Sedana Medical AB (publ)

STO:SEDANA

Earnings Call Transcript 2022-Q3

[Operator]

Welcome to the Sedana Medical Audiocast Teleconference Q3 2022. [Operator Instructions]

Today, I am pleased to present CEO and President, Johannes Doll; CFO, Johan Spetz; and CMO, Peter Sackey. Please begin your event.

[Johannes Doll, executive]

Good afternoon, everyone. Welcome to Sedana Medical's Q3 report. Thank you very much for taking the time with us today.

As usual, I will start by giving an update on the business, then Peter Sackey will talk us through our clinical and medical activities. And Johan will take us through the financial update before I will close and we'll open it up for your questions.

On Page 2, as always, I recommend that you give a quick read to our disclaimer as we will, of course, be talking about the future in this presentation.

Let's turn to Page 3, please. Before going into the quarter performance and the operational progress, I would like to take a moment again to look at the bigger picture.

We are living through a year where more is going on at the same time, than it's sometimes possible to digest. This is true for the world in general, where we are dealing with too many crises in parallel, Ukraine, inflation, energy prices, recession, supply chain issues, et cetera.

And it is also true for our market, the intensive care units, specifically. So far, we have seen a transition year after COVID-19 for the ICU world, the intensive care growth is on its way to find the new normal. And on that way, we have seen and are still seeing a temporary contraction of the addressable market. So, less ventilated patients in the ICUs, both COVID-19 patients and those with other indications. And significant staff shortages that our ICU customers are suffering from as well.

All of this is, of course, affecting our performance as a company. It is affecting how analysts look upon us, and it's, of course, also affecting how you as investors are taking investment decisions. Therefore, I would like to take a step back and remind ourselves what Sedana Medical is about. We have a business with attractive gross margins this quarter, 70%, up from 68% the year before, despite the price pressures we have seen in the supply chain, which by definition, can lead to a very profitable business when we rescale.

And we have already shown proof of concept for that in Germany. We don't disclose profitability on a country level, as you know. But already today, and in spite of the lower sales than last year, we are generating EBITDA margins on a local level that are quite a bit above our long-term guidance of 4%, so it can be done. And the key question here is, will we reach sufficient scale? Do we believe in inhaled sedation as a concept? Do we believe in our technology and do we believe we can convince enough intensive care units to use inhaled sedation as the new standard of care?

And here, I think we have all the ingredients in place. In our SED001 trial, we have shown clear clinical benefits over intravenous sedation, so less opioids use, more spontaneous breathing, faster wakeup times. In a post hoc analysis, based on the same study, we have even shown that our patients leave the ICU 4 days earlier than propofol patients.

And we've also shown healthy economic benefits, which were even confirmed by NICE in the U.K. And we are also targeting the U.S. with a big clinical program, which will one day become our most important market. So we have everything that it takes to play an important role in the world of ICU sedation.

Yes, sales have been down year-to-date, and they have been down significantly in the first half of the year, Q1 and Q2. But if you look one level deeper, you can see some positive indicators. Year-to-date, we have sold roughly 70% more than in 2019. So the last year before COVID. In Q3, we have grown the business in our direct markets, including Germany.

And we are adding, on average, 3 new customers per week, and we are very successful at keeping our customers as well. So to me, all of this taken together is implying that the underlying performance is solid. And once we return to a normal state in the ICU, this should also translate into steady growth again.

Lastly, but very, very importantly, we have enough money in the bank to execute our plans. So we have our destiny in our own hands and don't need to ask the market for new money, which in these days is super important and sets us apart from quite a few other companies of our size.

Let's move to Page 4, please, which shows a summary of the quarter. We have reported net sales of SEK 26.5 million, down 6% from last year. So still a sales yet, but one that is smaller than in the first 2 quarters this year. And what I'm very pleased about the decline is explained only by the distributor markets, actually one individual distributor while we were able to grow sales in Germany and also in our other direct markets as well.

Gross margin was 70%. We will come back to that, and we have a robust cash balance of SEK 676 million, which, as I said, allows us to execute our plan without needing to go to the market for new money in this environment.

On the operational side, we have seen more launches of the drug, Sedaconda (isoflurane), the most important country being France. At the same time, we're making progress with the local pricing and reimbursement processes. The main focus here is on Spain, where things are progressing according to plan. And assuming we won't get any delays from the authority side, we are expecting to be able to launch towards the end of the year or next year should we get too close to Christmas.

We have received market authorization in Switzerland and are getting feedback from the Polish authorities that we are finally very close in Poland now as well. In Italy and specifically U.K., however, the authorities caused us some delays which I will come back to.

Another important milestone even if maybe not too surprising. We did receive MDR certification for the main device during the quarter, which was well ahead of the deadline in 2024, and this will secure long-term market access from a regulatory perspective.

Our U.S. trials are progressing. We have the majority of sites up and running and actively recruiting. And of course, we continue to believe that if we can recruit patients according to plan, we can submit to the FDA in 2024, and then look at a launch in early 2025. And given the importance of the U.S. market for our company, this is, of course, very, very exciting for us to follow.

Then let us move to the next page, Page 5, please. As we anticipated, we continue to see lower number of ventilated patients in ICUs compared to last year. But the gap is a bit smaller than in the first half of the year. This is simply due to the fact that the third quarter has been the one that has always been least effective by COVID-19, simply because there's less respiratory infections during the summer.

And if you look at ICU patients in Germany, for instance, on the left side of this slide, you see the High-Care and ECMO patients, which are the segments where our products could be sold, that were on average 10% less patients than the ICU in the third quarter on a given day compared to last year.

Now these are all ICU patients. The publicly available data doesn't say how many of them were ventilated. So when we are looking only at mechanically ventilated COVID-19 patients in Germany, so this is now COVID-19, that number has decreased 20%.

As in the previous quarters, we don't have exact data about all ventilated patients and how they have developed. But from our experience, the decline should be somewhere between these 2 data points, so somewhere between 10% and 20%.

On Page 6, as we have talked about before, ICUs are still confronted with significant staff shortages for a number of different reasons, including COVID-19, burnout, sick leaves, on top of already higher staff turnover to start with.

In Germany, again, our main markets most ICU report on a daily basis, whether they have normal operations, restricted operations or partly restricted operations. And what we can see is that the restrictions are on a quite high level in Q3 with almost 2/3 of ICUs operating under restricted or partly restricted operations.

And of course, you have to look a little bit behind the drivers of these levels as otherwise, they don't need much. So in Q4 of last year, for example, we had even more ICUs with restrictions, and we have the best quarterly sales that we've ever had. But at that time, the high level of restriction was mostly because there were so many COVID-19 patients in the ICUs. Now the problem is not the number of patients, but the shortage of nurses.

On Page 7, we are seeing how our net sales have developed compared to Q3 of last year. On the positive side, despite the lower number of patients and despite the hospital restrictions, we have seen growth both in Germany and in our other direct markets as well, especially in Spain and U.K., where we're seeing very nice momentum.

On the less positive side, we have a significant decline in distributor markets. And what's happening here is that we have not had any purchases from our main distributor in South America during the quarter, a little bit like we've already seen in the first half of the year. While if you remember, in Q3 of last year, Colombia, one of the countries that is covered by this distributor was the second largest market after Germany. And the reason is that they are still sitting on quite high stock levels. And if we actually take out that effect from this one distributor, which admittedly is a very big effect, we actually did see growth and the remaining distributors in aggregate.

Then if we move to Page 8, please. This picture, I think, shows pretty well the dynamic we have been through as it is showing the first 9 months sales of the last years. Steady growth before COVID-19, followed by a real trend break during the Covid-19 years and then a correction downwards in 2022, as we're going through this transition year after COVID. But if you take this through cycle perspective, as you see it here on the slide, it's still quite visible that we are roughly 70% above the levels we have seen before COVID.

If we then turn to the next page, Page 9, please. You will see that we are still seeing positive underlying momentum despite the year-to-date sales decline. As I said, we did see growth in Q3 in several regions and local currencies that was 6% in Germany, 15% in the other direct markets are actually -- if we excluded the one South American distributor that I was talking about. We also saw a 17% growth in the other distributor markets.

On top of that, we have added 3 new customers per week on average. Q3 was a little bit slower than the first 2 quarters as every country tends to have a month in the summer where not much is going on, like all this in France or Spain. But on average, year-to-date, it's still 3 per week, which is a very good number. And as you have seen before, we have been very successful in keeping the customers that we have.

So in Germany, for example, we have not lost a single one of our top 100 customers from 2021. So if I take all of this together, some at least modest growth despite a lower number of patients, steady inflow of new customers and very, very little churn. This is a real reason for me to be looking optimistically into the future.

On the next page, Page 10, please. We see the progress that we have made with our pharmaceutical Sedaconda (isoflurane) in Europe. We have now also launched in France in September. So the product is now available in Germany, France, the Netherlands, Sweden, Norway and through a distributor also in Slovenia. There are a few countries where the pricing and reimbursement process is still going on.

Here, the most important one is Spain, where things are progressing according to plan, assuming that the authorities stick to the expected time line, we should be able to launch in late 2022 or early '23, adding another important country to the list. Then some mixed messages in the countries where we are still waiting for approval.

First, on the positive side, we have received market authorization in Switzerland, bringing the number of countries up to 15. And we are finally hearing from the Polish authorities that we seem to be very close to that approval as well. In Italy, it's our understanding that there's still some internal handover and communications problems inside the Italian authorities. So we landed on the agenda of a later meeting that we had hoped, but it's still our understanding that we will get approval towards the end of the year. So pretty much exactly 1 year after we submitted.

The one country where we are waiting for approval most eagerly as you know, is the U.K. because we received the fantastic NICE guidance already back in January of this year, so more than 9 months ago, while MHRA, unfortunately has made us wait with the approval, not because something has gone wrong, but because they are so overburdened still as a consequence of COVID-19 and Brexit. This delay will now be even longer as MHRA after our comes to follow up and learn more about the time line has just let us know that we will receive an update in January, and that update will also include a time line for approval.

Now hopefully, the approval will not be too far away from the update in January, but it seems quite certain that we will not receive the approval this year as we had previously hoped and, of course, also expected. Again, this is not because there are issues with our application nor we have received a lot of questions that we couldn't answer, nothing of the like. It is unfortunately only the authorities that simply have too much to do.

On Page 11. Of course, Sedana Medical is not immune to the cost pressures, but basically, all businesses experienced in the supply chain these days. We are finding the same effects as everybody else. And in that light, I'm very pleased that so far, we have been able to keep the gross margin at a good level, 70% and you can grow it despite the lower sales level this year. That's due to a number of targeted initiatives that we have put in place, including price adjustments, managing our transportation towards sea freight, away from air transport and of course, quite a few negotiations with our suppliers of stock.

With this, I will hand it over to Peter, our Chief Medical Officer, to give a brief update on the medical side in the U.S. and on the world.

[Peter Sackey, executive]

Yes. Sorry, are we on page 12 now?

[Operator]

Yes, we are.

[Peter Sackey, executive]

Okay. Thank you. So in the U.S., the 2 INSPIRE-ICU trials underway, and these are 2 identical Phase III studies across approximately 25 study sites. And in total, the 2 studies will enroll 470 patients, in addition to the 3 to 5 run-in training patients in each the study sites.

The primary end point is the proportion of time at target RASS and assessments of RASS as performed by assessed treatment. Key secondary endpoints are opioids use, wake-up time up after end of treatment, cognitive function one hour after end of treatment and spontaneous breathing during sedation.

And then if we go to Page 13. There's a lot of excitement in the participating institutions and the majority of the study sites are now actively recruiting patients. More information can be found on ClinicalTrials.gov, and we anticipate to have the last patient in the trial in Q4 2023, submitting the NDA in the spring of 2024 and launching an early 2025.

And then if we go to Page 14, a few words about the investigator-initiated trials. INASED has recruited approximately 110 patients and there's recent investigator meeting in Paris to boost recruitment. SESAR has included over 575 patients and the interim analysis is underway. And these interim results will be reviewed by our data monitoring committee that will determine if the study is to continue or be terminated for safety, futility or superiority reasons. And then we have ISCA, which has been completed with 196 patients and the manuscript has been submitted to peer review.

Now we can move to Page 15, please. In the third quarter of 2022, we continue to increase our activities after COVID organizing workshops, symposium, exhibition groups, congresses and intensive care meetings in Europe, Asia and Latin America.

And now if we can go to the next slide, I think that's back to you, Johannes.

[Operator]

Okay. Can I just confirm that we have both speaker lines on mute. Are you attending the conference, I just want to confirm that you're both still connected.

[Peter Sackey, executive]

Yes. Can you hear me?

[Operator]

I can hear you.

[Peter Sackey, executive]

I think Johannes or Johan were -- can you -- they haven't been able to hear.

[Johan Spetz, executive]

Can you hear us?

[Operator]

Yes, we can hear you.

[Johan Spetz, executive]

Okay. So have you heard anything from Slide 16 or should we go back to the top?

Yes. So we could just start over on the financial section. So going back to the top of Slide 16, where we can see our financial results for Q3, 2022. We report net sales of SEK 27 million for the quarter. That is down 6% relative to a year ago and down 10% in local currencies. And as Johannes has already described, the underlying dynamic here is that we see growth in Germany and our other direct markets, but a decline in sales year-over-year in -- from our main South American distributor, which leads this aggregate decline.

And if you look at the gross profit, we report SEK 8 million in gross profit for Q3, 2022. That's also a slight decline relative to a year ago. The gross margin remains at a robust 70%. That is up relative to 68% in Q3 of last year. And the improved gross margin here is mainly an effect of higher prices for our main products and also lower freight costs relative to a year ago.

EBITDA for the third quarter, we booked SEK 25 million negative. That is the result of OpEx for the quarter, so selling, admin and R&D costs of SEK 50 million in total. That is up from SEK 35 million in Q3 of 2021. The increase here is driven by the fact that we've started depreciating on our European registration. We have U.S. commercialization efforts that are ramping up still in the early stage, of course, but coming in here. And then also, we have some nonrecurring costs in the quarter related mainly to our NASDAQ uplisting project.

So we can move to the next slide, Slide 17, please. Let's take a look at our cash flow and cash balance. So cash flow from operations during Q3 was negative SEK 27 million and cash flow from investments, negative SEK 40 million. And the cash flows from investments, as you know, are mainly related to clinical studies and registration work taking place in the United States as well as our pediatric study in Europe.

So in total, we report cash flow for Q3 of minus SEK 67 million, which takes us to a cash balance at the end of the quarter of SEK 676 million. That's down from SEK 722 million at the beginning of the quarter. And it could be interesting also to add that out of this SEK 676 million that we have in the bank today, roughly 25 -- of this, we have roughly USD 25 million, roughly SEK 275 million out of this total cash position is already converted into dollars. And with this cash, we expect to be fully financed until breakeven.

And as we described in the Q2 report and earnings call, we have initiated a cost savings program, and these efforts continue. So we look at various ways of increasing the efficiency of our operating cost base. To some extent, our efforts here are a bit obscured in Q3. If you look at the total OpEx number in Q3 relative to Q2, there are some one-off items in the Q3 numbers that means that, as I said on the previous slide, we have SEK 50 million in OpEx in Q3 of this year, which is up from SEK 46 million in Q2.

And there, we have a couple of nonrecurring costs behind that. So related to organizational changes and again, the upcoming move to the Nasdaq main list. But we are confident that we are on the right track with regards to reviewing and trimming some of our operating costs to become more efficient.

And as a reminder, we don't have any long-term debt on our balance sheet. And as a final update on this slide, the move to the Nasdaq main list is progressing according to plan. We continue to expect to start trading on the main market here in Stockholm before the end of the year.

And then just very briefly on Slide 18, you can see our current largest shareholders, not much change there during the quarter, and we are, of course, very grateful for the support of the shareholders on this list and other shareholders as well.

Okay. With that, I will turn the call back to Johannes.

[Johannes Doll, executive]

Yes. Thank you, Johan. So let's take Page 19, please, trying to close the loop to where we started. We have seen and to some extent, are still seeing a very special year with a large number of external factors and uncertainties impacting our performance. This has made it quite difficult for you to assess our performance in an objective way because there are so many factors at play and comparisons were difficult with the last year as it's also heavily influenced by COVID-19 effects, such as inflated patient numbers, irregular purchasing patterns, stock building, et cetera.

So the big question that a lot of companies are trying to give an answer to is, how long will this last? When can we expect to come back to whatever the new normal looks like? And of course, we don't have a crystal ball either, but here's what we are expecting. We know that Q4 of last year was the last quarter that we saw that had a very, very high number of COVID-19 patients being the ICUs. There were more COVID-19 waves after that, but patients did not get so sick, so the ICUs were less affected.

So in Q4, we are still up against a tough comparator for that quarter. But what most of our customers expect and they are, of course, on the front lines is that we should see more normal patient numbers from early next year, which should then also make comparisons of our sales versus last year, much more meaningful as we are no longer comparing 2 quarters with a high degree of COVID 19 impact.

Some issues, most notably being staff shortages, we will probably have to live with for a little longer, but we're expecting that we are in a much more normalized situation from 2023 onwards.

But at the end of the day, the success of Sedana Medical will, of course, not depend on whether we will be back to a normal life quarter earlier or later. Thankfully, as we have said, we have a cash balance that allows us to deal with different scenarios here. But it's also not about whether or not we will get a very severe flu season this year. We are here to change behavior in the ICU and establish a new paradigm, which is to make inhaled sedation the new standard of care in ICUs.

And I hope that we have brought across that we're working hard on that and that we are making good progress to turn this vision into reality.

With that, I would be very happy to take your questions. And for now, thank you very much for listening.

[Operator]

[Operator Instructions] Our first question comes from the line of Oscar Bergman of Redeye.

[Oscar Bergman, analyst]

I have a few for you today, but I guess I can start off with asking 2 and then moving on to the 2 other questions. First off, I'm wondering about the U.K. market approval and specifically, how long you think it will take before -- sorry, between approval and first sales?

And second, I'm wondering if you can give some more details on label conversion in Germany. And also if you think that it will be less burdensome to get customers outside of Germany to start using on-label rather than off-label.

[Johannes Doll, executive]

I'll take them one by one. So U.K., as I said, just to briefly repeat, in January, MHRA has told us they will give us an update. That update should then include when we can expect approval. So ,of course, to some extent, it's still a little bit speculative of when that will happen, but I'm, of course, really, really hoping since they've made us wait so long without a real reason or content reason behind it. But it will not be too far after that January update.

Now your second part of that question, how long will it take between the approval and first sales? The approval in the U.K. for me is important for 2 different reasons. One, the obvious one is we can start selling isoflurane, the gas in -- Sedaconda isoflurane in the U.K. as well, but which today we can't.

Secondly, and probably even more importantly, we can benefit more from the tailwind that we should be getting from the NICE guidance that we already got back in January of this year, which not only recommended Sedaconda ACD for the use of inhaled sedation in ICUs, but it also confirmed a health economic benefit. So hospital is saving money if they're using our therapy. And that is almost the larger effects because we've lived in this weird situation where we have a recommendation for a therapy that is not yet approved.

But the first effect of when can we start selling the gas. That should be relatively soon after we get the approval. So you should not expect a long pricing and reimbursement process, but we can be up and running basically as soon as we have supply ready for the U.K.

Second question around on label conversion in Germany and how that is developing. It's a little bit in line with -- or not a little bit. It's in line with what we have been previously saying, it's a multistep process, and we're making good progress. So first of all, of course, we need to make sure we are listed with all the hospital chains or the purchasing organizations. There's been quite a few negotiations during especially the first half of the year. A lot of that work is done. So we have been successful in getting the product listed with the most important hospital chains and so forth. And then it becomes a kind of account by account undertaking to convert off-label to on-label. And as we predicted, we see the full range. So there's been a few customers that have converted quite fast. For them, it was a little bit of a no-brainer. If there's an on-label version available. Why should we keep using the off-label Isoflurane. So some of them have been very fast.

Others, that also relates to the third question that you had asked, say, look, we've used off-label isoflurane for so long. Nothing has really happened. We didn't have problems with that. So why should we pay a premium, here. So we are seeing progress. We are seeing the conversion is increasing over time. But of course, as we've previously said, it's not an overnight switch.

Your last question, which was kind of an interesting one. Will it be less burdensome in other countries to convert. Now we have not too much experience in these other markets. But from what we have seen, it's probably fair to say yes. And the reason for that is that we have seen faster uptake of faster conversion of the customers, for instance, in Sweden and some of the other markets where we've launched already. The issue is that these tend to be the smaller market. So it's not super visible in the numbers. But the reason for that conversion being a little bit easier is that those don't -- those countries don't tend to have the same track record of using the product of label for so long. For them, it's more establishing inhaled sedation and that comes with on-label Isoflurane. It's not so much a switching over from off-label. So to an extent, yes, it's a little bit easier to convert in markets outside Germany.

[Oscar Bergman, analyst]

And just going back to the question about conversion in Germany. Is it possible for you to give some sort of ballpark figure, in terms of portion of sales in Q3 that was on-label and/or off-label?

[Johannes Doll, executive]

No. So we are not disclosing how our sales break down into devices and pharmaceuticals. So unfortunately, I can't give you that breakdown. But you can, of course, assume that the majority of -- the majority of sales still comes from the device side.

[Oscar Bergman, analyst]

And then also, it's my 2 last questions. The first one, staffing shortages, I'm just wondering if you can give some more color on how that has developed in Q3 versus Q2? And how it looks in Q4?

[Johannes Doll, executive]

Yes. So these are -- I think are publicly available data. So there's a daily survey. Basically, that's most -- not all, but most ICUs in Germany fill out. And they have 3 choices. One is we are operating according to normal. We are operating under partly restricted operations and our restricted operations.

And then it's also further information about whether that's due to staffing, whether that's due to equipment that is missing or other reasons. And what you will typically see these days, it's almost always because of staffing. So after COVID, of course, it's quite rare that an ICU is not fully equipped with ventilators and so forth.

So the development we've seen this year, if you take the ICUs that report that they are operating under restricted or partly restricted operations. So things are not normal, if you like, in the first 3 quarters of this year, this number has always been above 60%. So there's more ICUs being restricted than of ICUs operating under normal conditions. Between Q2 and Q3, the equation. it's gone up a little bit, but that's in the area of 3%. So I wouldn't over interpret that. I would rather say the situation has not yet relaxed and we're still seeing quite high level of restriction.

And the trend in the beginning of the fourth quarter here, which again is public data, so I'm not giving you any secret here. It seems like more ICUs are seeing restrictions, which is the function of the staffing issues not being fully resolved. And at the same time, you see the seasonality that more patients are in ICU again. So once you enter the winter months, there's more respiratory infections, not necessarily only COVID but also flu and pneumonia and so forth. You always see more loads in October, November, December than in the previous month. So that combination of less nurses more patients causes more ICUs to be a bit restricted.

[Oscar Bergman, analyst]

All right. So last question before I head back into the queue. In the report, you gave some optimism about high interest at the U.S. centers. And I'm just wondering if you can say anything about the feedback, if you've got any.

[Johannes Doll, executive]

Are you talking about the U.S. trial? Or are you talking about commission?

[Oscar Bergman, analyst]

The trial.

[Johannes Doll, executive]

Maybe, Peter, can give a little bit of an update.

[Peter Sackey, executive]

I'm sorry, could you repeat the question? Can you hear me?

[Oscar Bergman, analyst]

The actions we're getting from the different trial prices in the U.S.

[Peter Sackey, executive]

Yes. No, there's a lot of excitement. Can you hear me okay? So this is -- this study is something that they have known about for years, many of these clinics and unfortunately, it hasn't been approved, so they haven't been able to use it. So they are very excited about bringing this to the U.S. And the cost experience is that each site has with these run-in patients. These are open-label patients. So they actually get to see how the effectiveness of this therapy and also how quickly patients wake up. So that has created a lot of excitement about getting these studies done. So we're very happy about the way these interactions have been with the study sites and also for future ambassadorship, you could say.

[Oscar Bergman, analyst]

Just a final question before I let the other analysts ask questions. In general speaking terms, is the U.S. market dynamics different from the EU? Would it be easier to see a sales ramp-up of your product there? I mean, are they more interested in using sedated inhalation compared to intravenous?

[Johannes Doll, executive]

So this is a very comprehensive question, of course. But there's -- is it different? Yes, of course, it's different. And when it comes to what ramp-up to expect, there's mainly 2 things to keep in mind. One is the U.S. does not have the same experience off-label experience that we could build on in Europe. So we'll be launching something completely new. So that is something for us to keep in mind from what we need to do from an education perspective, market preparation perspective, awareness creation perspective and so forth.

At the same time, this is also a very positive thing for us because it really allows us to launch inhaled sedation as a complete concept. So we can come with a convincing product offering, hopefully with good convincing clinical data, hopefully, with convincing health economic benefits and there's not so much history around using off-label or et cetera. So from that perspective, I'm really looking forward to that.

We're very, very encouraged by the feedback we are getting from as Peter is saying, from the clinical trial side, which, of course, as you know, these are very rapid institutions. A lot of the important opinion leaders are involved in getting the quality stem from those people and hearing the excitement and hearing that they can really tell the difference and with those patients that they have seen. That encourages me a lot, that we should not just come with kind of a me-too product, here an alternative way of sedating the ICU patients, but really something that can make a difference.

And as we've talked about before, the space of sedation in the ICU is one that hasn't seen much innovation in a very, very long time. So this is something that you're dedicating your academic or clinical career to, you absolutely have to be part of this movement, and that's the excitement that we are seeing with these starting teams right now. And hopefully, we will see the same level of excitement once we launch with our future customers.

[Operator]

And we have one further question in the queue at this time, and that's from Peter Ostling at Pareto Securities.

[Peter Östling, analyst]

Thank you very much. Good afternoon, guys. First, a quick question on there is some evidence of that we are maybe entering normal to maybe more severe flu season. I'm just interest -- curious to see, I mean, you alluded to that we had this situation with a lot of restricted ICUs in Q4, '21 and yet you had this fantastic sales. In practice, how does it work when you get this situation with a huge inflow of patients, but you have restricted ICUs?

[Johannes Doll, executive]

Yes. So what's typically happening is that hospitals start moving elective surgeries. So it's not the case that kind of you have patients showing up at the hospital that need to be intubated and suddenly needs life-saving support. Of course, they are not being sent away. But usually, the capacity utilization is so high that then they wouldn't run surgeries that they could also postpone because for some surgeries, you don't know whether that patient will need intensive care after the surgery, whether that would be in need for a ventilator for intubating that patient and ventilating them for a while. So it's safer from a hospital perspective, but it's not a life-threatening situation, and you can move the surgery, that is typically what they do.

[Peter Östling, analyst]

Okay. So elective surgery is the way to balance the inflow and capacity in that situation. Okay. That's clear. Then I'm just a little bit curious. You have -- you've said that you will have around 25 sites in the U.S., for the U.S. drives. I believe you have 19 sites now listed on the clinicaltrial.gov. Do you think that -- or do you expect that all the 25 sites will be listed or up and running before year-end or around year-end early '23?

[Johannes Doll, executive]

Yes. So as always, you have done your homework very thoroughly, Peter. So yes, you can indeed see the list on clinicaltrials.gov, we have a list of, I think, in '19 right now. And yes, the plan is to open quite a few sites over the next coming weeks. Doesn't mean that we will not consider opening more sites if that makes sense next year. But yes, we should reach that number relatively soon.

[Peter Östling, analyst]

Do you expect -- if we get this situation with a severe flu season, maybe some I don't know, COVID spread or maybe RSV spread. How will that affect your recruitment pace during Q4 and Q1?

[Peter Sackey, executive]

So that's a balancing act, of course, Peter here. It's always good to have patients in the ICU that's eligible for trial. So I think the net effect will likely be the benefit for the trial that more patients are in there intubated. At the same time, if staff get very stretched that can, of course, impact the ability to run a clinical trial if the ICUs are overflow with patients. I doubt that, that's going to be the case, though.

[Peter Östling, analyst]

Could you say anything about -- I'm back to Europe now? Could you say anything about the balance between -- you mentioned that you have made some price adjustments in the quarter. The balance between price and volume when you come to these growth numbers in Germany and other direct markets. Is it mainly price or is it mainly volume? Or is it more 50-50?

[Johannes Doll, executive]

Yes. So we -- as you know, we are, of course, not disclosing the prices on a product level. And the reason for that is that we have different prices and different customers, also between countries, of course differences. We have adjusted prices this year, as you say, not to a crazy extent but mostly to compensate for the fact that during COVID we made a conscious decision not to raise prices because we wanted to support customers. We didn't want to benefit off of that crisis situation.

In return, we have done raised the prices this year more than we would usually have. However, of course, our ambition is to become standard of care and that you can only become if it still makes sense from a customer perspective to -- actually, when you look at prices of course, we're looking at -- we will always charge more than you will pay for intravenous sedation. If you only look at the product cost because we bring a better product. But we also don't want to be in a situation where we charge 10x that because then we believe we would end up in a niche and not as many patients would benefit from our therapy as we think they should. So I can't give you an exact breakdown between price and volume and the numbers that we've seen.

But of course, what we are looking at and what we're very focused on is to see volume growth and especially an increase in the penetration. So the share of ventilated patients that get inhaled sedation is a key metric for me. So it's not just raising prices and hoping that's being reflected in the sales is really driving the volume.

[Peter Östling, analyst]

And that market share has probably increased during Q3 since patients in the ICU is dropping 10%, but you still have some volume within the 6%, for instance, in Germany.

[Johannes Doll, executive]

That's correct. Unfortunately, we don't have market share numbers as you know, otherwise, it would be much easier to communicate. But yes, the penetration has increased. As by the way, it had already during the second quarter, even though we saw a quite sharp sales decline, but the sales decline was less dramatic than the decline in the number of patients…

[Peter Östling, analyst]

You're talking about -- well, like all companies are talking about problems or disturbances in the supply chain. In your case, what exactly is the problem in your supply chain or has been.

[Johannes Doll, executive]

Well, it's -- the problem is probably a good problem to have because at least we've still been able to grow the gross margin, which I think set us apart from many other and many other companies. But of course, what we are experiencing, we depend on a number of suppliers. We don't have our own manufacturing, wouldn't make sense either for a company our size. And of course, like everybody else, they are trying to increase prices. So there's a lot of negotiations with our suppliers ongoing. But the overall trend is for raw materials or components or parts for manufacturing services, those costs tend to go up rather than down these days.

[Peter Östling, analyst]

Is it plastics? Or is it -- because I mean the device is mostly plastic and some membranes inside the device.

[Johannes Doll, executive]

I'm hoping that my engineers are not listening, but you're saying it's mostly plastic.

[Peter Östling, analyst]

I'm simplifying things you know.

[Johannes Doll, executive]

No, but I mean that's -- of course, there are some key components, and there is some cost pressures in certain elements of that. But as you've seen in the numbers so far, we've been able to compensate for that and actually overcompensate that. So that's given the price adjustment and the freight cost management.

[Peter Östling, analyst]

Have you felt that this pressure has been worse in Q3 or started to ease in Q3 going into Q4? Or is it more of the same? And do you expect to be able to compensate for any increased cost even going further?

[Johannes Doll, executive]

Well, that is, of course, always an option, right? We need to make sure that we have a sustainable business. At the same time, it's the balance, of course, we don't want to price ourselves out of the market. There's, of course, also differences between the different products we are offering. The Sedaconda ACD is a very innovative product where we don't have much competition.

So our pricing power is a bit higher. If you look at certain adopters or syringes where you could -- caving systems where you could use an alternative supplier as well. We can't raise the price in an unlimited way, had to changed much. I mean, we are not dealing with thousands of suppliers, right? So we are in constant exchange with them, and the dialogues have been going on for a few quarters now. But I wouldn't say that there has been a massive change between the quarter.

[Peter Östling, analyst]

And my last question, I guess, the plans to establish a second source in Europe has been put on hold, maybe due to the war in Ukraine?

[Johannes Doll, executive]

Well, so second sold is already up and running for the syringe. It's one of the important accessories. And we are working on establishing it also for the main product. We are basically ready to do that. Of course, now we've seen a year where the sales have been a bit on the lower end.

And of course, you have to be a little smart about the timing of when to introduce a second sold because otherwise, you are distributing low volumes over 2 sides, and then you haven't gained much, especially in a situation where the inventory levels are a little bit higher. But yes, we are making progress on that. They're basically ready to move. It's more about the right timing from an inventory and demand perspective.

[Operator]

[Operator Instructions]

[Johannes Doll, executive]

In the meantime, I can get to 2 quick questions that we received via the chat. One was around the inventory levels in South America, and what we can say about that? And when we are expecting that to normalize?

So yes, of course, we can comment on that. So what's happened here is in Q4 of last year, that's a specific distributor like probably a lot of people in the world and we're anticipating a big COVID wave that would be hitting the ICUs, which turned out to be the Omicron wave where very few people were ending up in the ICU. So they had very, very high stock levels, which they have been working through during the year. We still have a slightly higher stock levels than we would want it to be.

At the same time, South America and specifically that distributor is one that where we see a lot of potential for the demand in the market in light of the number of patients is still going very well. It's a dedicated team that is only focused on our products within that distributor. And there we really do a good job. So it's one that we're really focused on. We've actually hired the person in Brazil. We've added Brazil to the number of countries that distributor is covering.

So overall, things will look bright for that distributor in all likelihood, and of course, I don't have a crystal ball exactly, but what I would expect is that the demand in the sense of not in-market demand, but the repurchases you will see from that distributor will still be low in Q4, and then we should be back to a normal situation in Q1. So that's as much as I can say about that.

And then there was a second question around the SESAR trial, whether we could give a little bit of an update. I think Peter has done that during the presentation. But maybe, Peter, you can say a few words again about where we are with the SESAR trial.

[Peter Sackey, executive]

Yes. So as you can see from the numbers, they have a little bit more than 100 patients left to enroll. And the interim analysis is with the statisticians and it will not be a presentation of the actual data. We'll only be a guidance whether they should continue the trial or they should stop the trial because of security or safety or futility. So we're waiting, of course, to hear what the interim analysis will show. And then, of course, we're waiting to see that trial will wrap up and the data be presented.

[Operator]

Okay. Currently, there are no questions from the phones at this time.

[Johannes Doll, executive]

Okay. Perfect. And then I would like to thank you for spending the time with us. I understand there was a little technical issue in the middle here. So apologies for that. Thanks a lot, and you all have a great day.