OssDsign AB

STO:OSSD

Earnings Call Transcript 2023-Q2

[Operator]

Hello, and welcome to today's webcast presentation where we have OssDsign who will be presenting the second quarter for 2023. With us presenting, we have the CEO, Morten Henneveld; and CFO, Anders Svensson. [Operator Instructions] And with that said, I'll hand over the word to you guys. Please go ahead with your presentation.

[Morten Henneveld, executive]

Thank you. Thank you very much. Welcome to the second quarter of '23. My name is Morten Henneveld. I'm the CEO of OssDsign. With me, I have our CFO, Anders Svensson. Today, we want to walk you through our Q2 results and also the highlights of the quarter. As always, when we do these presentations, the normal disclaimer.

When looking at the highlights of the second quarter, we had another record sales quarter, and we are very pleased with the momentum that we see in the business. We continue to see sustainable and accelerating growth. The quarter was also transformative in the sense that our Orthobiologics business or bone graft franchise became the biggest in terms of revenue contribution. And of course, it was already significantly bigger in terms of gross profit contribution.

We're now also increasingly becoming a U.S.-dominated company, and we continue to see extremely strong development in the U.S. with the fifth consecutive quarter of triple-digit growth. Importantly, we've also seen a very positive development on the customer base as we've now won several long-term contracts with large hospital systems, so-called integrated delivery networks, or IDNs, when you abbreviate it.

I will come back to this a little bit later. And lastly, the quarter also clearly demonstrated the scalability we now have in the company, and we are now showing operating leverage, which Anders will talk to in greater detail later on. And with that, I'll hand you over to Anders to walk through the financial results before we go into the highlights in a bit more detail.

[Anders Svensson, executive]

Thank you, Morten. So if we turn to the results for the second quarter, we reported SEK 24 million in sales, which equals an outstanding 92% growth versus the same quarter last year and 79% growth in -- on a constant currency basis. As Morten mentioned, we are seeing a very sustainable and accelerating growth in the business. And what you see here on this slide is the last 6 quarters with the bars being quarterly sales and the circles above showing the growth rates in constant currency against the same quarter the previous year. And as you can see, sales are increasing at a very meaningful rate, and we continue to be a high-growth company.

And looking at where the growth is coming from, you can see that the U.S. business clearly accelerated again in Q2 with SEK 17.2 million in sales, continuing the strong momentum that we've seen now in the last many quarters. And it came in at a spectacular growth of 148% for this quarter. And that's fifth quarter in a row of triple-digit growth in the U.S. And the share of total revenues from the U.S. increased to 72% compared to 55% in the same period last year. But the markets outside the U.S. also showed good growth, 22% versus the same period last year, and this is despite a significant deterioration in the availability of hospital staff in Germany, our main European market, which impacted basically most of the quarter.

So all in all, a very strong quarter yet again. As usual, I want to deep dive it more on the U.S. and how the U.S. is not only taking off, but also showing sustainable growth with more hospital approvals, more customers and clearly driven by the acceleration of U.S. -- OssDsign Catalyst. Now what you see in this bar chart is the last 12 months sales in each bar. And we started to see this trend in Q2 of last year, and now this has accelerated further in the second quarter.

Again, it also means that the last quarter alone has contributed with more incremental sales in absolute terms than it took the company to reach in the first 5 years in the U.S. clearly highlighting the exponential momentum we have in our U.S. business right now, very strong development, and we're highly satisfied with that one. In line with our strategy, we're becoming an increasingly U.S.-dominated company.

And as you can see, in only a few years, the U.S. has grown from being about 1/3 of the business to now being 72% of sales in this quarter, and we expect this trend to continue in the coming quarters and years. So why is this important? Well, with significantly higher prices in the U.S. market, accelerating in the U.S. will be key to future revenue.

But equally important, it will be highly accretive to future margins and therefore, the profitability from the company. If we move on to the split by franchise, we continue to see a very healthy development in both businesses.

If we start with Cranial, we reported sales of SEK 11.7 million. Growth in the quarter was adversely impacted by the aforementioned deterioration in the availability of hospital staff in Germany, which impacted most of the quarter. Sales from the first 6 months ended at SEK 24.4 million and 47% growth. Moving to our Bone Graft franchise then. We saw further acceleration in momentum during the quarter because of more hospital approvals happening. And whilst I wouldn't pay too much attention to the growth numbers, as -- this is still too -- it's so early that the comparative base is very small, reporting SEK 12.3 million in sales during the quarter is a significant acceleration from the previous quarter and clearly indicates the scalability and also the transformative potential we have with OssDsign Catalysts. Our sales for the first 6 months ended at SEK 21.2 million (sic) [ 21.1 million ] and that's 614% growth.

As you can see here, the strong catalyst numbers also means that the bone graft increased to 51% of the sales for the quarter, and therefore, became for the first time, the biggest franchise in the company.

It also means that OssDsign Catalyst continues to become a larger and larger part of the business and due to the higher gross margin will positively impact both profitability and cash flow in the future. And for the first 6 months, the Bone-graft franchise is 46%, Cranial is 54% of sales. However, because of the high-quality earnings coming from OssDsign Catalyst, the Bone Graft franchise's profit contribution is significantly higher than the sales split.

And for the first time, we now also disclosed the gross margin, the underlying gross margin in the company. In the second quarter, the gross margin continued to develop very favorably and reached an impressive 77%, increasing 9 percentage points against Q2 '22. And for the first 6 months, gross margin was 76%. That's an increase of 14 percentage points against the same period last year. And this increase can all be attributed to the acceleration of OssDsign Catalyst.

Now as this is the first time we disclose this figure, we also wanted to give you some context. So on the slide here, you see the gross margin development in OssDsign since 2020. And although I think that the chart speaks for itself, you can see how we have dramatically increased the gross margin over the last years as we entered the Orthobiologic's business and successfully launched OssDsign Catalyst.

I personally -- I worked in many companies over the years, but I've never been part of such a steep increase in gross margin during such a short time.

So we're, of course, very pleased with delivering such a strong gross margin. I think it's also worth noting that this level is well above the average across the orthopedic industry. And as our bone graft franchise continues to become a larger part of the company, it will continue to be accretive to gross margin.

We are now starting to see the expected operating leverage in the company as we've also indicated before. However, as the comparisons year-on-year is heavily distorted by the fluctuations in exchange rate and most notably, the U.S. dollar hedge where we took a position a while back now. We felt this needs just a little bit more explain -- explanation in detail to ensure that everybody reads the underlying development correctly.

So on the slide, you can see sales, other income, which is basically the revaluation of our U.S. dollar hedge and the reported operating profit. Now if we start with Q2 last year, we had SEK 12.5 million in sales and SEK 4.2 million in other income. That's quite a big part being revaluation of the hedge, which led to an operating profit of SEK 24 million minus.

The other income was then 25% of total revenue reported. Now in Q2 '23, we had SEK 24 million of sales and only SEK 1.5 million in other income, which therefore only represents 6% during the quarter and leading to an operating profit of minus SEK 20 million. So that is an operating profit -- improvement of operating leverage of plus SEK 4 million.

However, when you normalize them for the hedge effect, which is unrealized in cash terms that leads to an underlying improvement in operating leverage of SEK 6.7 million or equivalent to 24% better. So albeit we haven't crossed the finishing line yet, what you see here is there's a clear sign that the current trajectory of the business is also improving the profit line as a result of the continued acceleration of OssDsign Catalyst whilst operating expenses have stabilized.

So I will now hand you back to Morten, who will talk some more about the key highlights and achievements we've seen.

[Morten Henneveld, executive]

Thank you, Anders. I wanted to come back to a very positive development we've seen in the customer base in the U.S., which, of course, contribute to the accelerating but also equally important will contribute to the sustainability in the sales going forward. And this is what I talked to in the beginning called the integrated delivery networks, or IDNs. I appreciate that not everybody may be familiar with what this important type of customer is. So let me just try to explain what an IDN is. In essence, these are large networks of healthcare units and facilities that offer a full range of healthcare services, and they constitute a very important part of the U.S. healthcare system. And what makes them important are really 2 things. One, they represent very large volumes as they typically have many hospitals in their system. Well, the second way -- the second reason they contribute is also that they conduct a very robust and thorough assessment when selecting new approvals, much more similar to what we know from tender contracts [ beside of the Atlantic. ] And therefore, IDNs also serve as a blue stamp of the high level of innovation we bring to market and therefore, something other potential surgeons will look to when they are selecting their products. So winning these long-term contracts with the large hospital system, these IDNs not only means that we significantly broaden the commercial opportunity right now, but it also means that it keeps that opportunity open for the years to come as we move into '24 and '25.

So hopefully, that's clear to everyone that winning IDNs is a big step forward and actually quite early in our commercialization phase that we've managed to get into these contracts now. So that is, of course, something we are extremely pleased with. As always, I also want to give an update on how we deliver on our strategy. And as you can see, we continue to execute well, and we accelerate value creation in the company. Our first priority is to win in the U.S. We focused a lot on the U.S. And as you can see, we are delivering to that plan. The business, as Anders mentioned, has now been running in a financial growth mode for the last many quarters and now have 5 consecutive growth quarters of triple digit. The last 12-month momentum is also up about 3x. It's now 72% of our revenue, creating a much healthier mix in the business. And the growth is sustainable with a broader customer base with more users, more recurrent users and now also with the addition of these long-term IDN contracts. The second priority is to build an Orthobiologics business, with SEK 17 million in sales in the first year and now in the second quarter, becoming the largest franchise, with well above 1,000 patients treated and the fact that we have attracted leading surgeons as ambassadors are all testaments to the successful launch that means we are well underway and have set up the company for continued acceleration. Our third priority is to innovate the portfolio, new product development, as you know, in the MedTech field takes time. We've already now launched the first line extension catalyst 1cc, and we will be launching more products in the years to come.

Our fourth priority was to accelerate our clinical efforts and to make some significant strategic investment in this area. And this was not only about doing more but more importantly, to fundamentally implement a new clinical agenda to do programs in the markets we are operating in with real surgeons and with real patients.

And I think the rapid uptake in the market since launch confirms the large potential we have with OssDsign Catalyst. But really to fully capture that opportunity, clinical evidence to support its differentiation will be required. And therefore, we are making these strategic mid- to long-term investments to produce clinical evidence as cost effectively as possible. And by combining a small clinical study, which is our TOP FUSION study that I hope many of you are familiar with, with a prospective multicenter registry in the U.S., which is PROPEL, we will build a stronger clinical evidence in a fast and cost effective way. And I'm sure many of you saw the press release we sent out a few days ago where we've now exceeded 200 patients in PROPEL. And whilst these investments, of course, adversely impact operating profits in the short term, we believe this is a well-balanced approach that will enable us to drive the growth of OssDsign Catalyst, building a substantially bigger and more profitable business in the years to come. The fifth and last priority is driving operational efficiency. As you know, we've cut Cranial PSI lead time by 40%. But I think more importantly, right now, as Anders talked to, we are now seeing operating leverage coming into the company as we also indicated previously. So as you can see, we have delivered on key promises in the strategy. We are significantly increasing value creation and building a stronger company with much greater scalability. Now during the last 3 to 6 months, we have received quite a lot of questions about where we see value and how we see value distribution in the company.

And what you see on the slide and what you also heard Anders talked to in today's presentation and which has been evident over the last many quarters, it is a fact that we see a lot of value creation coming from our new Orthobiologics business.

And it means that OssDsign is increasingly becoming a U.S.-dominated Orthobiologics company, which is completely in line with the strategy. So what you see on this slide here specifically is we try to attribute -- the main reason for actually executing so well on our strategy to either the Cranial, which is the blue or to OssDsign catalyst, which is the pink.

And as you can see, this slide is a lot more pink than it is blue. And why is this relevant? Well, it essentially means that our Orthobiologics business has significantly changed the profitability profile of OssDsign. We're seeing significant business shift with Bone Graft now being more than 50% of sales. And of course, as I said, even higher on gross margin -- gross profit and with the U.S. now being more than 70% of the business. That means that it significantly increased the scalability in the company, it means that we operate with higher ASPs. And it means we'll continue to deliver increasing sales and increasing margins also in the quarters and years to come. And finally, as we now also see, as Anders mentioned, stabilizing cost levels, this will inevitably also translate to improved operating leverage. So all in all, when looking at OssDsign, it is a significantly changed and improved profitability profile that exists now in the company and also a profitability profile that will only improve as we move forward and this business shift continue their current trends.

With those final words, I want to thank you all for listening to the presentation, and now -- and hand back to the operator for questions.

[Operator]

[Operator Instructions] And we'll start with the first question here. Lately, you have repeatedly pointed out that TOP FUSION will not deliver a statistically robust result regarding the fusion rate. Considering this, what should be seen as a good fusion rate in the study? And what would a bad result mean for OssDsign?

[Morten Henneveld, executive]

Well, yes, I think there's a little bit of a contradiction in the question because as we've said before, with 17 patients, you cannot report a fusion rate, which is statistically significant. What TOP FUSION will give us is a very profound understanding and very profound evidence on very regular time points on 17 patients of -- we actually said 15 evaluable on how the product is performing, how it is interacting with the human body.

And also how we see speed of fusion happening. So what do you see at 3 months or 6 months or 12 months and so on. So it will give us very, very profound evidence which we, of course, will be taking to market and partly are using, as we commercialize right now on the NDA with surgeons to show them preliminary data. I won't go into what potentially a bad fusion rate could be, I think, we'll have to get the data when we get it, and then we'll share that with everyone.

[Operator]

Okay. When you get a new customer in the U.S., how does the development of that account typically work? And if more work is required for the customer, how much of that falls on OssDsign and how much of that falls on the independent distributor? And is there a difference between Cranial and Catalyst when it comes to this?

[Morten Henneveld, executive]

Yes, I think there's a number of questions. So let me try to do them one by one. First of all, yes, there is a big difference between Cranial and Catalyst. Cranial is a much more [ intimate ] sales. It is a high touch -- what we call a high-touch sale, where we are deeply involved in interacting with the surgeon on selecting and designing the specific solution for any given patient.

OssDsign Catalyst is significantly different, given that it is a consignment product. It is on the shelf. So that also means that once an account is up and running, it's typically -- you get through a VAC approval with one surgeon who is the champion, then he or she starts using it. At that point, we tend to hand over to the distributor who do the heavy lifting on a day-to-day basis. That's also what we are paying them commission for, of course. So we expect them to keep driving it. And a typical development is that you go through the VAC approvals with one doctor championing that and getting it approved. And then gradually over time, that surgeon will start to use you in -- for more and more cases, more and more types of procedures. And of course, our aim also is over time that more and more of his or her colleagues will start to use the product. So that's a quite typical process. But as you can also hear, the scalability is just significantly bigger on OssDsign Catalyst because once the hospital is up and running, we have someone else to take over and then we can start to target the next surgeons and therefore, build the customer base significantly bigger and faster.

[Operator]

Cranial PSI seems to be an excellent product. So why has the recent sales number not been any better? And if we're not mistaken, sales of Cranial in Europe has now decreased over the last 2 quarters and decreased in the U.S. during Q2 in spite of the improved lead time for that market.

[Morten Henneveld, executive]

Yes. Well, first of all, I think Cranial is growing by 47% year-on-year. right? So I think that before we get too carried away, I think we should be pretty happy with the 47% growth year-on-year. It is a fact, as you know, on Cranial PSI. It is a much more volatile business when it comes to electric procedures, knowing that brain surgery after you've done the acute phase, the craniotomy, then the second phase thus fall lower down on the product list relative to other medical disciplines.

And that is what we've seen in particular here in Q2 as we also announced, we saw many accounts in Germany dropping from 100 to Index 20 due to a significant deterioration of staff shortages. So as long as you have -- you're dealing with the aftermath of the COVID pandemic, in that sense, it is inevitable that you will see some kind of fluctuations on the Cranial sales. Unfortunately, that is the environment we operate in today. Having said that, I think it's very clear that you can see what OssDsign Catalyst and the Orthobiologics business is doing to the company. So that is, of course, something where we also focus a lot and we put a lot of our investments and effort into right now, which clearly is having a profound impact on both the current performance in the company, but also, as I mentioned, the future both growth and profitability profile.

[Operator]

Perfect. Next question. Great quarter. Congratulations. Can you provide some color on the future for the Catalyst growth? And can one expect in terms of sales catalyst quarter-over-quarter growth to continue at the same pace or even, in fact, even accelerate?

[Anders Svensson, executive]

We don't normally provide forward-looking statements right. In fact, we think it's a very good development right now. And I don't see any reasons why we stop, but we're not going to talk about future numbers.

[Morten Henneveld, executive]

If I can just add, I think as we have said several times before, growth is not necessarily going to be linear. It's going to be more like a staircase. I think some of the acceleration you see right now is a result of us winning these long-term IDN contracts, then it may plateau a little bit before we get the next one in and then it accelerates again. So I don't think anyone should think about growth as being linear. It will be more of a staircase. But of course, we do expect that it will continue to grow and it will continue to grow significantly faster than our Cranial business.

[Operator]

The IDN contracts you mentioned, have you already seen the effect of those in sales? Or is that sale to come in future growth?

[Morten Henneveld, executive]

Yes and yes. Yes, in the sense that we have already seen it, we got the -- I think we won the first contract during the first quarter. So that certainly contributes to some of the acceleration. But this is, of course, not something that just stops once we had 1 or 2, we want to keep winning these contracts. So as we're winning more and more contracts, of course, we also expect that to continue to contribute to growth going forward and accelerate growth going forward.

[Operator]

Perfect. And can you please provide an update on the clinical activities for Catalyst, TOP FUSION and PROPEL. And when can we expect to see results and updates from both of those?

[Morten Henneveld, executive]

Yes, things are growing, I would say, absolutely according to plan. TOP FUSION, we now have patients who -- final patients are coming in for their 1-year checkups, then you need to look at the data, extrapolate it, get a third-party independent review on it. And then you need to write it up and publish it. So that will happen in the first half of '24, as we previously said. The same thing on PROPEL. You can see right now, we just exceeded 200 patients. We are increasingly also looking at the, I would say, building quality and credibility of the implant. So we now have some extremely noteworthy centers coming in to that registry. And we also expect to start publishing first -- getting the first publication from that registry as we come into '24. So '24 will really be the year where you will see us bringing more clinical evidence and more papers to the market.

[Operator]

Your growth rate is trending positively. What factors would you say are driving your growth in this direction?

[Anders Svensson, executive]

Well, I'd say it's the U.S. and Catalyst. And moreover, in the last few quarters, it's been mainly OssDsign Catalyst.

[Operator]

Perfect. And we'll take one final question here. What can investors expect from OssDsign in the remainder of 2023?

[Morten Henneveld, executive]

Well, I think, you can expect what we've been doing for the last many quarters now, which is that we deliver to the promises that we are giving that we are building a business that continues to be high growth. We are building a business that increasingly, as you've seen, will show better and better profitability, that will show increasingly better leverage as we move forward, and that will continue to focus on in a cost-conscious way, invest in clinical programs to generate clinical evidence to make sure that is also sustainable in the years to come.

[Operator]

Okay. Thank you very much, Morten and Anders for that presentation and answering all of our questions and a big thanks to all of the viewers who follow along OssDsign's Q2 report for 2023. Hope you have a great rest of the day and until next time. Thank you very much, and goodbye.

[Morten Henneveld, executive]

Thank you very much.

[Anders Svensson, executive]

Thank you very much.