Bonesupport Holding AB (publ) (BONEX) Earnings Call Transcript & Summary

Welcome to the Bonesupport Q4 report 2020. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I am pleased to present CEO, Emil Billbäck; and CFO, Håkan Johansson. Please begin your meeting.

Yes. Thank you very much, operator, and welcome, everyone, to Bonesupport's Quarter 4 2020 Results Call. So this morning, we will take about 20 minutes to run through the presentation of the fourth quarter results, and then we will open the line for question and answers. On Slide 2 of this presentation, you will see the regular forward-looking statements potentially that will be made today. And we go to Slide 3 and start the presentation. So I would like to start first to give a few highlights from the report that we released this morning. The overall, quarter 4 sales were SEK 53 million, which is up 15% year-over-year. EBIT was significantly improved over the last year as sales grew and expenses were reduced. A few important business operation topics to mention. We saw a strong influence from the second pandemic wave with rising infection incidents from the end of November. However, despite the disruption from the pandemic, we opened up a new market with high prevalence of bone infections, that is South Africa. A large focus has been placed on preparing the organization and the distributor representatives in the U.S. for the potential approval in quarter 1 2021 of CERAMENT G and the sequentially following launch. All in all, despite challenging times, we are seeing strong progress in several areas, providing confirmation on our business model and our strategy. So I will come back to each of the points relevant for quarter 4 and -- in this presentation, I will start by covering the impact of the pandemic. If we go to Slide 4, please. So as you well know, the pandemic has had hospital redistributed resources and many elective surgeries have also been deferred to a later date. Furthermore, orthopedic surgery capacity within the hospitals during these times have been limited by implementation of strict corona safety protocols. In the quarter, we saw a sharp rise in infection incidents moving into December, halting and actually even reversing the gradual return of elective surgeries that we saw in the early part of quarter 4. In several countries and regions, there has been a reintroduction and reimposing of restrictions, which has reduced the physical and on-site interactions between potential customers and our company representatives, leading to a slowdown in the recruitment rate of new customers. As a consequence, parts of the sales team in Continental Europe are again placed on part-time work. We have, however, fared better than the orthopedic overall market, which in 2020 was estimated to have declined with 10%. Looking at the regions where Bonesupport is present, meaning the U.S. and the 5 biggest markets in Europe, the market downturn was at a combined minus 12% to minus 13%. Thus, we are outpacing the total develop -- the total market development, and I'm pleased that CERAMENT, despite challenging time continues to take market share from other treatment offers. The disruption caused by the pandemic has moved the finalization of the SOLARIO study to quarter 1 2023. And the Dutch registry study is currently on hold. I would like to reiterate that COVID-19 has no impact on the underlying need for CERAMENT nor influence on the need to treat skeletal injuries. The accumulation and backlog of orthopedic surgeries is estimated to take some 1 to 3 years to clear depending on geography. Looking ahead, we see that there will be a material impact from the pandemic in the first half of 2021, and we anticipate gradual improvement during quarter 2 this year until full normalization in the second half of the year is achieved. We go to Slide 5, please. So next, I will guide you through the development of our last 12-month sales performance per quarter. So as you know, this slide shows sales in the last 12 months, with the red and orange part of the bar representing Europe and the blue part of the bar display is the U.S. I believe that this graph is pretty straightforward. It's displaying the trending that we have seen over time and report from. We see a new all-time high in quarter 4 2020. Even though this year turned out very differently than we had originally anticipated. The split between CERAMENT G and V, meaning the antibiotic eluting product and CERAMENT Bone Void Filler in Europe & Rest of the World, gives a strong indication on the potential for antibiotic eluting products in the U.S. once we have that approval. When we present the quarter 2 2021 results, I hope that I will have the chance to add one more color on top of the U.S. blue bar, representing the sales launch of CERAMENT G. Let me cover some details on North America on the next slide, Slide 6, please. So in the quarter, sales was close to SEK 29 million, which is up 23% year-over-year. We saw a sharp production of surgeries as infection incidents rose at the end of November, the largest regional impact was in the Southwest states, such as Texas, Arizona and also in Southern California. We also saw a big impact in the North East states. And those are regions where CERAMENT has a good and strong previous representation. Despite the pandemic, we saw continued progress, yet at a much lower pace with new customers' recruitment mainly under the GPO contract that we have previously been awarded. In April, we submitted the De Novo application for CERAMENT G in osteomyelitis, also known as bone infections, and we have had a continuous dialogue with FDA, and we replied to the agency's questions in mid-December of last year. We also submitted a substantial amount of documentation and we are now awaiting a notification by the end of February or latest beginning of March on our registration approval. We have put significant efforts into the preparations for a potential launch of CERAMENT G in early 2021. Focused efforts have been targeted on market access to ensure proper price levels, coding of the product and reimbursement. The sales teams have been trained in a series of mandatory digital education sessions as well as developed individual customer launch plans. We have also structured our relationships with key opinion leaders and advisory boards with clinicians actively working with patients in care of bone infections. We will submit an application for additional broader indications such as trauma at a later stage. That application will be based on the FORTIFY study, which is proceeding according to plan with patients follow-up running up until July 2021. On the next slide, you will see the 2 pathways that include the milestones of bringing CERAMENT G to the U.S., and I think this is well depicted with the De Novo and the FORTIFY based PMA process. As you can see on this slide, we are basically expecting an answer from FDA within the next 2 weeks. As soon as this happens, we will get back to all of you with more information. Below the arrow on this slide, you will see the milestones for FORTIFY and also the preparations that are being done for a wider span of indications. This work continues as planned without any disruption from COVID. Go to Slide 8, please. Let me cover some details regarding the segment, Europe & Rest of the World. We had also here a strong start to the quarter, but that reversed towards the end of the quarter as the impact from COVID-19 accelerated. All in all, sales were just short of SEK 25 million at a growth rate of 24% quarter-over-quarter and 7% year-over-year. Some of the highlights of the quarter were that we entered the Republic of South Africa with a very well qualified, appointed distributor. The first surgeries in South Africa have already taken place at some of the university hospitals. We also saw several repeat orders with orthopedic clinics in Australia. Our partner in Australia has introduced CERAMENT to a few clinics and the fact that surgeons are using the products with patients successfully and have ordered even more products is, for us, a very good sign. Eventually, the COVID-19 pandemic will reside, and we will resume our quest to transform the standard of care for treating bone injuries. As previously announced, we are convinced that we can combine the best of 2 business models and create a hybrid structure in Spain and Italy to accelerate sales penetration in these important markets. This setup is expected to be implemented in quarter 2 2021. So with that brief update, I will hand over to Håkan to cover the financial overview.

Thank you, Emil. So let us go to Slide #10. This is a graph that presents net sales by quarter as bars and last 12-month sales as a ligne. Net sales in the fourth quarter amounted to SEK 53.2 million compared with SEK 46.2 million in the same period previous year, equaling a growth of 15%. The fourth quarter continued to report a recovery from the COVID-19 pandemic, even if a certain slowdown was noted at the end of the period. This quarter reported 11% growth compared with the third quarter, involving a 24% growth in the segment, Europe & Rest of the World. Net sales for the last 12 months amounted to SEK 181 million compared to SEK 155 million last year, an increase of 16% despite the impact of the pandemic. The segment North America increased last 12-month sales with 46%, and the segment Europe & Rest of the World reported a minor growth in last 12 months sales with 7%. Next slide, please. In the segment North America, sales for the period amounted to SEK 28.6 million compared with SEK 23.3 million previous year, the growth of 23%. The new distribution structure has resulted in improved geographical coverage and allows for a broader market penetration of different indications. The continuously strengthened customer base together with the larger GPO contracts that were signed during previous years contribute to the sales increase. The contribution from the segment was plus SEK 0.1 million compared to a minus of SEK 9.3 million last year. The improved contribution is due to increased sales, improving gross profit with SEK 5.4 million as well as lower costs. Sales and marketing expenses during the quarter amounted to SEK 21.5 million compared with SEK 25.7 million last year, or with sales commission to distributors increased from SEK 8 million to SEK 8.4 million following the sales growth. Sales for the Europe & Rest of the World increased with 7% compared to previous year and amounted to SEK 24.5 million compared to SEK 22.9 million previous year. The segment showed continued recovery from the COVID-19 pandemic in the quarter, reporting a 24% sales growth compared with the third quarter this year. Sales in key markets accounted for 86% of the segment sales and sales of the antibiotic eluting products, CERAMENT G and CERAMENT V, followed the sales development in the segment and grew by 5%. The contribution from the segment was SEK 5.6 million compared to minus SEK 0.5 million previous year. The increased contribution is explained by higher sales and lower costs. Sales and marketing expenses decreased by SEK 4.3 million and amounted to SEK 15 million compared to SEK 19.3 million previous year. The decrease is partly due to a transition to cost-effective meetings on digital platforms as a direct effect of the pandemic and the restrictions on physical meetings that have been applied. Next slide, please. Sales in the third quarter reported a growth of 15% and has already been well covered during this presentation. Increased sales in the U.S. had a positive impact on the gross margin, reaching 89.8% compared to 88.9% previous year. The minor drop from the high gross margin level in the third quarter this year is explained by the market mix and the higher ratio of sales in the segment Europe & Rest of World. Operating loss in the quarter improved by SEK 11.9 million to minus SEK 26.7 million compared to a loss of SEK 38.6 million previous year. The reduced loss is explained by higher sales and lower costs. The fourth quarter ended with a net cash balance of SEK 354 million and we remain well funded to execute our strategy of the new share issue conducted in the second quarter of 2020, which brought the company SEK 362 million after issuer costs. Next slide, please. Total expenses in the last quarter were down SEK 8 million compared with the same period last year despite an increase in sales commission of SEK 0.4 million. The reduction in selling expenses was driven by lower travel costs as well as by canceled congresses and meetings as a direct effect of the pandemic. Research and development expenses picked up after reported low expenses earlier in the year as the pace of implementation in ongoing studies was temporarily affected by the pandemic. And with this, I hand over back to you, Emil.

Thank you, Håkan. If we go to Slide 15, I will sum up this presentation a bit. So all in all, I must say, I'm very pleased with how strong progress has been made during the year despite the pandemic disruption. We have been following our strategic plan, but we have adapted to the situation and circumstance present. Both the quarter and the full year showed strong progress and further confirmed the strength of our implemented strategy. We are hopeful to, within short, receive a notification on the De Novo application for CERAMENT G on the U.S. market. The bone infection market in the U.S. is currently worth USD 100 million. In our view, we are supported by strong clinical studies that CERAMENT G offers a more modern and effective way of addressing these difficult conditions. Upon approval, CERAMENT G would be the first of its kind on the very much underserved U.S. market. CERAMENT, as you know, has strong clinical studies providing the data on improved patient outcome. And many of these are from prestigious European university hospitals and clinics. But during 2021, we will have Level I clinical data in direct head-to-head comparison with standard of care on trauma patients from prominent U.S. centers by the FORTIFY study. We believe that this will further fuel the ability on market penetration. Our geographic market expansion is gradual and very focused with the repatriation of Netherlands, market entry in Australia and South Africa and even more so, the solidification of commercial platform and foundation in the U.S. in Europe. We feel that we're in a strong position to leverage our business model and enter a phase of strong sales acceleration. We are, as everyone else, eager to see the distribution of vaccines and the development of herd immunity to allow the business progress to go beyond the current limitations of the pandemic. Our confidence in our corporate target of an annual growth of 40% remains very high. And the final slide of my presentation, which is Slide 16, is timeline with the pivotal milestones mentioned in today's call. And that concludes our presentation of quarter 4. And I would like to open for -- the forum for questions.

[Operator Instructions] The first is from Rickard Anderkrans of ABG Sundal Collier.

So first one here at CERAMENT G, the potential launch in the U.S. Do you expect a rather rapid cannibalization of CERAMENT BVF sales? Or do you still expect growth in the BVF segment, it would be interesting to hear on the dynamics you expect for -- in terms of the competing situation with BVF, if you will?

Yes. Absolutely. Well, thank you, Rickard. Appreciate your presence in the question. There will naturally be some cannibalization, most likely because some of the sales in the U.S. are most likely used already in combination with different antibiotics. Exactly the size of that business is difficult to say. If I would give a guess, an estimate, even though I don't have any data on this, I would say it's mainly between 10% and 20%. Other than that, I do not expect much cannibalization. If we look at the BVF sales in Europe, when the antibiotic products were launched, they seem to have attracted more or less all new customers, but the BVF sales remained quite constant over the years and even grew with a CAGR of 9%. And given that the patients and bone infections have similar anatomy in the U.S., I could also anticipate that we have a similar development there.

Great. That's very helpful. And given that we should expect a higher price point for CERAMENT G going forward versus the BVF in the U.S. Do you expect any pushback in terms of pricing? Because obviously, you do have sort of a premium pricing strategy? And if you expect to push back, how do you mitigate that?

Yes. Thank you. To the first question, I do not anticipate pushback on the price. The current alternatives are quite old-fashioned used in the U.S. market. The biggest or most chosen treatment option is PMMA beads, which drives the clinic to multiple surgeries. And I think we already know from conversations with U.S. advisory boards that it will be a great benefit with CERAMENT that they can have a 1 stage procedure. So despite the fact that the price could be seen as a premium, there is a financial incentive anyhow for using a product, which is more modern and more efficient.

Sure. Makes sense. And do you believe that a potential positive readout from the FORTIFY study could have a positive impact on the global sales of CERAMENT? Are there any surgeons sort of waiting to see the readout from that study before getting more confident in the product?

I really think so because we know that orthopedic surgeons are quite a conservative cluster. And the FORTIFY study will be the first ever Level I randomized clinical trial similar to heavyweight pharma study to compare CERAMENT with the standard of care, mostly in American centers but also in European centers. So a positive readout, I think, will work as a very strong encouragement for those surgeons maybe within trauma that have not yet considered CERAMENT to make that switch.

Great. And the final one on South Africa. It is a large market opportunity in terms of population, but with its 2 tier health care system with a smaller sort of high-quality private sector. Can you comment on how we should think about the addressable market for CERAMENT there? And I guess also approval is already in place?

Yes, the approval is in place. The product has already been used in a few cases. And those cases have gone very well. The -- you're absolutely right that -- I mean it's a country of about 60 million people. But there's big differences in income levels between different groups and also in terms of health care coverage. So we look at the part of the market, which has the standards and affordability for this kind of product. And we estimate that the market there -- currently addressable market is just south of USD 10 million. But this is a rapidly increasing market. And there's a very high presence of bone infections. So we believe that this could be a developing market where there are a lot of synergies and similarities to the other commonwealth markets that we have entered recently.

Our next question comes from the line of Kristofer Liljeberg of Carnegie.

Three questions for me. First, in Europe, and the comment you made that sales slowed in December, is it possible to describe a little bit how bad it was in December versus earlier in the quarter and also what you have seen so far in the first quarter? I also wonder about Europe, which were despite this better than what I expected. Were there any large orders, for example, in South Africa to the distributor initially? So that's the first question. Then the U.S., I think you have done very well, considering the situation. But at the same time, I believe you have benefited from adding a lot of customers before the pandemic started. And I guess it has been more difficult to add additional clients the last year now. Do you think that's something that's going to impact the continued sales growth here in the first half before CERAMENT G hopefully picks up? And then coming back to the question previously on the FORTIFY study. How do you view the risks around that study? I remember that it's rather high bars to reach all the primary endpoints. And do you still think it's important to reach all of them when you hopefully already have the product approved for bone infection in the U.S.?

Okay. Well, thank you very much, Kristofer. Thank you for being part of the call today. It's difficult to comment on the first question exactly what kind of impact we had. But I will give you and the others this information that the second wave of the pandemic was much stronger and had as big of an impact as the impact seen in 2020 during the March and April month, and I think we can all see the available data that the second wave picked up significantly in pace at the last week of November, and it continues well into 2021. And as I said, the impact was the same as what we saw during the worst period in the spring. The...

Have you seen demand starting to come back again as things are improving a bit in Europe?

We're being tossed back and forth. And while we might see a little bit of pickup in England, for example, where there's been a very high degree of vaccination taking place. We still see that big markets such as Germany is equally sluggish. There were no major orders in quarter 4 that inflated the results. But you're right, Kristofer, there were a few clinics that -- what has happened during the pandemic is that more and more private clinics have tried to take patients away from the government-based health care system. And these private clinics tried to get a few patients out of the line before there would be a new calendar year and new insurance policies. So that probably supported sales a little bit in Europe despite the grim circumstances. There was one more question. Did I miss that?

U.S.