Medacta Group SA (MOVE) Earnings Call Transcript & Summary

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

Thank you. Thank you very much for the introduction. Welcome to this full year 2021 preliminary unaudited top line figures. I'm with Corrado Farsetta, Medacta's CEO -- CFO.

Good afternoon.

Highlights of 2021, which we are going to report today are focusing on top line only. Full year revenues this year reached EUR 363.1 million with positive revenue contribution from all our business lines and all our geographies. In terms of growth, we managed to grow at 21.4% at constant currency, 20% reported. And this was thanks to a significant both carryover and of existing customers acquired in 2020 and the new customer acquisition acquired in 2021. We could work in a more normal environment compared to 2020, although as we know, throughout the year, we had to manage different restrictions in Q1 and in Q4 and in the second half of the year, depending on which geography. The key pillars behind our growth are consistent with our strategy. We managed to introduce a significant amount of new innovative products, more than 50, especially in H1 to take advantage of the last opening of the window before the change in the new medical device regulation. We managed to continue to expand and leverage our medical education. In 2021, we further expanded the number of surgeons we touched. And we surpassed the numbers we had in 2019. So we not only went back to pre-COVID values, but we actually expanded significantly ahead. We expanded as well our employees with more than 150 new jobs added within Medacta on top of which we further expanded our distributor network, both in new territories and within certain geographies where we work with agents in particular in the U.S. If we go to the next slide, we can see some of the key aspects in terms of product development. One of the key focus has been in 2021, the deployment, the first market introduction of our augmented reality surgical platform, the NextAR. And we now can count on a cleared application for Knees, Shoulder and Spine in both the European market and in the U.S., on top of which we can count on the Australian TGA while we are still working on the Japanese full clearance. So we are at the moment in this so-called limited market release and Medacta is usually focusing in building reference center network, a group of surgeons that will help us then fully release the product with full support on the medical education side, which is going to happen next year, so 2022. We know the advantages of the NextAR, in particular, is a small footprint in terms of capital investment, significantly smaller than our competitors and significantly lower cost per case. And this is particularly interesting in European markets, in the Japanese market, in the U.S. market when we focus on the ambulatory surgery centers mark. This is a platform, as we know. It's currently available in Knees, Shoulder and Spine with the potential of additional increase outside of those indications. If we go to the different highlights on the business line, Hip, Knees, Extremities and Spine, we have reinforced all our business line with new products, new enhancement on the Hip side with the relaunch of the AMIS technique with some newer version like the Bikini incision. We further expanded and completed our revision offering. And we launched some personalized solution on the Hip side as well with to MyHip Planner, MyHip Verifier as a new technology to support our personalized MySolutions Ecosystem on the Hip side. The Knee franchise continued to grow extremely well with a strong focus on this personalized solution called kinematic alignment, which fits extremely well with our very original knee design, the GMK Sphere, for which we are introducing as well the cementless version in Europe and relatively soon in the U.S. We introduced as well some hypoallergenic implants to exploit a niche where most of our competitors are not able to play with the so-called SensiTiN line. And we further expanded as well our penetration with single-use instruments, which supports our Knee franchise. On the Extremities side, we apply this SensiTiN technology on the Shoulder on top of further completing our product range with a stemless solution and revision solution, both on the humeral side and on the glenoid side. Finally, we completed our product range on the sports med for what we consider one of the key indication on the Knee side. And we further enlarged our Shoulder and Hip solution, making ready now for further sales force expansion on this segment of the business as well. On the Spine, we continue to expand focusing our efforts on a minimal invasive procedural solution, trying to bring all together screws, cages, technology, preoperative solution, and this is a very important focus for us to really differentiate Medacta in a very crowded market like the Spine one. If we go to the next slide, we have a quick snapshot of our efforts in terms of marketing and especially the medical education programs. We, as I said in the intro, went back to normal level or more normal level with a very significant increase compared to 2019, even if we had to taper down some of our programs at the end of 2021 for the new version of COVID we are all dealing with, the Omicron. What we did was to continue our plans to decentralize marketing and medical education activities. Those efforts proved to be very, very effective in engaging surgeons in converting them even faster than with the previous model at potentially even at a lower cost. So it is definitely working well, and this is going to be our way to deploy medical education even moving forward outside of COVID. We strengthened as well our M.O.R.E in Touch program, expanding further on the web-based initiative that are proven as well to be very effective. And that's as well something we will continue to use on top of which we have launched this remote proctoring, which allows surgeons to support other surgeons without traveling, basically exploiting our augmented reality know-how and this is something we have been using more and more recently to support countries like Japan or South Africa in 2021 that were completely unable to travel, Australia as well. In terms of congresses, international travel restarted basically in June 2020. For 4, 5 months, we're almost back to normal. And then as we have seen further restrictions started in December and those restrictions made it -- were forcing us, if you want to cancel some of those international congresses, both internal and third-party events, and those are unfortunately restrictions which are still in place for January and potentially Q1 2022. If we go to the next slide, we can see the revenue trend by semester. Growth rate and sales value are heavily impacted by the previous year volatility. As we all know, H1 2020 was particularly impacted by COVID. In 2021, we managed, therefore, to not only recover, but as well grow significantly our customer base, and we have already reported this 35.4%. Differently from many companies in 2020, Medacta managed to almost fully recover the previous year. We ended up in 2020 with only minus 2% in terms of top line, which made our second half of 2021. A very good H2 already in 2020. And in 2021, we still managed to grow at around 10%, constant currency, although in the last full semester in Australia, we had a lot of headwind and especially in quarter 4, on top of Australia, we were negatively impacted throughout Europe and North America with particularly an impact on shortage on the hospital side with staffing issues and on top of that, delay of elective cases. Nevertheless, I think the performance in 2021 has been extremely strong. I'm extremely pleased with this 21.4%. If we analyze by product line, we can see that all our lines grew in a very significant way, definitely much more than what the market has been growing or recovering. And again, we did not only recover, but we fully grow our customer base and top line. On the Hip side, with almost 18% growth; on the Knee side, almost 25% growth; and then Extremities and Spine with a very good performance of 35% and 20%. Especially Spine is particularly affected by COVID. I think we will see in a few weeks or months when our peers will publish data that the market has been even more impacted than the other lines by COVID. In general, all the lines have benefited from significant sales force and marketing expansion throughout all the geographies, even those geographies like Australia, where we had a lot more headwind than planned, but we really wanted to take advantage of any opportunity to expand across the different geographies and product lines. If we analyze by geographic area, has been extremely different throughout the year. Europe and the U.S., both posted a 21%, 22% growth rate. Both of them had significant headwind, in particular in Q1 and in Q4. In the U.S., the previous year in 2020, we managed to fully recover. So this is true growth with no basic recovery. And in Asia Pacific, in 2021, we managed to grow significantly, 17.5%. Although in Australia, especially in the second half, we really had a lot of COVID-related delays that we hope we are going to be able to fully recover in 2022. Asia Pacific, it's important to remind everybody, did post a positive growth even in 2020. So this is a particularly good performance. Rest of the world is truly benefiting from recovery. This was our distribution channel, which was heavily impacted by COVID last year. So this is a significant portion of recovery plus an expansion and growth of existing channels. So overall, again, a good performance across all our geographies, and I'm very pleased with the effort of everybody. On this last note, I would like again and again to thank all our employees for their commitment and great performance in a very difficult year. Of course, a big thank you to all our customers and as well all our suppliers that supported this extremely high growth in this very difficult and challenging time. That's it from my side. I would leave it to the Q&A portion. Thank you very much.

[Operator Instructions] We have a first question. It's from Chris Gretler, Credit Suisse.

I have maybe 2 questions. First is on NextAR. Maybe could you disclose how many centers you have already installed the technology and maybe in terms of geographical spread and by indication, if you had any insights, that will be really very interesting. The second is on sports med. Is there any indication about the approximate sales level you have achieved last year, just to give you an idea how that must be taking up?

Chris, thank you for the question. So on the NextAR side, we're not going to systematically disclose numbers and geographies, and particularly now that we are preparing our launches. I'm sure it's interesting for you, but it's very interesting for our competitors as well. I can tell you we are a little bit behind our plans due to the -- especially delay we had in 2020 and the difficulties we had in exploiting some early clearances, especially in the U.S. We did catch up quite a bit in 2021. Our applications and indications have been cleared relatively recently, as you know, in Europe only in May last year. So the most advanced indication is probably the Shoulder at the moment. That's where we are going to focus on first. Immediately after, Knees and Spine will follow. We are talking in hundreds of systems when we talk about the NextAR for the different indications. So it is going to be relevant in terms of size and they will be evenly spread across the geographies where we are clear than a regulatory point of view. In terms of Sports Medicine, it is, as you know, part of our Extremity business. I can tell you at the moment in 2021, it was in the hands of a very selected group of surgeons that helped us to fine-tune and finalize our product range. We are talking less than 1% of sales at group level. So this is a very small base in which we come to expand starting in 2022.

Your next question is by Thando Skosana, UBS.

This is Thando from UBS. I've got 2 maybe that I could ask. The first one, clearly, it's been a tough end to the year with some restrictions and staff shortages impacting elective volumes. But just for context, how have things developed in Jan? And how does the staffing situation in particular seem versus this time last year? And then just on my second question is just around in medical education where you've mentioned that you're significantly ahead of 2019. Is this something we need to think about from a cost perspective going forward? Or was just -- was this mostly just a catch-up?

Yes. Thank you, Thando. So I think what probably has been underestimated so far is not only the staffing issues that are being described mainly as a U.S.-specific situation, but as well in some countries in Europe. This was particularly true in the second half of the second semester, so let's say, Q4, but as well it started in Q3. So we constantly had some delays across the board. On top of that, the Australian market, which was basically almost non-impacted until June, we really had to face a significant market stop, which is, of course, outside of our control. And it did deteriorate during the year instead of improving. As you probably follow some numbers, you have seen the spikes they currently are dealing with in Australia is the highest they ever had. So this is a situation we are still living in Q1, and we don't know, as usual, how long it's going to last. We will hope it's going to finish in the next 30, 60 days. But unfortunately, nobody knows. So staffing, surgeons becoming positive, last-minute cancellation because patients are positive. This was all a headwind that systematically delayed our plans. And this is, of course, something that has impacted Medacta, but I will suspect we will see a strong impact in general in the market in the next weeks when everybody will report. In terms of medical education, we managed to go back to 2019 levels of surgeons touched by Medacta. Actually, we surpassed significantly 2019 in terms of absolute numbers. But as I mentioned during my presentation, we have significantly changed the way we are delivering our medical education, decentralizing those efforts a lot, which proved to be very effective, and as well, very cost effective. So I don't think you need to be overly concerned about the potential cost increase on the medical education. And as you can imagine, both in Q1 and in Q4, we were still negatively impacted by COVID, and therefore, a lot of the other third-party events have been canceled. So there is still a lot of room to further expand marketing cost on the medical education side because there are big gaps on the standard third-party events cost side, if I explain myself the proper way.

The next question is by Daniel Jelovcan, Mirabaud.

Two questions also. The first one, I know it's very hypothetical, of course, but what do you think -- how much has COVID impacted your business? So out of the 21.4% constant currency grows, would it have been 2%, 3%, 4%, 5% more? Your best guess?

Yes. Yes. I mean it's difficult in this year to really have fixed numbers. And it's difficult to calculate because, frankly, we have been able to add a lot of new customers for which we don't have a baseline. So we cannot truly understand how big their contribution would have been in a normal year. It's easier to do it on our customer base because we know, let's say, their level in 2019. We know they have still been significantly impacted both in 2020 and still in 2021. So my answer is that definitely our customer base is still behind our 2019 numbers in many countries, and we still have to recover a lot. I think it's difficult for me to say that your guess estimate is correct simply because both in 2020 and in 2021, we have been able to add a lot of new customers, significant number for which we never had the chance to work in a normal environment. I suspect that it is potentially even slightly higher than what you said. But I have no solid numbers for this portion of our customer base because we never had the chance to work in a normal environment. Nevertheless, I'm pretty sure that all of them have been somehow impacted with the exception, most likely, of Japan only. Otherwise, in Europe, in Australia, in the U.S., all of them have been facing some headwind. And we will see once the, once the situation fully normalize, how much contribution this expanded customer base will provide.

Okay. Yes. Very good. That's very clear. And the second question is just when you -- when I compare the Hip and Knee growth between the 2 major segments, the Knee growth was, of course, much higher. But I think on top of my head, the market growth between Hip and Knee, there's no big difference right now or unless you correct me. So the question is, was the Hip segment more affected by the elective procedure issue? Or was just the Knee very dynamic because of your very good products?

So I think to -- first of all, you don't have to forget that we are comparing numbers in a very volatile environment. So you have to look as well at Medacta performance in 2020 to understand exactly the 2021 numbers. So the Hip was a little bit less impacted than the Knee last year, to begin with. And in general, even in the normal years, the Knee was growing faster than the Hip. So the Hip base is larger. The Knee base -- customer base is smaller. We do have an extremely successful and competitive product line on the Knee side, both in terms of implant design, in terms of instrumentation, in terms of technology. And we are growing faster on the Knee side than on the Hip side even before COVID. So those are 2 or 3 elements that are, in my opinion, more relevant to this different than the market growth, which I agree with you is most likely equivalent in terms of Hip and Knee's growth rate. And it's probably around 2%, 3% in the normal pre-COVID year.

The next question is by Chris Gretler, Credit Suisse.

It's Chris again. Just wanted to come back on cementless knee. Actually, could you describe what exactly offering you're planning to get approved by the FDA? So basically total or only compartmental knee?

Yes. No, total is going to come in probably second half of 2022, eventually a little bit earlier. We would probably announce clearance as we usually do for the new critical product lines. It is a platform, the cementless knee that we are very familiar with. We have been always having in those product lines in Europe, in Australia as well. So it is more dealing with the FDA that was slower than usual, but I think it's important that finally we can enter into this rapidly growing segment, especially in the U.S. But it's a total knee, it's our GMK Sphere.

Okay, GMK Sphere. And then maybe just quickly on the ASC. Is there any update on the market development into ASCs and your progression there? Is this still kind of even now in the current world still the strongest growing channel over there?

Yes. In general, the ASC business has been benefiting from COVID as we often mentioned during those calls. Patients, they tend to prefer not to spend time in the hospital, especially with COVID. It was already a trend that has been further accelerated by this pandemic. It is definitely here to stay. We are expanding. We are expanding our offering, our medical education offering. We see a lot of opportunities because our product line perfectly fits this rapidly growing niche with, of course, a clear need for minimal invasive solution that we can provide especially on the Hip and on the Spine side. On the Knee side, we have unicompartmental. We have total knees with single use and now technology that perfectly fits the environment of an ASC, where cost consciousness become extremely relevant because the surgeon is very often directly touched by the general overall cost associated with the solution, with the technology, with the implants, et cetera. And so we do have a very specific strategy to continue to expand our presence in this segment. And just to give you some ideas, we do already have customers that are doing more than 80% of their cases in ASCs. Those are, of course, more the pioneers, the exception to the rule, but we see this as a general possibility that will take maybe 5 to 7 to 10 years to fully develop, but that's the direction we believe orthopedics is going in the U.S. market.

Is there also a trend in Europe that you can see to more outpatient setting?

At the moment, the reimbursement does not drive this process. A few exceptions, which we can mention, and we mentioned in the past is France, where at least the reimbursement system does not penalize too much the surgeons or clinics that offer outpatient. Otherwise, at the moment, in most of the health care system, the hospital and the surgeons would be actually significantly penalized if they offer outpatient total joint in terms of reimbursement, meaning they would lose much more than what they could potentially gain if they send home patients too early. So reimbursement is going to drive this potential change. And I believe it is important for companies like Medacta to be ready because once it's proven that the solution works in a safe and effective way, maybe governments would take a look and look for ways to reduce health care cost in orthopedics, and that's one of the ways, in my opinion.

The next question is by Craig Mcdowell, JPMorgan.

I've got 2 questions, please. The first one, Francesco, just when you speak with your customers, I'm wondering what they're saying about backlog in terms of procedures that were not able to take place over the past 1 to 2 years. What are they saying in terms of the size of that? And also how they plan to address that and work on that backlog? That will be the first question. And then the second one, maybe for Corrado. Just in terms of the revenue figures that you've just reported. Is there anything in terms of either product or geographic mix that we should bear in mind when thinking about gross margin development? And then if I can squeeze actually one final one in. If you could just remind us of the revenue model for NextAR, if it's sort of a capital equipment kind of revenue model or is it more of a kind of subscription-based model, that would be helpful.

I would take maybe the last one as well, and then I'll leave the answer on the gross margin, geographic mix, product mix to Corrado. So in terms of backlog, this varies a lot country by country because the backlog is, of course, strictly related to 2 aspects, the duration of the restrictions, and of course, the availability of resources in a given country to address the backlog. So just to make it more clear with some practical examples, the U.K., which, for us, thankfully is not yet very irrelevant -- very relevant market, definitely generated a backlog of patients, which is massive, and it would take potentially years to fully recover because they have almost built an additional 2 years of backlog in the U.K. with very, very limited resources to address it. Australia, on the other side, they did have a relatively small backlog until now. And they attacked this backlog at the beginning of 2021 by shifting a lot of the public patients where the backlog was generated to the private sector, incentivizing both hospital nurses and surgeons in the private sector to try to address it. The U.S., which is, of course, a big source of backlog and recovery, we estimated at least 10% of patients are still to be recovered. This is, in general, nationwide. But here as well is a little bit more complex than that because there are areas like the northeast of the U.S., where the backlog was significantly bigger than that and other areas where there is almost no backlog anymore like Florida, definitely less than the Northeast or some central areas in the U.S. So last thing to address is probably Europe. We mentioned the U.K., the German, Austrian, Switzerland area is, I would say, much less impacted by backlog. Most of it has been recovered very different situation in Italy, France, potentially Spain. So those are the 3, let's say, Southern European large markets where we feel there is a significant backlog to be recovered. And again, it's probably different, their ability to recover. In Italy, we see again a shift from public to private. In France, they are not currently able to recover backlog, mainly because of staffing issue. And Spain would probably be similar to Italy. So it's a very nonhomogeneous situation. And overall, we feel there is potentially around another 10% of backlog that needs to be recovered but really not evenly spread across the different geographies. On the NextAR, the revenue model we are deploying varies significantly from market to market. What is important for us to understand is that we can, and we have been using a capital model where we sell completely the equipment. We have been using rental models or subscription model. So on a case by case, on a month-by-month and a year-by-year or completely sell. And we have this flexibility and we will use this flexibility because we can. And we have a very, very competitive cost of goods, if you want. And we will use this advantage in order to be as aggressive as needed in order to continue to drive revenues in terms of implant sales. So this is for us a significant door opener, differentiating factor, potentially source of revenue, but for us is mainly a driver for incremental sales growth on the joint and spine side.

Okay. Maybe I can take the one to the question about the margin. So what we can say, of course, it's very early to speak about margin, and this is not, of course, the topic of this publication. But what we can say is that the forces in the market are still there. We are -- we have prices that are going down. We have positive effects that are counterbalancing this negative effect, which are the geographic mix, the different geographical speed of growth in different geographies and the product mix. If you look at the numbers of this year, you see that there are no big changes compared to the long, let's say, the long-term trend. So again, what I can tell you is that we haven't seen any, let's say, change in what we thought it would be, let's say, the expected result in terms of margins. So we don't see any -- we don't see a reason why we should see changes, big changes in -- at that level. Provided that, we are still in a very early phase of the closing of the numbers, but this is for sure something that we can say.

So geographic mix, product mix, if you look at the chart at the end of 2019, 2020, 2021, would not significantly alter the big picture of the gross margin.

[Operator Instructions] For the moment, there are no further questions and so I hand back to you.

Thank you very much all for your attention, your interesting question. I look forward to the next call with a full report on our results in 2021, which, again, I'm very, very proud of. Given the external circumstances, I think we did a very good job, especially in the year-end with the last, hopefully, wave of COVID. So look forward to speak to you soon 11 of March. Thank you all for your attention.

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