OssDsign AB
STO:OSSD
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Hello, and welcome to today's webcast with OssDsign, where CEO Morten Henneveld; and CFO, Anders Svensson will present the report for the third quarter of 2024. [Operator Instructions]
And with that said, I hand over the word to you guys.
Thank you very much, and welcome, everyone. My name is Morten Henneveld. I'm the CEO of OssDsign. And as always, I have our CFO, Anders Svensson, with me here today.
Today, we want to walk you through our third quarter and first 9 month result. And I'm pleased to report that OssDsign continues to deliver sustained high growth while significantly improving profitability and cash flow. As always when we do these presentations, the normal disclaimer.
Before we go into the details, this quarter now marks 1 year since we announced our strategic shift to become a pure-play orthobiologics company. And as we emphasized at the time, the orthobiologics business is highly attractive and it's highly scalable, and I believe this was clearly proven in the quarterly report we just released today.
If we go into the highlights of the quarter, we saw several improvements on the fundamentals in the company. Firstly, the third quarter now marks 10th consecutive quarter of triple-digit growth in the U.S. That's 30 months in a row with growth above 100%. Of course, we're coming from a base of 0, but this is quite an achievement that we are incredibly pleased with.
Secondly, we continue to see very strong traction on the key fundamental drivers for growth, broader access in the market and deeper usage in the account. Thirdly, the strategic shift and focus has allowed us to optimize the company. Even though it's still early days, this has already produced some very significant results, where among other things, we have seen a material improvement in our sales force efficiency as well as in our production efficiency, clearly demonstrating the scalability of a pure-play orthobiologics company and allowing us to realize the inherent economies of scale that comes from operating a bigger business, both now but also in the future.
As mentioned earlier, the third quarter also clearly shows the operating leverage in the company. The quarter that we just reported today is also the first quarter in 2024 without, what I would call the overhang from the non-recurring cash outflow related to the cranial business, which has adversely impacted cash in the first half of this year. The much improved cash flow is, therefore, a truer picture of the performance, which we're now showing here in Q3.
And last but certainly not least, we are seeing a very strong improvement in our gross margin as a result of the previously mentioned production efficiency. And as a result of that, we have increased our guidance from previously at or above 90%, and now expect the gross margin to be above 93% going forward, albeit the exact number will inevitably be subject to quarterly fluctuations.
And with that, I'll hand you over to Anders to walk you through the financial results for both the quarter and the first 9 months.
Thank you very much, Morten.
Just before we go into the numbers as such, and as we also mentioned in our first quarter presentation, I just want to reiterate that given that the company no longer operates in the cranial space, during '24, we will only compare previous periods of orthobiologic sales. But when it comes to gross margin, this can't be separated out for the comparative year. So we will, therefore, only compare to the previous blended gross margin rate for that period.
Now as Morten mentioned, we continue to see high growth in the company during the quarter, reporting growth of 121% on a constant currency basis compared to the same period last year. Reported growth was adversely impacted by approximately 7% exchange rate headwind, and it came in at 114% compared to Q3 '23.
Now, if we go to the actual sales numbers, we reported SEK 35.7 million in sales for the third quarter, which, as mentioned, corresponds to 114% reported growth. And for the first 9 months, we have reported SEK 92.5 million in sales, which is equal to an impressive 145% reported growth. As we have also stated before, growth will not necessarily be linear. It's pretty clear it will not. It will more take the form of a staircase, where we will increase accounts and users in one quarter and then may slow down somewhat in the following quarter as we get new customers up and running. And then we go back and increase again.
So the best way to look at this really to smooth it out is to look at the underlying momentum in the company, looking at the rolling 12-month run rate or LTM. And as you can see in this chart, the third quarter continues the very strong trajectory from before. And the LTM momentum is up 163% compared to a year ago. That's an excellent performance that we are highly satisfied with.
Over to the gross margin then. So the gross margin for OssDsign Catalyst took a significant step up in Q3 and came in at 96.9%. That's 370 basis points up just in this previous quarter and 17.3% against the blended rate in Q3 '23. Now the increase in Q3 was somewhat extraordinary. It was driven by, to a large extent, increased or improvements in production efficiency, but it was also supported by the release of some provisions that we saw fit to make earlier in the year and now found it suitable to release.
For the first 9 months then, we've now delivered a gross margin of 94.7% against 75.5% in the first 9 months of last year, which is an increase of 19.2%. We are now raising our guidance, as Morten mentioned, to above 93% going forward from previously having said at or above 90%.
And with that, I will now hand you back to Morten.
Thank you very much, Anders.
We want to take a little bit step back here because over the last quarters, we've received many questions on how OssDsign Catalyst is so differentiated and which has allowed us to show the very fast ramp-up in the first years. So, we saw it's fair to spend some time on attempting at least to make this clear to everyone. And I will apologize upfront if this becomes a little bit technical. I will try to keep it as simple as possible. But the differentiation lies in what we call the mechanism of our action. In other words, why the structure and composition of Catalyst makes it so much more potent and therefore, generates better clinical outcomes.
The slide you see here should not be news to everyone. There is a very large clinical need for improved outcomes. And unfortunately, most people will suffer from back pain during their lives. Some will need to -- some will have a need to have, what we call, a fusion procedure performed and approximately 1 in 5 today do not have a successful outcome. And why is that? Well, the challenge in spine surgery is simply how to overcome human biology. The clinical goal is to stabilize the spine and relieve pain. To do this, surgeons will use screws and rods and cages to create a space for the nerves and thereby, decrease nerve pressure and pain. But to have a successful outcome, you need to have a fusion between the vertebrae as well as in the interbody space. And therefore, you require a bone graft to deliver a successful fusion.
If you look at the right side of the picture, when the bone graft is in contact with bleeding surfaces, which is what you see on the top and the bottom of this simplified little image here. This is where it's in contact with bleeding surfaces. That's what we call a vascular environment, typically at the edges, and there will be a natural bone formation due to blood cells stimulating this. This is also known as intramembranous bone formation. But where there are no blood cells in what we call in avascular environment, there is nothing biologically in the human body to drive that required bone formation that's known as endochondral bone formation, and that happens in the center of the fusion mass or, for example, in the void between the vertebra. If endochondral bone formation is not happening, it means that you're not getting a fully bridged bone. So essentially, a fully bridged bone is not formed. You will not have a fusion and therefore, you will not have a successful outcome. This is the core challenge in spine surgery, full stop.
It's all about forming bridging bone and do it as fast as you can. If you are successful with that, adverse events such as infections, implant loosening or other things will inevitably be reduced. So, you can look at these things more as symptoms essentially stemming from lack of bone formation. And again, the core problem to solve here is to show endochondral bone formation, so you have a fully bridged bone and therefore, a fusion.
What we are seeing with OssDsign Catalyst is a technology that drives rapid and reliable bone formation, including solid endochondral bone formation in poorly vascularized environments. Traditional synthetic bone graft typically only form bone via the intramembranous pathway. This means that bone will form in a creeping fashion from the outside in, essentially from the edges towards the middle. The problem here is that it may never reach the middle or it may take so long that adverse events occur long before that happens.
If you look at the right side on the screen, you'll see that Catalyst, on the other hand, is proven to follow what we call a dual-bone formation pathway, both the intramembranous and the endochondral. And that means that the technology and the product is, therefore, working simultaneously inside out from the center of the fusion mass towards the edges and at the same time, outside in from the edges towards the middle. This is something that was specifically tested in our preclinical study in the Boden model, which I'm sure many of you are familiar with. And as you can see, the numbers speak for themselves. In the highlighted area here in red, you can see that Catalyst grew almost 4x as much endochondral bone in the center of the mass compared to a traditional synthetic.
So, what does this mean for surgeons and patients? Well, it means that Catalyst looks like actually and forms bone just as native human bone, what's called autograft, but it also shows similarities to the more expensive and more riskier BMP-2 drugs that are known for their high potency. And in essence, it gives surgeons a potent and safe synthetic solution that they can use for all type of patients. And this is something that we have seen and proven again and again from the very first preclinical study to the first clinical study, TOP FUSION, and now to the first publications from our prospective spinal fusion registry called PROPEL.
The high potency of Catalyst, and its ability to form in the controlled bone in poorly vascularized environments is not only leading to solid 12-month outcome, which, as you may know, is the gold standard for measuring fusion rates. We have also seen a high speed to fusion, reaching 80% in the preclinical RAPID study, the bone model already at 6 weeks. We saw it in TOP FUSION with all patients being either fully or partially fused at 3 months. And then as more evidence of that, we're also seeing it in the latest peer-reviewed publications from PROPEL, where even complex patients were fully fused at 6 months and 3 months, respectively.
So, what is it really in the structure and the composition that makes OssDsign Catalyst very unique and differentiated in the marketplace? Well, essentially, Catalyst is a state-of-the-art innovation when it comes to operating at nanoscale, where we've managed to get it to essentially mimic native bone. It's also the only synthetic bone graft to be combined with silicate substitutes, and that is what triggered, what we call, dual-bone formation pathway, so inside out and outside in at the same time.
So as an analogy to that, you can compare it to a supercharge engine in the car where silicates are essentially driving supercharged bone formation. And as I mentioned a few slides back, the core challenge for surgeon is to build endochondral bone formation in a vascular environment and to ensure that a bridging bone is formed and therefore, have a successful fusion. And that is exactly what Catalyst is offering to surgeons. So I hope, at least this makes the differentiation aspect of Catalyst clearer to everyone. And I hope -- and as we know, this is also why the product resonates so well with so many surgeons in the U.S. these days. But, of course, proving clinically how Catalyst helps patients and surgeons to better outcome is something that never stops.
And even though we are still very early on the journey, we've already built a solid repository of preclinical and real-world clinical evidence totaling 4 clinical peer-reviewed publications, 4 clinical white papers and 3 preclinical publications and white papers today. And all of this is, of course, material to our commercialization effort, and we will continue to expand this and publish data as it matures. And of course, the next big thing for us will be the publication of the first 100-patient cohort from our PROPEL study, which we expect in the first half of next year. But we are also anticipating to come out with some really interesting, both clinical and preclinical papers before that in the early part of next year. So, there is a lot more to look forward to essentially proving the clinical evidence on the product, but certainly also what I just walked you through, the preclinical mechanism of action, what it is that just drives more bone formation and in particular, endochondral bone formation with OssDsign Catalyst.
So as you can see, overall, things are going really well in the company. Growth momentum is high. Gross margin is improving. We have a highly differentiated offering to the market, and we are building the clinical evidence to support this. So in sum, we have a very big untapped potential ahead of us, and we have a recipe that is working well. It's therefore all about continuing to execute on the strategic priorities to build access and coverage in the U.S. market to leverage the potent Catalyst technology, to bring new products to the market, build the clinical evidence and gradually expand into adjacent orthopedic segments.
So with those final words, I want to thank you all for listening to the presentation. And I'll hand over to the operator for questions.
Thank you so much for the presentation here. And as you mentioned, we'll move ahead to the questions.
You have now shown 10 quarters of triple-digit growth in the U.S. You must be very pleased with that?
Of course. Absolutely. We are exceptionally pleased with that. It's not every day you get to communicate something like this. But this is also now in the past. I think both Anders and I, and the rest of the company are a lot more focused and preoccupied with how to win an even bigger part of the market in the coming quarters and the coming years.
You talked a lot about how Catalyst is differentiated. What do the surgeons say?
Well, I think in many ways, what I just went through today is exactly what the surgeons are describing it. They're seeing a strong bridging bone in their patients, and they're also saying that it happens faster than they're used to seeing. And then, of course, as we've also said before, every single surgeon more or less highlight the excellent intraoperative handling qualities, and that's something that we've heard consistently from the very beginning since we launched the product. So I would say, in some surgeons, what I described to you today, that is exactly what surgeons are seeing, and that's what they're telling us.
You're showing strong growth again and have done for many quarters. Could you grow even faster?
No, absolutely. Absolutely, we can grow faster. We have a very large part of the market that we haven't even tapped into. And we are now showing a ramp-up, which is faster than any other synthetic bone graft within a couple of years. But the reality is, of course, we are a small company. We have limited resources, which means that we have to prioritize. And for example, there are significant parts of the U.S. geography that we're not even covering today. But we have managed to build very broad access in the market and a fairly large incumbent user base in a very short amount of time. But of course, the fact is that we have 90% of the market, give or take, that is still untapped potential. So, there's ample room to grow also faster than today with more better or broader sales coverage and new products and more clinical data, of course.
Your gross margin is fantastic this quarter and higher than many of your peer companies. Is that what we should expect going forward?
I would say that the 96.9% in Q3 was exceptional for that quarter. It could happen again, but we're very pleased with it. But I think that's not what we're aiming for every quarter from now on. We've guided now to above 93% going forward, and that -- I think that's a good guidance.
Is the percentage sales growth from Q3 2023 with respect to Catalysts only a effect of increasing the focus on Catalysts? Or do you see it continuing at the same pace in the coming quarters?
No. I think as we've said many times before and as Anders also reiterated today, I think we are seeing growth being more staircase than linear. So, I think we'll see some quarters where we jump as we are winning new customers, we get them up and running. But then also quite naturally, you have to spend a lot of time on making sure that these customers also become sustainable customers. And then the following quarter may be a little bit more flattish and then it goes up again. So, I think that's what people should expect when they look at OssDsign. It's going to come in jumps like a staircase.
Do you have any plans to start production in the U.S. after Trump got elected?
We have production in the U.S. today. There are 2 components of our production. One is the production of the granules. That's kind of the secret ingredients there. That's actually done in the U.S. today. And then the final product is assembled and produced in the U.K. So yes, we already have it today. But of course, given that we are an entirely U.S.-focused company, it also makes sense to increasingly produce more and more in the U.S. quite naturally.
But that made sense even before Trump got reelected, right?
Any update on PROPEL, and when you will be able to publish the first data?
Well, let me just be clear. We have already published the first data, the case reports. I assume the question refers to what I talked about, the first cohort publication. And as I said, we expect that in the -- probably in the later end of the first half, so somewhere around Q2 of next year.
Is the percentage figure for sales commissions and bonus prevailing for the foreseeable future?
No, I don't think so. I think maybe for the immediate future, it makes a lot of sense. It varies a little bit between distributor commissions and internal bonuses from quarter-to-quarter. Distributor commissions were down in Q3, whereas internal bonuses were a bit up versus Q2. But going a bit further out in time, we see this as coming down gradually over time.
Can you give an estimate how much of the gross margin improvement was a result of the release of provisions? Should I go ahead with next question? Or do you want to...
No, no. I just had to think how much I want to say. 1% to 1.5% was release of provisions from previous quarters.
What is the level of awareness of your product in the U.S. among doctors? In how many clinics/hospitals are you already present?
Well, I think we'll disclose that when we are ready to it. We already disclosed something in the early part of the year. Of course, we are much, much further than that. I can tell you right now from our own estimates here, we have access to just below 10% of the U.S. market. So, we are a lot more preoccupied with how to get to the remaining 90%. Having said that, as we've also said in the previous quarters, '24 was a different year for us than '23 because we actually came into the year with a fairly large incumbent user base that we keep building. And that means that we now have a lot more references when naturally when surgeons ask who else is using and how much they're using and which type of procedures they do, et cetera. We have a lot more of that. And that becomes kind of a fueling effect as you're commercializing, right?
The more you can talk about the more users you have, the easier it will be for a surgeon to make the switch to your product. So, I think that's also largely what's fueling it. But it's going absolutely, as I said in the beginning, all the key fundamentals are looking great. We keep winning more VAC approvals. We keep seeing more users. We keep seeing more usage within accounts in hospitals. So, all the things that Anders and I regard as leading indicators that are indicative for future growth are all moving in the right direction.
Can you elaborate on the need of expanded product portfolio, cost timing, et cetera?
Yes. Well, I can elaborate on the need. I don't think today, we'll go into the exact timing. I think everyone understands that it takes anywhere from 1 to 4 years to bring our products depending on the nature of those products. This is something that we -- as I also mentioned, with our full focus on biologics that we have now been able to mobilize on. There are a couple of products that we know we will take to market in the next 2 years to 3 years. And we are working on those. You'll also see in the report that this is the first report where we have a little bit of capitalization of some of the development costs. So, things are now moving given the fact that we, with the new focus on orthobiologics, we are now also finding the time and the resources to do that. So, we will come out. I can guarantee you that with more products, but we are looking at '26, '27. It takes some time, unfortunately, to develop products.
Moving on to the last question here. Another one regarding commission and bonuses. What percentage figure for sales commission and bonus do you think is reasonable to expect in the 18 months out?
I don't have a projection 18 months out. That would be pure guesswork. So, I'll refrain from answering that.
We actually received one more question here. What are your bottlenecks in terms of growth currently? What kind of role does competition play at the moment?
Well, I think you can -- I think there's 2 questions in one, I mean, because we have internal bottlenecks and then you have external competition, right? I think right now, clearly, one of the challenges is that some of our competitors are investing incredibly heavy into the marketplace in terms of presence, clinical data, new products and those type of things. So, I think we are actually competing with them. Many of our customers, we are winning from many of the large pure-play orthobiologics companies. So, I think we have a more than competitive offering. And I think our sales trajectory has clearly demonstrated that.
But as I said, of course, we are a small company. And we got a question from an investor a quarter or 2 ago, essentially asking if we had twice the sales force that we have right now, which is still only just below 10 people? Could we have grown faster and could we have had twice as many VAC approvals? And my answer to that is absolutely yes. Of course, we would. Why wouldn't we? So, of course, the bottleneck internally for us is that we have the resources we have, and we have to prioritize investments and manpower relative to that.
Thank you so much for the presentation today and answering all our questions. And thank you all for tuning in. I wish you a pleasant week.
Thank you very much.
Thank you very much.