Medartis Holding AG (MED) Earnings Call Transcript & Summary

Good morning or evening, everybody, and welcome to this video webcast on the Medartis 2022 Full Year Results. We appreciate you taking the time to dial in on this Tuesday, despite your busy schedules and the recent market turmoil caused by the collapse of the SVB. Thank you for your participation. I'm joined today as usual by our CEO, Christoph Bronnimann; and our CFO, Dirk Kirsten. As usual, we will use the presentation slide deck, which was published this morning on our website together with our press release as well as the annual and sustainability report. In particular, I would like to draw your attention to the disclaimer on Page 2 regarding forward-looking statements. On Slide 3, you can see today's agenda. At the end of the presentation, we will conclude or wrap up with the Q&A session. To improve the user experience, we have changed the setup a little bit and are now using a video platform. We would, therefore, like you to ask you to turn on your camera and microphone when you ask a question. Of course, we can -- you can also submit your questions in writing. And with this, I would like to hand over to Christoph for his opening remarks and the key highlights of the year 2022. Please go ahead, Christoph.

Good morning, everyone, and welcome to the full year 2022 presentation of Medartis, including the outlook for 2023. Following 2 years of the pandemic, we have hoped to return into a more stable business environment. However, the economical and business environment have changed significantly. In this volatile environment, we have reached a top line of CHF 82.8 million in total net revenue. We have strengthened our market position and we delivered again share gain in most of the markets across all of our business segments. We have posted double-digit growth in EMEA in the U.S. and also in the Latin region. Our revenue growth amounted to 17.8% in constant exchange rates versus prior year, which is in line with our midyear guidance. The organic growth, excluding the NSI manufacturing business amounted to 14.6 percentage points. The underlying margin was 12.8 percentage points. One-off effects like China and NSI integration, however, lowered the reported EBITDA margin by 3.9 percentage points. Running OpEx and dilution of NSI customer manufacturing business puts temporary pressure on our underlying margin. We have made strong progress in the execution of our strategy. I'm very pleased to announce that we have increased our stake in KeriMedical from 25% to 47%. In addition, late last year, we have signed a global distribution agreement with the Australian-based field Orthopedics. On the next slide, we have gained market share all of the product categories with low debt to double-digit increases, especially in the upper extremities and lower extremity. We have grown in the mid-teens to high teens. And the CMF business has grown in the lower teens as we are still in the conversion from a Motus to our Motor 2 systems. I'm particularly pleased with our performance in EMEA and Latin America. The Asia Pacific region struggled with the low activity levels still coming out of the COVID, which was effective most of the year. Despite the double-digit organic growth, it is a year of change in our U.S. organization. We have seen an acceleration of growth from 9.8 percentage points in the first half to 15.5% in the second half, and this acceleration momentum has continued into the beginning of Q1 of '23. The U.S. team concluded the NSI integration in the fourth quarter, and we have established global responsibilities for production, quality and R&D. Late last year, we also have made the decision to consolidate our U.S. operation locations in Warsaw, Indiana, which, as a result, we're going to close the Exton facility by the end of March of 2023. Please let me move on to innovation. One of our core competence and key priorities in the past years has been to strengthen our innovation pipeline and to bring more differentiating technologies to the market that improve the patient outcome. And I'm very pleased to report that we have made great progress in this dimension as well. We have introduced a versatile 3.5 straight plate system, which complements the lower extremity trauma system, and we have also concluded the clinical cases and the market acceptance test for the first NSI technologies, LapiPrep and also StealthFix, which are now being able to be launched starting at the end of this month. The KeriMedical portfolio, and especially the Touch prosthesis has become one of the growth drivers in those markets where we distribute the Touch for our hand portfolio. We still believe in the high potential of the treatment of rhizarthrosis through a touch, and we also have still strong beliefs in the potential of the entire KeriMedical portfolio. I'm very pleased about the first FDA approval for KERIFLEX for the U.S., which is the silicon finger joint that is about to be launched in the U.S. as we speak. On the next page, we have signed a comment a bit on the global partnership with Field Orthopedics. Field orthopedics has a nailing portfolio, which is called the Annex nailing system that addresses the growing need of surgeons for an efficient, less invasive treatment of mid hand and finger fractures. It is the most comprehensive nailing system on the market, and it perfectly complements our hand plating systems. So it provides the surgeon now an option to choose either nailing or a plating option for the treatment of those fractures. It mainly provides an opportunity for growth in the extremities market in the U.S. And once regulatory approval is granted, we are also considering the portfolio to be launched in other markets as well. Sales start was in the late last quarter of the last year. On the next slide, please. We have now grown as a Medartis company from 684 to 866 employees through the acquisition of NSI 97 employees and colleagues have joined the company. In addition, roughly 80 new employees have been hired during the course of last year, mainly in the markets in EMEA, also in the U.S. commercial organization as well as in the headquarter functions. On the next slide, I'm pleased to announce the appointment of Mario Delagarza as the Chief Operating Officer. As we introduce and expand our operations activities into the U.S. now with the NSI acquisition, we have made the decision to create the new function of Chief Operating Officer. Mario Delagarza joins us with a wealth of industry experience in medical devices, but also automotive industry, and it makes him well equipped to lead the acceleration of our digital processes in manufacturing, planning and also logistics. A very warm welcome to Mario Delagarza. With those comments, I would like to hand it over to our CFO, Dirk Kirsten, for the operation and financial review. Dirk.

Thank you, Christoph, and good morning, everybody. As Christoph already mentioned, 3 out of 4 regions have grown double digit in '22. EMEA, 17.3% at CER, led to 27.7% at CER and the U.S., 12.8% organically, if you include the former NSI business, it's even 28.7%. Only APAC grew lower with 3.5%. In total, the group achieved a full year growth of 17.8% at CER, which converts into 14.4% in reported Swiss. Our reported sales reached CHF 2.8 billion. When going into the different regions, let me give you a little bit more flavor. In EMEA, the DACH region grew more than 10%. Growth in France, the U.K. and in Poland was above 20%. In Spain, our youngest country, we even doubled our size. And with that reached an absolute size, which is after 3 years in the business bigger than in Poland, our direct business in Japan and at same size as Mexico. These results were driven mainly by commercial execution, further share gains in our hands and risk systems and a strong update of new products launched in '22-2021. Examples, therefore are implants for the treatment of Clavice, the ankle joint as well as the versatile CTS school extensions. Germany, Austria and the U.K. where Medartis sales exclusive distribution rights, KeriMedical sales also contributed remarkably to our growth. Our CMF business line modes, the migration from its first generation to modest 2 is progressing continuously.  In the APAC region, sales for the full year increased 3.5% at CER in '22. Our direct lower extremities business in Japan reported strong growth, while the indirect business and upper extremities or CMF were flattish or even lower than in previous periods. This example is a strong proof for us that our own marketing efforts as well as our strengthening of training and education supported also by independent era besides innovation, the most decisive factor to drive above average growth and win market share. In Australia and New Zealand, sales were adversely impacted as post-COVID restrictions were still existent, and hospitals have not allowed elective procedures to accelerate again. We've seen some signs of recovery since Q1 2023. And we believe our continued investments into sales, marketing, education, will bring us back the strong momentum, which we had also seen before the pandemic. As mentioned before, we decided to withdraw from the Chinese market in '22, which is following the decision of the Chinese government to introduce centralized procurement. And with that, the need to cut prices down to a level which would not have allowed us to make any profit in the foreseeable future. In Latin, Medartis reached 27.7% growth at CER during '22. While this number must be partially seen against a low comparison base in '21, it however, reflects the strong success with our direct organizations in Brazil and Mexico have been proud of. During COVID, both teams had focused on training and education and sales excellence after the pandemic, the continuous conversion of customers from competitors could be realized and will continue in the future. By broader category, the distal radios and CCS school product lines were the top performers. Medartis further accelerated CMS sales in Brazil. For the near future, a number of products, which have been already launched in other regions are expected to achieve regulatory approval also in Brazil. This makes us confident to continue strong growth across the entire region, also increasingly from its distributor markets. With that one, let me comment on the U.S. Here, we report full year growth of 12.8% or our MODUS business, which is 15.5% in the second half. While this growth is behind our own expectations, though a couple of positive developments can be pointed out. First, our new leadership team in the U.S. has successfully taken over and systematically segmented and prioritized its channel building activities. Second, all launches of the new NSI products were prepared accordingly to the original timetable and various for launches are just happening right now. And third and also important, we have combined our teams and decided to build one single Medartis organization in Warsaw, Indiana. The new Medartis headquarters are not only a sales subsidiary, but instead a fully-fledged organization with use dedicated R&D with old manufacturing, product management and marketing as well as training and education and also customer services.  As in Australia, we've seen increased year-on-year growth in early '23 and aim to achieve growth above group average for the next couple of years. This will be also supported by our most recent distribution agreement or partnership with Field Orthopedics products and the launch of KERIFLEX, a silicon finger joint, which received FDA approval last October. Accelerating U.S. growth while starting to achieve cost ratio improvements, and that is the #1 top priority for group management in '23. We are committed to show gradual improvements quarter-by-quarter and year-by-year. Turning towards the P&L. Page 14 summarizes the gross margin development in '22, starting from 83.4% at CER 21. The gross margin for our core business decreased only 40 bps on and stood at 83.0% in '22. Our high production efficiency was almost unchanged. A nonfarmable country in distributor mix and the increase of more distribution sales explain the year-on-year impact on our core gross margin. The main factor for the decrease that you see here on this slide of the reported gross margin was the acquired NSI what we call the third-party manufacturing business, which sales at much lower margins than the Medartis core business. We expect this business to fade out over the next coming years, and we will use the free capacities to systematically build manufacturing for our own global product portfolio in the new plant in Warsaw. On Page 15, you can see our OpEx development year-on-year. The OpEx ratio increased from 78.4% at CN'21 towards 82.8% as reported in '22. After excluding EUR 7.2 million of one-off costs for MSA transaction, for M&A transaction for the used restructuring for only one side and also for China, the underlying OpEx ratio was 78.9% in '23. Note this increase of only 50 basis points include the full consolidation of former NSI with functions like R&D, operations, QA, regulatory and so on. All other regions increased their cost more than EUR 10 million. Also in '22, Medartis has continued to invest into sales, marketing, training, mitigation in almost all countries. At the same time, almost no cost increase in central headquarter functions was recorded. Headquarter costs decreased year-on-year by about 5% is percentage of sales, seeking for more efficiency for all of our processes will be continued systematically also in the future. During '23, the group intends to upgrade its company-wide ERP system to a new generation, and this will further improve our process management and with that, realize also material economies of scales in the years to come. Page 16 summarizes the aforementioned factors: a '21 full year EBITDA margin of 17.2% as reported or 15.5% at CER, came down towards 8.9% in '22 or 12.8%, excluding one-offs. The underlying decrease of 2.7 percentage points results from a combination of the gross margin dilution from former NSI third-party manufacturing and the explained OpEx rate ratio increases. As mentioned, in H1 '22 reporting, we will continuously drive up the EBITDA margin over the next 2 to 3 years. To conclude the P&L, Page 17 shows the development of net profit. Medartis reports a net loss of CHF 5.8 million or a small net profit of CHF 1.5 million, excluding the above-mentioned one-offs. The key reason for that decrease was the lower operating profit. The combined financial result and income tax result was slightly positive for '22, but had almost no major impact on net earnings as reported. And with that, let me come to the cash flow development on Page 18, starting with high cash levels of over EUR 80 million in January '22. Our operative business decreased cash towards EUR 61.7 million. In addition, the acquisition of NSI, a small increase of our holding in KeriMedical and FX movements or reported cash down to a level of CHF 2.6 million towards the end of the year. This balance as well as the newly negotiated in committed loans with various banks provide sufficient liquidity also going forward. Opportunistic financing of the newly announced increase in KeriMedical doesn't exclude a small capital increase of maximum EUR 20 million to EUR 30 million, subject to investor appetite and market development. And with this, let me hand back to our CEO, Christoph Bronnimann.

Thank you. Let's move on with the strategy and the business update. Our strategy remains unchanged. We are passionately dedicated to developing and bringing to market differentiated technologies that improve patient care in the extremities and in CMF. We continue to focus our investments in new products and solutions, expansion of our sales organizations and new market opportunities. In the extremities market, we still believe we're playing in an attractive market, which is mainly driven by demographics. Our priorities for 2023 are the following: we're going to deliver innovation that we have developed and with NSI acquired. I think we have been focusing on broadening the strength of our pipeline through own and internal developments and through acquisition. Now we start the phase where we bring those technologies to the market, which I'm enormously excited about. We also continue to broaden our digital offerings in the CMX space by new launches and expanding our indications. The second priority is profitable growth. We have launched many technologies following the pandemic, the COVID pandemic, and before the MDD, MDR switch. We have still sufficient potential to continue to grow in those segments and in those technologies like foot and ankle, but also clavicle that we want to harvest on. But our main priority remains to continue to develop and expand our sales distribution channel, mainly in the U.S. The third priority is protection of our gross margin, not only the business environment and the inflation that has changed or the economical outlook, but we need to accelerate, continue the optimization and efficiency gains in our manufacturing and production cost base. On the next slide, gives you an overview now what I meant with the NSI and also the internal development technologies that are now becoming available for global launch. On the left-hand side, you see an overview of LapiPrep and StealthFix, which are the first NSI technologies that are being ready now for launch. Launch is starting by the end of March and especially Lapiprep and StealthFix now give us an opportunity to go into the market of instrument aided controlled correction of the Hallux Valgus. It's a market which we believe is around EUR 300 million, growing at 5%. But it's also a market that is shifting from the so-called freehand procedure towards the instrumented and guided procedures. So we will be able to play in the market and is fully compatible. The LapiPrep is fully compatible with our Medartis portfolio, either with the CCS cruise or with the TMT plating system or could even be used with the StealthFix. So the feedback that we have received from our surgeons is not only the controlled correction, the easiness of the compression, but also the flexibility of the fixation method once the osteotomy is cut. CalcShift will be launched later this year in the second half, and it will be helping us to expand our indications for the controlled corrections from the Hallux Valgus, into the mid food and then to the hindfoot. So we will go into the market of instrumented aided corrections of Hallux Valgus and all the flat foot indications. On the global level, we're going to continue to launch our -- and expand our CCS portfolio. We increased the indications in the mid finger and in the mid-hand finger fractures. Very excited about the launch of KERIFLEX as the silicon prosthesis now in the U.S. We also have an extension of the fore arm in the distal hand plate and the food auto system will ideally complement our trauma system for the foot, and it will allow and support the expansion into indications in the corrections of flat foot. In the CMX space, we're going to go into the CMX anchor and also orthognathic so that ankle corrections and orthognathic corrections and will be covered by the digital planning all the way with all the services towards a patient-specific implant. On the next page, we have this morning announced that we have acquired an additional 18% of the KeriMedical, which brings our holding from 25% to 30% and now to 47% in total. This is a strong sign of the execution of our strategy to enter not only the joint replacement, but also to bring the KeriMedical portfolio into the U.S. We now have clarity, especially when it comes to U.S. to jointly develop the reference centers, the training centers and leverage our KOLs in the space of hand surgery to expand our product offering from plates and screws into the KeriMedical portfolio, mainly in the U.S. It also allows for a better collaboration in R&D, regulatory marketing and professional education. Next page, please. On our second priority, we have a significant potential to grow in all segments in all our markets. Our #1 priority is to continue to gain share in the distal radius, where we have the most comprehensive portfolio, comprehensive clinical studies and a very well-educated sales force. So we're going to continue to focus on building our competence in the distal radius to drive market share gains in all of our markets. And the second priority, we have our foot and anchor business that we have started to build. With all the technologies that we're going to bring to the market, you can understand that we're building now a comprehensive portfolio, addressing forefoot, midfoot-hindfoot corrections in addition to the trauma indications that we already have. The NSI technologies will be launched in the U.S. first, but over time, we will also bring those technologies to the global markets as well. KeriMedical has become a growth driver in our hand segment, especially in Germany, U.K. and Austria, especially through the touch prosthesis. We believe that the touch prosthesis has the potential to change the way of treatment of rhizarthrosis from trapeziectomy towards a complete joint replacement with the touch prosthesis. Encouraged by that success, we're looking forward now to take the KeriMedical portfolio also into the U.S., starting with KERIFLEX as we speak. Let me comment on the U.S. We have been focusing on changing and expanding our sales channel. I think bringing those technologies into the market, we need 2 things. First and foremost, and that's our #1 priority, continue to expand the sales force, but also to strengthen the sales force. The second priority is on gaining and expanding our market access. Our U.S. team has been very active in both dimensions last year. We continue to expand. We are now well on track with the current sales rep and the expansion of the independent agents. In the top right chart, you can see we're right now about 230 reps, but we have also focused on the strength of our channels, meaning that we increase the exclusivity that we have changed and addressed underperformance and changed some of the distributors, mainly those who had joint replacement in the bag that we want to drive towards fully dedicated, exclusive, independent agents carrying the entire Medartis portfolio. Certainly, we have expanded in the upper and lower extremity. But going forward and in light of the NSI technologies, we must continue to expand and accelerate the sales channels, especially in the lower extremities. We have intensified our efforts in contracting and in pricing and have expanded and invested in the team, gained significant market access in the Central South, in the Central North and Southeast region, and we're working on continuing to expand the market access across the United States in national contracts. This has also become more and more of a value driver for us in negotiations with distributorships, gaining more and bigger distributorships in our sales, China. As we have established the IBRA U.S. chapter, we're going to continue to expand in the number of courses, but focusing mainly on young surgeons getting closer to the upper extremity and lower extremity fellowship centers. With all those activities, we are very confident that we're going to be delivering and expect in 2025 in the U.S., $80 million of revenue approximately. On the next slide, protecting our gross margin. I think we are very well on the way in our manufacturing site here in Basel. We're now going to focus the streamlining of the operation activities in the U.S. that came in with NSI. We're consolidating the operational sites and consolidate in Warsaw, Indiana, closing the Exton facility, which will also give us addition efficiencies in the back office and in our commercial capabilities.  We have initiated a product transfer and the manufacturing transfer project so that we can start producing semi-finish Medartis plates and screws in Warsaw earliest beginning of 2024. But therefore, we have already initiated the know-how transfer and the design transfer for those products. As you can imagine, the many different departments, regulatory quality that are being affected for such a know-how and knowledge transfer. We also improved and continue to work on the improvement of the OpEx sales ratio, especially in our U.S. organization when it comes to the nonproduction areas, which is an enormous important lever also for us to become more profitable as a group. On the next slide. Now let me conclude with the outlook for 2023. In the outlook of 2023, barring any unforeseen circumstances, of course, we're guiding towards an organic sales growth of 15% to 18%. And continue to recover in the elective decision in the hospital capacities is an assumption that we also go after in '23. Our underlying EBITDA margin is expected to grow back into 13% to 15%, which is in line what we have communicated after the NSI acquisition, where we benefit from operational leverage. With those remarks, I would conclude the presentation part, and probably open it up for Q&A.

Thank you, Christoph. Thank you, Dirk. Excellent questions -- excellent presentation. So let's move on to the presentation. Christoph, Dirk, are you ready? We have been waiting all day for this. So we have a few questions coming in mainly from the telephone line. [Operator Instructions] Operator, can we have the first question, please?

Daniel Jelovcan from Stifel.

Just 2 questions. The NX Nail fixation system. You mentioned it already launched late in Q4. Can you indicate about to roll out the most important markets outside the U.S.? I guess, the biggest market is in the U.S. though. And if you can maybe give us a global, let's say, opportunity for you in this probably attractive business? The second one is on the U.S. strategy. I think you plan to hire 20% more sales in the U.S. this year. Where do you get them from a mostly third-party uses or direct sales reps? And I guess, also because there is a certain payoff time when you hire a new rep that probably it's diluting the margin in the beginning. That's probably also a reason for the kind of slight margin improvement on an underlying basis. So I guess the dilution is coming from the U.S. this year. Good.

So Daniel, we couldn't hear you really well, try to repeat the questions. So the first was on -- and please correct me if I interpret you incorrectly. So the first question was on the NX Nail, Christoph, how we want to roll it out? What is the market opportunity? And what is the potential outside the U.S.? If you could elaborate on that first? And then I'll do the second question.

Okay. Let me comment on the NX Nail. The NX Nail is a new technology or a new way of treating finger fractures that has mainly come up in the U.S. It's much less used in Europe. There is some interest around it. It also has some disadvantages. But in the U.S. market, we have seen that the market has started to slide a little bit towards using nailing system. And a little bit means it's around about 10% of those finger fractures that are treated with NX Nail. So the plate and screw still is and remains the gold standard for the treatment of those fractures. However, there is some group of surgeons that are tending towards using an intermediary re-nailing, and that was the opportunity that we saw as there is the NX Nail available on the market. They have asked and searched for more distribution capabilities. And so for us, it was a strategic decision to add the portfolio that complements the Hand and plate portfolio in the U.S.

Good. Thank you, Christoph. Then the next question would be related to the sales force expansion. We have shown on Slide 24 that the indirect and direct sales will have grown in '22 to a level of just short of 230, and that will continue to 270 next year. The question is, is the time delay in training and making this sales rep for the agents, mainly productive and will that dilute the margins in the medium term or short term?

I think as you can see, from a numbers perspective of total reps, we're following about the plan. And the plan is also based on the onboarding, equipment of distributors with the new sets, but also providing the required training for our products and indications. From that perspective, we are on track, and we will continue to expand as we had planned. But I think it's not only about the number of reps, but it's also about the strength, the dedication and the share of voice, the share of time that we gained from those reps. So we are equally paying attention to select the right distributors and the right distributor for us means distributors who are dedicated to the extremities that do not carry a joint replacement product line in the back in addition, first of all. Second, we put more and more emphasis now as we become more competitive in our portfolio to get exclusivity, so that we're the only manufacturer with plates and screws in our portfolio in the product lines of those distributors. And I think those are the 2 dimensions that we pay enormous focus in the future expansion.

Chris Gretler from Crédit Suisse.

Maybe 2 questions. Now first is just on this sales force actually kind of -- could you discuss the productivity? Because if I calculate that, it's basically kind of shy of 200,000 per direct or indirect sales rep. It's just fairly low for this industry. Maybe could you discuss that? And what is the opportunity and how you drive basically sales per rep here?

On the productivity, our goal is to reach an average of about 500,000 to 750,000 per rep. That's what we consider a good sized territory. Now as we expand and onboard new reps, you will always have a mix of new reps, which is significantly lower sales compared to the more mature reps. So our biggest reps, they're probably running at about $2 million and plus and an average across the entire organization, we strive towards getting in the range of 500 to 750 million.

Okay. And then maybe the other thing is just on CapEx. Could you maybe discuss the capital requirement for this year and maybe next year in terms of instrumentation that you're planning to put out in order to support the growth, particularly on the U.S.

Christoph, I take the question, Dirk here. Now last year, we've put a lot of new sets into the U.S., which has also given the fact that we wanted to ramp up this business. We had a new team. We're also reviewing customer relationships, and we really didn't take out any sets even the opposite were very generous and put in a lot of sets. We've also selectively increased the number of sets through all the other countries, especially those countries which will grow very quickly. And with respect to this year, we will be a little bit more modest means, on the one hand, the what I call the installed bases for the U.S. is much higher than it was a year ago. And we also expect that there is some set turn, some revenue to come on these sets. The other thing is also that we believe that the level of sets, which are in the country is now at a level where we feel comfortable from which we can grow. Now that being said, our CapEx for sets will be certainly lower than it was last year. We will also be a little bit more cautious on the inventory buildup, which last year, we were in a special situation also with the NSI transfer, CV finished products, other things. So you should expect a CapEx number, which is clearly below this year, 22 million.

Maybe to add on your comment on the NSI launches, of course, to the new technologies that we're going to get into the market, I think we will also be cautious in terms of do we have the right reps? Do we convert the surgeons? And how many sets do we need in order to support. So we're certainly not going to go and flat the market with NSI technology sets, but we want to make sure that we get the sales turns and the set turns that we target at an early start of the launch.

The next question comes from the video line, Sandra Dietschy from Bank Octavian.

Yes. My first question is on the U.S. sales target. You said you're targeting roughly EUR 80 million of sales by 2025. So what's the split between sales from products, from Elsie products versus the underlying business there? And then the second question is also related to NSI. On the third-party sales, what should we expect that to phase out over? Is it kind of the next 2, 3 years? Or how long do you expect to still sell the third third-party sales? And if I may, I also have a third question on the sales force expansion in the U.S. You are now focusing on the independent sales agents. And there are obviously 2 different types of ones that are dedicated to either upper or lower and the ones that are doing both. Can you share what's the split today and how this will develop going forward? Is it to onboard more dedicated ones? Or how should we think about that?

Rob, you may repeat the first 2 questions. I had difficulty to hear as you turn down the volume.

So we start with the last one on the sales force expansion in direct and then we -- Sandra if you might -- we had a technical issue here at the beginning. So it was very...

I can take the second. Let me start with the expansion of the sales force. As I mentioned, our ambition actually is to move to independent agencies that have both that have reps that serve upper extremity and reps that serve the lower extremity field. So I think at the end we will have dedicated reps offer extremity and lower extremities. The portfolio becomes too wide to cover all the indications. So we want to get that specialty, that's training, that's knowledge, the competence into our sales force on the upper as well as in the lower extremities. So we have a combination. There are some distributors that have both. There are other distributors that have only upper extremity and/or lower extremity. Right now, from a total sales cost perspective, our dedicated lower extremity is still on a smaller level. It's around 20%. And that is certainly the competence that we need to accelerate to be in the special as we come now with the NSI technologies. I think you had the second question?

My understanding of the second question, though, I couldn't hear you very well, was how about the third-party manufactured products. How big of what is our plan going forward for the next 2 years? How big will that be? Did I understand your question?

Yes. And it's rather a phasing out or if we should expect kind of a dedicated scales.

As you know, we've taken over this business as a part of the transaction with NSI. We've also committed to maintain and to continue that business because there are contractual agreements with third parties. And also, we have, at this point of time, spare capacity in Warsaw on our production. So we're not guiding for it, which means that when Christoph has guided you with respect to top line, always take the what we call the organic growth that includes the Medartis business, but it does not include what we call the third-party manufacturing. So you will start from a basis which is around 2.8 million and then deduct the approximately EUR 5 million, which we got from NSI for the third-party manufacturing, and that is the basis for growth. We call that organic growth, number one. How big is the number is within that context, not really relevant. It does matter when in terms of gross margin and then also the overall profitability is affected by that one. I would assume that it's going to be a single-digit number for this year, and it's going to fade out for the next 2, 3 years. But of course, I can't tell you what the demand behavior and the order level and the time to come will be also from the third parties. Does that make sense?

Yes, just to clarify. So the third-party sales is even though you have acquired it, I think it was March last year, is not considered to be organic in -- so your guidance is excluding the third party?

Our guidance is on Medartis products only. That...

But including the new NSI product?

Which we've got from NSI, so the products which Christoph has referred to, but we consider them to be our products. The third-party manufacturing, which is the heritage business of what we got on top of everything, it's not part of our guidance. We do it as it comes in, but it doesn't really matter for our own business development.

Could you repeat the first one? I apologize.

Yes. So the first question was on this EUR 80 million sales target in the U.S. You mentioned your targets to reach by 2025 approximately. How much of this EUR 80 million is coming from new NSI products? And how much is what I would call the underlying business, if you could kind of give a split here?

Well, those EUR 80 million, we don't break down and we don't guide for individual product lines. For multiple times, we had already talked about reaching those EUR 80 million, but that included the expansion of our lower extremities portfolio. So the lower extremity portfolio is now fully consolidated into those EUR 80 million. And it includes the plates and screws, but also includes the NSI technologies, mainly the 3 that we have mentioned today that we start launching. Those are the ones that will have the key impact. So from that perspective, the EUR 80 million, the growth that you can imagine that you can calculate, which is going to add up about a 25% CAGR year-over-year to reach those EUR 80 million, that will be driven by our existing portfolio plus all the new products that we are about to launch this year.

Okay. And the target of the BRL 150 million sales by 2028 from NSI products, that's a target that's still in place?

Well, we still confirm and believe in the high potential of those products exactly. Now the difficulty is a bit to range up is, as I said, building the sales channel. I think if we look back, we have been building very fast in '21, but we have also realized last year, not all of that expansion has been sustainable. This is also why we changed some of the underperformance also why we changed from some distributors to others, mainly focusing on purely extremity dedicated. So I think if I take a lesson learned from the '21 expansion, certainly the one more quality rather than speed. And I think the basis that we have on the distributors that we have gained is a very solid one. Many of the new ones I have visited last year and also started to visit this year. So I feel much more comfortable that we have the right partners in there, which is a good base then to accelerate and to continue to expand.

Good. So then I'll have a look at the list again. We don't have any further questions for Q&A. Operator, we have somebody in the telephone line?

No, sir, we don't have any questions over the call.

Well, there is one question just coming in from the e-mail interface and that person would like to know, could we break out the cost of NSI on the OpEx level? So we indicated obviously that the margin were dilutive because of additional costs of these 97 people. Can you break out how much this costs, excluding the acquisition and restructuring costs were?

So there is one slide in the presentation where we've drawn a very fine line, which is the increase of OpEx. And within that, you can also see that approximately half of the increase is coming from NSI. Now what you have to know is that as of September, we run the company as one company. So we're not making any difference anymore, whether it's form NSI, whether it's from Max. It's actually one business and we run it together. So I wouldn't overemphasize or over focus on this specific NSI number. It's our used business. And Christoph has said that we're trying to improve our OpEx ratio for the entire business significantly also during this next year to come. So what you can see from the chart is that approximately half of the business or half of the OpEx is coming from former NSI, but no guidance on this number going forward.

Perfect. Dirk. There's another question for e-mail. The person would like to know on Slide 21, where you show up all the innovations, the product introduction in '23, which of the NSI product is the product with the biggest sales potential?

I think that the product with the biggest sales potential is clearly the LapiPrep. The LapiPrep, the instrumentation for the controlled correction of the Hallux Valgus. And I think it's not per se sold as an implant. I think it is combined with the implant. It can be used with the screws and plates. It can be used together with StealthFix. But for us, it's the system that we have developed instrumentation and also fixation opportunity for the instrument aided correction of the Hallux Valgus.

How the labor situation -- U.S. labor market looks like at the moment. Is it difficult to find sales rep and also to hire agents that have an exclusivity or a focus on the products that are relevant for Medartis.

If I take that question, the labor market per se has certainly changed also in the U.S. And we have made the experience that also in the sales force that reps rather take a job and position in the elective joint replacement where they work from 9 to 5 probably rather than in a trauma indication where they need to work 24/7. So having said that, on the other side, we also see many changes in the industry. Acquisitions, we also see consolidations. We're now hearing about layoff grounds and restructurings in the bigger. So that will open up and has already opened up opportunities to recruit dedicated extremity independent agency. So rather less of an issue and impact on the distributors much more impact on individual labor market.

Perfect. There are more questions from the video line. Mark Octavia, would like to ask a question. Please, operator, can we have them put through, please?

There are no questions all over the phone.

Okay. So the operator just told me there are no further questions on the line. If that's the -- I mean we can definitely also take the questions up afterwards, bilaterally. Thank you for your active participation. And for that, then I would -- some of you just coming in. Can we have her put through, please?

Yes. No, it's working again. Just a follow-up question on the KeriMedical. Is it still the plan to get the FDA approval by 2024 for the KERIFLEX? Is that kind of time frame we should think of and what are the thoughts regarding the remaining 53% stake of this company?

Thank you for the question. Sandra. Yes, the regulatory approval for the touch process is still expected mid next year, end of second quarter, maybe going into the third quarter, I think we're fairly stable as the touch has been granted, the fast track approval process by the FDA. So there is no change in our expectation. Going forward, as you can imagine, having started with 25% and now increasing our share to 47%. There will be certainly be an interest of our -- on our side to increase -- to further increase, I would say, but it always takes soon and more than those 18% have not been available as of now.

There was another question through e-mail. Can you elaborate of the phasing of your sales guidance between H1 and H2. So is the growth more pronounced in the first half, in the first 6 months last year than in the second half. Dirk, do you want to take that question?

Yes, I can do so. So there's certainly a higher proportion expected for H2. This is, on the one hand, based on the momentum. Christoph has alluded to the increasing momentum of the U.S. He's also referred to the increasing momentum, which we also see from Australia. So that should happen when the year continues to come through. The other thing is also the introduction of the new products, the launches, both the former NSI products, but also our own pipeline, which has been launched currently. That would also give a stronger bias towards the second half of the year.

So thank you for your engagement, excellent question and your interest in Medartis. This last question, we're going to close this out for today. Before we terminate this webcast and the closing remarks from our CEO, Christoph Bronnimann, let me draw your attention to our IR lender on Slide 30. We hope to meet as many of you, obviously, during one of the rotor activities or at one of the listed conferences. To access our annual report, which was released this morning, just simply press on the button on Slide 29. And with that, I would pass the word back to Christoph for his closing remarks.

Thank you, Fabian. So first of all, I would like to thank you all for your interest and engagement and the questions that you asked. When we put those presentations together, I was really inspired and really impressed again as we talked about the broadening and the strengthening of our pipeline. We changed the strategy to go beyond the plates and screws also in the joint replacement and also more and more in digital services. And now a couple of years later, seeing those technologies being available for launch, getting introduced into the market alongside with the KeriMedical, but also now looking forward to the NSI products to be launched starting as we speak, actually at the end of this month and also seeing the progress that we have made in the strength of the sales channel in the U.S. and very excited about the 2023. I'm very optimistic that we're going to bring a lot of technologies into the market that really have an impact on our patients. So in that sense, I'm really looking forward to 2023. Thank you again for the time that you have taken for the engagement and hope to see you soon. Thank you very much, and have a great day.