Sedana Medical AB (publ)

STO:SEDANA

Earnings Call Transcript 2023-Q1

[Operator]

Welcome to the Sedana Medical Q1 Report 2023. [Operator Instructions]Now I will hand the conference over to CEO, Johannes Doll; CFO, Johan Spetz; and CMO, Peter Sackey. Please go ahead.

[Johannes Doll, executive]

Good afternoon, everybody. Welcome to Sedana Medical's Q1 Report. Thanks for taking the time with us. We know there's a lot of reports coming out today, so we are happy to have you with us. With me, I have our Chief Medical Officer, Peter Sackey; and our CFO, Johan Spetz.I will kick us off by talking you through our performance and progress in Q1. Then Peter will give an update about our INSPiRE-ICU trials, which we have running in the U.S. And then Johan will go through our numbers in a bit more depth, before I will wrap it up and we can discuss your questions. As always, there are some predictions we're making about the future, so when you have a minute, please give our disclaimer on Page 2 a quick read.Let's start on Page 3, please, with the highlights for the quarter. For this year, 2023, we have set ourselves 3 main priorities. First, we want to grow again. Now that we're gradually entering more normal market conditions in the post-COVID-19 period, we want to show that Sedana Medical is indeed a growth company.Secondly, for me, it is of real strategic importance that we will be able to enter the U.S. based on a stable base business that is profitable. So we want to break-even outside the U.S. before we launch in the U.S. And for this year this means that we have to make creditable steps towards break-even ex-U.S.And thirdly, we want to make real headway towards being able to launch in the U.S. So for this year, this means that we want to complete enrollment of our INSPiRE-ICU trials.I'm very happy this time to report that we have made good progress against all these 3 priorities during the quarter. And this is, in a way, a very special report for us. After a long 2022 with lots of different post-COVID headwinds, we report growth again. Sales were up 12%, 5% in local currencies. And I'm even more pleased that every single one of our direct markets, so the countries where we have our own teams in place, have grown versus last year. And at the same time, we saw another quarter with sales decline in our distributor markets, which I will get back to.Great milestone in Spain, which has been one of the strongest performing markets for a while. In April, the Ministry of Health has approved pricing and reimbursement for our drug, Sedaconda (isoflurane). So we're looking forward to launching it soon. Also during the quarter, we received regulatory approval and pricing and reimbursement approval in Italy, meaning that there's only one country missing out of the 18 countries where we have applied for regulatory approval, which is the U.K., which I will also come back to.On the profitability side, we've grown our gross margin again, 73% versus 68% last year, which is, of course, very good to see. Even better to see that our EBITDA loss is 35% lower than a year ago. And of course, we continue to have a strong balance sheet with SEK 560 million in cash and short-term deposits, which we use to optimize interest rate income. So we have finance to execute on our plan, and we don't foresee that we will need to go to the market to ask for more money.Exciting times also in the U.S. Our trials, which, as you know, have gotten fast track by the FDA, are running full steam. We are still working towards completion before the year-end. And if we are successful with that and have a swift and successful review by FDA, we will have U.S. patients benefit from sedation in early 2025.On Page 4, you see our sales development over time. Of course, you know that especially 2020 and 2021 were heavily influenced by COVID-19, meaning a trend break in our longer-term sales development. Also Q1 of last year was still affected by the tail of the last COVID-19 wave hitting the ICUs. And then after that, we saw a significant reset in sales during 2022, which was explained by the fact that we saw a drastic decline of ventilated patients in intensive care pretty much in all countries. And while Q1 of this year still has less patients than last year, 2022, we do show growth on a company level again. And if you have a look at this picture, not just against last year, but also versus the first COVID quarter in 2020.If we then go to the next page, on Page 5, you see how the growth breaks down into our regions. Germany was up 6% in euros against the effect of still less patients in the ICU, including exchange rate that meant a growth of 13%. I'm very pleased with our other direct markets as well -- so these are Spain, France, U.K., Nordics and the Benelux countries -- not just with the overall growth of 61% or 52% in local currencies, but also that every single one of them has grown versus last year, which is good to see.We still see the same story about distributor markets, a heavy decline year-over-year of 43%, still with the same explanation that we still don't have new orders from our previously largest distributor in South America because they are working through a big stock that has been built during COVID-19. Q2 of last year, by the way, is the last quarter where we have received a sizable order from them. So after Q2 of this year, at least this effect should go away.And if you take a glass-full view on distributor markets, we did have growth for the other distributors. So if you take out the South America effect, we grew in the rest in Q1. We also had quarter-over-quarter growth for the third time in a row now. And at some point, of course, we will see sales from South America again once the stock has normalized because it continues to be a high potential region for us.Let's then move on to Page 6, please. We've talked a lot about the negative market influences that have plagued us in 2022 and we've also talked a lot about how things should gradually normalize during 2023. So here's a bit of an update of what we can see after the first quarter and whether things actually do improve. The largest impact, of course, on last year's performance was the lower number of ventilated ICU patients, which for parts of the year were down 40%, 50% according to our analysis. In Q1 of this year, we had even less patients than Q1 last year. That is because last year was still influenced by the tail of the last COVID-19 wave. But the good news is that the gap is narrowing. So we will hopefully soon start comparing apples with apples when we look at year-over-year comparisons.We've talked a lot also about staff shortages and how they affect ICUs because they have to run at lower capacity. With the staff shortages also came quality issues as well, because the vacancies had to be filled sometimes with nurses with normal -- from the normal wards that maybe didn't have the same intensive care background, or temp workers, or nurses from abroad with different education and experience. That is still an issue, and it will be an issue for a while for sure. It has eased a bit, though, in Q1, but it's still quite rare that you would find an ICU that will tell you that they are sufficiently staffed. But on the positive side, access to the hospitals in the sense of getting in, getting access to our customers, doing trainings, et cetera, is much, much easier than during COVID-19.A slightly more new development that we are seeing are strikes of health care staff, especially in U.K. and France. There have, of course, also been regional strikes last year, but less widespread and rarely affecting the the ICU. Now we do see nurses and doctors go on larger strikes and also walking out of ICUs, primarily again U.K. and France, of course, related to inflation and the resulting pay demands, but also for improved work conditions and to address the staff shortages. And the impact on us is that we had a few accounts where we had to postpone starting them up, postpone trainings and so forth. So we are hoping these strikes get resolved reasonably soon.So overall, are we in a market environment that is the same as before COVID? No. But those times will also not come back in my view. We have to deal with these new challenges, but we continue to believe that we will have a more friendly market environment than last year for sure, or at least a comparable one. And that's what really counts for us for our goal to grow the sales.On Page 7, just to show you what I've already talked about. These are the statistics for Germany in Q1. As we said before, there are no perfect data when it comes to ventilated and sedated patients in intensive care. So we have to triangulate a bit. On the left, you see the total number of ICU patients that were in a ventilator bed. But as we said before, that does not mean that they were actually ventilated or sedated. In fact, we typically see that around 40% of these patients are ventilated. That number decreased by 5% on average year-over-year. And on the right side, you have ventilated COVID-19 patients. So here, we know that they were ventilated, but it does not capture all patients as there are, of course, other reasons for being ventilated in an ICU apart from COVID.What we do see here is that the number is down 74%. We know from experience that the left side underestimates what's going on and the right side overestimates the decline. Our best estimate -- not hard data, but our best estimate is that in Germany we still have 20% less ventilated patients than a year ago. But then, the really good news here is, as you see on the slide, the gaps are getting narrower and narrower. So going forward, it will be easier to calibrate our performance versus last year.And on Page 8, as already mentioned, we saw a slight easing of the situation when it comes to whether or not ICUs were operating under normal conditions. But it is still 2/3 of all ICUs in Germany that report restricted or at least partly restricted operations, which is almost always a function of staff shortages.If we then go to Page 9, you see our progress with regards to the drug launch. There are several steps to take here. The first one is regulatory approval. We have secured that in 17 out of the 18 countries where we have applied. The one that is still missing is the U.K. We were promised an update on the timeline a while ago, but unfortunately have not received one. If you want to find anything positive in this very slow process, remember, we submit [Technical Difficulty] 2 years ago, it is that we've received a few questions from MHRA. So at least we know that someone is working on the case. They are also not very critical questions in our view. So we still think that the likelihood of getting approval like in the other 17 countries is very, very high. But unfortunately, we still can't make any predictions regarding the timeline.Once you have regulatory approval, you need to go through a process to make sure your products get paid for, a fact that is sometimes a bit underestimated by smaller companies. So you need pricing and reimbursement approval, which we have in place for all the major markets now apart for the U.K., of course. During Q1, we received approval in Italy. And after the quarter, we had great news from Spain, where the Ministry of Health, as I said, has approved pricing and reimbursement for Sedaconda. So now, we're looking forward to launching the drug in Spain in the next couple of months, and also in Italy, where from our perspective things should be ready for launch soon. But of course, here I should mention that we're working with the distributors. So don't have the timelines under control as much as we have for our direct markets.On Page 10, you see a little deep dive on Spain. Spain has been one of our strongest growing markets already since a while. But now since the beginning of the year, we received 2 really great news that might mean a further acceleration of the sales. I already mentioned pricing and reimbursement. The decision is already published, but there's still a little bit of paperwork to finish before we can launch the drug. And what's also helping a lot is the Spanish Intensive Care Society has updated their treatment recommendations for sedation in the ICU. And now, they recommend isoflurane as the first-line therapy on the same level as propofol for moderate and severe sedation.And of course, Sedana Medical is, as in the other countries as well, the only company that has an approved isoflurane for the ICU. So that, of course, helps us a lot. Both of these news are very important milestones because what you see in Spain a lot is that ICUs have sedation reference, as they call it. Usually, a senior nurse who have the special task to make a local protocol for how sedation is done in the ICU or hospital. And both pricing and reimbursement and treatment guidelines are things they look at very closely for making their decisions, whether a drug gets listed or not. So now we can tick both boxes for Sedaconda, which we hope will get us on the protocol for even more hospitals in Spain.On Page 11, I have already mentioned, we want to be profitable ex-U.S., before we launch in the U.S. I can't -- or we can't have a situation where we are still losing money in Europe and then we have to finance a U.S. launch. So we are putting a lot of focus on improving our P&L. And you can see here that is starting to have an impact. These numbers are for the whole company. So it includes the U.S. cost as well. Gross margins have reached 73%, which is great. The one word of caution, I would say, is that the price increases we have given our customers tend to have immediate effect in the P&L, and the increase in COGS that we've also had take a bit longer accounting-wise until they show in the P&L. So we might not always have this level from now on, but we still have a target to keep gross margins above 70%.2022 was a tough year, of course, in many ways, but we have also used the time to hopefully build a stronger and healthier Sedana Medical. We've streamlined our headquarters, especially in admin and overhead functions, and shifted more resources into the countries and driving sales. And that is starting to also show an effect on the OpEx side, where quarter-over-quarter you see a nice decline. And of course, higher sales, higher gross margin and lower OpEx together contribute to a lower EBITDA loss, roughly 35% lower than last year. And we will, of course, continue to work on the P&L to reach the goal of, again, breaking-even ex-U.S. before a U.S. launch.With that, let's go to Page 12. And I will hand it over to Peter to take us through the U.S. update.

[Peter Sackey, executive]

Yes. So when it comes to the U.S., we have had the interaction with the FDA there, and received in January this year a Fast Track Designation for our development program, which is very positive. And the purpose of this Fast Track Designation is to get important new therapies to U.S. patients earlier. And this is a confirmation that the FDA sees our therapy as potentially meeting a clinical medical need that's unmet and also it means that we potentially can have a swifter review and a more focused review from the FDA when we submit our NDA. And the potential benefits include accelerated approval prior to review -- or rolling review.Shall we move to the next slide, please? So Slide 13. And the 2 trials that we are running in the U.S. are progressing according to plans. We're adding on new study sites and seeing a decent recruitment rate. And we still aim to complete these trials by the end of this year so that we can have a launch early 2025.Next slide, 14. In parallel, we have some investigator-initiated trials that we've been supporting in different ways and you've heard of before. Maybe the most important one is the INASED study, which is a study to compare Isoflurane with propofol for up to 14 days. And the primary endpoint there is delirium incidents after end of treatment, also delirium duration and long-term quantitative outcomes. And the study is progressing with 145 patients recruited to date.We also have another study in France, that's the Sevoflurane in ARDS study, the SESAR study. That is not our study, but we are supporting the investigators in 30 ICUs across France. And in this study, over 600 patients have been recruited to date, and the plan is to have 700 in before the analysis. And this enrollment is expected to be completed by the end of this year.Then we had a study that we supported, the retrospective cohort study in ARDS patients, the ISCA study. That was a multinational retrospective data collection study that was published in January 2023. And this study then showed that inhaled sedation was feasible and safe and reduced the requirements of other sedatives. There were no significant differences with regards to long-term clinical outcomes. But as stated, it was concluded that the inhaled sedation was a useful sedative in this patient population.Next slide, please. So that's 15. As we've also communicated in this press release, we have completed the enrollment in our pediatric study in Europe, the IsoCOMFORT study. This was a study that was conducted in Sweden, Germany, France, Spain and the U.K. And the study compares the efficacy and safety of Senaconda versus IV midazolam for sedation of mechanically ventilated children from age 3 to 17. And the purpose of this study was to obtain market authorization for children and also to secure the data exclusivity and market protection for the adult indication until 2031.And we expect to present high-level results from the study in this quarter. And if we have a successful review, we expect to get a pediatric approval in the first half year of 2024. And regardless of the outcome of the study, and this is important, the data exclusivity extension to 2031 will be approved as long as we have the study report to the authorities. Of course, we are hoping and anticipating to get FDA approval as well. Another important aspect of this study being completed is that it's included as part of the approved U.S. Pediatric study plan together with the ongoing juvenile non-clinical studies. And that's important because that's a prerequisite for our NDA.Next slide, please. So just a few places we've been in the first quarter of 2023. So in different congresses and symposia across Europe, and also in South America and in the U.S. with a presentation in this -- in the program for the Society of Critical Care Medicine about inhaled sedation.And with that, I hand over to CFO, Johan Spetz, Slide 17.

[Johan Spetz, executive]

Thank you, Peter. Yes. So if we now turn to Slide 17 and take a look at the financials in a bit more detail. Our sales, as you've seen, in Q1 was SEK 38 million. That's up 12% compared to a year ago. At constant exchange rates, our sales increased by 5%. And as Johannes has already showed, Germany is back to growth. We see strong growth in our other direct markets, while our South American distributor continued to post some headwinds for our distributor segment. But overall, of course, good to be back and growing sales again.Our gross margin was 73% in Q1, and that can be compared to 68% in Q1 2022, and 72% in Q4 of 2022. So a continuation of the positive trend for the gross margin that we've seen in recent quarters. Now in Q1, it was mainly an effect of -- and Johannes mentioned this as well -- higher prices that we get from our customers. We also had a mix effect coming from the fact that we have a slightly lower share of distributor sales. And then we also have lower allocated central costs contributing to the gross margin.If we look at OpEx, we've been disciplined in general on the cost side in the quarter and we can report a slight OpEx reduction relative to a year ago. And this is, of course, despite the inflationary environment that we're seeing. And we continue in general to implement various cost efficiency measures that we have set out for ourselves. As Johannes has mentioned as well, we are streamlining headquarter and admin functions, while we continue to invest in our customer-facing teams. So this shows in our EBITDA, where we see a clear improvement year-over-year. Now for Q1, we report minus SEK 11 million in EBITDA, and that can be compared to minus SEK 16 million in Q1 of last year.So if we turn to the next slide, Slide 18, please, where we show our cash flow and available funds. And one important point to make related to our cash position is that we now split our available funds between our regular bank accounts and what we have placed in short-term deposits for better interest rates. And the deposits are now reported in the balance sheet, as you have seen, as short-term investments. But importantly, both of these are to be considered available funds for us. So the cash balance, including the short-term deposits at the end of Q1 was SEK 560 million, that can be compared to SEK 608 million at the beginning of the quarter.If we look at the cash flow in the quarter. So cash flow from operations was minus SEK 7 million, of which we had cash flow from working capital of positive SEK 3 million, mainly related to payments from customers. We report cash flow from investments in Q1 of minus SEK 346 million. But importantly here, we have this allocation from cash to short-term deposits making up SEK 306 million of this change.And similarly, for the total cash flow for Q1, we report minus SEK 354 million. But again, adjusted for the allocation of cash to deposits, the total cash flow in Q1 was minus SEK 48 million, and that can be compared to minus SEK 61 million in Q1 last year. So we expect to be fully financed until break-even and to execute on our strategic plan. And as a reminder, we have no long-term debt in the company.And then if we turn to Slide 19. Here, you can see our top shareholders at the end of the quarter. And we thank our shareholders for their continued support, of course.With that, I will hand the call back to Johannes.

[Johannes Doll, executive]

Yes. Thank you, guys. Let's go to the last page to wrap it up. Let's take a step back from all the information we've thrown at you during the last 25 minutes and remind ourselves what Sedana Medical is about from an investment perspective. We continue to see -- as we've heard multiple times, we've continued to see very good gross margins of 70% and up, especially good this quarter, as you've seen. So by definition, we can become quite profitable as a business when we reach scale.And we already have proof of concept for that in our main market, Germany, where the majority of intensive care units are already our customers today and where the team is generating very attractive EBITDA margins on a local level. And while we're not at the same scale yet to other countries -- like, Spain, for example, are also operating with nice profits on a local level already. So we have the proof of concept. It can be done.So will we reach enough scale and convince enough hospitals to use inhaled sedation as a standard therapy? We have all the arguments that we need in my opinion. We have convincing clinical data on our side, showing that patients really benefit from inhaled sedation, which is important, as only good medicine will translate into good business. And equally important, we can also show that hospitals actually save money with inhaled sedation versus the previous standard of care, intravenous sedation.And we have lots of places to grow, as you've heard, and to create new Germanys. Again, regulatory approval in 17 countries in Europe, hopefully, soon 18 when the U.K. finally comes around. And the largest opportunity, U.S., is still fully untapped with FDA giving us Fast Track Designation in January. So that is also coming closer.And let's not forget very important, indeed, a strong balance sheet. And as you've heard from Johan as well, a continued commitment to keep working on the OpEx side to get closer to profitability outside the U.S. so we can launch from a stable platform.That concludes our presentation. Thank you very much for listening, and we'll be very happy to take your questions.

[Operator]

[Operator Instructions] The next question comes from Mattias Vadsten from SEB.

[Mattias Vadsten, analyst]

I have a few questions. I'll probably take them one by one. You have, in my opinion, the strong development in direct markets this quarter, if you could give any more details as to which country or countries that were particularly good. And then to that, Spain that has been quite -- performing quite well, if you expect any major effect from Spain from Q2 now with the price reimbursement approval in place? That will be the first one.

[Johannes Doll, executive]

Yes. Thank you, Matthias. So as you know, we report the region, so Germany, the direct markets in aggregate and then the distributor market separate. So we are always a bit shy in talking about individual markets specifically. What I'm very happy about in this report is that every one of our direct markets. So Spain, France, U.K., Nordics and the Benelux countries, all of them have contributed positively to -- in terms of growth, and looking at the growth of more than 50% in local currencies. Of course, you can imagine that all of these growth rates look pretty healthy.I have called out Spain, which indeed is currently the strongest contributor within that group of countries. So we've seen very, very strong growth for a while. And just as a reminder, of course, you know that, that is with the device only because we didn't have the pricing and reimbursement approval yet. That was also without -- at least until beginning of the year, without the new treatment guidelines recommending inhaled sedation. So now we've reached these additional trigger points, if you like, in Spain, which, of course, we hope that will lead to a further acceleration. Will it be a dramatic difference if you have a country that's already growing very, very fast? Of course, we hope that we can accelerate a bit more. But I'm already very happy with where we are today.

[Mattias Vadsten, analyst]

And then maybe a difficult question, but if you could talk a little bit about what share of hospitals in each of the major markets in Europe, like, yes, let's say, U.K., Spain, France, maybe what share of hospitals you are that are purchasing your therapy? I know the penetration at current customers probably is high on your priority list. But anyway, just to get a feel, maybe versus yes, Germany?

[Johannes Doll, executive]

Yes. So I'll again stay a little more away than maybe you would wish because, of course, we don't disclose these kind of details. In Germany, I think you know that more than half of the ICUs are our customers today, and the ones that we have with customers tend to be the larger hospitals, so we cover more than the potential, a higher share of the potential. We're not at that same level in any other country yet. But it's also a little bit misleading only to look at how many hospitals have bought from us because, of course, we are quite targeted in which hospitals we pursue.So we are trying to be much smarter in terms of where the potential sits. So we want to fish where the fish are. We have a pretty good idea in most countries now where the potential sits. So how many, for example, ventilator beds does a certain hospital have? How many ICUs do they have? And also what's our likelihood of getting it. So do we have advocates? Do we have the arguments on our side to -- that make it likely that we can implement the therapy? So I will not be able to give you a percentage number. It's lower than in Germany, but the good news is that the number is steadily increasing. So, we still open new accounts on a continuous basis.And as we've discussed in the previous report, we're quite successful in also keeping the customers on board that once we have them, they typically stay with us. And that's, of course, speaks to the quality of the therapy because hospitals don't tend to stay with the therapy that doesn't work. So once they do see that it really makes a difference for these patients. They do wake up faster; they need less opioids; they are clearer when they wake up; they have a faster recovery, more spontaneous breathing, all these things that they see in their everyday practice, that of course, is the best loyalty program that you can have.

[Mattias Vadsten, analyst]

I think that's a good answer. But just to understand correctly, I guess you're happy with the coverage on high potential like U.S., let's say. It's just -- it's about the penetration on those now ahead, or are there any important ones in the specific countries that you're really after right now?

[Johannes Doll, executive]

No, that -- so the answer depends on the country. In Germany, I think that of course, there is a few, but there's very few large potential hospitals that are not using inhaled sedation at least to some extent. So here, the growth will partly come from new accounts, but mostly, we have to work on making sure that inhaled sedation, now that we have the fantastic clinical data, is used on a broader base.That looks different in the other countries where we don't have that same penetration, the same number of customers yet. So the priority is to find the right balance between opening new accounts and also making sure we increase the penetration in existing accounts. But, if the question is where the growth is coming from, of course; Germany, mostly increasing penetration; other markets, mostly opening new accounts.

[Operator]

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Johannes Doll, executive]

Yes. Thank you very much. Not much to say. Thanks a lot for joining us, and we're looking forward to updating you on our continued progress. You all have a nice day. Bye-bye.