Sedana Medical AB (publ)

STO:SEDANA

Earnings Call Transcript 2022-Q1

[Operator]

Welcome to the Sedana Medical Audiocast and Teleconference Q1 2022. [Operator Instructions]

Today, I'm pleased to present CEO and President, Johannes Doll; CFO, Johan Spetz; CMO, Peter Sackey. Please go ahead with your meeting.

[Johannes Doll, executive]

Thank you. Good afternoon, everyone, and Good morning to those of you dialing in from the U.S. Thank you very much for taking time with us today, and welcome to Sedana Medical Q1 report 2022.

Let's get into it. I will take the first part of the presentation and talk about the business and specifically about the sales performance and the different geographies. I would spend some time explaining the drivers behind that performance and also try to be as clear as possible what you can expect in the short-term and in the longer-term. Then Peter Sackey, who is dialing in from the U.S. today, will take over to give an update on the clinical trials in the United States that are now underway. And lastly, Johan Spetz, our new CFO, will give a financial update and also a short introduction to himself, since this is the first quarterly report as Sedana Medical's new CFO.

If you go to Page 2, as always, we will be talking about the future in this presentation, and I, therefore, recommend that you give a quick read to our disclaimer, but then let's turn to Page 3.

Let me again start with our purpose, which is to improve life during and beyond sedation. And in order to live up to this purpose, everybody at Sedana Medical is focused on making sure that mechanically ventilated patients in intensive care units around the world will receive inhaled sedation as standard therapy. And at the end of each quarter, as a very good check for us all to have been moved closer to that vision. And in the first month of 2022, the answer is clearly, yes, as we have achieved 2 very important milestones in our journey. We have launched our Sedaconda drug in Europe, and we have enrolled the first patient in our U.S. clinical program.

On Page 4, we have the highlights of the report. Our net sales were SEK 34 million, a 25% decline versus last year. The main reason behind that decline is that we have seen a significant decline in ventilated patients in the first quarter. I have myself visited many ICUs in Spain and Germany in the last week, and the picture is very similar in most units, many empty bad, and many of the patients are not intubated, and therefore, not sedated, and we will get to the explanations and statistics behind that.

Our gross margin improved versus last year to 68%, mainly because we have managed to ship more volumes from air transportation to sea freight, and we continue to have a very healthy cash balance, which, of course, is intended to take us all the way through to a U.S. launch in a few years' time.

On the operational side, the launch of our drug Sedaconda/isoflurane is now underway. We had first sales in Germany in February. Now we have first sales also in Sweden. The product is also available in the Netherlands, and we are adding more countries over the next weeks and months.

Also in the first quarter, we received a positive NICE guidance in the U.K., which now puts us in a position that we cannot only talk about great clinical advantages of our Sedaconda product, but also have strong healthy economic arguments with a tangible savings for hospitals that comes from using inhaled instead of intravenous sedation.

In the U.S., we expect -- which we expect will one day be our largest markets. We have enrolled our first patients in the clinical trial, which Peter will talk about, which means we are on track to keep our time line of a possible NDA submission and approval in 2024 and a launch likely in early 2025, simply because we don't tend to launch that before Christmas.

If we move to Page 5, please. Page 5 shows a longer-term view of our performance in the respect of first quarters. You can see that Sedana had a steady growth trend before COVID-19, then, we saw a real trend break in the COVID-19 years 2020 and '21. And now we are at a lower level than a year ago, but still clearly above the long-term trend. And I think it is important to take a full cycle perspective when looking at individual quarters because it confirms what we can say that COVID-19 clearly has given the Company a boost. And part of that boost is here to stay, also now that COVID-19 is fading out because more clinics are equipped to use inhaled sedation.

Let's turn to Page 6 and the sales development by geography. Overall, the gap of SEK 11 million versus last year is explained by lower sales in Germany and in South America, while our other regions showed solid growth, and I will now go through each of the geographies and explain the underlying dynamics.

So on Page 7, in Germany, we did see a decline of sales of more than 20%. That has to be put in relation with the development we saw on the patient side. The number of COVID-19 patients alone that had to be ventilated in an ICU has decreased on average 42% in the quarter, and this is because the Omicron variant was much milder, so less people ended up in intensive care and the ones that did end up in incentive care were actually less likely to need mechanical ventilation. So these 2 factors together led to this 42% decline, which we also see continue into April. So right now, that number is down 80%. In all of Germany, we now have less than 600 ventilated COVID patients in ICU, and at the same time last year, that number was still close to 3,000.

The same quality of statistics and data is not available for other patient groups outside COVID-19, but we have seen these groups declined significantly as well. Like all parts of society, of course, hospitals were also hit very hard by staff absence due to Omicron on top of high level of earn-out and turnover, which you already had before in intensive care units, which then reduced ICU capacity and led to a situation, where a lot of surgeries have to be postponed.

Also, in Germany, you still have a lot of people wearing face masks, work from home, move around less, so you have less community-acquired infections. Essentially, you're left with kind of the heart attack, stroke and trauma patients, but we have much less surgery and pneumonia patients on top of the COVID patients that are not there anymore.

On Page 8, you see there's a daily survey in Germany, where ICUs report whether they can operate under normal conditions. And as you can see here, the vast majority of ICUs in Germany had restricted or at least partly restricted operations in the first quarter, and that situation was even worse than a year ago. And the reason is the staff absence, which we have already talked about, which lead to ICUs having to close down bed because there's a maximum number of patients and nurses allowed to look after in Germany like the same situation in many other countries as well. And for Sedana, this meant that less patients were in the ICUs, but also we had restricted access, trainings are being postponed and new therapy introductions are moving a bit more slowly.

Let's move to our other direct markets on Page 9. We saw quite similar market dynamics as in Germany, less patients overall, more active restrictions with, of course, very different variations between the markets. So the U.K., for example, being on the very strict side with NHS banning pretty much all external visitors and banning any introduction of new therapies in a number of hospitals to protect the staff. But Spain, for example, being on the -- on the more liberal side, but the underlying growth in these markets, especially in Spain, especially in France and U.K. and that was also be comparably low levels last year resulted in a 12% year-over-year growth.

On Page 10, on the distributor market side, you see a very significant decline, which can be isolated to only one distributor in South America, which, as we know, if you've followed us for a while, is our most important distributor region. All other markets actually showed quite nice growth.

What's happened in South America is 2 things. We had a very high first quarter last year, an artificially high quarter, as we had propofol shortage in the region at the time. So people were buying whatever they could get their hands on to sedate the patient. And secondly, our distributor has stocked-up in the winter, anticipating a new COVID wave [ like we had before ], which did not come or it did not hit the ICUs that much as Omicron turned out to be much milder than previous variants. So we had no orders in January and February from these countries, but the outlook is more positive. Orders have picked up again. And importantly, we did get the device approved in Brazil, which is a sizable market and will be taken care of by the same distributor and contribute to this important region.

On Page 11, this fits with the overall progress in distributor markets in Q1. We got the device, Sedaconda ACD approved not only in Brazil, but also in Indonesia, which both of them are sizable opportunities, and we are looking forward to quite a few launches of both the device in Brazil, in Indonesia, also Argentina, Turkey, and hopefully, also China in the not-so-distant future, but also of the drug in some of the markets, where we are not present ourselves, but where we have or we will have approvals like Austria, Switzerland, Italy, et cetera.

If we move to Page 12, please. Let's switch gears a bit to what we can expect. I'll say it again, our clear ambition is to become standard of care. And we believe we should be standard of care because of the clinical benefits that our therapy is bringing versus the intravenous sedation. Less opioid requirements, more spontaneous breathing, shorter wake-up time compared to IV, and at the same time, not having to compromise on the efficacy, and also the clear health economic benefit. You remember the NICE guidance that recommends the use of Sedaconda ACD as a cost-effective option and showing a per-patient saving, looking over a 30-day period, of GBP 3,800 worth of intravenous sedation and that saving is largely based on a post-hoc analysis we had presented as a poster at ISICEM this year, a big intensive care conference, which has shown a significant reduction of ICU 3 days, actually 4 days compared to IV sedation, which is, of course, very meaningful, as patients leave the ICU 4 days earlier than they would have otherwise with IV sedation.

On Page 13, so how should we think about what is to come? What should you expect this year? What should we see in the following years until '25? And what will happen from '25 and onwards. When trying to predict the market dynamics, there is, of course, some uncertainty involved, but I'm giving you our best estimate from today's perspective and from what we know today.

We are anticipating a few more quarters, probably 2 quarters that will be affected by lower ICU capacity and access restrictions. It will take some time until the hospitals are back to normal staffing levels. It will take some time until we can access hospitals in a normal way again. But that impact should become less severe over time, and we are already seeing some signs of access, for example, to some hospitals improving somewhat, but it might take until closer to the end of this year until we are back to a fully normalized state.

And then from that point on, and this is, of course, under the assumption that we are not hit by another COVID wave, and we have been surprised by this virus before, then we should return to something similar to a pre-COVID state and a steady structural market growth in line with demographics, which in most markets is probably somewhere in the area of 5% [ a year ].

Against that short-term uncertainty, as a company, we are, of course, fully focused on what we have under our control, which is the commercial execution, as we are currently implementing a [ sales ] growth program with different initiatives that we have named mission standard of care and that is really the focus. We have a few ICUs already today that use inhaled sedation, as a first-line sedation, meaning that every patient that will be ventilated and sedated for more than 24 hours will receive inhaled sedation and not IV sedation. And it's our job to get as many accounts as possible to that stage because we know that these patients will benefit.

In terms of what you can expect, assuming we get approval by MHRA in the U.K. by the end of this year, Sedaconda/isoflurane should be available in all of our direct markets, and a few more, I should say, in the distributor market. During the year, we should see increasing penetration of inhaled sedation overall. Again, it might be versus a temporarily smaller addressable market, but the penetration should go up and a gradual shift from off-label generics to our on-label therapy. Again, as we have said previously, this is not something that will happen overnight, as you have to work through the purchasing processes accounts for accounts and deal with every group purchasing organization individually, but gradually, we should see more and more isoflurane moving from off-label to on-label.

By 2025, we are expecting to reach sales levels of SEK 500 million in Europe. We have postponed that target by 1 year and that has 2 reasons. First, at the time the guidance was made for the first time back in 2017, the Company underestimated the time it takes to maneuver through national reimbursement processes, as there is a quite long period between approval and actually being able to sell. Second reason is the temporary market conditions I have discussed, lower ICU capacity, access restrictions, which are slowing down the launch to some extent, and it will take some time until staffing levels are back to normal [ strength ]. By that time, we have an ambition to have converted the majority of off-label isoflurane to our drug.

From 2025 onwards, we will be able to add the United States to our market. We will give sales guidance, including that market when we move closer, but it's quite clear that the United States is the highest potential market. But we have communicated already, but we are keeping the EBITDA target of 40% for the whole company once we have been through the initial launch and have reached a steady state in the U.S. And importantly, of course, if things that go as planned, we expect our cash position to be sufficient to get us through that U.S. launch.

With this, let me hand over to Peter for the clinical update.

[Peter Sackey, executive]

Thank you, Johannes. So could we move to Slide 14, please. So as we've communicated previously, our intention was to start the clinical trials in the turn of Q1, Q2 or more specifically in April. And we successfully enrolled the first patients to the first INSPiRE-ICU yesterday here at -- in Nashville, and we are anticipating a ramp-up now of study sites over the coming months. And so these 2 studies are identical studies, INSPiRE-ICU 1 and 2. INSPiRE stands for inhaled sedation versus propofol in respiratory failure. And these studies are non-inferiority studies that we've agreed with the FDA when it comes to design and to confirm efficacy and safety of inhaled isoflurane via the Sedaconda ACD.

And 2 studies, we will be enrolling a total of 470 adult patients for the primary endpoint and an additional 3 to 5 patients per sit, as run-in training patients. And similar to our European study SED001, the primary endpoint is the proportion of time spent within the target range of sedation depth in absence of rescue sedation assessed with a RASS scale and the target is the same as in SED001.

The secondary endpoints are the use of opioids over the duration of sedation, time to wake-up at end of sedation, cognitive recovery after end of sedation, and spontaneous breathing. And this -- the primary endpoint will be assessed by blinded assessors. So it's not a double-blind study, but an assessor blinded study. Both of the studies are identical, as I mentioned.

So let's move over to Slide 15. So looking at the start of the clinical trials now, we anticipate them to be completed by -- towards the end of 2023 in Q4 and then to submit our NDA early 2024 for an approval before the end of 2024.

And with that, I hand over to -- back to you, Johannes, I think.

[Johannes Doll, executive]

Yes. Thank you very much, Peter. If we look at Page 16, a quick comment, of course. We are following the terrible war in Ukraine, which is affecting us all. Business-wise, however, the impact for Sedana Medical is manageable. We do not have the presence, either direct or indirect in Ukraine and only very limited business in Russia, last year, that was 0.1% of our sales. We have actually decided not to stop supplying Russian intensive care units, as we will be withholding products from critically ill patients that could improve their outcome. But percentage wise, that is a very, very small share of our sales.

The more relevant impact on us is that our gas monitors have been produced by a Russian engineering company. It's not a big contributor to our sales and profit, but a quite important enabler of our therapy because a lot of ICUs feel more comfortable using our product, if they can measure the gas concentration. And in the short-term, we have sufficient supply to satisfy the demand for this year, as we are not in direct trouble here. But we are, of course, anticipating a situation, where trade with Russia will be limited for an undefined period from what we know today. So it is, of course, prudent for us to look for an alternative, and we have started a project to do exactly that through this time to find a solution before we run out of stock, so we can continue to supply our customers with gas monitors as they choose to source them from us. Of course, there is gas monitors also available from other manufacturers that they can buy directly.

With this, let's move on over to Johan and the financials.

[Johan Spetz, executive]

Thank you, Johannes. Yes. So my name is Johan Spetz. I'm the new CFO of Sedana Medical. I assumed my role in late March. Just briefly, so my career so far has been in the finance industry. I joined Sedana from my previous role as Partner and Head of Equity Research at Pareto Securities here in Stockholm. And I'm now very happy to be part of the team here at Sedana and to contribute to bringing our new therapy to ICU patients around the globe.

So if we turn to the financials for Q1, 2022 on Slide 18. So Johannes has already described the sales development, so I will focus mainly on our margins and cash position. So our gross margin increased to 68% in Q1, 2022 from 64% in Q1, 2021, and this is mainly due to lower transportation costs that Johannes mentioned earlier and also to some extent, a positive market mix, where we see a relatively lower share of distributor market in Q1 of this year.

Our OpEx, if we are excluding costs, so that is the selling, administrative and R&D costs were SEK 45 million in Q1 2022. That's up compared to SEK 39 million in Q1 2021, but down compared to Q4 2021 when it was SEK 51 million, so a slight decrease sequentially in Q1 relative to Q4 of last year. The resulting EBITDA was negative SEK 16 million in Q1 2022, and that's compared to negative SEK 8 million in Q1 of last year.

So if you turn to the next Slide, Slide 19, to have a look at our cash flow and cash position. The cash flow from operations during Q1, 2022 was negative SEK 28 million. Of this, SEK 11 million was working capital-related, related to an increase in inventory and also VAT and bonus payments. Cash flow from investments during the quarter were a negative SEK 32 million. And as most of you are aware, that's mainly related to our clinical studies and related work. So we have a total cash flow for the period of Q1, 2022 of negative SEK 61 million.

That takes us to a cash balance at quarter end of SEK 779 million, so a very healthy cash balance, and that's compared to SEK 836 million at the beginning of the quarter. And importantly, in -- we're looking at this, and this is the case also after considering the -- the slight revenue guidance revision we published this morning. We expect to be fully funded until breakeven and through the U.S. launch phase, as Johannes mentioned earlier. So a healthy -- healthy cash position that provides stability and flexibility for us. In addition, it should be mentioned as well that Sedana Medical is a debt-free company.

And as a final remark from me regarding the move to the NASDAQ main list here in Stockholm, we have now finalized an assessment and have a tentative work plan in place that should lead us to our main market listing during this year.

So with that, I will hand the call back to Johannes.

[Johannes Doll, executive]

Yes. Thank you, Johan, and thanks, everybody, for listening. Let's move to the last page, Page 20, the highlights again, which I am, of course, not going to repeat. But what I would like to reiterate is that with the launch of our drug in Europe and our first patient enrollment in the U.S. study, we have achieved 2 very important milestones since beginning of the year. And despite the temporary contraction in the market that we are seeing, we, of course, remain fully convinced that inhaled sedation should be and will be the future standard for sedation in ICUs.

And with that, I will give it back to the moderator and open it up for any questions, you might have.

[Operator]

[Operator Instructions]

[Johannes Doll, executive]

So maybe in the meantime, I can take a -- we can take a question that we received via the chat. I'm just going to read the question, the question is for the new CFO. In an increasingly difficult inflation environment globally, how does Sedana Medical carry any threats to the Swedish krona, considering Sedana is currently very cash heavy? And this comes from a private investor.

[Johan Spetz, executive]

Yes. That's a great point. We are cash heavy. As I mentioned, we have SEK 779 million in cash at this point. And as you will be aware, a lot of the expenses that we have coming up are related to our clinical studies in the U.S., it will be USD expenses. So we have some, some evaluation to do here with regards to how we -- how we convert that into U.S. dollars. What we started doing already is to convert a certain amount by weekly to spread out that FX risk, but that is something that we will come back to on that topic. But it is a risk that we are already managing, and we will continue to manage it going forward.

[Johannes Doll, executive]

Back to you, moderator.

[Operator]

No questions have come in the telecom -- one question is just coming in from Peter Ostling at Pareto Securities.

[Peter Östling, analyst]

Yes. Just a quick one. Could you just remind me what the estimated cost for the U.S. trials will be?

[Johannes Doll, executive]

Yes. So there's no reminding to be done because we have not -- not disclosed the amount. It is a clinical trial in the U.S., 2 Phase III trials with a total of 470 patients plus the run-in patients. So that is, of course, a significant investment even higher than what we have seen for the European approval trial A, because it's more patient; B, because U.S. trial tend to be more, more expensive, but we have not disclosed a concrete amount. So sorry, if I'm not directly answering the question.

[Peter Östling, analyst]

Well, I tried anyway.

[Johannes Doll, executive]

And I know you will continue to do that.

[Operator]

There are no further questions in the teleconference for the moment, for closing remarks, I would like to...

[Johannes Doll, executive]

Sorry. We have -- we have received more questions through the -- through the chat. So thanks for that. How has the market share of Sedana in Germany developed?

And that, that is a very good, good question. I think a very relevant question because, of course, a 25% decline overall and the 22% decline in Germany is a very short version of the truth. As I said, it has to be seen in relation to a very significant contraction of the market. And unfortunately, we are not dealing with the market, where you can just look up the data. Ideally, I would like to look at how many ventilated patients do we have in the ICU and how many are being -- are being sedated.

We have almost perfect data for COVID patients, but we have to make assumptions for -- in terms of patients that are -- majority of patients that are outside of COVID. For COVID, we can say that the number has decreased by 42% in relation to that, our sales decline was lower. We don't have that exact number for the other patient population. But as an estimate from what we are seeing in the ICUs when we are there, it is a fair assumption that our sales decline has been lower proportionately than the decline in patients, that's true.

Consequently, we should have seen the penetration go up. The penetration rate we have seen previously or communicated previously in Germany is in the area of 8% to 10%, and we have seen some, some slight improvement on that in the first quarter. And of course, there is a clear ambition of not just seeing a slight improvement, but seeing that penetration improve a lot. Now that we have the approval, and now that we have the gas launch, which the approval given kind of the [ hunting ] license, if you like, now the full therapy is on-label, and we can fully promote it.

Any more questions from the phone?

[Operator]

No new questions have come in.

[Johannes Doll, executive]

Okay. Sorry. Every time I get back to you, there's a new question on the chat. What is the status of the SESAR study?

There is no, no update to be given. But maybe for -- for the sake of everybody maybe -- maybe, Peter, you can remind people about the SESAR study as is about and...

[Peter Sackey, executive]

Yes. So the SESAR study is a study -- it's an academic study led by investigators from Clermont-Ferrand in France. This is a study that we do not have any direct insight in. It's a [ hand of ] study, where we had provided -- provided the devices and materials for the study. We do know that they've had a good recruitment overall, and that they're still continuing to recruit across France. It's a study looking at ARDS patients, and we're using sevoflurane, which is not our drug, but it's also volatile anesthetic. So we're obviously very interested to see the data when -- when -- the results when the study comes out. And as far as I know, the progress in the study is good. But I don't have any recruitment number that I can share with you.

[Johannes Doll, executive]

Good. I can see no more questions in the chat. I assume we have no more questions on the phone either. So then, I would thank you -- I would like to thank you again, for taking the time with us. Thank you for the good questions and discussion and looking forward to keeping you updated on the progress. Have a nice day.

[Operator]

This concludes our conference call. Thank you all for attending. You may now disconnect your lines.