OssDsign AB

STO:OSSD

Earnings Call Transcript 2023-Q4

[Operator]

Hello, and welcome to today's webcast presentation with OssDsign.With us presenting today, we have the CEO, Morten Henneveld; and CFO, Anders Svensson. If you have any questions, you can use the form that is located to the right, and we'll take that up during the Q&A section after the presentation.And with that said, please go ahead, Morten and Anders with your presentation.

[Morten Henneveld, executive]

Thank you very much, and thank you very much for having us again. My name is Morten Henneveld. I am the CEO of OssDsign. And with me, I have our CFO, Anders Svensson.Today, we want to walk you through our Q4 results highlights of the quarter as well as the full year. As always, we will do these presentations, the normal disclaimer. But before we go into the details of the quarter, I want to take the opportunity to look back at 2023 as a whole. And the year was another transformational but also an extremely successful year for us. Not only did we deliver solid growth numbers in all quarters, which Anders will take you through shortly, equally important, we continue to lay important building blocks for future growth.Now this is a little bit of a busy slide, so I don't plan to cover everything that you can see, but I do want to call out a few. We showed an exceptional strong acceleration of Catalyst and went from 500 patients treated early in the year to already reaching 2,000 in September, and we continue to see that accelerating. As you know, the number of patients treated is important to surgeon as it reduces the perceived risk when using a novel technology. Our clinical registry PROPEL also continued to develop positively and now holds more than 200 patients. As mentioned before, we expect to see the first publications coming out of that in the second half of 2024.We also managed to keep building clinical evidence for OssDsign Catalyst with the first patient report in January '23, and just here in January '24, we've reported the full study, which I'll come back to shortly. And in September, of course, as we've talked about before, we saw the breakthrough expanded interbody clearance by the FDA, which made us an elite category bone graft. So all in all, we hit some very big milestones during the year, and all these achievements will continue to serve us well and help us to deliver strong growth in the quarters and years to come.When looking at the highlights for the fourth quarter, we had another record quarter, and we are more than pleased with the momentum we see in the orthobiologics business. We continue to see acceleration in that business, which led to us in December issuing our first reverse profit warning and a continued quarter-on-quarter acceleration of our orthobiologics sales reaching another all-time high on sales. The U.S. also continues its exponential growth curve and now reported the [ seven ] consecutive triple-digit growth quarter.Clearly, the biggest announcement came just after the quarter ended as we published our first clinical data showing an exceptional fusion rate after 12 months. And finally, and as we promised when we announced the strategy shift back in September, we have now executed the closure of the Cranial PSI business extremely efficiently during the quarter, and it means that we've now started Q1 as a pure play orthobiologics company. As Anders will also walk you through in more detail, this, of course, means that many one-offs have been taken here in Q4, which adversely affected reported results as well as the transparency of the underlying business, but Anders will clarify that later in the presentation.I want to spend some time talking about the strong clinical outcome we reported from TOP FUSION a few weeks ago, which were published in the peer-reviewed journal, Biomedical Journal of Scientific & Technical Research. But just to quickly recap, TOP FUSION included 17 patients to evaluate the safety and efficacy of OssDsign Catalyst in patients undergoing TLIF surgery. Of the 17 patients recruited, 3 were withdrawn for reasons unrelated to Catalyst. All the remaining 14 patients completed the follow-up 12 months after surgery.Postoperative follow-up took place at 6 weeks, 3 months, 6 months and 12 months and CT scans were taken at 3 months, 6 months and 12 months postoperatively to assess the presence of fusion. Very importantly, and I do want to stress this, the CTs were independently radiologically reviewed by Medical Metrics, which is one of the most renowned companies to do this, which means that we have taken out any bias in the assessment of fusion rate, and that is sometimes a problem. The bias is a problem when you read many public studies. We wanted to take that out, which means that we have had this independently assessed and clarified.In the study, there are 4 important clinical data points I want to call out. One, of course, is the one that we have already highlighted, which is an outstanding 93% fusion rate after 12 months, which, albeit not statistically significant, it is above the average in the industry, which is typically around 75% to 80%. Equally important, if you read the paper in more detail, you will see that we saw a very fast progression to fusion where all patients were either fully fused or had progression to fusion after only 3 months. This confirms the high potency we see in the technology and there's also a strong confirmation of the previous preclinical data where fast fusion was also clearly present.And as you know, the faster you can form bone that is directly correlated to a reduction in complications such as implant loosening, infections and so on. The third important data point is that all scores used to quantify pain and function showed an improvement in quality of life over time at all postoperative follow-up evaluations. And finally, and also extremely important, no device-related adverse events were observed during the study. This is again a confirmation of what we've previously reported in our First Post-Market Safety Report.The authors, therefore, conclude and I quote "this prospective series indicated OssDsign Catalyst bone graft substitute demonstrates consistent and rapid bone healing and remodeling with corresponding improved patient outcomes." And the publication of these outstanding clinical results in TOP FUSION is, therefore, a crucial step in our process of establishing OssDsign Catalyst as a clinically proven synthetic bone graft, and we are extremely pleased with these first clinical results and the favorable outcome of this first material clinical study, therefore, paves the way for a strong position of OssDsign Catalyst on the U.S. market.So with that, I'll hand you over to Anders to walk you through the financial results before we go into some of the highlights in a few more -- a bit more detail.

[Anders Svensson, executive]

Yes. Okay. So let's look at the results for the fourth quarter then. Now if we turn to those results, we reported SEK 35 million in sales, and that's despite closing the Cranial PSI line during the quarter. This equals an outstanding 76% growth versus the same quarter last year and the 75% growth if you look on a constant currency basis. For the full year, we reported SEK 112 million in sales, that's a reported growth of 97% and 88% on a constant currency basis.So needless to say, we're extremely pleased with this result. And as Morten mentioned, we're seeing a very sustainable and accelerating growth in the business, and it's clearly driven by the orthobiologics. So what you see here on this slide is now the last 8 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 still, and we continue to be a high-growth company, significantly outperforming the industry peer average.Focusing on the orthobiologics business then. Sales in the fourth quarter totaled SEK 26.8 million, representing a growth of 256% compared to the same period last year. And that's also the growth at constant exchange rates for the quarter. Our sales in the quarter were positively affected by several extraordinary orders from a large hospital system, totaling about SEK 4 million. For the full year '23, Catalyst reached sales of SEK 64.6 million, representing a growth of 279% compared to '22 or 260% at constant exchange rates.Now as usual, and in the context of our strategy announcement, I'd like to deep dive on the U.S. and to see how the U.S. continues their exponential growth trajectory, and it's clearly driven by the acceleration of OssDsign Catalyst. Now what you see in this bar chart is the last 12 months of LTM sales in each bar. And we've seen this trend for many quarters now, starting in Q2 last year, and we see significant acceleration in the fourth quarter as well, an excellent performance that we are highly satisfied with.Turning over to gross margin. In the fourth quarter, the gross margin continued to develop favorably compared to last year, reaching 73% on a reported basis, and that's an increase of 9 percentage points against Q4 '22. However, the reported gross margin was heavily impacted by Cranial PSI discontinuation related expenses as well as some Catalyst production process testing activities. And these all resulted in one-off costs impacting COGS in the fourth quarter.Adjusted for this, you'd find the gross margin to be about 83%, which then means that it continues to develop favorably also against previous quarters. And going into 2024, we still expect to operate at 90% or above across the year. For the full year of '23, the gross margin was 75%. That's an increase of 14 percentage points against 2022. The -- the increase is entirely attributed to the acceleration of OssDsign Catalyst.Looking at Q4 in numbers then. The fourth quarter was highly unusual, as Morten alluded to before, many one-off factors distorting transparency and comparability of the underlying business. And the key factors were the closure of the Cranial PSI business line that impacted both the COGS and the nonrecurring items. We had very high sales bonus accruals, and we also had some revaluation effects from -- stemming from the goodwill impairment test. All of these adversely affected the operating result and general comparability. So I therefore just want to spend some time making sure everyone understands, first of all, what those factors were and secondly, that those were indeed one-off factors.So as such, temporary in nature and not something we expect to see in 2024. If we start with the gross margin, as I just mentioned, we had a number of costs related to the closure of the Cranial PSI business that did not qualify as nonrecurring items, and therefore, they adversely impacted COGS. Simultaneously, we have started work to scale production Catalyst, which required several tests of new production processes at scale, which means several batches was consumed and scrapped as these are R&D samples really. The high testing activities were isolated to the fourth quarter, and they're not something we expect to see on this scale again.Combined, all of these effects impacted about 10% on gross margin, as I mentioned before. So adjusting for this, the underlying gross margin will be rather in the neighborhood of 83%. The second item that impacted the P&L adversely was the impact of the revaluation related to the goodwill impairment test. So those revaluations really concern the conditional variable consideration, [ tough one there ], that's the future expected royalty payments on the Sirakoss acquisition. And they really derived from the success that we have seen with OssDsign Catalyst, because as sales are coming in above our plan, we must unavoidably increase the provisions for future royalty payments and that hits the P&L.Now adjusting for those revaluation effects alone would give an EBIT improvement of almost SEK 10 million compared to the previous year. Especially since last year, that effect was positive, whereas this year, it was negative. But you should remember that this is only a technical exercise and it does not impact actual cash, certainly not at this point in time. And the third area then impacting profit for the period is, of course, the nonrecurring items stemming from the closure of Cranial PSI. So nonrecurring costs of [ SEK 28.5 million ] in the quarter. That includes all costs related to the restructuring of the company, and it encompasses all functions and areas, including personnel severance, legal representation, termination of premises and the earlier cessation of operations from 1st of December already.The total cost ended up somewhat above previous estimates, and that's for a variety of reasons. So for example, we negotiated employee terminations in multiple jurisdictions. And as we did, some more detailed costs became apparent. There were asset valuations, which affected write-down amounts and scrapping, and then also the more efficient closure of the production, which meant we could close earlier than expected. Now all of the above, of course, ultimately impacted profit for the period. So if you were to look at on an adjusted basis, profit for the quarter would have come out approximately SEK 30 million better than the reported [ one ]. As we have now completed the closure of the Cranial PSI business during the quarter and therefore, taken most, if not all, of the closure costs in '23, we do not expect to have any material closure costs left from Q1 and onwards.And with that, I'll now hand you back over to Morten for closing remarks.

[Morten Henneveld, executive]

Thank you very much, Anders. I think we understand that the -- there are many moving parts here. I want to remind everyone to really focus on the exceptional growth that we have now seen across multiple quarters. We are reporting again and again, growth numbers that sit in the upper quartile of the growth coming closer to 100%. So we have a business here which is growing exceptionally fast. We also have a business that is seeing a clear acceleration in that growth trajectory quarter-on-quarter and have done so for many quarters.But I also want to talk to something else other than just the sales because I want to update you on where we are in the commercialization phase. And even if we won't continue to share development of these operational KPIs on an ongoing basis, we have decided this time to give you a snapshot of where we are today. I have to say I'm extremely proud of how far we've come. I think sometimes we tend to forget how early on we are in the commercialization phase.We only entered the orthobiologics space in the fall of 2021, and really, only started selling in the second quarter of '22. And here only a little more than 2 years later, we have already built up a fully fledged spine sales channel, and we have also started to expand into orthopedics or more specifically, the extremities with a foot and ankle focus. So specifically, where we are right now, we now have 88 approvals in U.S. institutions. So we have access now to 88 institutions in the U.S. market. As you also know, attracting a strong distributor network is a prerequisite for success in the U.S. market, where the market works in a hybrid model.And here, we have now already established a network of 70 distributors that work with us as an extended arm into the facilities and helping the surgeons on a day-to-day basis. We are also on full contract with the military. And with the recent ECAT inclusion of OssDsign Catalyst, we now have access to all the military treatment facilities nationwide. And lastly, and we don't really talk -- we haven't talked a lot about it because our strategic focus clearly is on spine. However, we have, in fact, already started to expand into orthopedics or more specifically extremities with a focus on foot and ankle surgery where we know there is a high need for bone graft.As you may remember, our 510(k) indications for use of OssDsign Catalysts are a lot broader than spine. And it means that there are adjacencies within either trauma as a bone void filler or other orthopedic segments as foot and ankle where the product can be applied. So we have now started, still early days, but we have actively started the expansion into the extremity business. Our clear strategic focus is still on spine, but we now have started the expansion also into extremities. So all in all, here, 2 years into the commercialization give or take, we have established a full commercial infrastructure that we can and will scale even more in the future.As a final remark, I just want to remind everyone that OssDsign is now a pure play orthobiologics company from January '24 in a strategy shift, which is expected to generate higher shareholder value in the future. It means from now on and at least for the foreseeable future, we will have a sole focus on the U.S. market, which is the biggest market in the world characterized by high volume, high pricing and solid underlying growth. We are seeing high scalability in this business as proven over the last 2 years.And as Anders mentioned, we expect going forward to operate with a gross margin of 90% or above. And despite the fact that we're now reallocating much of the cranial savings into orthobiologics to accelerate growth, both in the short and the medium term, as this business grows inevitably, we will start to see the positive effect on cash flow over time.And with those words, I want to thank you all for listening to the presentation and hand back to operator for any questions.

[Operator]

Thank you very much. And like you said, now it's time for the Q&A.And we'll start with the first question here. The 88 VAC approvals, does that mean 88 hospitals or does it mean 88 hospital systems?

[Morten Henneveld, executive]

No, the 88 we talk about are the 88 facilities that we have access to, and this will be a mix of very large hospitals, medium-sized hospitals and also ambulatory surgery centers. It -- the military access that we have will be in addition to that.

[Operator]

Okay. And can you give some background to military access? And is this a crowded agreement with a high signaling value or will it result in sales in the shorter term?

[Morten Henneveld, executive]

Sorry, I didn't hear. You were breaking up. Can you repeat the question?

[Operator]

Sorry. Can you give some background to the military access? And is this a crowded agreement with a high signaling value or will it result in sales in the shorter term?

[Morten Henneveld, executive]

Well, I would say it's both. As you know, the military access as such is nothing new. We managed very early on to get OssDsign Catalyst on the what's called the DAPA agreement that we have. So we've been selling into the military ever since the first day. Actually, we launched the product in the U.S. As you know, yes, it is a high signal value. The military only wants to use the best product for their servicemen who have been wounded in action or veterans for that matter.But it's also very attractive commercially because it tends to be one of the absolute highest price point in the U.S. market. So we've had access to the military for a long time. Now with the ECAT system, the military are changing systems all the time. The ECAT now means that we are universally available. It doesn't take away the fact that we need to work surgeon by surgeon to convince them, it's the best solution for their patients, but it does mean that we are in the system for military facilities. And there are also some changes happening right now for VA facilities. And we hope to come out with some news on that in the next quarter or 2.

[Operator]

Okay. And when will you be cash flow positive?

[Morten Henneveld, executive]

Well, as we guided in -- when we did the strategy change, we see the breakeven level of approximately SEK 150 million to SEK 200 million. And we see that -- we see OssDsign reaching that in the medium term. So we'll stay to what we previously communicated.

[Operator]

How has the Q1 progressed so far in terms of sales? And what will OpEx develop like for the coming quarters?

[Morten Henneveld, executive]

Well, I'll -- I can answer the sales, and then I'll hand over to Anders. Well, what we're seeing, as you can also see, we did the reverse profit warning early December, indicating some exceptionally strong sales for October, November. As you can also see, the sales that came in, in December were actually not far from the average across October, November despite the fact that we had extraordinary orders in those months. So I would say we are seeing a very strong development. And what we've seen across the last many months and quarters, we are seeing a constant acceleration of the underlying run rate. We saw that coming into December and January.

[Operator]

Sorry, go ahead.

[Anders Svensson, executive]

You want me to mention OpEx. We can't really guide to what OpEx is going to look like in the next few quarters, that would be telling. But certainly, it's going to go down in Q1 compared to Q4. Q4 is our highest OpEx quarter. So you should expect it -- you should expect Q4 not to be a guide for the following quarters. Q1 will be lower.

[Operator]

Okay. And when will we see the first publication or top line results from PROPEL?

[Morten Henneveld, executive]

Well, it's not a -- I think it's important to mention here, this is a prospective spinal fusion registry, which means that this is not a clinical trial. So it's not run with a specific enrollment number at specific time points. This is a broad inclusion of all type of patients, all type of procedures, all type of material, which means that we can say, for sure, when we will have a cohort, which is homogeneous enough to actually run a statistically significant publications. That is something we keep assessing the data. We keep scrubbing the data. We keep mining the data. But exactly when we will reach a point where we have a homogeneous cohort, it's just impossible to predict. Our expectation is that we will start to see some first publications at least coming out of PROPEL in the second half of '24. But exactly what type of complications, we can't say anything about at this point in time.

[Operator]

Can you say anything about how many surgeons are using Catalyst as a preferred choice? And roughly how many surgeries they conduct in a year?

[Morten Henneveld, executive]

No. I think we are -- we've decided to disclose the amount of VAC approvals and the distributor network and now the expansion into extremities. So I think that's the level of detail of the business that we're willing to share at this point in time.

[Operator]

How has ECAT impacted sales so far? And what are your expectations, how will -- how it will impact your sales going forward?

[Morten Henneveld, executive]

No, listen, I think as we also guided when we announced ECAT, I mean, this is not something that will fundamentally accelerate sales overnight, right? We were already on contract. We were already selling. What we've experienced is that the military can be quite administrative heavy once you actually find a surgeon who wants to use it to get set up in the system. And this can take lots of time, and there can be many hoops you need to jump through to make it happen.ECAT will significantly facilitate that process, but it doesn't remove the fact that before a surgeon will start to use your product on his or her patients, you still need to go through the normal process of convincing them, showing your preclinical data, your clinical data and convince them that it's the right product for his or her patients. So it will follow the very traditional pattern we see in the rest of the market, which is you need to work surgeon by surgeon.

[Operator]

And is OssDsign in need of any external funding going forward or in the future?

[Anders Svensson, executive]

Not as we can see right now.

[Operator]

Checking the [ MAUDE ] database in the U.S., we note a number of adverse events reported with the Catalyst. Are any of this a concern to the business?

[Morten Henneveld, executive]

No, I think you have to put it in the context of a number of things. One is that we have now treated well above 2,000 patients. In any surgery, patient will come in with a number of comorbidities or different situations and so on. So it's an inevitable that there will always be communications on some of the surgeries where Catalyst is also being used. What we have seen is an exceptional low level of reported complications where Catalyst was also involved. So this is not something that we are in any way concerned about. Since we also have a post-market study and now also our TOP FUSION, they clearly indicate that we have no adverse events, which is device-related. So I think you're always going to see some coming in, given that we're dealing with human beings, but this is not a cause for concern in any way.

[Operator]

Okay. And we'll take one final question here. What can investors expect from OssDsign in the remainder of 2024?

[Morten Henneveld, executive]

Well, investors can expect that we are a high-growth company who have now across many, many quarters demonstrated exceptional growth rates and significantly outperforming our peer average, both in Sweden, but also, I think, more importantly, in the orthopedic industry. So that is what you can expect for us. We see the high growth continuing. We have a product that has received an extremely good foothold in the U.S. market in a very short amount of time, has been received extremely well by surgeons, achieved and expanded FDA clearance as one of the first bone graft on the U.S. market. So investors can clearly expect that we will continue to demonstrate extremely high growth rates also coming into '24.

[Operator]

Okay. Thank you, everyone, who followed along OssDsign's webcast today, and also thank you very much, Morten and Anders for presenting and answering our questions. And until next time, thank you very much.

[Anders Svensson, executive]

Thank you.

[Morten Henneveld, executive]

Thank you.