbäck, Chief Executive Officer]

Yes. I mean, it's a very good question. I wish I could give good granularity in my answer. The -- it has been more difficult in Europe than it has been in the U.S. to get access and win new accounts. Overall, it depends on what access we have to hospitals. So in regions, or cities, or countries where the hospital system is completely dedicated to care for COVID sick patients, there are very few orthopedic surgeries taking place and also very few orthopedic sales representatives being admitted to go into the hospital and meet -- or allowed into the hospitals and meet the surgeons. So it is difficult. No doubt. As long as the COVID is focusing all the priorities of the health care, we have some challenges to recruit new customers. We see that the existing customers are staying very faithful and loyal to CERAMENT. And when they do have surgeries, of course, then procedures take place where CERAMENT is used. But to convince a new surgeon or a new department, in a digital meeting, has not been very successful.

[Operator]

[Operator Instructions] There are no further questions at this time. Please go ahead, speakers.

[Emil Billbäck, Chief Executive Officer]

Very good. Well, then I would like to thank everyone for making the time to join our conference call, when we presented our quarter 3 numbers. We live in turbulent times. And I think what you've seen from our presentation today is that we have stayed low, and we have put our shoulder against the challenges and pushed as hard as we can and with that, also delivered a very fine result for this quarter. So I thank everyone and hope that you continue to follow us for the next quarters as well. Thank you. Bye-bye.