Sedana Medical AB (publ) (SEDANA) Earnings Call Transcript & Summary

Welcome to the presentation of Sedana Medical Q3 Report. [Operator Instructions] Now, I will hand the conference over to CEO, Johannes Doll; CFO, Johan Spetz; and CMO, Peter Sackey. Please go ahead.

Thank you very much. Welcome, everybody, to our Q3 report. We will follow the same structure today that we always use for these calls. I will kick us off by presenting the performance during the third quarter and the progress we have made against our 3 strategic priorities. Then Peter Sackey, our Chief Medical Officer, will talk about where we are with our clinical trials in the United States, and our CFO, Johan Spetz, will go a little deeper into the financials. And then I will wrap it up, and we will take time to discuss your questions. So let's get started on Page 3, please. As many of you know, we have the whole company fully focused on 3 strategic priorities. These priorities are: first, to achieve profitable growth in our current business after having leveled the COVID-19 aftermath behind; second, to reach breakeven in our ex U.S. business during next year already; and thirdly, simultaneously getting closer towards an approval of our inhaled sedation therapy in the United States and to prepare for the launch of our future largest potential market. During the third quarter, we have seen some good progress on all of these 3 priorities. First of all, I'm quite happy that after the COVID-19 roller coaster, we have reached some level of consistency in our sales growth. We are now looking at the third quarter in a row with quite robust growth, especially in our direct markets. So where we have our own field forces and therefore, more control of the performance. Sales growth in the quarter was 29% in Swedish krona and 16% in local currencies. So we continue to benefit from quite strong currency tailwinds here. I will come back to the performance in the individual markets, but what you see already standouts very positively is the growth in our so-called other direct markets, which includes Spain, France, U.K., Nordics and the Benelux countries, where we had a growth of 87% or 69% in local currencies. And this represents another great step forward in our journey to reach scale outside our main market, Germany. After the quarter, we also had 2 very positive milestones, both of them, we have waited for a very long time. In the U.K., we have finally received MHRA approval, regulatory approval. And in Spain, the Ministry of Health has now officially confirmed pricing and reimbursement approval. Both of these milestones could be quite important triggers for future growth in these markets. From a P&L perspective, we are seeing quite good progress as well. Our gross margin was at 70%, and we have been able to reduce our operating expenses by 17%. In this case, exchange rates are working a little bit against us, as a big part of our cost is in euros, not intact. And without that effect, let's say, savings would even have been at 21%. So I'm quite proud of the fact that we have been able to achieve this level of cost savings in an inflationary environment, and at the same time, also showing robust growth on the top line. You can see the results on the EBITDA line. We've been able to cut our EBITDA loss in half compared to last year. So I see us quite well on track to meet our big goal of reaching EBITDA breakeven in our ex-U.S. business during 2024, so next year. And with SEK 450 million or a little bit more on the bank account. We continue to be financed to execute on our plan, including the clinical trials in the U.S. and also the launch in the United States. Speaking of the U.S., we're seeing very good progress in the U.S. as well. Both Phase III trials INSPiRE-ICU 1 and 2 have enrolled the majority of patients. The study is in full swing. We have 27 clinical trial sites actively recruiting now. And what we're currently seeing is an acceleration of enrollment after the summer month. The summer in the ICU is typically a bit slow. That acceleration has come a little bit later than we had planned for, which is mostly a function of how many patients that you have in the ICU that need to be mechanically ventilated. So we currently expect that both trials will run into the early part of '24. But importantly, there is no change to the overall timeline. So our estimate is still that we will be able to submit the NDA, so the file to the FDA in the first quarter of 2025. And as you probably remember, we did received FDA Fast Track designation. So while there is, of course, no guarantee, but that we will try to work with the FDA to get a shorter review period that may standard, which is 10 months. If we then move to Page 4, please. What you see here is a brief recap of our view on the market potential and our short-term financial targets, which we have introduced in the last quarterly report in the summer. Based on that, we see that in our current direct markets in Europe, so again, Germany, Spain, France, U.K., Nordics and Benelux. A bit less than 1 million patients are mechanically ventilated and sedated per year. And that translates into a market potential for our current products between SEK 3 billion and SEK 4 billion. And in the U.S., based on the same analysis, we've [Technical Difficulty] more than 2 million and those patients a year are mechanically ventilated in ICUs, which translates into a market potential between SEK 10 billion and SEK 12 billion. So very clearly the U.S. once we get there, will be our largest potential markets, even though we have not assumed a significant price premium versus Europe. It is, however, quite important to note that other sedation products, most notably propofol, which is the standard of care have a net price of 2x, 3x, sometimes 4x the European price levels, depending on the hospital. So there might be some upside. We have defined 2 important financial targets for the shorter term and sales level of SEK 145 million to SEK 155 million for this year and also to reach breakeven ex-U.S. during next year. Sales-wise, we're now at SEK 109 million after Q3. Typically, the fourth quarter is a bit stronger for us compared to the summer quarters, that is because you have more patients in the ICU during the winter months as you tend to have more respiratory infections in the winter, of course. So I see the company well on track to end up within that range for the full year and also for the profitability targets you have seen that we have cut the EBITDA loss in half. So it's, of course, still very much early to declare victory here, but with continued sales growth and continued discipline on the cost side, which we have been quite successful with so far and confident that we will get there during next year as well. Then on the next page, Page 5, we see the longer-term sales development with a sharp increase during COVID-19 and the following drop in 2022. Year-to-date, we see a growth of 26% or still 15% in local currencies at the sales level, that is both more than double of that in the last pre-COVID year 2019 and also already higher than 2020, which was quite heavily influenced by COVID patients. So overall, a very positive picture. On Page 6, the next page, you see the sales bridge for the third quarter year-over-year. In absolute numbers, Germany has contributed the most to our sales growth, 9% growth in euros during the quarter, which corresponds to 21% in SEK, a little bit less than the very strong second quarter, where we were comparing to the weakest quarter in 2022, but still a solid 16% growth in euro year-to-date. In Germany, we have less possibilities to grow from new customers as we do have the majority of German intensive care units as our customers already. So our focus is very much on high potential accounts where we want to increase the penetration of inhaled sedation. And in order to do that, we have launched a field force effectiveness program several quarters ago, which is focused on spending more time with our key customers and help them identify more patients who are likely to benefit from the clinically proven advantages of inhaled sedation. Really strong growth in our other direct markets. Spain stands out here as the main growth engine. And remember, the pricing and reimbursement approval only came after the end of the quarter. So this is only based on device sales. 69% growth or 87% in SEK. And also here, this result is not a coincidence, but very much in line with our strategy of creating more Germany, so to reach scale in these markets by investing in a very targeted way and profitable growth opportunities, while at the same time, also be very disciplined to streamline the organization where we don't see profitable growth. And that very focused approach is showing results. On the distributor side, so the countries where we don't have our own teams on the ground but have partners selling the product on our behalf. We had a weaker quarter, minus of 11% or 20% in local currencies. That is partly explained by timing effects. Many of our partners only order once a year. And depending on where these orders fall, we see a stronger or sometimes a weaker quarter. But also, we do still see quite high stock levels in some of the countries, which are delaying new orders. What we're doing is, implementing a quite similar approach, and that has worked very well in our direct markets. So a very focused approach where we work very closely with our key distributors, where we see the highest potential, and at the same time, we find a quite efficient support model for our smaller partners. Then let us move on to Page 7. Finally, I'm able to present a map that is completely green here. We have received regulatory approval in the U.K. after submitting our file, I think, 2.5 years ago. That's very great news as we have now received approval in all of the 18 countries where we have applied for marketing authorization. So we did not get a single no anywhere, which speaks very strongly for the quality of our clinical data and the meaningful benefits that we are bringing to intensive care patients with this therapy. On Page 8, you see that the U.K. was not the only good news, but let us stay with the U.K. for a second. We are planning to launch our pharmaceuticals, Sedaconda, isoflurane, when we have the supply available. Now that we have the approval, we could place that order with our supplier, and that is going to take a few months. And what this means for us is that, finally, inhaled sedation is an on-label therapy also in the U.K., and our team can actively promote it. And let's not forget, this finally allows us to fully benefit from the very positive NICE guidance that we have received already back in 2021, which recommends inhaled sedation and confirms a saving of GBP 3,800 approximately per patient if the hospital uses our product instead of intravenous sedatives. So we are hoping for increased demand from customers in the U.K. as a [ complement ] of this regulatory approval. In Spain, we cannot complain at all about a lack of demand, but we're growing very fast already. But now we have also received pricing and reimbursement approval, you probably know that, that has taken a bit of back and forth with the Ministry of Health. But now we are allowed to sell the drug from December onwards. But as in all countries, I should also say that the drug as such is not going to be the main driver of sales and margin growth, our main business is and will be the medical devices, and we hope we will see an acceleration of devices sales as a consequence. The reason for believing that is that, we have quite a few customers in Spain that have delayed the implementation of our therapy because they were waiting for the drug to be available, so they did not have to use an off-label treatment. So quite a few reasons to be optimistic about the further development in these 2 key markets. If we then move on to Page 9. This page shows how we are doing on our quest towards profitability outside the U.S. during 2024. And all of these are year-to-date numbers. In short, sales are up, gross margin is up, and we have taken out a significant share of operating expenses, 10% down in OpEx year-to-date. If you exclude the currency effects and as referred more than 20% in the quarter, and the result is an EBITDA loss that is still negative, but it's half of last year, so a very good trend. I've highlighted on this slide, the ex-U.S. portion, but the darker blue here. And as you can see, the U.S.-related operating expenses are quite minor for now because the big cost in the U.S. is currently clinical trial-related and those are capitalized to the balance sheet, yes. So, again, how will we get to turn the remaining EBITDA loss into a positive number sometime during next year? It will continue to be a mix of further sales growth, again, in a very focused and targeted approach and further spending discipline across the organization. Then let's switch gears and talk about the U.S. This is Page 10. Our strategy is to build up a Sedana U.S. organization and launch our inhaled sedation products ourselves. What makes us confident that this is the right strategy for the U.S. is the fact that we see by far the largest commercial opportunity in the U.S. and at the same time, we are also dealing with a manageable target population. And therefore, the investment level is realistic also for a company that does not have limitless resources available. Strategically, I think having our destiny on hand and planning for stand-alone launches, it's worth a lot. But, of course, when the time comes and we feel that complementing our own commercial presence with a partner that can maybe help us achieve faster growth overall in our reach, we would, of course, consider that as well. But before we can talk about a successful U.S. launch, which, of course, I'm very much looking forward to, we have to complete the clinical trial. And with this, I'll hand it over to Peter Sackey, our Chief Medical Officer, who will give an update on that.

Thank you. Yes. So as you may have heard before, we have the 2 Phase III studies, INSPiRE-ICU 1 and INSPiRE-ICU 2, that are ongoing, and we've added more active study sites with both trials enrolling -- I think, having enrolled more than [ pile of ] patients and with a good trajectory on the enrollment side. We will, however, expect to see some of the enrollment running to 2024. With that said, we are still counting on submitting our NDA to the FDA in Q1 in 2025, and where the standard review time is 10 months. And as we've communicated before, we have received a Fast Track designation by the FDA early this year. If we move over to Slide 11, please. The Fast Track designation that the FDA has granted our Sedaconda program is purposed to generally give the new therapies faster approval if the data are appropriate. And that in itself confirms the FDA sees our therapy as an important potential addition to what's available today. And the potential benefits of the Fast Track designation includes frequent communication and accelerated approval, priority or rolling review. And we hope that one of these will be applicable. However, we will not know that until the time submission of our pre-NDA meeting. This is what we'll be discussing with the FDA, if any of these options would be possible to utilize. If we move over to Slide 12, good news, when it comes to the investigator-initiated trial. So the SESAR trial, as we communicated earlier, has completed enrollment of 700 patients. This is the largest [ clinical ] trial of inhaled sedation to date. And obviously, this will be very interesting to follow the outcome of this study in ARDS patients. And the investigators are independent from Sedana despite sponsoring devices on some training from our side, but they have communicated that they expect to see the data or present the data in the second half year 2024. The other study that is investigator-initiated and that we have played a role in facilitating is the INASED study, also in France. This study is currently enrolling and has reached 165 patients to date. And then we move to next slide, so Slide #13. In the last months, we have had a number of activities in different parts of the world, either by Sedana or by our distributors. And the most notable one was earlier this week with the European Society of Intensive Care Medicine, where we held an evening symposium and our inhaled sedation was also on the regular program that was presented by one of the [indiscernible] globally. And with that, I'd like to move to Slide 14 and hand over to Johan Spetz.

Thank you, Peter. Yes. So next up is the financial section. So in general, on this slide, what you can see is very much what Johannes says -- has talked about the fact that we are seeing good progress over the past couple of -- or several quarters in terms of the financial development of the company, where we are continuously growing sales. And at the same time, we're able to lower our cost base despite the general inflationary environment that we're seeing in most of our markets. But let's dive into some of the details here. So net sales in the quarter, we reported SEK 34 million. That's up 29% year-over-year or 16% if we adjust for the positive currency effect that we are experiencing. Of course, most of our sales is in euros, as you know. And as Johannes described already, we are growing in Germany, driven mainly by increased penetration in existing accounts and also growing strongly in our other direct markets where it's mainly driven by new accounts opening up. So we are seeing steady robust growth also in Q3 overall. If we look at the gross profit, we reported SEK 24 million for the third quarter. That's equivalent to a gross margin of 70%, which is in line with what we had in the same period of last year. We are experiencing cost increases in the supply chain for things like materials and components. And we are, of course, in ongoing dialogue with our main suppliers. Sequentially, as you can see, we are slightly -- reporting a slightly lower gross margin in Q3 compared to Q2, where we had 71%. So this is something that we are, of course, working with on maintaining a good gross margin. Looking at EBITDA for the quarter, we report minus SEK 13 million, and that's essentially a reduction in the EBITDA loss by 50% compared to a year ago. And really what's coming through in that number is, of course, the sales growth, but also the fact that we are able to reduce our OpEx to looking at selling, admin and R&D costs for the company. So we report a reduction of those type of costs of 17% in Q3 this year compared to last year. And at fixed exchange rates, the reduction is actually slightly more pronounced, so 21% reduction when adjusting for currency effects. So what we're doing here is very much continuing on the various efforts that we've initiated. So we're continuing to streamline our headquarter functions, things like HR, Investor Relations, accounting controlling, we're also continuously trying to reduce external spending on consultants and other vendors, as well as conferences. So, we have done quite a bit in this regard, as you see in our numbers, and we aim to do more going forward as well. Of course, our target for next year is to breakeven ex-U.S. in terms of EBITDA. So that's what we're going for. In terms of our organization, we have 92 employees and consultants at the end of Q3. That's down from 95 at the beginning of the year. So that's, of course, also in line with us, streamlining, in particular, the headquarter functions of the company. Next slide, please. So the next slide, Slide 15, you can see our cash flow and the development of our cash balance. So looking at both cash and our short-term deposits in combination. You can see that, that balance stood at SEK 453 million at the end of Q3 compared to SEK 504 million at the beginning of the quarter, and the reduction here of SEK 51 million is primarily driven by the investments in the U.S. clinical program. So cash flow from operations for the quarter was minus SEK 4 million. It should be noted there that for accounting reasons that line includes interest received on our short-term deposits of SEK 6 million. So that's why it's boosted in a way by that. Cash flow from investments in capitalized development expenditures was minus SEK 42 million. So that's primarily the investment in the U.S. clinical program, as just mentioned. When you look at the total cash flow from investments for the quarter, that's a positive number, SEK 111 million. What's important to highlight there is that, that also takes into account the fact that we have had deposits that expired in Q3. So we have a reallocation of cash from short-term deposits back to the cash line in the balance sheet, which then has this effect on cash flow from investments. But really, what's important to highlight here is that, the actual change in the cash plus short-term deposit balance, which is what really matters, that -- to look at that, it's much more relevant to look at what's been invested in the capitalized development expenditures. Similarly for total cash flow in the quarter there, when we, again, adjust for the allocation from deposits to cash. The total cash flow was minus SEK 47 million for the quarter, and that's really what provides a fair picture of what's happened in the quarter. But again, the reported total cash flow is then a positive number of SEK 106 million. But again, that captures the reallocation back to cash from short-term deposits. So liquidity management, of course, remains very important for us. As you know, if you follow us, a lot of our expenses over the coming years will be in the U.S. So we have already now around 75% of our available funds in U.S. dollars. And as I said, during the third quarter, we reinvested part of our dollars in new short-term deposits to optimize our interest rates that we're earning on our cash. And again, as a reminder, we expect to be fully financed until breakeven with the cash and short-term deposits that we have, and to be able to execute on our strategic plan. And also as a reminder, we have no long-term debt in the company. And then if we turn to the next slide, here, you can see our largest shareholders at the end of the quarter, and we continue to be grateful of the support from this group of investors, of course, as we continue on our growth journey with Sedana Medical. And with that, I will hand back to Johannes.

Yes. Thank you, Johan. That brings us to our new page, Page 17 to wrap it up. Let's take a step back again and recap why we think Sedana Medical is worth a look as an investment. Our business model lends itself to attractive profitability over time, and that is for 2 reasons. We continue to see healthy gross margins of 70%. So by definition, we can become quite profitable as a business when we reach scale. So that's one. And at the same time, secondly, our customers are intensive care units, so not a very large target population. So we can cover these intensive care units with a relatively small operating expense level on a local level. And we already have proof of concept for that in our main market, Germany, we -- where the majority of intensive care units are already our customers today. The team is generating very attractive EBITDA margins on a local level already. And while we are not at the same scale yet, other countries like Spain, for example, are operating with nice profitability on a local level already as well. So we have the proof of concept. It can be done. So then the real question is, will we reach enough scale and convince enough hospitals to use inhaled sedation more broadly? And here, we have convincing clinical data on our side showing that patients really benefit from inhaled sedation. And equally importantly, we can also show that hospitals do save money with inhaled sedation versus the previous standard of care, which was intravenous sedation. And we have lots of places to grow and to create new Germany, as I said before, again, regulatory approval in now 18 countries in Europe and the largest commercial opportunity. The U.S. is still completely untapped with the FDA, having given us Fast Track designation. And let's not forget, very important these days, a strong balance sheet and the commitment to get profitability outside the U.S. already next year. So we can hopefully soon launch in the U.S. out of a position of strength with a stable and probable platform in Europe. And as we've talked about, we have -- I think we have a pretty exciting time ahead with a potential breakeven next year outside the United States and also clinical biodata coming in. So we are very much looking forward to that next year. That concludes our presentation. Thank you very much again for listening, and we will now be very happy to take your questions.

[Operator Instructions] The next question comes from Mattias Vadsten from SEB.

I have 3 connected to the U.S. to begin with. The first one relates to the comments around patient recruitment being slower than expected or, let's say, the acceleration of the summer months at least. So yes, what gives you confidence that you can still submit the application to the FDA in Q1 2025 based on this? Just some elaboration there would be good.

Yes. I'll talk maybe the first glance, in computing. So first of all, we are, of course, not talking about a massive delay and sometimes it will be difficult to predict exactly how many patients we will have in the ICU. And now after the summer, it ticked up slightly more slowly than we thought. The reason it does not impact overall timeline, and that's the important part here is that, after the last patient was reported, we still have this long-term follow-up, so the 3- and 6-month follow-up. And that gives us the opportunity to do a few things in parallel as opposed to doing them sequentially. So that allows us to keep the timelines under control, even if maybe the recruitment takes a little bit longer. But again, now we've -- very recently, we've had some of the best enrolling weeks that we've ever had in the study. So if we continue like that, when things look pretty good. But again, the important thing is that, the overall timeline does not change.

I appreciate. And when do you expect to be able to show some kind of headline data from these studies? I appreciate you said studies will recruit until early 2024. But how long after final recruitment does it take before we can see any headline data? Maybe not a follow-up, but the headline data.

Yes. So as we've done for previous trials, we are planning to publish when the top line data are available, typically, that's the primary endpoint. It depends a little bit on what the data looks like. Of course, if you have very clear results, it usually goes a bit faster. If it's a more [ bigger ] situation, it might take a little bit longer. What you can typically expect is that, there's a couple of months of data cleaning, getting the data in the right format and so forth until you can do a database lock. So then that data don't move any more, and we can even analyze them. But I'd expect to be able to see something around mid-next year.

Perfect answer. And the last one connected to the U.S. is, as I've asked before, any comments on where you expect CapEx connected to the study and OpEx related to the U.S. next year? That's very helpful, if you can share some thoughts on.

Yes, sure. So with regards to the overall spending in the U.S., if we think sort of prelaunch spending, so including both CapEx for the clinical program and also building up the U.S. organization commercially ahead of launch. What we said is, based on the equity raise we did in late 2021, and that's still the case today. We are fully funded to execute on that plan. So then what's always been the case is, in terms of the clinical trials, 2023 is the big spending year just based on the shape of the expected recruitment plan. But then, of course, now with the slight change in the timeline that might change somewhat, but 2023 is still the main year for investments in the U.S. in terms of the clinical trial. We have not guided specifically on any OpEx number for the U.S. next year. So there, we will need to refer back to the fact that we do think that we have enough cash in the bank to execute on the plan of launching ourselves in the U.S. in 2026.

Yes. And just from a financial perspective, if you're looking at a launch, I will assume that there's no benefit from the Fast Track designation, which, of course, I'm hoping that there will be. If we then look at the launch, for example, in early 2026, and you will typically see the bulk of the investment from an OpEx perspective, so building up the organization preparing for the launch, really [ attentively ] that you would see in the year leading up to the launch, so 2024 will still be comparatively minor in comparison to what it will be at and before launch.

Perfect. I appreciate this comment. Then 2 more. The first one is on demand. I mean, we're almost into November now. So could you share any indication on what the seasonality you expect going into Q4 in terms of more patients at the ICU due to flu and so on? What do you see out there?

Sorry, we had a short disconnect there. Can you repeat the question?

So the question, I think if -- we got cut off here in the middle, but I think your question was around whether we see any patterns in Q4 here in terms of how many patients we have in the ICU? Of course, from a seasonality perspective, Q4 tends to be one of the stronger quarters that we see. The reason for that is that, ICUs typically fill up during the winter months because you have more respiratory infections, not just COVID, but also just the flu and pneumonia, things like that. So you always have more patients, at least in the countries where we are mostly active in the winter compared to the summer months. The October was in the sense of a little bit -- the typical October where you see a bit of a mix geographically. So in Germany, for example, we're seeing that some regions, the ICUs are already quite full, in others, that's not yet the case. And that's not so atypical. So after the summer, October is oftentimes a transition month. And then in November and December, you see more patients. So, so far, there's no reason to believe that we would have an unusual Q4 from a patient perspective.

Were you perhaps referring to the study or to sales?

I think that answers my question. And can you hear me good now, by the way?

Yes. Sorry.

Okay. Good. The last one was just on Germany, a bit slower here in Q3 versus a very strong Q2. Of course, there are -- there were an easier comp in Q2, and the comparison should be more normal in Q3, let's say. But in Germany, the 9% here, is that something you're satisfied with? Or would you want to see that increase in terms of percentage growth year-on-year going forward? Or yes, how do you look upon Germany?

Yes. So, I mean, overall, I'm satisfied. But if you look at the company, 16% growth, while at the same time, reducing OpEx at 21%, that's I think nothing to be ashamed of. 9% in Germany in euros is less than we had last quarter. But as you rightly say, there's also a bit of a comparator effect in here because last Q2 and last year was the trough in terms of demand and sales in Germany. And then there was a little bit of a catch-up effect in Q3, a very weak Q2 last year. So we had a weak comparator in Q2 and a slightly stronger comparator in Q3. I think over time, that will equal out. The year-to-date number, 16%, is, I think, one that we are quite pleased with. Again, in Germany, we have the majority of ICUs already as our customers, so where the growth needs to come from is convincing our customers to use inhaled sedation in more patients, and we are succeeding with that as we continue to take share. So overall, well on track.