Medartis Holding AG (MED) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the publication of the Half Year Results 2021 Conference Call and Live Webcast. I am Alice, the Chorus Call operator. [Operator Instructions]. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Christoph Bronnimann, CEO. Please go ahead, sir.

Good morning, ladies and gentlemen, and welcome to this video webcast on the Medartis 2021 first half year results. We will use the presentation slide deck, which was published this morning on our website together with the press release and our half year report. In particular, I would like to draw your attention to the disclaimer on Page 2, which also applies to the forward-looking statements during this webcast. On the following slide, you can see today's agenda, which will then be followed by an answer and question session. Today, I would like to welcome our new Chief Financial Officer, Dirk Kirsten, who has started at Medartis in his role at the beginning of March of this year. I'm also joined by Fabian Hildbrand, our new Head of Corporate Communications. Let's go on the half year highlights. I'm very pleased to report that the acceleration of our growth momentum has continued into the first half of 2021. We have achieved a growth in revenue of CHF 73.6 million, which is a revenue growth of 29.2% in constant exchange rates versus prior year and 20.6% versus 2019. I'm also very pleased to see that all the regions and all the key markets have contributed strongly to the strong growth, with the U.S. market leading at 46% versus prior year and 31% versus 2019. The strong growth in top line has also delivered on a record in EBITDA of CHF 14 million, which in addition to efficiency gains, we report an EBITDA margin of 19.2%. The headcount has slightly increased to 649, which is an increase of 5% versus prior year. We have mainly added new jobs and new employees in the area of sales, R&D and quality and regulatory to comply with the MDR requirements. Been very pleased with the strong growth in all the regions, in all the markets across all the segments, especially leading in the key markets, the U.S. at 46%, where we have seen the investments that we have started in the second half of past year are paying off now, not only in the U.S. market, but also in the other key markets. During the first half year, we have seen also an easing of the pandemic restrictions, but we still notice some uncertainties and the case load is still not at 100%. The uncertainty, especially in relation to the Delta variant remains also during the second half of this year. The profitability has increased strongly on all levels [indiscernible] and also the KeriMedical portfolio continues to see very positive feedback from our surgeons. And in relation to the distribution of KeriMedical that has started during the course in the second quarter [indiscernible] Germany and U.K. We can note that still on a low level, we are ahead of plan. The completion of our product portfolio continues. We have added new projects for Global and also for the U.S. market and are building R&D capabilities in the U.S. to further strengthen our innovation pipeline. We have also gone live with an EU supply chain hub in Germany successfully not only to comply with MDR regulations, but also to mitigate the risk as a result of the cancellation of the framework agreement between Switzerland and the European Union. So the strong first half year performance allows us to look more positively into the second half year, And it's the reason why we raised our full year sales growth guidance to at least 20% in constant exchange rates. The growth momentum we have gained in the second half of 2020 has continued to accelerate as a result of market investments and is driven by surgeon conversions, new product introduction and also higher surgeon activities in the elective surgery field. With those comments, I would like to hand it over to Dirk Kirsten to give you a financial and the business review.

Thank you, Christoph, and good morning, everybody, also from my side. Let me start my presentation with giving you an overview on our regional business development. As you can see, Medartis has grown 29% versus prior year; the U.S. grew 46%; APAC did grew 35%; Europe, our largest region, grew 22%; and even LatAm, which was heavily affected by COVID, grew 32%. In this chart, you also see the growth rates versus 2019 as last year was strongly affected by COVID in H1. The figure shows you that with the exception of LatAm, all of the regions also grew materially against 2019. If we go more in detail into the regions in H1, Europe was still affected somewhat by COVID, especially in April and May, when the third wave came through, many hospitals delayed elective procedures wherever possible in order to rose capacities for COVID cases. In the U.K., the NHS was at case levels of only 70% towards the end of H1. This led to lower-than-expected growth. On the flip side, some other countries, for example, in the DACH region, in the German-speaking countries region, grew strongly even within the remaining COVID uncertainties. France was a country with specifically strong growth in H1. Also, our distributors in the region generated good growth and the introduction of our new KeriMedical product was very successful. In the U.S., we've grown 46% year-on-year and 31% versus 2019. Our highly motivated team has become stronger and faster and successfully converted many hospitals to work with Medartis. We feel that the momentum has increased and we received a lot of positive feedback from the market. We will now, as COVID allows us, also visibly increase our activities in training, litigation, enforce our U.S. IBRA chapter and also intensify our work with the regional fellowship programs. This goes along with the further buildup of our sales force, as well as investments into infrastructure such as supply chain, automatization of processes and similar. All in all, we are very confident to grow significantly in this key market over the next periods to come. Also in Australia, we've seen significant growth beyond 35% in the first half of the year. As in the U.S., we have a highly motivated team there are winning new accounts on a daily basis, and we're increasing the business with existing customers as well. The plan was behind plan, which was due to the COVID situation in the country, the activity level was still limited as COVID restrictions are very tough. We believe that we are about 1 quarter behind plan. In China, we have further established our footprint, won a couple of tenders and selected additional distributors. We expect that sales would increase in the coming months as well. And through the entire APAC region, we've seen distributors still holding back larger orders and remaining quarters of inventory build up. Also here, we would expect that the situation in H2 will improve always assuming no further turbulences from COVID to occur. Which leads me to LatAm, a region with enormous growth potential, but also a region which has suffered even stronger from COVID, especially in Brazil, our largest country. The COVID situation was very severe during Q1. Many public hospitals didn't do any selective business or procedures anymore. Our team has navigated carefully [indiscernible] and impressively kept the team moral high within this very difficult time. Due to the low comparison basis from 2019, Brazil still strongly grew as did Mexico on a smaller basis. Selected distributors [indiscernible] overall growth in the business [indiscernible] we see here, the lower extremity business [indiscernible] 40% [indiscernible] the much larger upper extremity business [indiscernible]. The strong growth in lower extremities comes in Australia and the U.S. This is strategic for us, and we will also try to accelerate growth in [indiscernible] upper extremities, we've seen strong growth from the expanded CCS portfolio. And the countries such Germany, Austria and also the U.K., where we introduced the new KeriMedical products, we've seen also strong demand and promising initiatives. Training and education will be a very important growth driver going forward. This will allow us better to present our new products in physical meetings due to our customers, which unfortunately wasn't possible so far due to COVID. CMF, which is mainly elective business also grew nicely with almost 30%, and we have continuously with [indiscernible] models 1 with the new models 2 system, which was introduced last year. Also, we have supported the growth with our customer-specific solutions and digital planning for surgeons, what we call the so-called CMX platform. Within this context let me make the overstatement that we believe our product portfolio is 1 of the most comprehensive and innovative in the market. We will use this competitive advantage to systematically gain customers and tenants who want to work with Medartis in taking quality benchmarks in the industry. And with that, let me quickly move to the P&L on Page 12. Gross margin has improved 160 basis points to now 83.6%. This is due to retail mix effects from countries with higher ASPs, but also from increasing production efficiency. We are running our business at higher capacity utilization than 1 year ago. Also, we did have a couple of nonrecurring elements in last year's P&L, which had diluted the margin. I would say that the margin is now at sustainable levels of around 84%. Slide 13 shows the operating level to our business. When top line picks up, you see an immediate improvement of our OpEx ratios. As the majority of the operating expenses from FTEs or other fixed costs. As you can see here, we have increased the level of spending in absolute terms again after last year's specialty trading in corona. We will even increase further spending for meeting our customers doing training, education and similar, all directly to the market. Also, we are committed to research and development in order to drive further innovation. With respect to general and administration, we remain cautious. But of course, also, we need to strengthen the group infrastructure further, serve an increasing number of countries, and also work on processes which are impacted, for example, by regulatory or similar. As Christophe has mentioned before, we have established a new European supply hub in H1 in order to fulfill with the new MDR requirements. This has added complexity and also caused some increase of G&A expenses. The important aspect is, however, that the higher absolute expenses still leads to a lower, what I call OpEx to sales ratio. It was 80% in H1 2019, due to corona, it increased to 85% in 2020. Now in the first half of 2021, it only stood at 75%. It's our ambition to sequentially improve that ratio without giving the necessary investments into our group, especially on the market side. Slide 14 puts everything together, better gross margin, better OpEx ratio, both combined leads to a 10% higher EBITDA margin than in 2020. We had guided for at least 16% for this year. In the first half of the year, the underlying margin was clearly better, assuming less restrictions from COVID. We will now spend slightly more money in H2 for customer activities. And directionally outside, we are confident to accrete this margin gradually towards the 20% level and beyond, which is in line with top line growth in the further periods to come. Two technical comments: a, currencies didn't play a big role in 2021 in the first half of the year. And we also, we received a small income from KeriMedical, of whom, we took a stake, I remember, in the 25% towards the end of last year. With that, let me summarize the net profit development. Operating profit was also supported by an improvement from the financial result, which we had -- which have been more challenging in the first half of last year. We have recently started to derisk FX as much as possible and install the program there. Taxes are slightly higher than last year. This reflects also that we are back in a profit-making situation. And also, we've grown 30% versus the prior year. So aside of that, the net profit margin was almost 10% for the first half of the year. Our absolute net profit has increased from minus CHF 6 million to plus CHF 7 million year-on-year. To finish my presentation, we can also report an increase of cash versus end of last year. Our group has sufficient cash reserves to support further growth, be it on the working capital side, for example, with consignment inventory for our customers, or be it for CapEx, which also includes the set investments for our customers, and of course, R&D. We do also have sufficient cash to drive small to midsized M&A projects if and when such should occur. Thus, we believe we are well prepared to grow faster and stronger also in the future. With that one, let me hand back to Christoph. Thanks very much.

Thank you, Dirk. Let me give you an update on our strategy and business. Our strategy for the long-term growth remains the same. We will continue to play in a very attractive market, which demographics will continue to be the key driver. We also expect the global extremities market also post COVID to continue to grow at an attractive mid-single-digit growth rates. Our priorities also remain enhancing sales focus, continue to target investments in key markets such as the U.S. as a first priority, and then also accelerate the time to market post MDR certification to continue to deliver fast and differentiated solutions to the market. This should help us to become and establish Medartis as an innovation leader in global extremities. As we execute on our strategy, we have also initiated a culture journey. Let me explain how we move forward on our culture journey. We have undergone significant changes in the organization. We have made changes over the past 12 to 18 months in our executive leadership team, but also on regional teams. Also, the pandemic has changed the way we interact, the way we collaborate internally, but also collaborate and engage our surgeons may it be in R&D projects, in professional education, but also in our sales process. How we introduce new products to the market, and that digitalization will remain as we go forward. as we hopefully now return to what we call the normality. We're going to reconnect to our employees, but also want to reconnect with our surgeons resurgence as we start with face-to-face professional education events during the course of the second quarter. But with all those changes and the complexity and to cope and adapt to those, we believe that a learning culture becomes even more important to position Medartis as a responsive, flexible, agile organization where people are valued. We have started with a culture journey and the first workshops and engage the top management, and we will also roll out concepts and workshops to engage the entire organization in the course of the second half year. So let me comment and give you a little bit of an order of magnitude of the changes that we have seen by going more towards digital content. The virtual training and education offerings at Medartis and IBRA has tripled on a year-on-year comparison in '21. Also, the webinars, trainings and live surgeries have increased by almost 50% with very positive search and responses, especially in the far reaching countries in Latin America and Asia Pacific. But online formats have also established themselves in the engagement of surgeon as part of our sales process when new offerings to existing customers, new products, but also the engagement in R&D projects has changed. We have also seen an increase of 50% of our IBRA membership, which is the biggest increase of its foundation over the past 17 years. So as we believe those digital platforms and content will remain, we're now also going to reactivate the face-to-face education and marketing activities in the course of the second half year. The U.S. remains our key priority, and we have made clear progress in the sales network, investments also in infrastructure and product development and also investments in training and education. Let me go through in more detail. As communicated in the full year 2020 results in March, we have continued the reallocation of sales territories to increase the distributor network and made changes in our direct sales organization. Investments of surgical set continues, especially as we launch new products, and we have gone live now with the new compensation plan in the U.S. sales force. We are now in the hiring phase -- we are now in the hiring phase of building up R&D capabilities in the U.S. to support a regional innovation pipeline for the U.S. market. But we also need to continue to invest in supporting infrastructure, in back office and logistics to accommodate anticipated growth. The regional chapter for IBRA is up and running, and we are continuing to onboard key opinion leaders to expand our training and education offering, but also engaging KOLs in the future development of our portfolio. In the second half year, we anticipate or plan for the following launches: in August, we are all about to launch a new Minimally Invasive Distal Radius Plate, with the first patient-specific application in the risk osteotomy, which is a 3D printed drilling guide and cutting guides. Also in September, we will go into the full launch now of the Ankle Trauma system, which is currently in the limited release, followed by a new addition of the KeriMedical portfolio of Keri Fuse, which is an intramedullary arthrodesis device for the finger joint. And we will conclude the year with the launches of a patient-specific application for orthognathic indications in November as well with an addition in our hand portfolio with the CMC 1 fusion plate. That will conclude the launches of Medartis in the second half of this year. To start with the distribution of the KeriMedical portfolio in Austria, Germany and the U.K. is off to a good start. The sales level are still on a low level, but we are already ahead of plan as we have experienced some delays in the distribution in the U.K. We are now on the way of the registration of the KeriMedical portfolio for the U.S. market followed for the Australian market. The MDR has been a multiyear journey or project, whatever you want to look at it. We are now in the final steps to conclude, hopefully. We are scheduled now for the second orders on the MDR regulation in September, and we anticipate the registration of the self certification on the CE mark under the MDR in the first half of 2022. I would also like to draw your attention to the proposal of the board for new board members. Ciro Roemer and Nadia Tarolli Schmidt have been proposed for the election at the AGM in 2022. Ciro Roemer has more than 30 years of experience in the medical device industry. He has held leading executive positions at Synthes and then in J&J and has been a former Board member of the AO Foundation and Eucomed. Mrs. Tarolli Schmidt, a registered Swiss attorney at law, tax expert and has extensive experience in business law with specific skills in the areas of taxation and social security. This leads me now to our outlook for the full year 2021. As I have mentioned, based on the strong performance in the half year 1 and despite the more challenging baseline in the second half year, we expect a full year sales growth in constant exchange rate of at least 20%. This also assumes a further improvement of the corona pandemic environment, which should especially lead to more elective surgeries. Furthermore, we also confirm, as Dirk has presented this morning, our assumption of a stable EBITDA margin as we continue to invest in our sales force, product pipeline and assume a gradual pickup of the training and marketing activities in the remainder of this year. With this, we conclude our presentation. I suggest now we open up the Q&A session.

[Operator Instructions] Our first question comes from the line of Dylan van Haaften from Bryan Garnier & Co.

Congrats on a very strong H1, Dirk and Christoph. Just a few questions from my side. Maybe first for you, Dirk. Could you quantify in very broad terms sort of the COVID impact you've seen in terms of surgical capacity? And perhaps if the distributor markets are back to 2019 levels in stocking in absolute sales figures? And my second question would be on the exit rate trends you're seeing in June, and if there's any reason to think that the second half would be softer, excluding the slightly tougher comparison base?

Good morning, Brian, thank you very much. I hand it over to Dirk for the questions.

I think the question -- the first question was also the run rates, especially the COVID impact and whether you can quantify that a little bit? It depends -- the answer is it depends on country to country. We say that on overall, probably, we are capacities, which is slightly ahead of 90%. But of course, it depends on the countries. If you look at the U.K., it's probably slightly lower 70% going to other countries such as in Brazil were lower. But then on the flip side, we have the U.S., where the momentum currently is very, very nice. Also in Germany, I think the situation picked up and it's a little bit volatile. So we've seen that through the second, through the third wave. Hopefully, there's no fourth wave to come. So that's very important. Where do we see the second half of the year and how much will it be softer? We are confident that we can further grow. We see also from the months after the half year closing, we see that the momentum is increasing or it's going on, on a similar level. So we're confident also to close the second half of the year on similar levels. As Christoph and myself have presented to you, we are focusing very much on the U.S. So there's a terrific momentum in the market, and we're sure we can also capture further market share here. So confident on the second half of the year. That's also the reason why we increased the guidance on a top line basis for the second half of the year and for the full year.

Excellent, and then maybe just 2 more on my side. One would be on have you seen any market share gains so far? Or is this still largely penetration growth and new product growth? And my final question would be on the touch prosthesis, if there's any regulatory interaction with the FDA, you could tell us about so far?

Okay, if you look at our growth, yes, we have converted surgeons. We have certainly gained market share across all the segments in all our key markets. And in relation to the Touch prosthesis, we are now in the -- or KeriMedical actually is in the submission and presentation of the documentation. We have had some conversations as to how we want to approach the registration. So we're using the European data that we have and submit the documentation to the FDA. So we are still in that submission process, so we have not heard yet any feedback on the registration documentation from the FDA. Dirk, had a follow-up on...

I just wanted to build on the market share gains. Look, one of our friendly competitors came up with an estimation that the extremity market grows somewhere between 6% and 10%, which is the huge range. It depends on the region. If that is the case, then we clearly have won market share, for example, in the U.S., but also in Australia or some of the European countries. So yes, we do believe that we have made some progress also in relative terms.

The next question comes from the line of Daniel Buchta with Zurcher Kantonalbank.

Three questions from my side. The first one on the new compensation system in the U.S. that you mentioned. I mean you mentioned before as well that you're hiring a couple of people there now again. In the past, it was a risk that you lost good sales reps again due to competitors paying better than you. How can you avoid that issue now in the future? And how is your new compensation system in that regard designed? Then maybe a question on Dirk. You mentioned this FX derisking. What does that mean a bit more specifically? And how can we see that then in the future in terms of margin influence and things like that? And then maybe the last one on sales and marketing. I mean, you have kindly shown how sales and marketing relative to sales have developed and last year first half and also the prior year first half was roughly 52%. Now it was round about 45% into the second half and especially into 2022. Is it expected to go kind of back to this 52%-ish level? Or because of the material efficiency gains from virtual training and education, is that going to be lower than that? How can we expect that to develop? That's it from my side.

Let me start with the first one and then hand it over to Dirk for the other 2 questions. The compensation scheme in the U.S. that we have changed is mainly targeted towards growth. So -- what we have seen in the past, and that's also what you're alluding towards why we did lose sales reps, they're not only left the company at the very beginning because of competitors paying more, the main reason is always when you start with a sales rep, if you have not a complete portfolio that supports and a full year income of the sales rep, then you need to overpay them in the fixed salary and especially for a rep not having a full portfolio that's over time, it's frustrating. That's probably the key reason why reps are leaving because they're not competitive in the office, in the surgery and in the OR with a full range of portfolio. Now in the meantime, especially in the upper extremities where we have a competitive and also complete portfolio, that has changed, first of all. Second of all, we are now coming from less fixed towards more compensation towards variable pay, especially in the U.S., where we have increased the variable pay reduced the fix with giving a higher target. So that means the sales rep are more incentivized with the stronger growth. So an uncapped commission on growth with a higher target that allows them to make more money if they achieve the objective versus just to maintain the business. And that drives the behavior change of our sales organization in the market to get more focused, driving more and more aggressive growth. That was the back end that's the intent of the entire change in our incentive base. For the other 2 questions, I would hand it over to Dirk.

Yes, from my side, FX derisking, what we haven't done is started into any complex hedging programs at this point of time. We think that's just not the situation we should do right now. But what we do, we're a little bit more cautious on what currencies are we holding our cash. Can we set it back into Square sales and that has been successful also for the first half of the year. When I'm talking about the program, I'm looking deeper into the organization. And I'm also looking at the supply chain. As you probably know, our supply chain is -- this is quite complicated selling the [indiscernible] back to customers. We have a lot of inventory also on a consignment basis with our customers, which we're fueling where we're trying to grow where we put that inventory and also the sets into the countries. What that means is that there's a lot of compliant FX risk. So managing FX risk, for me means also to simplify the supply chain and take out risk, which is more related to the processes, and that's what we're continue to be doing also going forward, number one. Number two, on the ratio with sales and marketing and the 45% the important figure here on Page 13, I believe, is the CHF 33 million in absolute terms, and we are back on the level where we were in 2019. Now having said that, it comes down as a margin because the top line has increased. Now what do we plan for the second half of the year? We have established a program which is called Medartis WeConnect, which is especially after corona important that we do get close contacts for our customers again on a social level, but also when presenting the new products, introducing the new features we have and getting very close to those customers back. So yes, that will increase costs again in the second half of the year. This is not a guidance, but maybe in the range of CHF 2 million, CHF 3 million for the second half of the year. And that means that the 45% is probably at the lower level. I would more assume it to go back to 47%, 50%. But don't take this as an absolute number. We're still in a COVID environment and nobody knows what's happening just 1 month afterwards as we speak. So this is just to give you an idea of what we plan to do. And hopefully, we can spend the money.

Yes, hopefully, in the long term, it's obviously benefiting for your investment case. And maybe 1 quick follow-up afterwards. I mean you mentioned how the market dynamics, for example, in the U.S. and in Germany are. So that means at the moment based on the rising incidents in various countries, like Germany, also like the U.S., you see no bigger impact yet on non, I would say, nonurgent or elective procedures, nothing yet?

Again, it depends. Nothing major, honestly, yes, absolutely. I think it's also what we see that the countries and the hospitals are dealing with the different waves in different matters. As we went into the lockdown in spring 2020, most of the countries went in a complete shutdown of elective surgeries and reserve the capacities for and the treatment of corona patients that at the end didn't come. So now with the second, third or whatever fifth wave in the meantime, the hospitals are still trying to mitigate COVID patients, trauma and elective surgeries. So this is also why the overall caseload has appreciated again. And there's in the ranges we estimate, as Dirk has mentioned, at the 90% level. So now with the Delta variant that came up and started to come up a few months ago, we have seen local shutdowns in Australia, for example. It has been open and has been a very low caseload. All of a sudden, Australia has started to slow down and shut down. So Australia has closed elective procedures. They continue to do trauma. Other countries like Germany and also Switzerland are more pragmatic. So we don't see a significant impact now for Delta, but it remains at the macro sort basically for the second half of the year.