Bactiguard Holding AB (publ) (BACTIB) Earnings Call Transcript & Summary

Good morning, and welcome to the Bactiguard Q2 Report 2021. [Operator Instructions] Today, I am pleased to present CEO, Cecilia Edstrom; and CFO, Gabriella Caracciolo. Please go ahead with your meeting.

Thank you, operator, and good morning, everyone. I hope you're well, safe and enjoying this summer. This quarter, we closed our books in record time and brought the Q2 report forward by almost a month compared to last year. And I hope this will add some value for you as investors and analysts, although I do know that we are competing with several other companies reporting today, so it's a busy day. The temperature is rising in Sweden, and I can say the same about our business. So let's start by looking at some business highlights on Slide #2. So if we go to Slide #2, please. We have a lot of activities ongoing and made significant progress, both in the licensing business and through a new partnership for our own portfolio. The most important breakthrough is, of course, the launch of ZNN Bactiguard in Europe and select MEA markets less than 2 years after the strategic partnership was established and only 1 year after we took the strategic decision to shift focus at a launch in Europe ahead of the U.S. to take advantage of the CE mark that Bactiguard already had. I am so excited about our partnership with Zimmer Biomet and proud of the progress we have made thus far. It's a major achievement by our joint development team and the result of an excellent cooperation, and this bodes very well for the future. At the same time, as we're launching in Europe, multicenter clinical trials are being initiated in several European countries to gather further evidence that ZNN Bactiguard implants reduce postoperative infections in permanent or semipermanent application. Health care is still under strong pressure in major parts of the world because of the pandemic, and sales of BIP products have not developed at the pace we expect due to reduced regular health services and postponed elective surgery. However, the interest in infection prevention is increasing and this has resulted in new strategic partnerships. In Sweden, we have entered leading pharmacy chain, most recently Apotek Hjärtat. We have also entered a partnership with schülke, a leading global manufacturing distributor of infection prevention and hygiene solutions targeting German hospitals. In Spain, we have partnered with Farmaban, a company with significant expertise in wound care and clear intentions to grow. These are 2 large and important European markets with the potential to generate significant growth for our wound care portfolio going forward. And I look forward to following developments in this third quarter when the launch will take place. We have also entered a completely new market segment, veterinary care, a sizable segment with significant potential for growth. We took the first step, together with Musti Group, the leading chain for pet products in the Nordic region with more than 300 stores in the Nordics as well as online sales. So those were the business highlights. Let's now turn to Page #3 or Slide #3 and look at some of the financials. Sales in the quarter were 5% lower than last year, but organically, we grew by 5%. This is below our growth target, of course, and not in line with our ambition. Our business with BD has been negatively affected by lower general occupancy and postponed elective surgeries over the past year. But the recovery we began to see in the autumn has continued. So in this quarter, revenues were at par with last year, although significantly affected by weaker U.S. dollar. We also received a milestone payment from Zimmer Biomet, 1 out of 2, under the license agreement, which increased total license revenues. And as the implants now reach end customers, they will start generating royalties to Bactiguard and increase our recurring license revenues going forward. BIP sales were significantly lower than last year, and there's some explanations to that, that we will come back to. However, we do see positive developments in some regions like Europe and the Nordics where sales are developing positively. The investment in our own sales force in the Nordic countries is already beginning to show results, and that's very reassuring. EBITDA was significantly lower than last year, as you can see. And the main drivers were lower sales, some one-off costs and investments in sales and marketing, which will generate increasing revenues ahead. Gabriella will come back to more details on the rest of the financials, so I'll leave the rest for now. Let's take a global outlook and see where we are in terms of COVID. In the second quarter, the center of gravity, we are now on Slide 4, I must remind myself to say that, Slide 4, global outlook. The center of gravity has shifted to Southeast Asia and MEA, as you can clearly see from the slide, on the purple bars. There have been lockdowns in several countries in Southeast Asia as well as in India. India is stabilizing but still facing enormous challenges in health care and also with the vaccine rollout. The U.S. is ahead of the curve. EU is gradually opening up, but increasing rates are being reported based on travel to the southern parts of Europe and linked to the European Cup in football. And to date, there have been more than 180 million cases and more than 4 million deaths. That's a horrible number. But again, if you put back in the context of antimicrobial resistance, that runs the risk of taking 10 million people lives by 2050. So we need to focus on prevention, and that has become very clear. So let's turn to Page 5. How has this impacted our business in the quarter? The U.S., as I mentioned, we see a recovery following massive vaccination programs, and they are well ahead of the rest of the world in terms of opening up elective surgeries and other regular health care. So we expect to see that the stabilization we've there had with BD will continue. And it also bodes well for Zimmer Biomet, who has a big part of their business in the U.S. In the Nordics and Europe, elective surgeries are still low but gradually catching up. But I'd also like you remind you that there's a huge backlog to start managing and that will remain at least until 2020. But it also opens up opportunities for infection prevention. In the Middle East and Africa, we've had major impact on the business. Elective surgeries have been at a minimum and there's been limited access to hospitals. Some planned tenders have also been delayed. The existing ones have been extended. But we now see that increased activity, and I'm very hopeful that this will generate more business in the quarters to come. In India, that's been a major impact on the business because effectively the hospitals have been shut to outside visitors. But we have developed our distribution network with channel partners who have their foot in the door, which has meant that we have been able to access the surgeons, the hospitals. And we've also conducted a lot of training online across India and many other countries. The situation in China is stable, but there's still some travel restrictions, which means that there's limited physical access to the hospitals and health care professionals. So we're working on supporting training and digital activity. In Southeast Asia, we've had a temporary impact on the business, whilst it still looks healthy. Malaysia has been in lockdown for 2 months effectively, but we are in a prioritized and critical industry which means that we can continue operating but at limited capacity. So our manufacturing capacity has been temporarily reduced, something that we've been able to overcome and manage both our own orders and as well as deliveries for Zimmer Biomet. Let's now turn to Slide 6. Just over a year ago, we acquired Malaysian Vigilenz, and that has been a lucky strike for us. We knew what we were buying, but not exactly how good it was, because in addition to having the CE mark orthopedic implant, they also have an attractive portfolio of wound care products for infection prevention. So in connection with the outbreak of the pandemic, we quickly developed products for this infection based on the effective nonalcoholic wound care solution Hydrocyn, and we are now expanding the business further. So based on the Bactiguard-coated trauma implant that was CE marked in 2018, we signed the agreement with Zimmer Biomet in 2019 and that was a clear door opener. We acquired Vigilenz in 2020, in February. And already in March, we launched disinfection. In 2021, in January, at the beginning of the year, we extended the CE mark that we already had to include ZNN Bactiguard. And in April, we started production. The major breakthrough was the European launch in June. And at the same time, we are also expanding and launching wound care in Sweden. And as I mentioned earlier, in the third quarter of this year, we will launch wound care in Germany and Spain as well as Aniocyn for pet and animal. So let's take a closer look at the Zimmer Biomet launch on -- and turn to Slide #7. Imagine that 1 in every 10 drivers of a car would be involved in an accident, or that 1 in every 10 cyclists would also be involved in an accident. That is luckily far from reality. But we still wear seatbelts and helmets and have life insurance. In health care, 1 in every 10 patient is exposed to complication infection, which leads to longer hospital stays, increased complication and sometimes even death. This is how Zimmer Biomet has positioned the Bactiguard technology to their customers as life insurance that everybody deserves. Let's turn to Slide 8, please. If we take a closer look at the European data, there are more than 3 million cases of hospital-acquired infections every year, resulting in 16 million extra hospital days. Huge cost to society, but most importantly, a very big sacrifice for patients and their families. This increased stay in the hospitals results in cost of EUR 7 billion per year. 65% of the hospital-acquired infection cases are related to biofilm on medical devices. There's a 30% infection rate in orthopedic trauma cases. And as high as 80% in open fracture cases. So to me, this is a clear indication that the Bactiguard coating is very much needed in this application and we very much look forward to following the rollout. Let's turn to Slide 9. Zimmer Biomet is making significant investments in this launch, one being the investment in multicenter clinical studies in several European countries to further validate the Bactiguard technology as efficient and safe in reducing postoperative infection. And this will clearly be beneficial for other applications, too. What has been initiated initially is a multicenter study for patients with severe tibial fractures, i.e., the lower part of the leg where they need fixation with intramedullary nail, which you see on the right. The total study is for 500 patients, and we're looking to further verify that they all reduced infection rates after fracture fixation. So the primary endpoint is to look at fracture-related infections after 12 months. There's also a secondary endpoint related to fracture healing and quality of life. And this is an important aspect that Zimmer Biomet is following closely, to see how can the patients regain quality of life after an accident or after an elective surgery. The total study will last for 3.5 years, but there will be intermediate measure points. And this will continue to be rolled up. Let's now turn to Page #10, what I alluded on initially how we've expanded the business in Vigilenz. Started with a portfolio of wound care solutions that Vigilenz was offering to hospitals, primarily in Malaysia. That expanded the Hydrocyn disinfection, which we are selling in Sweden. We are still waiting for the European clearance to sell disinfection solutions across Europe because it's part of a different regulatory framework than wound care solutions. The wound care solutions, we've expanded to -- under the frame of Bactiguard wound care solutions and we are gaining very good traction through partnerships. Last but not least, Aniocyn veterinary care for veterinarians, safe and effective infection protection that we will continue exploring in Sweden, in Europe and many other markets. So let's turn to Page #8. We are developing our business model by broadening our product portfolio for infection prevention -- Slide #11, sorry. I said Slide #8 but it's actually Slide #11. We're developing our distribution model. We broadened our product portfolio for infection prevention, which has given us a stable base. It gives us more relevance vis-a-vis end customers but also vis-a-vis distributors. We will be capitalizing on the increasing need for infection prevention and making investments in sales and marketing activity. We have our own sales force in the Nordics and in Malaysia. And we will employ more staff, moving to a hybrid distribution model where our sales force will be maintaining the contract, developing and maintaining the contracts with the key opinion leaders and major hospitals and where distributors will be more responsible for physical distribution. The aftersales service will be provided both by us and by our distributors. By moving to this hybrid model, we expect to see positive outcomes like we have seen in the Nordics and expect to see more of going forward. And with this, we believe we are very well positioned for the bounce back once health care services return to more normal activity levels. With that, I'd like to hand over to Gabriella for financial update.

Thank you, Cecilia. So good morning, everyone. My name is Gabriella Björknert Caracciolo, and I'm the CFO of Bactiguard, and I will go through the financials. So if we can go to Slide 13, please. On this slide, we look at the sales development and profitability in the rolling 12-month perspective. Looking back at the last 15 months, there is a clear negative impact on our sales due to the pandemic. And the backlog of regular health care and elective surgery continues to build up and still need to be addressed. We now start to see a sign of recovery, mainly in licensing business, but also for stabilization of sales of the BIP portfolio in certain markets. Starting with the licensing business, the blue bar in the chart. We have a solid platform in the recurring license revenue from BD. Revenues from BD vary slightly between the quarters but are essentially stable on a yearly basis. The revenue from BD is impacted by the weaker U.S. dollar rate. The royalty income decreased slightly in the second quarter due to the negative currency effects of negative SEK 3.8 million. Currency adjusted, the total revenue from BD resulted in organic growth of 18% compared with Q2 2020. One of the highlights of this quarter, as Cecilia mentioned, is that we have initiated the production of coated Zimmer implants and this will start to generate license revenue and contribute to the recurring revenue later this year. During this quarter, we reached a milestone payment with Zimmer Biomet of SEK 8.5 million connected to the launch of coated trauma implants in selected EMEA markets, shown as the yellow part of the bar. Due to the Vigilenz acquisition last year, we have a broader product portfolio generating revenue sales adding to the BIP sales, here shown in the green bars. And to mention a few highlights, the growth was primarily driven by wound care products and new agreements will have been signed. We have also launched wound care in the Nordics for the veterinary segment together with Musti Group. All these agreements will start to generate revenue later this year and most likely start to generate revenue end of Q3. During Q2, the sales of BIP products accounted for approximately 1/3 of the revenue, which is roughly at the same level as for the previous 6 months. The main drivers for the EBITDA development are the current level of revenue streams from the different segments, in combination with investments in sales and marketing. And due to the pandemic, there is an uncertainty in the market and the future development is still a bit difficult to assess. Next page, please. Looking at the financial overview for the second quarter compared with the same quarter 2020. The revenue totaled SEK 46.8 million (sic) [ SEK 46.0 million ]. The revenue dropped compared to same quarter last year, totaled SEK 48.2 million, a decrease of negative 5%. And currency adjusted, an increase of plus 5%. If we look at the first 6 months compared to same period 2020, revenue totaled SEK 87.8 million, and in 2020, SEK 96.3 million, a decrease of negative 9% and currency adjusted, a decrease of negative 4%. In both quarter 1 and 2 2020, Bactiguard had a low order intake for disinfection due to the outbreak of COVID-19. EBITDA for the second quarter landed on SEK 1.8 million and with an EBITDA margin of 4%. Last year, EBITDA for the same quarter was SEK 10.5 million with a 22% EBITDA margin. This quarter, EBITDA is impacted by inventory write-down for obsolete inventory. The inventory was planned to meet higher demand than the actual sales during the last year. That's in combination with higher shipping and purchasing costs for raw materials driven by lower global transportation capacity and currency movement, have also had a negative effect on the item raw materials and consumables. For the first 6 months, the EBITDA amounted SEK 3.7 million with a margin of 4% compared to last year, SEK 24.9 million, with a margin of 26%. The net result of the second quarter is negative SEK 12 million, and this related to depreciation of our technology of negative SEK 6.4 million, which is the same for every quarter and according to plan. The cash flow is not impacted by the depreciation. Now turning to the next page. Here, we have an overview of our cash flow. For the second quarter 2021, we had a positive operating cash flow of SEK 5.5 million, mainly impacted by the new license revenue, an increase of accounts receivables at the end of the period and also by a minor stock increase. At the end of the period, we had utilized SEK 14.3 million of the overdraft facility. To summarize, we see high activity level, and forward-looking, we are optimistic and convinced that our technology will play an important role when it comes to infection prevention. And with that, back to you, Cecilia.

Thank you, Gabriella. We now turn to Slide 16. We've had a challenging first half, mostly related to the COVID situation globally, but we do see an increasing interest in infection control and the Bactiguard technology. And we are building a very strong space for future growth and bounce back. We start by looking at the license business. The rollout of ZNN Bactiguard in EMEA is very important. And our partnership with Zimmer Biomet has the potential to expand Bactiguard's license business significantly. Now that we have introduced the product in Europe and other select EMEA markets, we will intensify the focus on the U.S. and the rest of the world. At the same time, multicenter clinical trials will be initiated for long-term applications, strengthening the clinical evidence, but also giving us access to a very important key opinion leader network across Europe, who will now be exposed and experienced in the Bactiguard technology, and that is very valuable. If we were to look at the potential for the Zimmer Biomet cooperation, you could say that if all Zimmer Biomet trauma implants were coated with the Bactiguard technology, license revenues would be about 3x those we receive on an annual basis from BD. And if we look at the potential in EMEA, that represents about 20% of the Zimmer Biomet business. But it's not only important for those purposes. It's also -- our partnership is also important as it provides a quality staff to our technology. And also, it verifies the application in permanently implanted device. But we're also looking at expanding into new applications. And as I mentioned, we have several interesting dialogues ongoing. And the temperature is rising in those dialogues, which means that we also need to strengthen our team, and we are recruiting a few new team members to strengthen the licensing team, and that will be a very welcome addition. Looking at the Bactiguard portfolio, we are expanding into new applications and market segments and the veterinary segment is clearly exciting, and I think there will be more to come. We're enhancing our distribution model for better access to end customers and key opinion leaders to drive the growth by focusing on generating recurring sales to hospitals as well as home care and veterinary care. The consumer segment is also something that we haven't flipped into, but that will be an important brand builder for Bactiguard. And we are establishing new strategic partnerships. For example, the one we've established with schülke in Germany and Musti Group for the Nordic countries. In order to enable this growth, we are investing in training and marketing activities and COVID has actually accelerated our digitalization. So we've been able to provide seminars and training to many more health care professionals than we have done in the past by traveling digitally to India, to the Middle East, to China and Southeast Asia. The clinical studies we're investing in are important. And the clinical evidence we have is the strength and assets that we have. And it also creates a barrier to entry to new technologies and new entrants. And we are very well positioned under the new regulatory framework MDR for Europe. And we've also added MDSAP to have easier access to Brazil and Canada. Let's turn to Page 17. So our financial targets remain the same. We reiterate them. We are looking at average revenue growth of 20% per annum over the 5-year period and an EBIT margin of at least 30%, clearly aware that we've not reached that level in the first half, but we are positioning ourselves for future growth. Let's turn to Page 18. So why should you invest in Bactiguard? We believe that Bactiguard infection prevention should be standard of care in any health care facility because it's effective and safe. We have very strong clinical evidence to back it up. There's major potential, market potential, both for our own portfolio, but also for new licensing agreement and new license applications. We have very long-term owners, and we have a dedicated management, and we are attracting more core members to the team. With that, I'd like to hand over to you, operator, and see if there are any questions.

[Operator Instructions] Our first question is from [ Matthias Ward ] of SEB.

[ Matthias Ward ]. I have a few questions. Firstly, how do you view the outlook for Q3? I guess there are a few driving sources here. First, the one where underlying sales will be benefited by improved general health care. And on the other hand, we have the vacations in combination with the potential threat from the delta virus. I mean it's very difficult for you to know as well, but it would just be interesting to hear your thoughts.

Yes. Thank you, Matthias. If we take the businesses one by one, we expect to see the stabilizing of the BD business to continue. We expect the license revenue from Zimmer Biomet, the recurring revenue, to continue picking up. No new license revenue is expected in that quarter from this deal, but gradually picking up as we produce more implants and as we -- implants reach end customers. For the BIP portfolio, I expect that we will see growth in the portfolio. There were a lot of tenders that were postponed from Q2 that we see potential in now. Of course, it's always difficult to assess exactly when they will happen. As you rightly mentioned, Q3 is the main holiday quarter and typically the weakest quarter of the year. But the signals we are receiving is that there is positive momentum, I should say, in effectively all regions.

Next question, I mean, is it possible for you to disclose how much of the sales that were related to the sales of trauma implants in the EU out of the total license revenues? And I guess, that's a minor number but -- and then will you disclose that number in future interim reports just for modeling purposes?

Not at this rate. It was a small number in both Q1 and Q2. We will disclose new license revenues, but we will not make separate announcements of exactly how much it is in the recurring business. I mean we will generate -- from the trauma business, we will generate production-related sales. And royalties will be slightly delayed as we need based on actual sales in the quarter, so they will come in the following quarter.

And then thirdly, on the multi-center study here of trauma implants from Zimmer, I mean it sounds interesting. You talked about total study duration, if I remember correctly, 3.5 years. But when can one expect the interim readout, which I guess is interesting as well before the launch?

Yes. Patients will start being recruited as of this quarter, and then the follow-up will be up to 12 months with them. So depending on how quickly they can recruit patients, I would expect interim results 1.5 years -- at roughly, 1.5 years from interim or a little longer.

And in terms of BIP sales, just to return to that, we all know that elective procedures have been down and that COVID-19 situation was very bad primarily in the first quarter. Can you comment anything specific about the development at the end of the quarter, let's say, in June, how that progressed? Is that increased activity that you talked about also for the product, excluding then the Vigilenz of sales.

Vigilenz, also Southeast Asia was affected in May and had a different May and then we had a recovery in June, and we see that continuing. It was a complete lockdown for a few weeks in the country. People were not able to move. And as the bulk of the sales are from Malaysia, that had an impact. But we see better momentum in June and going on from there. In India, we -- as I mentioned, it's been slow, but we are seeing increased interest in primarily [indiscernible], I should say, very strong interest because this is for critically ill patients, and we managed to open more accounts. There's also [indiscernible] and we are registering our sutures as well as the hydrogen wound care and disinfection range also and India has the strong interest. That will take a couple of months to get that through. But we should see improved momentum there as well. The Middle East has been very slow in Q2. But there are now tenders coming on. We see increased activities in the region and the various countries. And we should see positive momentum there as well. Europe has been remarkably strong comparing the other countries. And we continue to see a very healthy recurring sales for the markets where we've been in for a long time. It will be interesting to follow the new partnerships that we have, and we'll start on from September. Nordic, a lot of interest. You see gain traction. But a lot of the visits have been so down until September time because, as you all know, the health care staff has been under heavy pressure and focusing on delivering care and not really interested in looking at other opportunities. But now I think sense a great need of getting and getting new inputs and getting into more regulatory and develop -- regular care and development of the activity.

Very helpful for the modeling. And lastly, I mean the launch of Aniocyn here together with the Musti Group, as I understand that looks like a major opportunity. So you give me more detail around the partnership setup? And also, should we expect sort of a gradual launch from September onwards? Or can the launch be quite swiftly given production, et cetera, et cetera?

Yes. production is not an obstacle there. That can be quite quick. So we expect to see most of their retail outlets having products and also that they will be pushed through online sales. It's difficult to assess the exact magnitude. But pet owners are really focusing on the care of their pets. And we see also great potential in expanding this to other markets. COVID has also meant that a lot of people have -- want to have pets. And I think second to our children, our pets are our most valuable family members.

Our next question is from Hans Bostrom of Trinity Delta.

I have a couple of questions. I'm new to the company, so I just want to understand your expectations for your increase in your own sales force. Is this across the product range? Are they in particular markets you're looking at? And I'm curious also to understand your target of 30% EBITDA margin over a 5-year period. What assumptions are you making in terms of the composition of revenues from license sales royalties versus your own sales in that?

Thank you for those questions. Very good questions, by the way. So with respect to the geography, we'll be strengthening our team in licensing with a few team members because licensing is mostly business to business sales and project management of our major projects. If we look geographically, again, we've made investments in the Nordics. We need to make new -- invest in more staff in Europe, very, very big countries and we have relatively few members of the team covering those. So looking at putting people in the major markets to drive sales and support distributors. Maybe 1 or 2 more in India, 1 or 2 more in Southeast Asia, but those are relatively low-cost investments. So yes, across the product portfolio, both in licensing and in our existing product portfolio, some specialists in some markets where we are doing cross-selling, where we've had sold a lot of wound care, where we need to push more of the traditional Bactiguard portfolio, like Southeast Asia. But yes, across the portfolio. Then on the question of how do we build profitable growth? It's a combination of growing sales of our own proprietary portfolio. In the past, we've had an ambition of doubling it every year. That's a very high ambition. But we see by adding new product ranges, product lines, new segments, we can accelerate that growth. Growing the licensing business will clearly also be important, and that has a high -- substantially higher gross margin than our own portfolio, essentially because the investments are behind us. And most of the investments that we are making and the costs that we drive are in people who actually help drive the processes. And of course, I mean, we can also look at -- selectively look at acquisitions as the acquisition we made has clearly increased our asset type. We will not become an acquisition machine, but there may be opportunities going forward that could add value to our portfolio.

[Operator Instructions] There are no further questions at this time, so I'll hand back over to our speakers.

Thank you, operator. I heard that there was a breakup in the web transmission just before the Q&A. Do you know which part that was, in case I need to repeat anything?

I'm not sure, sorry.

Okay. Well, then I'll just repeat my main conclusion anyway. We've had a challenging first half. COVID has had an impact on the health care sector. But COVID has also led to opportunities as it has increased the interest in infection control and in the Bactiguard technology. And we will capitalize on that and build a stronger base for profitable growth, both by strengthening our team and growing into new market segments and developing new license applications, because our technology is effective and safe and it serves to be present on all medical devices that stay in the body for a longer period of time. We have substantial clinical evidence to back it up, and I see major market potential going forward. With that, I'd like to invite you to follow our progress and look forward to catching up again after the third quarter in October. And until then, if you have any further questions, please don't hesitate to reach out either to Gabriella or to me. And I wish you all a lovely summer. Bye for now.