Integrum AB (publ) (INTEGB) Earnings Call Transcript & Summary

Hello, and welcome to today's presentation, where we have Integrum presenting their Q2 report. With us presenting, we have acting CEO, Scott Flora; and CFO, Jorgen Svanstrom. [Operator Instructions] And with that said, please go ahead with your presentation. Jorgen?

Yes. Here, we can see the agenda for today. We will have a brief introduction from Scott and then a business update. And myself, I will do a financial update. And after that, a summary and some Q&A at the end. So with that said, over to you, Scott.

Thanks, Jorgen, and good morning if you're here in the East Coast U.S. and good afternoon to all of you in Sweden. And I'm very happy to present this Q2 report today and spend a little more time on what we think are the critical things the company needs to do. First, why am I at -- why do I get involved with Integrum and why am I here? This is a phenomenal product. If you look at the orthopedic marketplace, hasn't been a lot of true innovation and a lot of PMAs that have been done that really impact patients' lives the way we do. And therefore, I think this is a real game-changing device. Now with that, we're on a market adoption journey. And with that market adoption journey, there are some key levers that we need to execute better on. The team here at Integrum, we're really not very happy with our second quarter results with the exception of the bright spot in the S1 surgeries returning in the U.S. But we know we've got to do -- we've got to execute better against driving market adoption. And what that means for the team, it's not an easy thing. We're changing how we think around just being a science company to transition to more of a commercial execution company. And that requires some funding changes and that requires some people thinking differently. And I'll tell you that for the first quarter end, I think the team has done a great job of getting their head around the mission at hand because they're also buoyant to the fact that this is a tremendous game-changing technology. So let me take you through what we're focused on and what we think is going to drive what I call tangible, real market adoption results, which is getting more patients implanted and those patients being happy and becoming mission referrers of ours and then having more prosthetists surgeons also driving and adopting this procedure. Jorgen? So like I said, the financial summary, we're disappointed, and we think the -- but the S1 focus, I think, has paid off, and I'm going to talk some more about that. And if you talk about the highlights from Q2, we did rebound in S1s. And there's a process that we're driving now on a monthly basis where we review the patients in the pipeline. And it's a standard commercial activity that's done across any company where you look at your leads, you look at what's going on and how do you push those. How do you get those leads and get them into revenue faster? So we're doing that with the patients and with the prosthetists and education. We also purchased some new software that helps us read CT scans faster and help the surgeons to identify what's the right implant to use. So that's been a key focus. Sales force productivity, getting the team focused on the critical activities that meet the needs of the customers that drive revenue. And then fighting -- defending our on-label use in the U.S. We have a PMA for above the knee in the U.S. That is a huge TAM. And we're not even close to being 1% penetrated. We would be a very decent-sized company if we could achieve that. We have got to laser focus on driving our FDA-approved product and getting more patients done with that surgery. Yes, there's a lot of things in the pipeline, there's humerus, there's all this other stuff. But all that can be defocusing and all of it needs to be in the right queue at the right time, but we really need to drive our PMA-approved product in the U.S. There's other products we can drive in the EU, and we'll talk about that later. So we are also -- we also have some people in the U.S. that are seeing this opportunity, and they try to get creative and use different regulatory path. And we've been defending and we're out there educating patients and surgeons about why this PMA procedure is the one to use. It's the one that invented this technique and it's why it's the market-leading procedure and implant in the U.S. Around portfolio and product launch, we've done a rebalancing activity with the team. And we now have prioritized all the R&D projects on importance. And we're using time-tested measurements like time to revenue, does it support the strategy, size of market, ROI, those types of measures that say this is -- this product should be focused on. We cannot work on all projects. We got to work on the critical few at our size company because that's the best use of our cash. Jorgen? So our focused strategy to accelerate commercialization win is all about sales force productivity, defending our PMA, marketing our PMA. I'm thinking through our leadership portfolio and product launches more thoughtfully and then focused growth. So, I've had a lot of questions that came in about ecosystems and things, and I'm going to share that in a second with you, but we're focused -- every -- in the last 40 years, every company I've been with, it's all about focus. And you got to focus on a few critical markets that you think you can win in. And right now, we're focused on 3 markets in Europe and 1 in the U.S. And that's where we're going to spend our money, and we're going to go deep. And we've got to fight the temptation of wandering off the trail, and we got to stay very focused and win in those markets. And then developing a strategic -- that's why I just talked about the key U.S. and European partners, and we'll talk about that in a second. Jorgen? So if you talk to any large strategic company or any acquirer, they look at what is the company's penetration in critical accounts. And the one thing that we've identified here is that we need a playbook. So in the U.S., we're going to partner with 2 large users of ours. And we're going to create a playbook on how do you create an Osseointegration Center of Excellence. And then we'll take that playbook and then we can partner that playbook across the country. Now currently, we have quite a -- we've got 18 to 20 centers that are well trained on Osseointegration, know how to use our implant. But what we have to do is then partner with those hospitals and those surgeons and connect those to the right certified prosthetists so the flow of patients goes into those centers. And that's what we're going to work on this playbook about. And I've seen early traction that I'm pleased with. It's nothing to share or forecast with you, but I'm pleased early days on how that playbook is working. Jorgen? So this is the sort of the road map for the team as they think about what they're supposed to do every day, how do we get patients through the pipeline, how do we defend our market position. We are the market leader. We need to reinforce that and defend that, project portfolio management. We're working hard as a team around what are the right projects to spend money on and partnership with specific clinics. And then the last 1 is the Axor experience for patients. In -- when we do surgery on a patient, that patient become ours for life. And we have an opportunity to delight them with our Axor. We just announced that we're going to start doing Axor repair in the U.S. for faster turnaround. And we are thinking about new Axors and we're thinking about lifestyle Axors and that's a patient strategy that we think is going to help differentiate us in the future. Jorgen? So just a reminder, we've got Jorgen as our Interim CFO, and Jorgen has been a great partner in this. Inger Rydin is running the operations for me in Europe and then Jeff Zanni, President of the U.S., he runs the commercial activities. And our Board of Directors over there, they've been good partners through this transition. These transitions are -- they're never easy. And there's a lot of things that need to be done, and they've been good partners in guiding me through it. Jorgen? So I'll turn it over to Jorgen to take you through the numbers.

Thanks, Scott. Okay. So looking at the numbers, we can see for the quarter, we have SEK 21.8 million in net sales in comparison to SEK 27.6 million for the comparable quarter or the same quarter last year. This is a decrease of about 21%, and of course, last year's quarter 2 was an increase of 36% over the year before that. Operating profit is minus SEK 11.3 million. And last year, in the same quarter, we had -- we made a profit of SEK 6.5 million. Of course, this leads to a negative EBIT margin, whereas last year, we had 23%. For the full year so far or year-to-date, the revenue is SEK 40.2 million in comparison to SEK 48 million last year, so a little bit behind. And looking at the 12 months rolling over last 12 months, we're currently at 96.7. And for the -- after the full year last year, we were at 104. But I'd like to sort of call to your attention the graph we saw in one of the first slides, 96.7 is still historically quite a good number. And it leads to a CAGR of 26%. And of course, historically, we've been a lot higher than that, and we are not happy about that number, and we intend to increase it. That's our absolute goal. The cash position end October is SEK 34.1 million in comparison to SEK 33.3 million in the same quarter last year. Yes. And here, again, you can see every quarter, the revenue going back a few years. And we're at SEK 21.8 million, which is quite a good increase from the first quarter this year. So I guess we're heading in the right direction, although we're not happy about that number. So yes, looking at EBIT, also quite big negative numbers. And we intend to -- and aim for improving the EBIT as well. But again, we have sequential growth of 18% from last quarter. So we hope to keep that momentum going. Mostly, the increase is, of course, created from increase in S1 procedures and Axor sales. Looking at the full year, we're at SEK 40.2 million, as I said. Also want to mention that we have unrealized currency effects in the result that is net of about SEK 2.1 million negative. And yes, looking at how the dollar has gone over the year, it's still high. I just want to remind you that since it's high, again, sort of -- our average sort of AR currency rate is also increasing. So as long as we keep the same sort of FX rate, we will see sort of a decrease in the volatility in the currency effects. But when it moves, of course, the currency effects will also be there. Okay. So that was it for the financial update. Back to you, Scott.

Yes. So the last slide here is why invest in Integrum. We have an amazing product, and we have a market-leading position in bone-anchored prosthetics. And we need to leverage that position in one of the largest TAMs I've seen in the orthopedic industry. We're going to do that. We're going to win. We're going to focus on winning in the U.S. And we've got a shift -- we are underclubbed in the U.S. on resources to drive this penetration. But first, we're going to prove and understand how to win and then we'll deploy resources against the winning formula. So it's a term I'd like to use called test and learn. So we're going to figure it out first, and then we're going to execute. We're going to win in Europe by focusing on Germany and the U.K. I'm sure there will be other one-off opportunities in Europe that we'll consider doing. But these are 2 good markets to win in and they're leading markets within the European market. Again, leadership portfolio and product launches. We cannot launch a product, we cannot start doing work on a product or think about doing a PMA unless we understand how the U.S. is going to pay for it, how Europe is going to pay for it, what's the return on investment, what's the market size and what are the resources we need to take it across the finish line. So we're going to have a very focused leadership portfolio business model that we're putting in place that there's more thought on the -- we do a really good job on how to get this product to market. But we need to think more about why are we getting this product to market. And then, again, developing the strategic road map with Integrum's Centers of Excellence. And I think that this would be -- this is a great opportunity, and I think this company has a great runway ahead of it, and I look forward to helping the Board find the next leader and then supporting that next leader from the Board position. But until then, we're just going to keep doing what we're doing and stay focused.

All right. So I guess we can hand over to a bit of Q&A.

Okay. Thank you very much, Scott and Jorgen, for that presentation. And let's dive into the Q&A section here. We'll start with the first one. What is the company's objective on achieving profitability? And when it is likely to happen?

We're focused on being profitable. Anybody with our margins should be able to figure out how to be profitable. But that's also based upon growth and penetration and what's the outsized opportunity. And the when -- you know we don't give guidance, so I won't go there.

Okay. How did the resource allocation to the Hanger partnership impact sales in Q2?

So I'm going to hit this straight up because there's been a bunch of questions about our strategic partner. We have a contract with them, and they are a great company and a good partner. In the contract, it specifically -- it says you will not talk about us in your public announcements for partnerships. So I'm just going to refer to our strategy with CPOs going forward. So we have a CPO strategy, which is for the certified prosthetists. Certified prosthetists want education around Osseointegration. Not all of them do. And it's about finding right the certified prosthetists and connecting them to the right orthopedic hospital. There are some certified prosthetists that like to do other things. They fit orthotics and things like that. So we've got to find the ones that want to take care of these surgical patients and then we train and partner with them. So we hired, as you know, last quarter, somebody who is experienced from the prosthetic marketplace, somebody that knows how to market and connect with prosthetists. And so early days on that, I'm pleased.

Okay. Thank you, Scott, for clarifying that. The next question here, when can we expect the FDA application submission for [ ARMs ]?

So we are collecting data for the humeral application. That data collection is still in progress. And then when it's done, we'll submit it to FDA and we'll see what they say. But I don't have a time line on that yet.

Okay. And during the Q1 presentation, you showed 4 focused ecosystem accounts. Are these 4 accounts up and running, doing surgeries, et cetera?

Yes. Those 4 ecosystems are up and running. So we shared an ecosystem strategy, and I think that's a good strategy to explain how the market works, where there's patients, prosthetists and surgeons all intertwined and then the hospitals themselves that create a center of excellence around doing Osseointegration. What we decided to do since then is to become extremely focused, and this is part of a Board strategy exercise we went through was to get extremely focused on 2. And the reason we chose the 2 is, 1 of them, the 1 in Carolina has an amazing center setup. They actually -- they have housing for patients. They help patients with reimbursement. They have a great surgical process. There's 2 surgeons there. There's a prosthetist on staff that works with the patients, that's part of a large CPO organization. But it is the right milieu to study and understand how do we take that footprint and go elsewhere with it. So that's our -- that's why we've refined it to 2. We actually have -- we have a number of centers that implant we want to get -- but we want to understand how do you unlock large market adoption within these centers where you start driving 10 to 30 procedures. When is that going to happen? I don't know, but we're going to study it and figure out how we unlock it.

Okay. And what would you say are the main reasons that revenue in the U.S. has been declining over the past 4 quarters?

Yes, Jorgen?

Yes. I think that premise is a little bit flawed. I don't think revenue has declined sequentially quarter-over-quarter. But I will say that S1s have picked up lately. And I think it's important to understand that why we talk about S1s because people rarely or ever do an S1 without doing an S2 and then buying an Axor. So for us, that's a strategically important number. But S2s are also important for revenue. So if we don't do S1s, we're not going to get S2s later. And when we do S1s now, and while we didn't do S1s before or had smaller numbers before, that's going to hit revenue now because we don't get the S2s. So this is sort of an explanation that doing S1 -- if we do S1s, the rest will follow. So that's why that strategy makes sense. And also can be part of an explanation in the sort of volatility in revenue.

Thank you, Jorgen, for that answer. Several surgeons have recently encouraged the use of OPRA directly after amputation or shortly thereafter. Is this a patient flow you see a potential in going forward?

So I'm aware of that. I think it's very interesting, but I cannot market that because it's not FDA approved. In the U.S., a surgeon is allowed discretion to do what they think is best for their patient and they can make that decision. But we cannot market it and we can't even suggest to a surgeon that they do it. Would it be an interesting market in the future, especially for infected total knees? Yes, I think that could be something very interesting. But again, that would have to be a clinical study. We'd have to go to FDA and we have to do the right way to be able to promote it. So no forward thoughts on that yet, but outside that it could be an interesting opportunity.

Thank you, Scott, for that answer. And the next question is directed to you, Scott, where I ask you to clarify how your sales team has prioritized ecosystem training for certified orthopedic engineers and prosthetic experts has progressed. And what the current challenges are with the training and where the skepticism toward OI lies?

Great question. So first, we looked at the U.S. organization. And we now have a certified prosthetist who is actually connected to large prosthetist organizations that provides training and educational programs in a number of ways. Then we also have a sales activity going in and helping prosthetists to understand why, so they're in their best interest to get involved in Osseointegration. And then we have 2 really good clinical people in the U.S. that go out and partner with U.S. surgeons who want to do who -- let's say, somebody is doing a first-time surgery, they go and partner and do the first cases. And then they also support existing customers on the orthopedic side of things. So we've sort of split our small sales force into 3 functions to get very laser focused on the critical activities. So I don't think we get a lot of pushback from prosthetists. I just don't think -- like I said, we have to prove that this model works, and then we've got to start funding it bigger and that's where we have to think differently about our uses of cash. But that's something we're working on as a team and we'll continue to do. But I'm seeing -- I'm happy with what I see early in that effort, and we'll study it and talk more about it as it becomes tangible.

Thank you for that answer. What about Incentrum? Do they work for you anymore? And what do they do?

So Incentrum is an investment bank that takes a long-term interest in companies. And they work with us on thinking about strategic options. And so we've worked for them off and on, but it's not a big time commitment right now, and it's -- and we continue to monitor the marketplace, but it's a way to think about how could we think differently about maybe more scale or going to market. So that work is still ongoing.

Okay. And with a focus on the U.S., will you also focus on the U.S. investors?

I think there's an opportunity. Since I've taken this job, it's been interesting. I've had a lot of people reach out to me about what is Integrum, and from orthopedic executives to people who used to work for me to people that I know in the market that work with investors. So I think there's a U.S. opportunity for this device because it's such a large U.S. TAM. And also, it's a device that was embedded in collaboration with Walter Reed. There's a military aspect to this. So there should be an appeal. But we just need to figure out how to do that and then get investors interested. So I have no forecast on is that going to happen? I'm just -- it's -- we're thinking about it.

Okay. Thank you. We can read about how VA are now starting to scale up OI surgeries on 6 locations. Can you elaborate on how your cooperation with them is developing? And is the increase in Stage I surgery is a result of VA increasing their surgeries?

So just a quick aside on VAs. So you can get a government contract that proves you to be used in a VA. It's still up to the independent surgeon within the independent VA hospital to decide what they want to do and what they want to use. So within the VA, there are some VAs that don't do Osseointegration. They refer those to Walter Reed and places like that. There are some VAs that want to do it. And then within those VAs, do they want to use Integrum or do they want to think about something else? So I would say that we have partnership with VAs, and I would say that the accounts in the ecosystem are driving more of our revenue currently than the ones in the VAs.

And when do you expect to file for PMA for humerus?

As soon as I get the data collected and we think it's worth filing, then we'll file and let you know.

What is currently the main obstacle in the process of developing an amputee to choose OPRA over your competitors? And how do you plan to overcome that obstacle?

So we -- and we were behind in this, and we're catching up fast, but we're not there yet. We -- and it's a series of well-thought-out, well-crafted communication pieces that the prosthetist can use to educate their patients. First, we got to educate the prosthetist and we got to continue to educate surgeons on why our PMA-approved surgery is better for patients. And it's all about the differentiation and how the patient is treated during the Stage I and Stage II steps in the surgery. So it's educating the patients, caregivers and the market that this is the best approach. And this is why the FDA gave us a PMA. And we are also doing activities to make sure that the market knows that creative ways around the PMA aren't really legitimate. And so that is -- it's an education process. But we were underclubbed on patient education materials, and we're catching up very fast. We've got a very creative -- we've created a global marketing team where we put the U.S. and European marketing groups together. So they are now thinking through this, and we're leveraging those tools across both continents. And that's a much more cost-effective way to do things.

Thank you, Scott, for that answer. Has there been any new additions in terms of ecosystems in the last quarter? And how many potential ecosystems are there currently in your pipeline?

Yes. So I have plenty of ecosystems for right now. And I think focusing on '25, if we had the playbook up and running, we would be focusing at around '25. And then the whole game is to figure out how to funnel patients to those '25.

Okay. And do you have any updates on the process of below-knee FDA study by Walter Reed? Also, are there any plans to also apply for PMA for above and below elbow or thumb?

Yes. So the first statement I'll make is PMAs are not an insignificant cost. And I want to leverage the first PMA that we have deeper and those funds -- if I was a $30 million company in the U.S. with our margins, I could take on a lot of interesting projects. And that's just -- and I think we can do that by just getting focused on market penetration. So when I -- and that's why I talk about portfolio. What we're going through right now is to look at the portfolio and say, what is the proper sequence of all these PMAs that we had an appetite for doing and what's the proper sequence to do them? And right now, the first proper sequence is we really think the humerus is a phenomenal product, and we want to move that forward. So we are in the work of digging into all of these R&D projects and figuring out where they're at and what we should prioritize with our limited resources, and then we'll prioritize those. And then once that is a public, something I can talk about, I will share it with you. So all these PMAs are great, but we're in the process of thinking them through.

Understood. And how is the work going on solving the problems with the insurance companies that arose in Q1?

Yes, I'm glad you asked that question. So our U.S. President put a task force together. We hired a consulting firm that helps you fight this and they put a body on it, and it's a very cost-effective solution. And we have been -- early days, we've had some nice wins working with insurance companies. So we really didn't -- we got 2 things that have happened. One, we're now educating insurance companies because this task force that Jeff put together has put a great set of tools together for hospitals to use and defending why they should do Osseointegration surgery. Second, we can now go back and look at patients that were denied and we can try to get them back into the queue. So it was a good piece of work. I'm really happy we've got a strategy against that now. It doesn't mean I'm going to win everyone. Insurance companies are insurance companies, and they love to say, no, but you just got to keep fighting the fight.

Okay. The Axor II insurance code, how is this structured with cost reimbursement and hourly reimbursement for prosthetics?

It factors all those in. They're -- they get paid for the device and they get paid for their -- the hours that they do, and it's very competitive with doing a socket.

And how do you work with the center of excellence in the U.S.?

You support the surgeon, you support the staff. One of the things that we've started doing, but we need -- again, this is -- all these ideas take funding, and we got to figure out where are the best ones to deploy. But we've got -- in these 2 test centers we're doing, these hospitals want to do co-marketing to patients where we brand the hospital and Integrum together. Similar -- very similar to what Intuitive does with robots or MAKO does with robots or people do with single incision surgery, those types of things, and then you brand that as a service offering at the hospital. So we're trying to go into these hospitals to say, how do we make this bigger? How do we make this an important piece of your surgical game plan? How do you -- and it's -- because it's a great revenue generator for hospitals, and these patients, they come into the system, they are good patients to have in the system. So we work on marketing, we work on having the surgeons be the best that they can be. We work on the staff understanding. We work on logistics where -- how do these people get entered into system. And then we work on economics. And that's the last piece. We're really drilling into economics on why this is a good return for a hospital to focus on.

Thank you for that. What do you aim to get out of the Hanger partnership this fiscal year?

Yes. I'll stay away from that one. That's given some guidance.

Understood. Can you talk a bit more about the dynamic of the competitors in the U.S. that tries to sell non-PMA implants?

Yes. The dynamic is they sell a different procedure, and they go to people and say this is cheaper to do and then the patient doesn't get the revascularization of tissue around the stump, which is the proper way to do it. They don't have the proper safety device. A lot of these patients are -- the single-stage surgery is done and then they're just dismissed out into the marketplace, and it's left up to the prosthetist to try to invent and build his own safety device. So it's just a -- it's a good-sized market. And anytime there's a good market, people try to invent their way in. We just got to take the high ground, defend our PMA, talk about why this is a documented scientific surgery that's got great clinical studies and great clinical data behind it, and you got to fight the fight. And then any market that's big, you've always got to fight that fight and just keep educating and keep driving the point that this is the best outcome.

Okay. And regarding payments from Ukraine, are you getting paid for the work you've done there?

Yes. Jorgen, do you want to go through that?

Yes. We're getting paid regularly. But I mean, I'm glad you asked the question because then I can mention the fact that we're also working with the Swedish Export Credit Authority to fund some of our exports to the Ukraine. So yes, that's -- and they have a special sort of program for that. So that's going to be interesting.

Okay. I'm going to take 1 final question here before we wrap up. Is there anything that investors should look out for in 2025?

Jorgen. I don't think I can...

No. I don't know. I mean we're going to do our best to both increase revenue and collect cash and so on. But I mean, that's not guidance. That's our ambition, I guess. So not a given.

We're going to focus on what I call sticky tangible revenue that creates market penetration. And we're going to use our -- we're going to think about how we use our cash more effectively, and then we're going to execute on payables and driving -- I'm not going to say operational excellence because that's a long-term goal, but just being much -- being very focused on operating the business.

Okay. Jorgen and Scott, thank you very much. It's been a pleasure having you on here presenting and answering all of our questions. And I wish you a very good luck going forward. Thank you very much.

Thanks, everybody, for calling in. Appreciate it.

Thanks, guys.