Senzime AB (publ) (SEZI) Earnings Call Transcript & Summary

[Foreign Language]

Yes.

Yes.

In English, if it's okay.

Yes, fine.

And that's a little bit because we have increasing share of U.S. and international shareholders.

[Foreign Language]

All right.

Go ahead.

Okay. Nice to be here. Good morning, good afternoon. So I am the CEO of Senzime. We are a Swedish medical device company. We're in the midst of a technology and clinical shift happening in the market. We've developed monitoring solutions to help eliminate complications and help reduce drug costs of patients undergoing anesthesia and also in postoperative care. The technology is predominantly based out of long-term research at the Mayo Clinic in the U.S. and also at Mass General Hospital. We have a business model which is classic for our industry. We sell monitors and then it's consumables recurring sales of various types of sensors. We have a very commercial infrastructure in place with focus on the -- U.S. is probably our most important market. And we are on the Nasdaq main market with a strong shareholder base and supported by clinical guidelines. So we had a report this morning, so I'll share a little bit about -- brief about the company and then our Q2 highlights. So as I said, we are a company based out of Uppsala with -- that's where we have our R&D and production. And then U.S. is where we have half of our team. We also have distribution in a number of countries and we have 4 key license agreements covering the Japanese, Chinese and other types of markets. The background of what we're doing is that when you are, as a patient, undergoing anesthesia, there are 3 key elements that your anesthesiologist is monitoring. It's making sure you're asleep and that you are not going to remember what's going to happen. They are monitoring your pain levels and they're also monitoring the level of relaxation or how well you are paralyzed. The surgeon wants you to be absolutely still when you're under surgery. And as you get these types of paralytic drugs, you will lose the ability to breathe. So then you are intubated on mechanical ventilation. So these paralytic drugs that have been around for a long time have been shown in research to have -- they're very difficult to monitor and it's difficult to determine exactly when is it safe to wake the patient, when is this drug out of your body. And if you look at the market today, there's about 160 million larger surgeries done in the world where about half of them, the patients receive these neuromuscular blocking drugs or paralytic drugs. And if you look at the big research out there, there's been a vast amount of patients that have had complications because they're woken up too early where they're given the wrong amount of these paralytic drugs. So there's a high level of complications, which is typically resulting in pneumonia or longer stay and the postoperative care. So what we are doing as a company is kind of leading this shift from a traditional subjective view of, okay, is it safe to now wake the patient? Is the drug -- are the drugs out of the body to now successfully moving this towards an algorithm-based electromyography, digital way of really patient-centered monitoring the patient. And what we did -- our main product is called the TetraGraph system. We brought it to market a few years ago. It's FDA-cleared and CE marked. We're approved in Japan and multiple other countries. It's a system that is used in the operating room. It is connected to the patient via a disposable sensor, which will stimulate you on a near real-time basis with small electricity impulses. And then it picks up the impulses in your nervous system and it will monitor how well is your nervous system working. And then our very defined clinical guideline stating that when 90% of these drugs are out of your body, it's safe to wake the patient. So it's used during typically the operation. And our strength here is a strong IP portfolio, long-term research in the field. We are the most accurate solution on the market, I can guarantee. And this is the ideal solution for new robotic and other types of advanced surgeries. The market that we're in has been, as I said, characterized by subjective and other types of ways of following these patients. So since a couple of years, there's been introduced guidelines to support what we're doing. And the strongest of these guidelines came out during the winter just a few months ago. First came the European guideline stating that every single patient that receives these paralytic drugs should be objectively monitored to make sure that they are safely woken up. And then came the U.S. guidelines that were essentially the same as European, independent of each other. So there's a strong underlying driver for introducing the types of products we have in the market. So we're really in a -- to summarize, we're really in a once-in-a-decade opportunity where we have an amazing technology platform, which is now being introduced and where there's a new clinical variable, which is really becoming standard of care in the world. And I think we are very well-positioned in this market shift. Okay. So a little bit about the Q2 reports. We've had a strong uptake in our business. And I would say the inflection point was really during this winter as these guidelines were introduced. Our Q2 sales were SEK 8.5 million. So we had a nice growth rate. And for the half -- first half year, we're also showing a very nice growth rate. The drive is really in the utilization of our monitors, that more and more are used, the sensors are being sold. And this translates into improved gross margins. So we -- our gross margin improved from 50% last year to 70% this quarter, which is thanks to consumable sales, product mix, but also a very efficient product process. We signed an important license agreement, which was our fourth licensing agreement in China. So one of our product lines called the ExSpiron was out-licensed to a local Chinese partner who will commercialize this over 10 years. And then we are, in general, in a very nice and exciting ramp-up phase. It's really driven by this and we confirmed this during the summer in a capital markets update that our financial targets remain unchanged. So just to give some highlights on the numbers. It's fun to see how it's really started to take off. And consumables, again, is our most important target. And if you look at the first 6 months of sales of TetraSens, which is this disposable sensor, it has more than quadrupled. So the trends are pointing in the right direction. We are closely monitoring our chip-based of TetraGraphs. So there are roughly 1,700 TetraGraphs out there in a number of hospitals across the globe. And then if you look at the units of sensors, you can also tell by the graph that there's been a significant paradigm shift here during the last couple of months. So for us, the key kind of KPI here is making sure there's a strong utilization rate of these monitors. The graph to the left here are visualizing 2 different graphs. The one on the bottom is looking at if you look at our deployed accounts in the key markets, how often are the monitors used. And that's growing to be about twice a week. And then if you look at the key accounts that we define is the key accounts in the U.S. and in certain markets where we have direct access, it's nearing towards 4 times a week, which is nearing to kind of the goal where we establish ourselves. And we're also continuously growing our hospital and customer base. And what we're really targeting is the academic large institutions who are driving this shift and we're really in the top of the pyramid. So we have some really strong customer cases. I just showcased some here in the U.S. We're also monitoring all the time how are we winning accounts. And if you look at the end of Q4, we had 111 hospital accounts that we have secured and these are in our direct markets, excluding Japan, South Korea, we're attractive in and smaller distribution markets. And by the end of July, we had 151 hospital accounts. I'll come back to this number, what that means. And to visualize how our business model works, this is an example of a large U.S. hospital system in the Midwest of the U.S. We won this account about roughly a year ago after a long clinical evaluation. It took about 3 months to install our systems. And then you can see after about 12 months, they've already done and followed over 20,000 patients. So this has become standard of care in this hospital system. Revenues -- they are typically using this -- each TetraGraph more than 5 times per week. And we have a run rate in this type of account of about SEK 3.5 million a year. So this is really a recurring business and this is what we're now duplicating in our business. People ask me about this installed base. Yes, you have 1,700 TetraGraphs out there. Why aren't the numbers better yet? It's because to visualize here, some of these that we've sold are still in early stock. Some of them are in distribution channels and some have been installed in hospitals, but these just not yet have started to give the traction. But we're in a structured manner working to increase the utilization rate because the value for us as a company here is to get high-end utilization. If you have a typical TetraGraph should at least generate SEK 50,000 per unit a year. So the guidelines that I mentioned, they came out during the winter. And then during the summer, during the quarter here, there was additional calls out from the society, specifically the European and the U.S. society saying, hey, guys, you need to start following the guidelines. So there's a strong drive, which is helping us to convince anesthesiologists and hospitals around the world that you need to shift from this kind of subjective to objective digital monitoring of patients. We've had a long innovation-driven clinical approach to really strengthen our case. There were 4 key studies that were published here in the last few months just to give a very short view. They're all in the U.S. market. One big study showed we proved our accuracy versus kind of a gold standard laboratory technique showing that we are leading in this field in terms of clinical accuracy. Studies have been shown that by using our TetraGraph system, you can actually reduce drug spend because you can optimize the way you follow the patient and thereby reduce cost of medications. We brought to market a pediatric solution that was also presented and was the first study in its field to show a complete pediatric monitoring solution. And there was a study presented showing our fifth generation algorithm that this is -- we are the leader in the field. Okay. So that was a little bit on the sales opportunity and research. So of course, we are following our expense levels very closely, we are trying to be as optimal as possible. We moved production from external subcontracted, we moved it back to our head office in Uppsala and that has -- we're seeing a very nice shift in our gross margin. That was 70% in the quarter on a rolling 12 basis just under that. So we're seeing the effects of our productivity. To give a little bit glimpse on operating expenses. It reduced slightly during the quarter. We increased our EBITDA still negative during the quarter and we had roughly SEK 42 million at hand end of the quarter. So we -- this morning, we announced that we did a direct shares issue. It was directed to some of our main shareholders, which is the Swedish pension fund, Handelsbanken, Robur, the Crafoord family and our Chairman, Adam Dahlberg was also a main contributing into this. And we did this directed share issue of SEK 56 million. We did it at market price. So no discounts and a very cost-effective and very rapid way of financing the company from our strong shareholder base. So approximately today, we have about 100 million shares in the company, if you want to do the math. But to comment a little bit. We have, I think, a very strong long-term shareholder base. The Crafoord family is our main shareholder, also represented by Adam Dahlberg as our Chairman. And then following, we have Handelsbanken, Segulah, TIN Fonder, the Fjarde AP, the pension fund and Swedbank as major shareholders. So to wrap up, we -- how do you grow this? And what's next? And I just want to visualize that I mentioned that we, today, have roughly 150 hospitals running our system. They're not all yet in full use. But if I were to grow this business to have 300 active hospitals and this market is in excess of 5,000 hospitals, which is our addressable market. And I get all of these hospitals that each have 30 TetraGraphs in each of these hospitals, which is roughly an average number of operating rooms. And then we get the utilization rate to be 4 patients per week, which is where we are today in our key accounts. This corresponds to almost 2 million patients a year. And for us as a company, this generates revenues just under SEK 300 million. So this is just how you visualize the consumable business. On top of that, you have sales from monitors. We have license fees agreements. We have various kind of partnerships that will generate this. But this is the way we're growing. And that's why we've been very firm on our outlook that we believe that our sales by 2025 are going to reach roughly SEK 300 million. And we believe that with the type of business model we have, our long-term EBITDA margin will exceed 40%. And our strong driver is to be the market leader in what we do and have at least 10% market share in our segments. So all of this, of course, is thanks to a fantastic team. We have a strong international Board as well as a management team and an absolutely brilliant team based in Uppsala in the U.S. and in Germany. And the Board today consists of a mix of -- we have 2 professors both based in the U.S. and we have a strong kind of mix of competencies into this. So to wrap up, Senzime, I think we are a company that is in midst of what I said, a clinical and market shift with a very strong leading product portfolio. This is a derisked medical device case. We're way past regulatory challenges. We're way past clinical studies that need to prove this. This is all about adapting and following what the guidelines are saying. So it's driving up utilization, making sure we're cost-effective in what we do and I'm very thankful to have very strong shareholders who believe in our story. So thank you very much.

Thank you so much, Philip, for the nice presentation. And I guess, as you have shown, you have quite significant growth during the first half of the year. And I guess it's due to the change in guidelines in the U.S., particularly. But could you say anything how the awareness of these guidelines have been taken up in the hospital market?

Yes. I would say -- I mean, if you attend an Anesthesiology Congress today, the kind of the leading discussion point is now today is these new guidelines. This is the main topic of the full discussion. How do you adapt? What technologies are out there? How do you change practice? And it is a big shift change in practice. And guidelines don't make things happen overnight, but it's -- these guidelines start from the top. You get the academic institutions to adhere to these new rules and then it [ tringles ] down to all the hospitals. So that is the main driver and that's what's happening. So a number of tenders, number of requests, the demand is really skyrocketing.

And the request that you get a lot of incoming from clinics that are interested in your product?

Yes. So the sales process is typically that a larger hospital system will say, okay, we need to introduce quantitative, objective neuromuscular monitoring. And a number of companies are asked to come in and do clinical evaluation and able to test a number of different products. We have a strong clinical team that comes in and helps with this. Evaluations can take everything from 2 weeks to 9 months. And what I'm noting here is that we are winning, securing these large accounts, which I think is an amazing -- and it's a result of, again, the team, the product and our absolutely leading position.

And maybe if you can describe a little bit about the competition and how fierce it is?

Absolutely. I mean there are some good competitors out there and I love the competitors because we're all building this market together. I could say it's a mix of some large companies such as Philips Healthcare, GE HealthCare and other products that typically have a more type of analog legacy technology. We're a number of smaller companies driving this digital shift towards what we call EMG, or electromyography. And there, I would say our main, I would say, friends in the industry are American companies and others. And there's so much market out there. There's so much demand. There's room for plenty. But my sales pitch remains the same. We have such a fantastic leading product that we are the eminence of this industry.

Is there a risk that the first customers that you have got so far is the low-hanging fruit and it will be a little bit more complicated to reach out to new hospitals [indiscernible]?

Yes. Good point. I mean, of course, we are talking to early adopters who are shifting. But the early adopters are now quickly turning into that everybody has to do this. So they are typically then listening to who is presented at these congresses, what research is out there, who knows this industry. And ultimately, these monitors are used by anesthesiology nurses and they need to be very attractive. They need to be easy to use. They need to be integrated into all patient monitoring systems. And I think we are in a good position to meet those market demands.

And the sales force currently are you satisfied with how it's structured and personnel?

Yes. So we have a direct sales force covering the U.S. market and the German market, which we believe the 2 key markets to grow in. And then we decided to have distribution partners in other countries who have local presence. And as I mentioned, then we have license agreements in certain regions where it's maybe stronger that a local partner sells our technology under their own brand, such as Fukuda Denshi, who is one of the leading in the world in Japan.

Yes. And what kind of sales activity should we expect from you during the autumn and winter?

Good question. I hope to announce a number of key 1 large hospital system deals that we are working on. So that's just -- and that it's just hard work, continue to grow the business, continue to prove the utilization, help customers, help absolutely -- I mean, we're in this for the patients and help make sure that every single patient out there is adequately monitored.

Sounds good. And I mean you mentioned the change of guidelines in the U.S. and in Europe, but we don't see the sort of the same fast uptake in Europe. Could you describe a little bit the differences between these?

Yes. I mean U.S. is more -- I would say, if I look at our typical deal flow, U.S. -- large U.S. hospital system will make a large tender and they will buy all at once and they will implement all at once. While I would say the European uptake is a little bit slower, you typically buy a couple of monitors and you grow and you prove and you grow it. I've had a case study that I presented before, which is a Swiss hospital. They have grown their installed base, but it's taken about 3 years. But now they are leveling at the same level that these U.S. accounts we have. So it's just a different type of uptake in it, yes.

I see. And I mean, you have some really nice health economic data coming out. How important is this? And do you plan to generate such data for yourself?

Yes, health economic data is absolutely important. I would say that it's -- as part of these guidelines, the health economic data has already been integrated into those decisions. So we are not dependent on it because there's such strong evidence that adequately monitoring the patient in the operating room will reduce length of stay in the postoperative care and complications. And that is already out there with strong American international studies.

Do you notice any kind of skepticism towards your technology out there?

I would say our largest competitor still remains an anesthesiologist who has been doing the same way for 40 years, which is subjectively understanding when is it safe to wake you, Klas, after surgery. So it's a shift where we're moving towards -- and that costs essentially nothing. While we're introducing a monitoring solution with a onetime fee, but also a recurring fee for each patient. So there is a difference that we need to convince these value committees in the hospitals. But we're seeing that these value committees are now every time saying that there is a value case for this. So that's not a limiting factor. The limiting factor -- the challenge is moving and driving the change. And I think there's an indicator in our numbers to see that the guidelines are now making people change. Ultimately, there's going to be a litigation risk if you don't adhere to these guidelines. So people will follow.

And finally, about the financing that you did this morning, is it proper to give an indication how far it takes you for the current run rate and what you...

Yes, it's a very good question. I mean I can just assure you that the Board and us were working continuously day and night in optimizing the right type of financing for the company. We've had a -- yes, if I was -- I could, as a CEO, ask I want them to be very capitalized. But I think the company should have the right amount of money at each given time point. If you look at our math backwards, you'll see that we had expense levels of roughly SEK 30 million. And if you add the added cash today with the Q2 numbers, you can do the math that this will take us 9 to 12 months on that. But we're also having a cash flow increase from gross profits and -- it's a good question, but...

Fully understand you're in a...

Yes. We're in this phase where we're growing. And I ultimately think that as we grow, there are other ways than going to the shareholders and financing our working capital. So -- but my belief is we need to be very efficient. And we did a preferred -- we did a rights issue during the spring, which we did because we believe that we saw the signals were happening. So we said that all shareholders have equal opportunity to come in. So we did that. But the direct share issue we did now was a proof that -- I think that is a smart way going forward to finance the company cost-effectively and I can focus my team on growing the business rather than writing prospectuses for 3 months. But the rights issue to take.

Sounds very good, Philip. Thank you so much for presentation. Thank you.

Thank you.