Medacta Group SA (MOVE) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the conference call of Medacta International SA. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand you over to Medacta's CEO, Mr. Francesco Siccardi, who will lead you through this conference. Please go ahead, sir.

Thank you very much, and welcome to this preliminary presentation of our top line figures for the full year 2019 results. As you have seen from our press release, Medacta confirmed a very strong revenue growth, significantly above market. We managed to hit an organic growth of 14% reported with revenues up to almost EUR 311 million. This is equivalent to 11.4% in constant currency. In terms of product mix, we have seen a very positive contribution from all our business lines, with a very good and stable growth in our core business, Hip and Knee; a very good performance in Spine business, thanks to the strong acceleration in the second half of this year; and a very successful strategy deployment in the Shoulder business, along with a very fast business expansion. If we look at our geographic mix, we have seen a very good growth in all our markets, with Europe basically in line with our expectation despite that we have, of course, a higher market share and continued the same price pressure. In particular, this year, we had France and Belgium where prices are fixed by government that has been cut. Asia Pacific delivered very well, thanks to a very good marketing strategy. We'll go a little bit more in details around this point. And a very good full year performance for our U.S. territory with a strong reacceleration of Spine, especially in the second half of the year. In the rest of the world segment where we go mainly through stocking distributors, we have seen a very good expansion as well, both through adding new territories in new countries and reinforcement of existing distributors. The last highlight is related to the contribution of our big investment this year with the M.O.R.E Congress for the 20-year anniversary of Medacta. We have seen a good -- a high conversion rate in all the different business line, with additional sales generated mainly in the second half of 2019. And of course, this will carry over in 2020 with customers continuing to ramping up and contributing for the full year in 2020. If we go on the next slide, on Page 5, we can see the contribution by product and by region and the comparison with the previous year. If we look at our product mix, we can see a stable growth on the Hip side, a slight reduction. This is mainly, I would say, physiological within our growth rate year-over-year. On a full year, we had a very strong performance of our Knee. We were expecting slightly higher than that, but definitely not as strong as we had in 2018. Very pleased with Extremities, which is growing extremely well, with a very good contribution to Medacta top line and profitability. And very good acceleration in the second half, as you can see, that only partially recovered the full year results. We had a very strong growth in 2018 and we finished at 23%. You will see later on the strong contribution we had in Spine from the second half of this year. The geographic mix is quite in line with our expectation, 8%. Very stable growth in Europe, in line with last year. U.S., overall, at 13.2% growth, overall, definitely a good result. Some delays in hospital approvals did not allow us to hit the numbers we were expecting, but overall, a very good performance, while Asia Pacific did perform exactly in line with our expectation with an extremely strong second half performance. In this table, you can see the good increase in our stocking distributors with the addition of new countries, minor countries and some reinforcement in existing territories, in particular in South American market in Brazil as a special focus. If we make a deep dive or a deeper dive on Page 6, you can see the overall revenue growth by products. The Hip, on a yearly basis, up 5.3%. The key focus remains our AMIS technique and its expansion and medical education, that continues to grow above market. The Knee side is very exciting, still delivering incredible growth, 13-plus percent. This is linked to a very strong offering Medacta is able to propose to the market, combining innovative implant design, personalized kinematic alignment and the single-use instrumentation, which continues to increase percentage-wise in the number of knees implanted using this unique technology from Medacta. The Shoulder, as we said, continued to grow. We continue to expand and complete our product portfolio. We had some delay in getting the FDA clearance for our MyShoulder personalized platform. We just received the clearance at the end of 2019. While we were expecting this to come earlier, nevertheless, the performance is exactly in line, but we could have done even more. Spine, on the next slide, you will see it more in detail, how the reorganization and refocus around our MIS, MySpine MC did bear its fruit, with a very strong acceleration in H2 and basically doubling the growth rate we had in H1. And on Page 7, you can see the comparison between the 2 semesters where we noticed a deceleration of our growth in Hips going from 6% to 4%. There are some delays here mainly linked to some European tenders in Italy and in Austria and the overall delay we have seen in the U.S., which is mainly concentrated in Hip and Knee. Knee, nevertheless, continued to be stable, around 13% in terms of growth. And the Shoulder, that did slow down, but this is linked as well to the increased base, if you want, of turnover that we continue to generate in our Shoulder portfolio. Spine, as I was mentioning before, we are very pleased of this turnaround with the second half of '19 delivering 35% growth, back on track. And especially pleased because we really changed the way we approach the market, going from almost a commodity type of sale with the screw and cages, in the direction of a super specialty MIS technique and related medical education that Medacta can provide. We do the same exercise on a geographic base. You can see the contribution of our geographies with Europe in line with our plans. Good performance, definitely above market, where we estimate the European market to grow between 2% and 3%, so definitely a very good performance. U.S., as we said, overall, strong performance, 13%. We were expecting slightly more, at least a couple of points more, and this is the delay we announced in November with hospital approval as one of the main road blocks and the slowdown that are just taking longer for us to enter some of the accounts that are waiting for us. Asia Pacific, extremely growth -- extremely good growth and above our expectation in the second half. Very good marketing strategy in the Australian market where we have started to market direct to -- directly to patients our innovative products and this did deliver a very strong growth, and a very good performance in Japan, both on the joint side, Hip and Knee, and in the Spine. As we said, very strong growth in the rest of the world. Our stocking distributor market did perform extremely well, especially South America and new markets in the Middle East and North Africa that helped us a little bit accelerating our presence in those markets. If we compare the 2 semester on Page 9, you can see a very stable growth situation in Europe. While we notice this deceleration, but still a very good growth, almost around 10% in North America. North America is as well an area where we do have, on a periodic base, some new territories conversion. Last year, we had a very good bump in Southern California. We do expect additional bumps where we convert competitive reps in certain states and we hire 5, 6, 7 people at -- in a single shot. And those are closing as well. Those are fluctuation between the different quarter or semester. It can be H1 bigger than H2 or vice versa. This is part of our growth history and you will see it moving forward. You notice here in APAC as well, the very good performance in the second half of this year with 18.6% coming from Asia Pacific in the second half, contributing to an excellent full year performance, mainly refocused and refined marketing strategy around direct-to-patient communication and helping surgeons in practice and hospital to market Medacta innovation directly to patient. This was particularly true in Australia where there is a very competitive market environment for our customers. In the rest of the world, the stocking distributor shows this increase. Percentage-wise, it looks very, very big. In terms of dollar, it's much more reasonable, but we basically were able to reinforce our presence in Brazil, and we were able to open additional countries. In particular, we had new countries in Lebanon, Mexico, Paraguay, Tunisia, which started with new stocking orders, some only for Knees, some only for Spine, but it's, overall, a good contribution that will continue to carry fruits -- bear fruits in 2020. I think this is all for our top line highlights, and I would open to any Q&A session, and I believe our moderator will manage this time.

[Operator Instructions] And we've received a first question via the telephone. It's from Alex Gibson, Morgan Stanley.

I just have 2 quick ones here. On the conversion rate of surgeons that you had from the M.O.R.E Symposium in Lugano, what is that conversion rate so far? And what it -- does it compare to your target conversion rate? Effectively, how many more surgeons should we be expecting to contribute to growth next year? And then my second question is on reimbursement changes in your respective markets. I know it's 12 months or so since you gave your midterm guidance, but if you could just put into perspective about how any reimbursement changes are impacting your thinking there, that would be helpful.

Yes. On the M.O.R.E Symposium, the conversion rate we have seen in terms of number of surgeons converted is in line with our expectation in terms of number of surgeons that started to use our product. We were expecting some of the surgeons to start earlier or with a faster ramp-up. We did see some of the conversion coming a little bit later than anticipated. We are talking about November and December, but the vast majority of the surgeons expected to convert, because of specific -- that event is basically come to an end. We do still have a few very important accounts that we are dealing with hospital approvals, but we're talking about small numbers but relevant in terms of turnover. But of course, you have to consider as well that the contribution that surgeons have for 2019 is, by definition, much stronger in 2020 because they will contribute with a higher number for a longer number of months, hopefully, the full 12 months next year. So we do still expect a very good carryover contribution from those accounts. The second question in terms of -- so back to the rate, we are still around our 80% conversion, which remains our target. The second question was around reimbursement, and I believe you are referring to the specific countries where price is fixed by the government such as Japan, Australia, France and Belgium. There are some rumors that some price reduction in Japan should happen. We are not sure about the entity and the timing, but we did forecast for this in our plans. And the same could or should apply for other minor market. We did model this price erosion in our midterm plans. So this should not have a material impact in our midterm guidance so far.

Okay. Great. And just one follow-up on the conversion rate in conference. Given that it's such a good way to convert surgeons, what's your budget for next year when it comes to conferences? Are we likely to see a similar spend to 2019 with regard to those conference and marketing events?

Yes. In general, as we try to emphasize during the H1, the budget we spent in 2019 for the 20-year anniversary conference was concentrated in one event, but it's not significantly higher than the budget we spent in 2018, at least in percentage of sales for smaller events, but overall, the total expenses remain the same. And in 2020, instead of having one big event, we are planning 5 to 6 international events, 1 in North America, 2 in Australia, 2 in Europe and so on and so on. So we have this kind of tradition within Medacta that every second or third year, we do a global event. Otherwise, we have the same marketing expenses distributed in smaller event. So the contribution of smaller event and big event more or less remains the same. And don't forget that this is on top of our standard education effort around surgeon-to-surgeon visit and the more personalized medical education through cadaver courses, proctoring, et cetera. So this remains an overall marketing and education effort that we continue to do in more or less the same fashion, but different tactic, if you want.

The next question via the telephone is from Chris Gretler, Crédit Suisse.

This is Chris. Francesca or Corrado, actually, I just wanted to follow-up in this onboarding kind of situation towards the end of last year. I understand kind of what you commented. So basically, what's the issue with this other few important accounts you mentioned that are yet to be onboarded?

This is always a process that we have to deal on a daily basis of hospital approvals. So more and more, but especially in bigger accounts, especially in academic center, to enter into those accounts, you have to go through quite a long administrative process. And you basically have to win, of course, the support of the key surgeons within the hospital organization and then you have to go through a pricing discussion and then you have to go through cleaning and sterilization approval. It's quite a long process and, unfortunately, the people involved are not the same agenda we have. And this is the case with some very big accounts or government accounts. We're talking about, for example, VA hospitals where we do have, for example, a national agreement in the U.S., but you still have to win at local level and go through the bureaucracy and this is the government. So there's not so much you can do to push and sometimes it goes relatively fast. We are talking about 2 to 3 months. Sometimes it can last 6 months or even longer, and this is the case for some of those accounts. But then once you are in, you are in a very protected environment, hopefully, for many years. So that's not uncommon. It is part of our job. We have reinforced our corporate account activity with more people fully dedicated to this task. And we are quite confident to that -- but this is part of our job, our daily routine. But when you grow fast, you have to play on different tables at the same time and sometimes it slows you down.

Okay. Yes, I got it. And then just quickly on the distributor business, I guess, at the time -- at the last time, basically kind of spoke to the market. You basically mentioned a little bit of volatility, I mean, towards the end of the year, kind of. Has this normalized? And basically, you're now happy with kind of the levels you achieved relative to your original expectations?

Not really. We do still have 2 or 3 distributors with whom we are discussing, that we were hoping to close last year, which was part of the announcement we did in November in certain markets or for certain product lines. Just to give you an example, basically none of our distributors do carry our Shoulder product line. And there is still a mix between countries where we only have joint and not Spine or vice versa. So those are some of the areas where we are actively working. And some of those activities I was hoping to close the end of last year, but they are -- we are still in discussion with pricing, with payment conditions, et cetera. Overall, of course, as you could see from our second half, the rest of the world did become a little bit more focused. We have reinforced our sales structure dedicated to the 20-plus countries where we have our products carried by independent distributors. So I hope it will continue to grow. It remains 5% to 6%, I guess, overall, more or less the same percentage. But as we continue to grow, it requires -- and it can -- it requires attention and it can really bring good contribution to our top line.

Okay. And then maybe the last question, just on Spine. There was very kind of meaningful momentum now in the second half. So it looks like your strategy and your kind of efforts are now taking effect. I was just wondering kind of basically, initially, you tried to sell more like these plain vanilla products, essentially kind of, and then to MySpine. Does this actually involve different customers, basically you need to fund? Or is it basically kind of leveraging a different type of product now into the same customer base you're already having?

No. It's the same customer base, but the sales cycle is a little bit longer. It's exactly the same experience we faced with a similar approach. So you go into an account and instead of simply trying to switch implant with basically product feature, you go in and you try to have a clinical and a business discussion around an innovative, minimally invasive technique that can improve patient outcome, shorten hospital stay, but it requires a medical education. So they are interested, they come, they want to see some of their colleagues doing cases or they come to cadaver courses where there are teachers. And this cycle takes 3, 4 months, and that's what we paid, if you want. When you change strategy, you have to build a pipeline of customers that are through this process. So now that the pipeline is full and we run on a frequent basis those kind of courses, we believe we will continue to generate interest in all the different markets. The feedback is very good and you see the sales figures as a result. But the beauty of those numbers are not the numbers per se are the fact that surgeons are linked to a specialty from Medacta and not to a generic me-too product that they could switch. So we believe we can build more -- some more, how do you say, loyalty to -- with our customers, thanks to this kind of specialty product. And then, of course, bringing the rest of the product range less differentiated, if you want, but that's a very strong opener for sure.

There are currently no further questions via the telephone. [Operator Instructions] There are no further questions on the phone.

Excellent. I would say, if there are no further questions or there are questions down the road, we can, of course, address them on a one-on-one basis, and we could close the call. And probably, of course, we have the chance to speak again in April, and I look forward to that.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.