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

Welcome to the Bactiguard Q4 conference call. [Operator Instructions] Now I will hand the conference over to the speakers, CEO, Anders Goransson; and CFO, Carin Jakobson. Please go ahead.

Welcome to all our shareholders, investors and analysts in today's call. Today, we will share our Q4 and 2022 results. Reflecting on the year, it has been a year of transformation for Bactiguard. In the beginning of the year, we launched a new focused growth strategy and set new long-term financial goals. And since then, we have invested in our organization to realize at full potential of our infection prevention offering, including signing and starting product development with 2 new partners during 2022 or in 2 new partnerships, I should say. If we go to Page 3 and look at 2022 in brief. First, we had a strong year with revenue increase of 42% and in quarter 4, it was 57%. And this is despite the bump in macroeconomics, post-COVID-related issues still affecting healthcare systems in part of the world and everything. So very strong revenue growth. During 2022, we have positioned us to capture future growth opportunities, both by reorganizing ourselves to create focus in the organization as well as strategic investments into capabilities and resources to deliver on our long term goals. A key priority is to get our infection prevention technology to more patients through licensing and product development partnerships, but also through our own product portfolio. The capability boost have focused on license sales, coating development and regulatory capabilities. We also have invested in the commercial capabilities to drive our own product portfolio as well as reorganizing our sales organization to align our resources with where the biggest potential is. We had a very successful year in licensing with 2 new partnerships, delivering on our goal of 1 to 2 new partnerships per year. In February in 2022, we extended our partnership with Zimmer Biomet to cover the broader part of their portfolio, including joint reconstructions like hip, knee and shoulder implants. This agreement has the potential to become Bactiguard's largest agreement ever so far once commercial products are developed and launched. Then in April, last year. We entered into a development agreement, including a license option with Dentsply Sirona, our first step into -- for us, new dental area where infection is a large problem. Both these partnerships have really increased our work in coated development as new materials and applications are being pursued. If we turn to our own product portfolio. Sales for the year was lower than anticipated with only 9% growth in the year. We still see good traction in areas where we are investing, but I will come back with more detail around this later on. To summarize 2022, it has been a very good year and the transformation of the company is progressing well, and we feel we're well positioned for the future, and we can already see the revenue traction from the expanding license business. Before we go into our financials, I just wanted to reiterate why Bactiguard's mission is so important and why we feel confident our infection prevention solutions are well positioned for the future. Let's go to Page 4. If you look at some of the key global macro trends, right? First, rise of infection and increased use of antibiotic is a real threat to global health and modern medicine. This is fueled by the threat of antibiotic resistant bacteria, a silent pandemic, where healthcare institutions are slowly catching on to the need to proactively manage this. And this is so critical because the fact remains, 1 out of 10 patients worldwide are affected by healthcare-associated infections, e.g., you enter a hospital for treatment. And during your visit you acquired new infection, often caused by bacteria adhering to medical devices that is part of that treatment. Add to that, the underlying demographic developments an ageing population, increasing lifestyle diseases like diabetes, increasing immunocompromised patients in the healthcare system. And the healthcare systems already have strained resources, and the importance of preventing disease and infections are becoming more and more important across the globe. On the right-hand side, you see our 5 priority therapeutic areas, which we define in our growth strategy to get more focus on where to pursue license partnerships. The markets we're going after are very large and showcase the potential of our technology. These are market size numbers in billions of U.S. dollars, and I will come back to that later. But a large part of this potential is in most therapeutic areas in the United States. In summary, infection prevention has never been more important, and our technology can really make a difference for patients and in the fight against antimicrobial resistance. Avoiding an infection. For example, in connection with orthopedic surgery or extended use of a urinary catheter could mean the difference between life and death for the patient. If we go to Page 5 and an overview of our strong Q4 financial results. If we start with our revenue, we see a quarter of very strong growth, reaching an all-time high of SEK 72 million in Q4, a growth of 57% compared to Q4 last year. This is boosted by a very strong currency effect. But even when adjusting for that, the underlying growth is still strong with 23%. The largest part of our revenue is from our license business, amounting to SEK 46 million in the quarter, a growth of 88% compared to last year and even when adjusted for currency effect, the growth is 58%, a very strong license revenue quarter. Our BIP sales was lower than anticipated and actually declined year-over-year in Q4 as we had a weak quarter in some markets that normally are very strong in Q4, as well as some supply issues in our suture business. I will come back to this later. Our EBITDA is minus SEK 1.1 million in the quarter, a significant improvement compared to the loss of SEK 12 million in Q4 2021. As you know, our EBITDA are impacted by the investments into our focused growth strategy. When we announced the long-term financial goals for 2026, we also announced that during 2022 and 2023, we will build the organization and initiate a number of growth initiatives. This will impact our EBITDA also during this year. We are early on our growth journey, and we're on track to deliver on our plans. Finally, worth noting is whether positive operating cash flow of plus SEK 3.1 million compared to a negative cash flow of SEK 12.8 million in Q4 2021. I will come back to some of the key events later on, but worth highlighting is that we in Q4 have done a reorganization to align our resources with our priorities. As part of that, we have added our Chief Quality and Regulatory Officer, Fatima Stensvad Flodin, to the management team and moved Satish Subramanian to the critical role of Chief Technology Officer, where he will work closely together with our license Officer and Medical Officer to bring our technology to more customers through existing and new license partnerships. These changes in our organization will strengthen us to continue executing on our growth strategy. If we go to Page 6 and look at the 3 engines for the license business. First, we look at our most important revenue contributor, Becton, Dickinson, or BD, who has an exclusive right to sell the urinary catheters with Bactiguard technology in the U.S. and Japan. We're back to pre-COVID volumes of the business, which is amplified by the strong USD, bringing the revenue to close to SEK 39 million, a growth of 65% compared to Q4 the year before. We also have significant growth of license revenue from our 2 agreements with Zimmer Biomet as well as a development agreement with Dentsply Sirona. In total, SEK 7.4 million compared to SEK 1.1 million last year. As a reminder, with Zimmer Biomet, we have 2 agreements, one for trauma implants entered in 2019, where the current revenue is mainly attributable to contract manufacturing and royalty for Bactiguard coated trauma nails produced for and mainly sold in Europe. During 2022, we met our goal of 1 to 2 new license partnerships. In February last year, we expanded the collaboration with Zimmer Biomet to the broad portfolio. And then in April, we entered into a development agreement with Dentsply Sirona in the dental field. Both of these development projects are progressing and contributing significantly to our top and bottom line in the fourth quarter. If we go to Page 6 and zoom in on the Zimmer Biomet trauma. The launch of ZNN Bactiguard in Europe, Middle East and Africa region is going according to plan. The market shows the fastest uptake are still Italy and Germany with continued positive feedback and interest from customers. During Q4, the work we're preparing new markets for the launch of ZNN Bactiguard devices continued according to plan. The regulatory efforts to approve Bactiguard implants in more key markets across the globe is progressing with a focus on getting a U.S. approval, which when achieved will be a key milestone. And as I mentioned in our last earnings call, Zimmer Biomet is investing a lot behind strengthening the evidence of the clinical benefit of coated orthopedic implants. Currently, 4 different studies are being initiated across leading trauma centers in Europe. But I wanted to highlight a publication that was published online in the paper antibiotics in November last year. You can read more about this on our home page, where you also can find a link to the full publication that can be downloaded for free. This was the first-in-man clinical study with Bactiguard coated trauma implants. This study is based on our own trauma implants that has been launched in Malaysia since 2019. It's a key series of 35 severe trauma patients. For example, after motorcycle crash where you've broken your lower leg and caused a so-called open fracture. Open fractures are where the fracture bone produces through the skin, leading to wound and therefore, an increased infection risk. According to the literature, the infection risk in similar healthcare settings would be between 12.5% up to close to 30%. The study showed that only 3 out of 35 patients developed an infection, an infection rate of only 8.6%. In addition, all these 3 infections were resolved by antibiotic therapy. And no side effects were recorded in the study. The study concluded that a Bactiguard coated titanium nail can prevent infection and facilitate bony union achievement in patients undergoing surgery for severe open fractures. Clinical evidence is a key competitive advantage for us, which is why studies of our technology are crucial. They give both healthcare givers and takers concrete evidence that factors coating is sufficient. Also, why this is important is, of course, the global market for orthopedic trauma devices, which is expected to grow. It currently is between USD 8 billion or USD 9 billion, and by 2030, it's expected to be $16 billion. And our infection prevention technology can make a real difference for patients there. Just imagine the positive impact using more coated orthopedic nails would bring to weaker patients. Like an elderly which, for example, might have slipped in the winter and gotten a hip fracture, which is very common here in Sweden, among other places. Let's leave our license business and go to Page 8 and our own product portfolio. As you know, our own product portfolio consists of our coated catheters, for example, Foley catheters for the urine, central venous catheters for the blood stream, and endotracheal tubes for the airways. Secondly, it consists of our wound care portfolio of wound cleansers and gels. And finally, our sutures, which are mainly sold in Southeast Asia. Let me be transparent and say we're not happy with the performance in Q4 where sales were lower than anticipated and even declined from Q4 in 2021. During Q4, as part of our larger reorganization, we also restructured our sales organization. And this did impact some regions, and that is where we see bad performance in Q4, especially in regions which normally is strong in Q4, like the Middle East. In addition, we were impacted by some supply issues for our suture business impacting the top line in Q4. However, during the year, we have done strategic investments into our commercial offering, especially on the wound care side, and we're entering 2023 well positioned to accelerate growth, focusing our Wound Care business as well as our recently MDR approved Foley Catheter business. Let me just spend some time on the medical device regulation, MDR, and how important it is for us. As in January of this year got our first product approval, which also means our whole quality management system is now MDR approved. The new MDR regulation was announced in 2017, but adopted in 2021. And it's to ensure that only non-harmful equipment is used on patients in the European market. What that means is that products are scrutinized in the MDR process and audited through higher standards of quality and safety. Gaining the MDR approval for the BIP Foley catheter is the first step, but an important achievement for us as it is a formal acknowledgment of our work on quality and safety, and this will pave the way also for future product approvals, but also as a quality stamp on our quality and safe products and technology. So as mentioned, while Q4 was lower than we wanted on total. At the same time, we have continued strong momentum in key markets like Nordics, India and Malaysia, where we have invested behind our portfolio and have put more sales sources behind the products. Our expanding wound care portfolio of wound rinses and gels, we continue to get very positive feedback from customers and great patient cases. For example, on diabetic foot ulcers, a common chronic wound that in worst case, can lead to limb amputations. And just for your info, out from the press, we have recently launched brand-new sales material with a focus on wound healing, a unique indication we have. So we feel well positioned to accelerate sales. We can see that our focused strategy and investments behind our own urinary catheter, the [ BIP Foley ], is paying off, and we have continued strong momentum. With that, I would like to hand over to Carin to give us more detail on our Q4 financials. Over to you, Carin.

Thank you, Anders, and welcome, everyone. I'll take you through the financials. On this slide, we are looking at the rolling 12 months revenues and EBITDA. We are very happy that the rolling 12 months revenues are growing for the fourth quarter in a row. And also this quarter are at an all-time high. If we start looking at the license business, which is the blue bar in the chart. Our main revenue stream is a recurring license revenue from BD, comprising of sold concentrate as rates depending on the sold items. They both vary between the quarters that are essentially stable in volumes on a yearly basis. And BD volumes have been constantly higher on 2022 compared to 2021, but we expect them to stabilize on a pre-COVID level. The revenue from BD shows a growth of 65% this quarter, but volumes have increased and which has also impacted -- the revenue is also impacted by the strong dollar that we have seen compared to 2021. Including the license business is also revenue from the contract manufacturing for Zimmer Biomet that we handle for them. And [ the royalty corresponding ] to the Zimmer Biomet sales of ZNN Bactiguard implant in Europe. If we continue with the big portfolio, the green bar in the chart. The big portfolio shows a declined revenue for the quarter compared to 2021, but sales are up with 9% compared to -- on the full year rolling 12 months. The growth is mainly in the regions where we have our own resources like India, Nordics and Malaysia. And the growth is mainly in our own product -- in the Foley's, the products that we just talked about that we got the MDR. The yellow bar in the chart shows a new license revenue and are showing the nonrecurring revenue fee that we received from our licensed partners before products are launched. As Anders mentioned, we are doing development to our licensing partner before they launch products in a market that will generate royalties. And this development projects can look very different, depending on the scope and complexity of the materials to be coated. This caused BIP project revenues like what ours are reported as new license revenues together with different types of initial fees and milestone payments. The current development projects are showing good momentum in both the projects with Zimmer Biomet signed in February and Dentsply Sirona also getting well and contributing with both regulatory revenues and development work. The new license business together is a very important building block and together with the recurring -- sorry -- together with the recurring business are the foundation to continued growth to meet the long-term financial goals. And if we now look at the financial overview of 2022 compared to 2021. Bactiguard had a strong year. The total revenues for 2022 was SEK 253 million, a growth of 42%. In a local currency, the growth was 15%. In the license business, as we have talked about, is the main driver with 43% and the BIP portfolio grew with 9%. EBITDA for the 2022 was negative SEK 6.4 million corresponding to an EBITDA margin of 2.5%, which should be compared to the last year's EBITDA of negative SEK 7.2 million, corresponding to an EBITDA margin of negative 4%. And just to mention -- just a reminder that last year's EBITDA was positively impacted by the milestone payment of $1 million from Zimmer Biomet trauma contract study. In 2022 it was an investment year where we kicked off our growth strategy and where we had increased capabilities within regulatory and now getting our first product Foley catheters and the ARPU and within commercials with 2 new development projects as well as strengthened our technology business development team. The transformation of Bactiguard will continue to affect profitability over the next year, while we expect profitability to accelerate after that. The net result for 2022 was negative SEK 52.9 million, which was SEK 5.9 million better than last year. We see changes in the macro event. And as China now is opening up and the rest of the market is almost back to pre-COVID. The increase as well as the direct effect on -- that indirect as well as the direct effect of the pandemic is phasing out. So we see very little direct effect on the financial performance from the Russian war against Ukraine as we have neither suppliers or customers in the area. We do see indirect effects from the war such as energy costs increased in Sweden, which has not yet impacted the company's financial performance significantly as most of our production takes place in Malaysia, where situation is completely different, but we will see increased indirect cost in our credit facility from SEB, which will impact the company negatively. But on the positive side, as we have already mentioned, we have seen the U.S. dollar strengthening, which has significantly impact to our financial results. We're now looking at the cash flow and liquidity slide. We have a strong financial position with total cash and overdraft facility of SEK [ 228 ] million shown in the gray and green bars in the chart. The investments we have made in the company, and we continue to make are not only impacting EBITDA, but also our cash. But we are strong in our financial and have cash, which is fundamental to deliver on the focused growth strategy that enable us to do the necessary investments that we put Bactiguard in a better position to capture growth opportunities across our therapeutic areas and focus markets such as the U.S. and will deliver on our long-term financial goals. Now looking at the cash flow from an operating -- the operating activities, the line in the chart. The cash flow from operating activities very slightly -- significantly quarter-to-quarter, which is a result of a large milestone payment from license partners and other non-recurring payments related to the new license business and our development projects, but also, of course, [ seasonal variances ] and business performance. And this quarter's cash flow from operating activities was SEK 7 million compared to negative SEK 11.6 million last year. Now back to you, Anders.

Thank you, Carin. If we go to the next page, Page 14, to summarize this. As highlighted, our EBITDA is impacted by our investments into our organization to deliver on our strategy and long-term goals. We now have many of the critical prerequisites in place to accelerate our growth. I just want to reiterate why we believe this is the right time to invest and fuel our growth. First, we have strong clinical evidence that continues to be strengthened, like the Bactiguard coated trauma implants that I talked about earlier. We also show we can meet the very high standards that regulatory parties are setting on us like the new MDR approval. We have the capital to fund our goals, and as Carin showed, we have a very strong financial position. We have strengthened our organization and built and broadened our commercial capabilities for continued expansion. We have allocated more resources to coating business and product development. We have reorganized our sales organization and strengthened our commercial offering. And during the year, the European patent office approved our third generation patent for our technology, giving us even more long-term horizon to work towards. We believe we have a very strong IP protection with the know-how of coating different materials, our confidential recipe to our concentrate as well now with patent protection up to 2039. Finally, I believe our 2 recent additions of licensed partnerships is a proof-of-concept and the potential of our technology. Let's go to Slide 15. In where I want to highlight the key growth drivers to deliver on our 2026 financial goals. As highlighted earlier, the need for infection prevention have never been greater, and our technology provides unique protection against infections even though caused by multi-resistant bacteria. This is why we believe our technology should protect everything that will be placed within the body for longer than 2 days in order to prevent the occurrence of biofilm, which could lead to infection. What are we aiming to do through a couple of key drivers? First, the basis for our growth is our existing license contracts with BD and especially Zimmer Biomet, where we anticipate significant growth in the future once the U.S. approval of the different implants and especially if it becomes an embedded feature in some key product lines. Secondly, we see new license agreement in our focus areas, which will contribute to our future growth, both through exclusivity fees, development and milestones and especially royalties once products are commercialized and launched. Depending on the product area time-to-market varies. Worth highlighting is that during 2023, the development agreement with Dentsply Sirona, the aim is to enter a full license agreement. Thirdly, our own product portfolio of infection prevention catheters and wound care products, where the focus is to get our products to more patients in key global healthcare markets. Finally, we're not excluding smaller M&As similar to the acquisition of Vigilenz in 2020 to further accelerate our growth and provide effective and safe infection prevention across the globe. And you may find our financial goals aggressive. But if we go to Page 16, I want to highlight one of the reasons why we have set these targets. The largest metric market in the world is without hesitation, the U.S. But from our perspective, it's even more important as it's a market where infection prevention is a high priority, and you get penalized if he caused infections. We see great potential for Bactiguard's offering of infection prevention solutions and products. So getting our technology to the U.S. market is very critical, both for our own product portfolio, but of course, also for our current and future license partners and the entrance barrier is, of course, the product approval by the FDA. Currently, the only approved Bactiguard coated product is Becton, Dickinson's urinary catheter, which is a key driver of our current revenues. As you all know, approval of Zimmer Biomet trauma implant is critical to accelerate growth. I can't give any further indication of timing, but once achieved, it will be a landmark event. Then we have our own product portfolio, like our endotracheal tubes and central venous catheters. We have, during last year, started the discussions with FDA on how we can get our products approved and are working intensely to submit them for approval once approved their pathway have been agreed with FDA. The go-to-market strategy is still under evaluation if we go via license partner or distribution partner in the end. We wanted to highlight this as getting Bactiguard products approved and commercialized in the U.S. market is what will be needed to significantly bend the curve for a growth predictor. If we go to Page 17. 2022 was a year we kick started our growth strategy, and we have delivered a very strong revenue growth. We met our goal of 1 to 2 license partnerships per year, we have invested in our organization to strengthen our capabilities, but also to position ourselves for strong growth. In addition, the global healthcare macro trends present significant opportunities and the potential to make positive impact with our infection prevention offering is huge. We have only started our transformation journey, but we have good momentum and energy in the company to deliver on our plans. If we go to the final page, we want to highlight that our infection prevention technology was recognized as one of the most important Swedish life science innovations of all time in Life Science Sweden. We're very proud of making it on a list together with other great Swedish innovations like Losec or the Walker. I think this once again confirms the uniqueness and potential of our technology. With that, thank you, investors, and then tie it back to your team for a great collaboration during the year, and that was all for us. And operator, we're now ready for any questions on the line.

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

A few questions for me today. I think we can start with BIP sales. Of course, you had some supply-related issues in Q4 and some reorganizations or -- can you explain how the organized -- organization in, for example, Middle East, what the restructurings are? Is it mainly the addition of sales staff or what more in practical terms are you doing? And also explain if there are other areas where those initiatives have been taken. That would be the first one.

Yes. Let me start with that. I mean, as you mentioned, right, we have some supply issues on our sutures which impacted the top line, but the key impact and the bad Q4 sales was driven by very low sales in regions that normally are very strong in Q4, right? They're quite yearly order pattern, and that is one is Middle East. The Middle East has been an important market for Bactiguard historically. But if we look forward looking, it's still a great potential in the market, but maybe not where we should have most of the resources. So what we've done is we actually reduced our resources in that region to invest them in different places. So that's what the reorganization have done and to some extent, probably also impacted the Q4 performance from that perspective.

Okay. Good. And if we look on sort of BIP and the BIP product sales going forward, can you just outline that maybe the main drivers for growth rates in 2023 onwards from here. I mean it was strong in the first 9 months 2022, but maybe a slow end. What are the main drivers going forward that you identified to grow there?

For me, the -- so first, right, we need to keep the base, and that's what didn't materialize because of the supply issues and the sales in the Middle East, right? So we didn't keep the base. But then what I see is growth, especially in our Foley where we have strong momentum, where we put resources behind it, we see the momentum and we're now taking those learnings to really get that momentum into other markets across the globe. But then also the wound care, where I think it's important to highlight that 2022 has been a year of launch and getting distributors in place, where we now see we are set for actually accelerating the wound care growth as well outside the Southeast and Asia where it has been very strong. So I think if -- the 2 key drivers will be the wound care and our Foley.

Just a follow-up on the Wound Care. Where are these products available now for customers via distributors in most regions.