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

Hello, and welcome to Redeye. Today, we are joined by Integrum to discuss the company's Q4 report. And with me, I have the new CEO, Martin Hillsten, and we're also joined by the acting CFO, Jorgen Svanstrom; and the former acting CEO, Scott Flora. Welcome.

Thank you, and welcome to the year-end and fourth quarter report from Integrum. My name is Martin Hillsten, I'm the new CEO for Integrum, and I'm very excited to be on board. So I joined here just recently, early May, and I'm trying to get my head around the company and the business we are conducting. As you know, Integrum is a fantastic company with amazing products. And I had the opportunity to also meet the U.S. team in Boston. I have followed the company for a few years from outside, and I'm very excited to be -- finally be on board. Before signing, I've had close relation with the Board and to understand the new strategy for the company. And I'm very happy to finally joining the company and be able to present the fourth quarter for the last fiscal year. As you probably know, the U.S. market is our main target and where we put a lot of commercial resources and where our focus is. We are the only PMA-approved product for bone-anchored prosthesis systems in the U.S. We have the sales team in the U.S., representing approximately 10 people. We have distributing partners across the country. And the U.S. market for this product is about USD 5.6 billion. But we're also in the European markets, which is also an important, but not a focus market for the time being. We have internal sales force even there, and the market is a little bit smaller, approximately USD 2.2 billion. So I will take over now from Scott Flora, which has been acting CEO and also a Board member, and the strategic plan that was communicated in the market in February of this year is delivered by Scott and the Board. So I will introduce Scott Flora to everyone here for his message.

Well, thanks, Martin. It's good to be back with everybody and Martin, congratulations on your appointment, and we're very excited about you leading the team at Integrum and looking very much forward to your driving growth continuing in the company. As I start out today, I want to thank the Board and all the Integrum employees because we made some tough decisions. And we told you last September, we needed to get focused on market penetration, and we needed to find a way to get more money into commercialization and be a little more focused about what R&D programs we were going to drive. And some of those decisions are hard and tough, and I really appreciate the employees' support in doing that, and the Board has been great working alongside of them. So I'm supposed to talk about the U.S. today. But I think what a really interesting thing about Integrum is the growth in the U.S. has been driven by the whole team. It's been driven by the great people in Sweden and the great people in the U.S. pulling together because we really made it clear that this is a once-in-a-lifetime opportunity. You've got a PMA and a huge market opportunity, and we've got to get focused on driving adoption. And that adoption is going to feed critical resources back into the company and help the company do more projects and drive more growth. And they got behind that. And that's what really helped get focused on driving S1s as we've often talked about. We've got a small, but focused U.S. team. And I think one of the really cool things that they did was pull together and identify the critical tactics that needed to be executed on to drive the performance that you saw in the Q4. And again, the Swedish team supporting from logistics and other marketing and regulatory is just an all-out team effort, and I'm very proud of all of them. And it was a real privilege to be working with them. But I think the U.S. team, we started the journey of understanding how to drive S1s. We're not there yet. We got -- the company has work to do, but I just think there's a really great platform now to grow from. And I think I'm really excited about Martin joining the company and helping us take that next giant step. So finally, it's been a pleasure and honor to be Integrum's CEO. And I really enjoyed getting this company back on its feet and helping set it up for growth. And I really enjoyed -- I met a lot of you, a lot of investors, I spoke to a lot on the phone and e-mails, and I really appreciate all of your support. So, Martin?

Yes. Thank you, Scott. Yes, the journey you commenced earlier this year, it's bringing a lot of value. And now I'm going to present just the overview numbers, how this fourth quarter came out. As you can see, we are performing really well. On the screen here, you can see the last 4 quarters. And if you compare to last year for the S1s, which is the KPI that we are communicating in the market and it's taken us from 41 to 45, which is proving -- it's a proof that our business model actually work. Let's focus on the U.S. numbers. So 23 -- the KPI was 23, now 34, which is up 48%. And this is a strong message and also result from the focus that we have in the U.S. market and the way we want to work and create those ecosystems around the hospitals to bring new patients into the OPRA system. And S1 is the clear KPI that show that we have a long-term growth and that the work we do actually pays off. So we also have our CFO, Jorgen. He will go a little bit deeper into the numbers. So I'm handing over to Jorgen.

Thank you, Martin, and thank you, Scott. It's been a real pleasure working with you and getting to know you. So thanks a lot. Looking at the numbers, it's -- we're happy to finally report growth in comparison to the corresponding quarter last year, for the first time this year, and given the slow start of the year as well. So we're now at SEK 27.1 million for the quarter in comparison to SEK 26.1 million last year. If we look at how this is distributed over the markets, the U.S. is as usual, the bulk of the revenue, but even more so this quarter, when we compare it to last year's Q4 with SEK 21.7 million in comparison to SEK 16.3 million last year. And by the way, this is also the best quarter ever for the U.S. team. So we're very happy with that. Also, I mean, if we look at the rest of the world, EMEA, APAC, SEK 5.4 million for the quarter. And this has to be seen also in the light of us having one salesperson in that team working for EMEA, APAC. So a really nice contribution to our total revenue. Also, I think the comparison to last year, it should be noted that, if you remember, we opened up markets in Israel and the United Kingdom with set sales, implant set sales in each of those markets totaling about SEK 3 million. So looking at the sales organically, we are -- yes, we are doing almost as last year even in EMEA, APAC. Turning to the EBIT. It's minus SEK 11.7 million in comparison to plus SEK 2.6 million last year. Of course, there are slightly higher costs in the OpEx this year, but it should also be noted that last year's figure was also boosted by SEK 4.5 million in currency -- positive currency effects, whereas this year's EBIT is affected by negative currency effects of almost SEK 2 million. So yes, I think the quarters are more similar than it may seem at first sight. The cash flow, if you exclude the share issue, was totaling at SEK 3.5 million negative, but that's also including the trade term loan that we made use of, of about USD 500,000, almost SEK 5 million. So -- and of course, we are using the trade term loan facility to smooth out our working capital issues. So I guess, we've been talking about this. Yes, I think we started talking about that facility at last year's call, Q4 call. So it feels good to be able -- finally be able to say that we are now being able to use it and are actually using it to improve the cash flow. And that leads us to a cash position of SEK 39.6 million at the end of Q4. Another thing that we changed for this quarter is an accounting change that needs some explanation, I guess. But since the parent company is selling implants to the subsidiary in the U.S., we have a lot of group internal accounts receivable. And I think it's more of an accounting issue than anything else. So given the accounting rules, we are now treating those accounts receivables as loan and an investment instead, which means that we can remove the currency effects of those accounts receivables from the result and the P&L and instead post it directly to the equity. So it's still there, but I guess the move will make it easier for investors to interpret our P&L, and that's the whole purpose, I guess. Thanks a lot.

Yes. Thank you, Jorgen. Thank you. So my first month here, I'm trying to understand the company, and I've been deep-diving into the organization and to see what we need to do. As I mentioned, the U.S. team is driving the sales in a very good way. We focus on selected centers of excellence, meaning that we're trying to establish ecosystem around the hospital to capture patients and make sure that the S1, so the first surgery actually will happen. We're looking to how to strengthen the aftermarket business, which is likely part of our business model, the consumable, the Axor II. It's the connection in between the implant and the final prosthesis, which is a 3-year product that we hope to find a strong business model around and also trying to capture the CPO. So these are actually technicians that has contact with the future patients of ours. As you know, this is R&D company going into the market. So we are having some different R&D projects, and we need to understand what we need to feed the strategy that the Board has approved. And have an overlook and see what kind of priorities we need to focus on the right things and discontinue the things that we don't need. And we have communicated the S1. This is the second quarter that we are disclosing this KPI. And we believe that it's a strong indicator for telling how the growth for the company is going and showing our performance of the operations, especially the commercial operations. So I hope everyone has read the report and understand the numbers. We have received a few questions. So I welcome Oscar on stage.

All right. Thank you, Martin, for that presentation. We have quite some time for the Q&A session. I think that's a good thing because I have a lot of questions and also from investors watching. But let's start with you. You joined Integrum about a month ago. Could you just elaborate a bit on your interest in the company and what you expect to bring to the table?

Yes. So I have about 20 years of experience in medical devices. I started out my career at Nobel Biocare, so dental implants, which is manufacturing in the same way, which is titanium growing into bone. I always worked in commercial structure and trying to develop companies to grow top line more or less. For my past 5 years, I've been developing a company called Integration Diagnostics with the unique technology for measuring osseointegration of dental implants. So I have given the idea of growing titanium into bone, a very great deal of thought so -- and driving commercial structures and the position that Integrum is in right now, I think that is a really good match. And yes, to me, it's a very exciting moment to take on this.

So it's not an unfamiliar area for you in other words, with osseointegration?

Yes, it's very familiar, to say.

And Integrum now has a permanent CEO in the management group, but you still have an acting CFO and an acting COO. So I'm just wondering, now with the CEO in place, what's the plan for finding permanent solutions for the rest of the management group?

Good question. I think the Board just waited to have like a permanent CEO to make any big decisions for the top management of the company. We are in the process of recruiting a new CFO and I hope that we can present that very shortly. And Jorgen has performed a great job and -- but we're trying to find a permanent solution that will be very close to me and work in the top management.

Okay. And in the meantime, we still see how clinical validation is strengthening. OPRA, for example, Walter Reed published an independent study with some pretty interesting results. Could you just summarize them and maybe explain how you will leverage this in your commercialization efforts?

Yes, the data from Walter Reeds strengthened our position as a truly unique system with very good data, and we are performing studies, especially in the U.S., also supporting our PMA, our registration. And the data is clearly showing that we have a good system, safe system and really bringing strong evidence for patient benefits.

We actually have a question because you mentioned the PMA there. You have process for PMA above-elbow, which we haven't heard much about in recent times. Can you just explain where you are standing with this research?

Yes. So the project is ongoing. I can't really disclose the time frame for it. But it would bring a strong patient benefit if we can have PMA for above-elbow also in the U.S. market, but we're not there yet. I can't really disclose the time frame for it.

Okay. And Jorgen, I think this next question is most suitable for you. You conducted a share issue of SEK 31 million in this quarter, and you also announced a strategic shift that aims to reduce costs. Can you give some background to this equity raise, and perhaps also some concrete examples of how you will reduce costs?

Yes, of course. I think you have to look at the program in light of the other shifts in strategy, and that's, of course, making the company focus more on the commercial side. So a lot of the activities we are doing, pertain to shifting resources away from R&D activities that we feel aren't bringing commercial success in the short term -- or mid- to short term. So I mean that's then letting go of certain consultants and so on is a typical activity then for a program like that. And of course, the share issue is to give us the runway to make us able to focus even more commercially.

And you also mentioned in this report that by the next Q4, we should see the cost efficiency measures to be implemented. Is this depending on any specific factors that might be at the risk of delaying this implementation?

I mean, of course, there are never any guarantees, but I think that -- I mean, it's just that -- I mean, I'm part of it as well, of course, the program itself. So depending on when Martin can replace me, that's also when a small part of that program will take place. So I think we're on track with that and I think it will still hold that the full effect will -- all activities will be done by Q4 this fiscal year. And that, of course, means that the full effect will not take place until next fiscal year, the full year effect, I can say.

And before we dive into the nitty-gritty details of this report, can you just explain, again, the gross margin we saw in Q4? You have, in the past 4 quarters been pretty stable at 80%, but you have seen quite volatility in past quarters, and now you're at 64%. Just some background to this, please?

Of course, yes. I mean, I mentioned in the report that we have done some write-offs totaling SEK 2 million. And of course, yes, it's a little bit of an accounting issue, and I don't want to dive too deep into that stuff. But we have, for example, instruments that we are renting and loaning for the surgeries and procedures that we do. And of course, there is wear and tear. And it's -- there are several ways to handle this, but we have chosen a way that means that we write them off when they are sort of used up. And this is what we have done in this quarter and some other similar things. So...

Are there any spillover effects into Q1 for write-offs and so on? Or should we expect the gross margin to reach back upwards 80%?

I don't want to give too much guidance here, but I would like to, I mean, point out that the underlying costs are the same, the structure is basically the same for Q4 as well. So I mean, you never know, but I mean, given all things equal, the old sort of gross margin should remain.

Okay. And this is the second quarter where you actually mentioned how many S1 surgeries that you have, and you had 34 S1 surgeries, but we learned that roughly 80% of these were conducted at just a few hospitals. And I understand the strategy of going deeper -- for going wide. But can you explain sort of in terms of capacity at these few hospitals, are they having any more room for increasing volumes? Because I'm trying to understand where growth will come from as we advance. Should we expect more volumes at these small hospitals or more hospitals starting using OPRA?

Is that a question to me or Scott? Jorgen or Scott?

Anyone who wants to answer?

Thanks, Oscar. So the focus centers, they have capacity. And some of them are working on bringing other surgeons on board, but we think there is more capacity in those centers. And it's all about linking patients to those centers and find -- and training the prosthetists around those centers. We also have a set of centers that want to do more osseointegration. But we have been very focused on getting patients to the trained centers because it does cost money to train a surgeon, it does cost money to bring a new center up. But there is a funnel of -- our top focus centers have capacity. Then there's another group of centers where we could go to where the surgeons have been trained, but we would just start engaging and driving patients. And then there's another set of hospitals that want to get involved, but we just don't have the capacity to train them yet. So there's a pipeline there. There's a pipeline for growth.

Is this something that can be sorted by expanding your team of people in the U.S. for training?

Yes. And I think Martin hit the nail on the head earlier when he said we got to keep working on this. We got this U.S. team and then how do we expand that U.S. team, and how do we make it more efficient and then how do we really fine-tune what R&D projects we're going to do? So I feel comfortable Martin's got his hand on that one very firmly.

Okay. And if we -- I mean, this year, it's going to be 5 years since OPRA received the PMA approval. And I suspect 5 years ago, Integrum expected sales to be higher than they are currently today. Can you just explain what the challenges have been? And what's different in this strategy compared to how it was 4 years ago?

Yes, because it's all about people programs and focus. And we've had 2 to 3 people in the U.S. Well, my first one -- when I first started helping the company, we had one person. And I think it's about expanding the right type of salesperson that understands how to sell this device and then getting the support at the orthopedic side as we've talked about, and then selling the prosthetic, the partner, the CPO to refer the patient. And then it's getting the right marketing programs. Martin also just hit on the -- we've got clinical studies where we're showing that this product is a valid product, and it's something that should be implanted and it improves lives. Getting those into materials that educate patients and surgeons and prosthetists, those are programs that we've got to do and we weren't doing in the past. So to be -- not to hit this too hard, but we probably underclubbed or went after some wrong programs at the beginning, but I think there's a much better understanding of what levers to pull now.

And to what extent do partnerships play a part because you have a partnership that was announced about a year ago with Hanger. We haven't really seen or heard much about it, but can you explain how that has progressed since it was announced?

That partnership has progressed well. Hanger is a company, and they don't -- they prefer us not to talk about details, so we have to respect them with that. But that's a -- I think that's a really good partnership. They're a good partner. They distribute product for us. They help us co-educate prosthetists. And when you only have 3 salespeople, picking the right prosthetists to educate is very important because you got to run -- you can't run around and train 100 prosthetists because you don't have enough people. You got to be very focused in doing that. So Hanger helps us really get focused on, okay, you're at hospital X, here's the prosthetist to train. So that's -- I think that program has come a long way and our U.S. President, he's done a great job in making that making that really work. And I tell you the benefit of that collaboration is it helps us become a better company at understanding these patients and understanding what information they need to do to decide to have surgery.

I'm going to circle back to one of the questions regarding the number of hospitals that are doing your surgeries. Can you give some more background to what that list of active centers looked like today? And perhaps a figure would be nice or anything of the like?

Yes. I'm sure it would. I'm not -- I don't -- I think we should just keep it at, we've got a very few centers doing most of our patients. And it's just like -- I never used to give out the number of implant sets that I had in the market. It helps people try to triangulate things. So we've got a few really good centers, and they have capacity like I said, and then there's others waiting to go.

Okay. And I guess then my next question might answer itself. But are you looking into providing details on how many surgeons are active and up and running with OPRA?

Are we going to disclose those details? I'm not because, right now, I'm not as a Board member. And I wouldn't, as the CEO. What I would say is, the reason we decided on S1s is we thought that was a really good KPI for our investors to get their head around that we're actually building revenue by bringing new patients into the company. And then there's a revenue stream with those patients. And that's what we want our investors to understand.

And I think we have one more question for you, Scott, before we turn our heads back to Martin to wrap this up. In January, you announced an educational partnership with SPS to host a number of educational programs during the year. Can you just elaborate on how this has progressed so far?

I think -- so that's where we're working with Hanger. So just to help everybody understand, Hanger has 2 businesses, and the SPS part of Hanger is their distribution team. So they sell to non-Hanger-owned prostheticians. And so Hanger asked us to help them train those prosthetists and get better associated with osseointegration. And again, what we did, and some of them -- we probably missed it on a few of them. But for the most part, we -- SPS identified people that where we had hospitals with trained surgeons. So we weren't just training somebody that didn't have anybody -- they weren't near anybody they could send a patient to. So that program has been successful. We learned a lot with those first couple of programs and SPS and us from what I understand, are still engaged in that.

Okay. Thank you, Scott. Martin, as a final question, what are the 3 focus areas for Integrum in the coming 12 months?

Yes, that resonates well with what Scott just told us that we need to understand that we're doing the right commercial operations in the U.S. You said going deep before going wide and to secure the business that we have and trying to establish those ecosystems, and we use our resources efficiently. That's one of the main thing. And taking this organization from traditional R&D organization, medical into a more commercialized focused organization. And that's a transition, that's a culture, and that's the thing that we work hard with. And the third part is to find our processes, define those and make everything scalable. So that's in a nutshell I think.

Thank you very much, Martin.

Thank you for having us.