OssDsign AB
STO:OSSD
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Hello, and welcome to today's webcast presentation where we have OssDsign presenting the Q3 report for 2023. With us presenting, we have the CEO, Morten Henneveld; and CFO, Anders Svensson, presenting and answering our questions at the Q&A after the presentation. [Operator Instructions] With that said, please go ahead with your presentation.
Thank you very much, and welcome to this third quarter of 2023. My name is Morten Henneveld. I'm the CEO of OssDsign and with me, as always, I have our CFO, Anders Svensson. Today, we want to walk you through our Q3 results and highlights of the quarter.
As always, when we do these presentations, we have the normal disclaimer for any forward-looking statements. But before we go into the details, I just want to do a quick recap on the strategy shift, which we announced at the end of September, announcing that OssDsign will become a pure play orthobiologics company from 2024. This also means naturally in today's call, we will focus a lot more on the orthobiologics business.
If we take a step back, and look at what has happened to OssDsign over the years. For the first 10 years, OssDsign was only a cranial patient-specific implant company. The acquisition we did of Sirakoss late 2020 and subsequent successful entry into the orthobiologics market in late '21, fundamentally transformed the company as you can see on the chart below.
And already, in the second quarter of this year, the orthobiologics business became the biggest and also the fastest-growing franchise in the company. The reason -- the main reason at least for the strategy shift is to be found in the fact that the orthobiologics pure-play company is expected to drive significantly increased shareholder values in the future. We will now focus on a $1.8 billion market with solid underlying growth, targeting standard procedures.
The growth of the synthetic bone graft segment within that is expected to be further fueled by a number of factors, including a growing elderly population, which means that we're likely to see solid underlying volume growth for many years to come. We're also seeing a swing in surgeon preferences moving away from using the patients own bone called autograft or allograft towards synthetic bone graft solutions.
And finally, we're seeing that even those that are using a synthetic bone graft today, are moving away quite rapidly from the older generation technologies to new generation products where OssDsign Catalyst represent the latest fourth or maybe even fifth-generation product.
So we have a very large attractive market with solid underlying growth. As we've also proven since launch, the orthobiologics business is incredibly scalable and has already reached a level of sales within 18 months, which took the cranial business 10 years to reach.
As we also announced here in the comments around the quarterly report, this business, the orthobiologics business, will operate with a gross margin at or above 90%. And as a result of the shift, we will reduce our underlying OpEx levels, which also means that we have opportunity to invest in some of the things that have not been possible in the orthobiologics business.
And equally important, the costs that are going away are the structural costs. So ultimately, we, of course, expect that this will lead to improved cash flow, but also the fact that we're significantly simplifying the business, enables us to focus our time, our effort and our investments to accelerate the orthobiologics business even more.
As part of the strategy change, we also announced an updated strategy, which we call Thrive 26, which has 4 very clear priorities. Clearly, winning the U.S. is probably not too surprising because we will now have a strong focus on the U.S. market. But as we also said, this will free up capacity time and money to drive even more value through innovation and accelerate our R&D effort.
We will continue to improve clinical performance, and we will continue to invest in our clinical programs to achieve that goal. And then we will build scalability throughout the business with a short-term focus right now on manufacturing and supply chain to ensure that we can scale to the rapidly increasing demand that we're seeing in the market. As part of the new strategy, we also updated new financial targets.
So with that, let's go to the third quarter and some of the highlights. Q3 was another record quarter and we're extremely pleased with the results, and we're pleased with the momentum that we see in the business. The growth we're seeing which has been sustained across multiple quarters now, we see that also looking forward as being sustainable, and it continues to accelerate. And we're seeing a continued quarter-on-quarter growth of our orthobiologics sales, reaching another all-time high this quarter.
The U.S. continues its exponential growth curve, and this quarter also marks the sixth consecutive triple-digit growth quarter, which is quite impressive. Clearly, the biggest announcement of the quarter was the FDA interbody clearance, which we'll come back to a little bit later.
Operationally, we continue the strong momentum, we're seeing an increasing customer base. We're winning more and more IDNs. In addition, we also broaden our military contracts with the inclusion of OssDsign Catalyst and what's called the ECAT system, or the e-catalog system, making it available to more than 50 military sites immediately.
And last but certainly not least, we're clearly seeing now that the quarter showed further scalability in the business, translating into increased operating leverage.
As mentioned, I want to spend a little bit more time talking about the extraordinary breakthrough we had with the FDA a few months ago, where the FDA cleared OssDsign Catalyst for use in the interbody space, allowing surgeons to use OssDsign Catalyst on-label in any interbody cage cleared for use with synthetic bone graft. This was very deliberately not something we've been talking about at all throughout the process, which has been spanning over multiple quarters and in 2 years because we wanted to stay under the radar, and we did not want to give anyone in the market, the slightest hint that we were going after this indication.
But the clearance was remarkable in itself in several ways. Not only did it immediately catapult OssDsign Catalyst into the elite category of synthetic bone graft, the clearance itself also had a number of firsts. It is the first synthetic bone graft to obtain interbody clearance based on the intrinsic bone graft data alone. It's also the first and the only for the time being, latest generation synthetic bone graft to have an interbody clearance.
And when you look at it from a competitive point of view, as we've said, typically, we compete mostly with the pure play orthobiologics companies, OssDsign right now is the only company in that group to have an interbody clearance.
So why is the interbody clearance in itself important? Well, first and foremost, it means that OssDsign Catalyst can be used on-label for all major spine procedures. As we know, up to 50% of all bone graft use in spine surgery happens in what's called the interbody space, which you see here on the image, which is the red circle. It provides us with an on-label claim for what's by far the biggest part of the market.
And whilst we believe that this may, over time, also drive more usage and adoption, the clear upside of this approval will be in gaining access and approvals in more hospitals in the quarters and years to come. We also believe that this is clearly a window of opportunity that we need to capitalize on. Short term, what we have done here and what we have announced also means that we have now shown a regulatory pathway for others to follow. So we do believe that there will be more companies also going after an interbody clearance now.
However, if you look at it from a mid to long term, we believe that this eventually will actually result in a tiering of the bone graft market where you will have the so-called lead bone graft are the ones that carry an interbody clearance and the rest will not have it. And this means that OssDsign are extremely well positioned to capture more market shares, both now and in the future.
With that, I'll now hand you over to Anders to walk us through the financial results before we go back into highlights and Q&A.
Absolutely. So if we turn to the results for the third quarter, we reported SEK 31.7 million in sales, which equals an outstanding 81% growth versus the same quarter last year. And 74% growth if you look at it on a constant currency basis.
Moving on to the first 9 months. We reported SEK 77.2 million in sales. That's a triple-digit growth, 108% for the first 9 months, 95%, if you look at it on a constant currency basis. And needless to say, we're extremely pleased with this result.
As Morten mentioned, we're seeing a very sustainable and accelerating growth in the business. It's clearly driven by the orthobiologics. What you see here on the slide is the last 7 quarters now 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, significantly outperforming the industry peer average.
Looking at where the growth is coming from, you can see that the U.S. business accelerated again in Q3, SEK 25 million in sales, thereby continuing the exponential momentum that we've seen in the last many quarters now, and they came in at a remarkable growth of 132% for the quarter, which means the U.S. year-to-date has a growth of 174%, and this is now the sixth consecutive quarter of triple-digit growth in the U.S. The share of total revenues from the U.S. then increased to 79% of our total global sales, which is up by 70% compared to last quarter.
The markets outside the U.S. had flat growth versus the same period last year in the quarter. For the 9 months, though, the region reported 27% growth despite some continued challenging conditions in some of the big European markets. So all in all, we believe a very strong quarter yet again and very satisfying performance overall for the 9 months.
You've seen this slide before. As usual, and in the context now, especially at our strategy announcement, I want to deep dive on the U.S., just to see how the U.S. continues this exponential growth trajectory, which is then clearly driven by the acceleration of OssDsign Catalyst. And what you see in this bar chart is the last 12 months or LTM sales in each bar and we have seen this trend for many quarters now, starting in Q2 of last year, and we see continued acceleration in the third quarter. And again, it also means that the last quarter alone contributed more incremental sales in absolute terms, than it took the company to reach in the first 5 years in the U.S. And that's an excellent performance that we're really satisfied with.
Looking at it over time, the strong U.S. performance also means that we're continuing to see the trend over many years where the U.S. has grown from being 1/3 of global sales in 2020. We hit about 2/3 in Q2, and now we're up to almost 80%. So we're already a U.S.-dominated company. Looking at the sales by franchise then, we continue to see a very healthy development actually in both businesses. Maybe to start with cranial, we reported SEK 15 million in sales and a growth of 37%. Sales for the first 9 months ended at 39.3% and a 43% growth. Now obviously, for the quarter, then most of that growth comes from the U.S.
Moving to our orthobiologics franchise, we see a further acceleration in momentum during the quarter, SEK 16.7 million in sales and a growth of 155%. And for the first 9 months, it's even better at SEK 37.8 million and 297% growth.
Now gross margin. In the third quarter, the gross margin continued to develop favorably as it has for many quarters now to reach 80%. That's a 12% increase versus Q3 last year. For the first 9 months, the gross margin was 76%, and that's an increase of 16 percentage points against the same period last year. And this increase is entirely attributed to the acceleration of OssDsign Catalyst.
Now finally, in terms of our financial reporting, we have decided to provide some further transparency through a revised income statement table. We used to have a cost-based income statement table, which wasn't all that transparent, and we've now moved to a function based.
And the key changes in the function-based table are that we now report an official consolidated gross margin for the company. We also report a split of the operating expenses by function. And in addition to that, we have broken out the -- the cost items that vary a lot with net sales are broken out under a separate heading called sales commissions and fees. Now we believe this change will improve all investors' understanding of the company's underlying performance. And at the same time, we're more closely adhering to the industry standard as used by our peers.
Thank you very much, Anders. So just before we go into Q&A, again, just want to quickly recap that OssDsign will become a pure play orthobiologics company from January '24. It is a strategy expected to generate significantly higher shareholder value. We will have a sole focus at least in the foreseeable future on the U.S. market, which is the biggest in the world and also characterized by high volume and higher pricing.
What we've seen is an orthobiologics offering with OssDsign Catalyst that carries real differentiation and has extreme -- received very strong market acceptance and therefore simply warrants all our attention and focus. As part of that, as I mentioned earlier, we launched a new strategy called Thrive 26 and update our financial targets. And it also means now that as of the end of last week, we have actively stopped taking more cranial orders and the ongoing efforts that we also mentioned last time to sell the cranial assets are ongoing.
So with those words, I want to thank you very much for listening to the presentation. We always enjoy these presentations in particular, the last 6 or 7 quarters. And I will now hand you over to the operator for questions.
Thank you very much for that presentation. And like you said, now we'll will jump into the Q&A section. And we'll start with the first question here. As far as I understand, it could argue that OssDsign is becoming a 1 product company after the discontinuation of cranial. To the extent that you agree, what risks do you see with this?
Well, yes, I think that's pretty obvious, at least for the time being with OssDsign Catalyst, yes, we have 1 product. Of course, there is always a risk when you have 1 product, if that product suddenly fails or anything bad can happen in the market, in the U.S. market as we only have a focus on that.
Now we believe it's the right thing to do. We have now treated more than 2,000 patients. We've done a post-market follow-up report. We have ongoing clinical programs that we will start to see published coming into next year. So we feel very confident and we certainly believe that the focus that we will now have in the business, the quality of earnings that the orthobiologics business will bring in outweigh the, what I would call is a theoretical risk of being 1 product.
But as I also mentioned earlier, there are things we want to accelerate R&D and innovation is one of them that we haven't been able to as long as we had cranial tying up a big part of the cost base. So we certainly see the 1 product company as a temporary thing.
How are you coping with and also planning for the future, the exceptionally high growth that you are enjoying? And are you encountering any issues in the scale up, whether that be in production or organizationally, meaning logistics, processing, sales, et cetera?
Yes. That's, I think, only to be expected, but we have encountered some issues, especially when we scale up so quickly, but we're countering that with hiring more resources and improving our flow -- product flow.
So if I may just add, I mean, I have full confidence in the team that we're able, as we're right now, we're actually, from a supply point of view in a really good position. We have inventory. As you can also see in the P&L, we're building up inventory to also cater for increased volume. We have accelerated our production.
But of course, we need to keep working on this as we move forward and make sure that we cannot only cope with the demand that we're seeing today or in the next couple of quarters, but also into the coming years. But we're -- it's not something, of course, is high on our agenda, but it's something that we're -- I would say we're managing and we're handling that extremely well, and the team is doing a really good job in that regard.
Have you signed new IDN contracts during Q3? Or are you referring to the IDN signed in Q1 and in Q2? And are further IDNs being signed in Q4?
Maybe we just need -- we highlighted it last quarter. Let me just clarify. We're signing IDNs all the time. IDN is a fairly broad description of a system that can be either extremely large or it can be fairly small. It's simply a group of hospitals that are teamed up in some shape or form.
To answer your question, we're signing new IDNs and new customers all the time. We have a fairly rapid momentum right now on winning new accounts, some of which are, I would say, smaller IDNs, some are larger, some are also occasionally purely individual hospitals. So yes, we have many IDNs already signed up, and we're doing that on an ongoing basis.
Perfect. I'll take the next question here. Could you please talk about the current trading pathway into Q4? And how has Q4 started?
Yes. Always interesting. Listen, we see no change to the momentum. We keep seeing very strong momentum as expected, which we also announced, of course, on the cranial side, yes, things are dropping off, and that was exactly as I expected. Catalyst is growing very well, and we continue to see the same momentum, sustainable growth and also accelerating growth.
And how much of your growth is driven by new customers versus deeper penetration at existing customers?
I don't think, first of all, that's probably not something we want to go into detail, but it's also a little bit hard just technically to qualify it because, of course, all new customers coming in will be new customers in month 1. But in month 2, they are technically existing customers.
I think what we're seeing is this, we're seeing the overall customer base keep growing month-on-month. That's one thing. Then when you look -- we have a normal distribution curve, there are certain where we have probably above a fair share, there are certain where we have a fair share and there are certainly also accounts where we believe we have a below fair share.
But we're seeing 2 important things. As I said, one, we're seeing the total customer base, number of approvals, a number of users keep going up every month. Equally important, what we're also seeing that each month, we have moved some of the, let's call them, the below fair share customers into the fair share category, and we've moved some of the fair share category into the above fair share, meaning that we have a majority share in those accounts. And that we see and we track and we see that developing favorably each and every month right now.
And what is your visibility into the number of treatments performed with Catalyst? Do you get weekly reports or how does it work?
We get case reports on patients for some hospitals where we have consignment stock, and there are also hospitals where they decide or they want to own the inventory, which means that they place larger and less frequent orders naturally. In those cases, we don't have the same, I would say, real-time transparency of exactly when and how often and how many products that is being used on each patient.
So that's something we have a dialogue with. It's not something which is 100% scientific in real time.
Looking at the near-term OpEx development compared with Q3 levels, is the Q3 level a good proxy for Q4?
No, I don't think it -- it couldn't possibly be. Q4, we're changing the whole business around to discontinue cranial. And with the restructuring like that, it's going to drive a lot of extra costs temporarily. And so I don't think you can infer anything about Q4 based on Q3 or any previous quarters.
Okay. R&D expenses are up 50%. Can you add some more color to why?
In the quarter, you mean? Well, partly it's driven by exchange rates since we have virtually all of those costs in foreign currency and mostly it in U.S. dollars. And then we're -- we have increased the PROPEL registry costs in the quarter. Those are the 2 main drivers.
Okay. Thank you very much for presenting today and answering all of the questions and also big thanks to everyone who followed along OssDsign's Q3 report for 2023. Hope you have a great rest of the day and until next time. Thank you very much, and goodbye.