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

Hello, welcome to this Q4 2024 presentation with Senzime. My name is Klas Palin, Equity Analyst at Carnegie and I will be moderating the Q&A session. But to present Senzime's Q4 report, with me in the studio, I have Philip Siberg.

Thank you.

Very welcome.

Thank you.

And I give the word to you, Philip, go ahead with your presentation.

Thank you. Nice to be here. So I'm here to present little bit of what happened last year and highlight a little bit of Q4. And just to introduce for those who are not familiar with the company, briefly, again, what we do. So Senzime is a medical device business, originated out of U.S. out of Mayo Clinic, headquartered now in Uppsala. We're driving change in the operating room. So we've developed a system, the TetraGraph system, which is used to monitor patients after undergoing anesthesia. We monitor the patients during surgery to make sure they get the right dose of certain anesthetic drugs and that they are extubated or can breathe on their own again after surgery. So our system is available in about 500 hospitals around the world, we have about 3,000 of our monitoring systems. And by now, we've monitored over 500,000 patients. What we're driving here is called EMG. It's a technology for measuring the neuromuscular transmission or the level of paralysis in the body. And we are pioneering this technology called electromyography and the change that we're driving, the paradigm shift is that there's about 80,000 to 100,000 monitors out there in operating rooms using a traditional legacy technology where you measure the indirect effects of these special drugs. So this legacy technology measures the indirect response, measures the muscle movement. There's been studies shown that the variability in the data is up towards 50%. So there is definitely an opportunity for the patient to be extubated at the wrong time. They can end up in the postoperative care units still being paralyzed or they get the wrong amount of drugs during surgery. So what we were driving is the change to EMG or electromyography, it's an algorithm-based technology, digital, and we're measuring the response inside the muscle itself. So it's a direct effect and that's been shown to have a variability of 0.3%. So extremely clinically accurate. Example of use are in operating rooms where robotic surgery is done. So I typically call the TetraGraph the da Vinci robots best friend. So it's used to really, really accurate to determine that the patient who is deeply blocked during robotic surgery has the right amount of anesthetic drug, specifically paralytic drugs, and that they can end the session at the right time. So what's so exciting about Senzime is not just the big market, there's about 100 million patients that are addressed with this technology. It's that one, there are now clear clinical guidelines, both in Europe and both in the U.S. mandating that every patient that receives paralytic drugs as part of anesthesia should be monitored with the technology. And then number two here is shown that the EMG technology that we are driving has been shown to be significantly more accurate, just as I showed in the previous picture. The third thing here is that EMG monitoring has shown to radically decrease the amount of drugs needed during surgery because you can monitor accurately and let the patients spontaneously wake up and also shown that it eliminates postoperative complications. And then number four here is that our specific system, we've shown that we have the highest accuracy in the business. And by far now, we are the only the EMG portable only system that is validated at all levels of patient block. So there's a very strong fundamental and basis for our business. So if we look at '24, I can summarize it into 5 buckets. I think it was another major growth year for us. So growth was about 65%, and we reached SEK 58.5 million in sales. The U.S. market was the main driver with about 72% growth, but also the big chunk of our business. Our business model is predominantly based on selling disposable sensors. So that's the importance here. And that grew triple digit, just over 100%. And what's driving it is recurring use and recurring use of the monitors in the hospitals. During the fourth quarter, we launched our next-generation TetraGraph. This is a project we've been working on for many years and was really a game-changer in the industry. As we launched this pretty mid-October, there was a very successful feedback from the market. But it also -- what happened was that it kind of changed some of the short-term purchasing processes that the big opportunities we had in the pipeline, all said, shifted to, okay, we want your new monitor. So this affected short-term Q4 growth, but very strongly sets us for the right position as we move to the future. If we look at our operating expenses, we made some significant investments last year, specifically in the U.S. commercial sales force. We're continuing to grow it. But last year, the operating expenses were pretty much flat versus the year before. And then the fifth pillar here is that we secured additional funding last year. We did a direct shares issue. We did it -- we were targeted towards institutional investors. We brought in the funding at market price. And I'll come back to a little bit of how we see the future. So we are -- we continue to be one of the fastest-growing companies in the medical device space on the NASDAQ main market. So we are in a very exciting hockey club phase of our company. The delivery of base of TetraGraph System is a key KPI for us. So there's about 3,000 units out there now in the market. And again, the importance here is driving sales and usage of disposable sensors. So if you look at the graph to the right, you can see that it is a typical bumpy ride between the months. It depends on how hospital systems stock up and ordering processes. What you can also see is that we had a little bit of perhaps lower rate in Q4. But if I look at what happened in Q1 instead, I had an all-time record high. So it bumps between the months, but you can see a very nice trajectory growth. Overall, split on sales, U.S. as I said before is about 73% of our business. If we look at the markets, Europe had a weaker capital year last year. It did move to the positive in Q4. But overall, it was longer sales processes for capital goods. Some of our stars was South Korea and Japan that had phenomenal growth rates where you could see that in specifically South Korea, the local reimbursement in South Korea for our type of system is driving growth. So I'll just make a quick spotlight in the U.S. We announced about a year ago that we were going to expand the U.S. commercial team additionally. And we did, and we expanded the marketing team and this resulted in strong growth in the U.S. market, about 72%. If you look at over the last 3 years, we've actually sixfold increased our sales. We've secured a number of main large and very prestigious hospital systems all across the U.S. both for adult and pediatric use. We secured a major veterans affairs public tender, and we signed our first GPO agreements last year, which is a group purchasing agreement where we are already clinically validated. There is a pricing scheme, and we can see deliveries to one of the largest U.S. hospital systems via that agreement. Okay. So quick on the next-gen TetraGraph that we launched in October. So the beauty of this is really making advanced neuromuscular monitoring and the type of technology we have, very simple and then by that, addressing a very large addressable market. And the highlights of this without going into details, it's all about making very simple, introducing a gauge to make it very simple for clinicians to really follow how deeply blocked is the patient. And then we -- on top of that, we added adaptive intelligence, to help them make it easier and a number of features that we believe are very positively seen by the market. We really developed this together with anesthesiologists around the world. And what we're doing now is really doing clinical evaluations all around the globe, strong pipeline, strong interest. And typically, when you buy these type of units and invest in this, you want to make a clinic evaluation, you want to get on board the everybody on the nurses, on the clinicians team, et cetera. So it's an exciting phase that's ongoing right now. So if we look at Q4, we had growth, of course, but it was impacted a little bit about the short-term next-gen launch, $14 million in sales, about 30% growth rate. Gross margin was a little bit improved as well. I think it was because of a higher proportion of sensor sales. But otherwise, the KPIs that we've had in the past remain pretty much in effect, about 500 hospitals out there. Typically, we're seeing that our key opinion leader accounts are running about 4 sensors per monitor per week. But also seeing additional accounts now with robotic surgery cases, where there's a higher penetration throughput. Highlights of the quarter. As I said, the successful launch, including FDA and MDR clearance. There was also this study that I mentioned early on, where -- which is very important to really validate that the TetraGraph system and the algorithms and the solutions that we use has the leading accuracy on the market. And again, that is validated now clinically, not just for lightly paralyzed patients, but also under a very deep block, which is important in the robotic surgery. And then we announced that we secured the first deals, which was pretty quickly. We secured a hospital in Switzerland, and we had more hospital wins communicated early on in the year '25. So one more spotlight on Japan. I think it's a very exciting market. We've been there and we've had a collaboration with Fukuda Denshi. So it's about now almost 10 years back now. They launched early on last year, the first integrated patient module, which was based on our technology. So Fukuda has a large installed base of patient monitors, predominantly in Japan, but also in U.K., U.S., Italy and a few other markets. So they now offer the solution where you modulize our technology and then click it into the existing installed base of monitors. So we supply the sensors, and we are granted a royalty on the sales of the module itself. And we could see that in the Japanese market, sales grew almost 90% last year, which was very much driven from sensors and sales of these modules. So Fukuda is not our only industrial partner, we've had a long-term relationship with Philips. So the majority of our systems that are sold are now connected into a Philips monitor. So you can see the data on your centralized Philips monitor. In early -- late Q3, we also had an integration completed and approved with GE Healthcare, so we can integrate into their systems. We announced early now in Q1 with Massimo that we've had a relationship with over 2 years, which was a second milestone in our collaboration. And now we're linking into their system and then further on into electronic health records like Epic and Cerner. And then we just released a connectivity to Mindray as well so we can connect into their systems. So I think I would say that we have the most comprehensive integration package on the market. So quickly looking at some of the numbers. Operating expenses, I think I've had an ambition all the time to really nail down every little dime that we have, but to keep it flat at the same time as we grow. So if I look at our full year expenses 2024, they were pretty much flat as compared to the year before. And this was despite significant commercial investments in the U.S. market. Specifically in Q4, operating expenses were SEK 33 million, which is a significant reduction from the year before. We also took some onetime hits in Q4, of which one was related to an office lease. We have in a former Boston office that we're trying to get out of. And I made some onetime severance offers. So there are some onetime hits into this. Of course, the currency rate has effects on our expense base and the favorable or the strong U.S. dollar had positively affected the expenses in the quarter. If I look at our progression towards profitability, I would say we're also making a nice trend towards the right way. So EBITDA over the full year was minus -- just under SEK 100 million, which was an improvement from the year before. And if I look at EBITDA, specifically in Q4, it was minus SEK 18.1 million versus SEK 34.7 million last year. And again, this relates to increase in sales, keeping costs fixed and with help of currency as well. So by the end of the year, we had just over SEK 100 million in our cash position. We had a little bit more that was not yet in yet from our directed shares issue due to administrative reasons of U.S. investors, et cetera. Looking a little bit of the outlook. We announced in Q3 last year kind of what of our long-term goals with this. I mean it's, of course, to be the undisputed market leader in electromyography and monitoring patients inside the operating room. So the long term, our goal is to really create a SEK 1 billion company with high profitability. On the route to that is 2026 goals, which is to reaching revenues of SEK 250 million to SEK 350 million. And what we said this year, as we now grow up as a company and we're maturing and we kind of can see and learn from the business, the outlook for this year is to reach somewhere around SEK 110 million to SEK 140 million, which is predominantly more than doubling our business. And this is driven from existing, recurring business, we have a strong base and we have a very strong pipeline of business as well. And equally important is operating expenses. So I anticipate that there will be -- we are now making additional investments in the U.S. commercial team. But despite that operating expenses are expected to grow single digit, which is pretty much in line with overall cost in the society. Quick on our shareholder base. If I summarize what's happened in the last quarter, I would say that my top investors continue to increase their position. Handelsbanken Fonder and Tin reduced some of their positions last year. But all in all, we have now just over 130 million shares on the market. So 2025 growth drivers. What's happening now? I mean, one, it's the commercial excellence out of this. I mean we have, as I said, a strong recurring base. We have some of the top leading hospitals in the world, and it's really driving business out of this. The industrial partnerships that I mentioned that we're working with together are important drivers of business and as well as we now expand the U.S. team additionally with about 30% increase in headcount if I look at the commercial team in the U.S. We have a very strong leading commercial portfolio of products now, extremely happy about the next-generation TetraGraph. We have a strong pole position in the market. We're now starting to roll it out. We will roll it out in March to remaining. We started by launching it in the U.S. and now we're launching it to the rest of the world here in Q1 and then if you look at the drivers in the market, it's the guidelines. More guidelines are anticipated to come this year. I will keep you updated on that. We're seeing more and more protocolization. So hospitals are introducing this as a standard of care and getting it to every single patient. We're seeing that these data integrations are important. And then, of course, we have a strong set of collaborations and partnerships with KOLs and science to back all this up. The last puzzle bit is, of course, having the capacity to deliver. Last year, we moved into new sustainable production facilities in Uppsala, north of Stockholm. This is all FDR MDR compliant, and we have the capacity to meet the business plan for the next 5 years. And we're also closely monitoring the U.S. market in terms of tariffs and trade and what's going to happen. So we have the readiness, we have tactics, we have strategies. So if there are tolls introduced, we have ability to do this. But I think we're -- just as everybody else in the medical device industry, we're following this closely to see what happens. So to conclude, very exciting commercial phase, 2024 was yet again a commercial breakthrough year for us. It's driven by guidelines, driven by standards of care, protocolization and I think driven from a need to monitor every single patient out there with adequate technology. EMG that we've been spearheading has quickly established itself as the new gold standard in operating rooms. There are more than 160,000 operating rooms out there to target, and we've come at least away on that mission. U.S. has been our strong focus. It will continue to be. And we have the backing, we have the pipeline. We have the right owners of this, and I think we have very clear communicated how we're going to make this happen. So it's all about revolutionizing perioperative care.

Thank you so much, Philip, for a nice presentation. And I'd like to start with some questions then related to Q4 particularly. Strong growth in 2024, however, a little bit of a hiccup perhaps in Q4. What's -- were you satisfied with the sales outcome in the fourth quarter?

Well, a CEO should never be satisfied, but I am extremely satisfied with the introduction of our new product portfolio. I guess we made such an impact that it almost hit us negatively because everybody said, okay, we're in the buying process for the classic that we call TetraGraph, but everybody said, "Okay, well, we want to shift. This is what we want. And we started to deliver our first units in the end of December, but really now in 2025, delivering a volume. So it short term hit capital sales. And it's the function of bringing fantastic technology to market.

Okay. But does this affect the cycles, when you're talking to customers, become more lengthy processes or...

No, I don't think so. It's more that when you buy this as a leading hospital system, everybody wants to clinically evaluate it. They want to trial it. So -- what I see now in the difference, we made a major U.S. trial last week. And instead of this taking 3 weeks, day after 3 days determined like this is exactly what we want. So I see that our new technology is simplifying this so much that it will address and make buying processes shorter over time.

Okay. But has the next-generation TetraGraph affected existing order backlog? Or is it mainly new customers that you were anticipating.

Yes. It's mainly -- I would say it's both. It's both that we were in lengthy buying processes. And then they said, okay, we want to shift to the new one. So we want to do a trial on that one as well. So that kind of just shifted the process a little bit.

So we should expect sort of -- of course, based on your guidance, you should expect strong growth.

There is definitely a catch-up effect here. And as I mentioned in the report, we've now secured hundreds of these new units already as we're in mid-February. So yes. So we're on good track.

Okay. Because I think from a market perspective, we're looking at your press release communication previously, you have had a lot of order intake, but it was a little bit light in Q4 and have started the year even though we have press release some orders but not in the same frequency.

No, I think Q4 effect was the Next Gen introduction.

So we should expect a more vibrant press release from your side. But what was -- did you -- anything you want to highlight that was challenging except for the launch of the Next Gen.

I mean Q4 is always a little bit of an odd quarter. You have Thanksgiving, you have Christmas, and we had a little bit of the IV fluid issue in the beginning of the quarter. So there's a couple of things that happened because I wasn't really satisfied with the volume of sensors, and it goes up and down. I also saw feedback from the market that hospitals are trying to minimize stock inventory at the end of the year. And so I could see that, and I showed the graph, showing that we also had record all-time high sales in January. So it goes a bit up and down of that. I would also say that the classic Q4 effect that we had in the medical device industry in the past is no longer viable. There's no longer excess budgets for just wrapping up the year. This is all part of standard buying processes. So besides that, I don't think there's anything. We're on the trajectory we're expecting.

And you think the sort of underlying market demand for your products are still as strong as this has ever been.

Yes. There's nothing that's changed. Science keeps getting stronger. More guidelines, as I said, are coming out this year. So it's just about time in trying to change clinical practice.

Okay. I mean the new guideline that was issued in late 2022. So more or less 2 years now, has the sort of the customer that approaching you or are approaching changed over these 2 years?

I think -- I mean it started definitely with the top key kind of top tier hospital systems in the top, yes. So that's what we quickly won, and that's now trickling down, as I've mentioned before. What I've seen is also a few of the hospital systems, I think, for the whole industry saw that, okay, we got to do this. But then it wasn't properly protocolized. So they introduced it, but there was no standard of care in the hospital system. So I've seen that change now over time to baking it more. Okay, we're making the investment, but now we need to make this happen as well to make it used. And that shift is now happening quicker than before. And we're helping hospitals now to really make this protocolized and standard of care.

And you mentioned also that you are -- would expand the U.S. sales force somewhat, is this particular type of person that you are looking for to employ?

I mean, yes, I mean, when we started, we launched in the U.S. just a week before COVID hit, bumpy start, new technology, pre-guidelines, it was hard to find the right salespeople. Now as we grow, when we look for people, we get hundreds of applications. People just love to be part of this growth story. And we're getting really strong candidates to come in to help. So what we're doing now is moving from a couple of spearheading salespeople to 2 big regions, 9 territories, bringing in very strong. So I can see that the people that we're now hiring, they're coming in with a deck of contacts, so we can immediately start rolling. So time from penetrating a new territory with a new sales manager, time to market is very rapid versus before.

Okay, and you seem quite a bit about the next-generation TetraGraph?

Yes.

And you sort of indicated that you have good responses from customers as well. But do you feel also that you are winning contracts in competition compared to Blink versus...

Yes, yes, definitely. We did not lose a major clinical evaluation or competitive trial in Q4 again. So we keep on strengthening our market shares. I can't be everywhere, so I don't know every single deal that we were not addressing. But by expanding the U.S. team now, I want to make sure we are absolutely everywhere where there is sourcing some type of neuromuscular monitoring technology.

That sounds good. And maybe we could talk a little bit about your forward guidance 2025. That indicates that sales would grow by about 100% or even more, you are growing with 65% in 2024. Why should we believe in such strong growth?

No. Yes, I think it's good. I mean, if I just look at my kind of run rate 3 months or 6 months, et cetera, we're on that trajectory. And again, I see it in my base of recurring business. I see it in the pipeline, and I see it in the opportunities out there. And again, we are maturing. We are learning, but we've done kind of estimates in the past. We've known less, and this is a way for us to really show and align the dots, and we're strong believers in this. And of course, the pipeline and the estimate is very driven by U.S., but also just continued growth in other regions.

Yes. I guess this is sort of a more or less back-end loaded forecast.

Yes, typically, but also in line with expectations.

That sounds good. We have focused on the U.S. market. Maybe you could give us some thoughts on what's happening in the European market as well.

Yes. I mean Europe was a little bit challenging last year, as I mentioned. Typically, despite the guidelines being in effect, there's a very strong hold of AMG technology, which is well established. And it's taking time for European hospital systems to shift from AMG to EMG. We're winning account after account. We're deeply penetrating specifically robotic surgery, pediatric surgery and other segments. But capital goods, there's been a lack of budgets for new technology to come in like this. So I can see a good recurring growth rate on the usage base. But I am -- with the new monitor, we've also had multiple orders in the European market even before we launch the device. So we're seeing this as a positive outlook for the year. And then if I look at Asia, I mentioned it already a little bit, but fascinating growth rates in both South Korea and Japan and anticipated to continue to grow in a rapid pace.

And looking at the utilization rates in the installed base, is it the same utilization rate you see in the European and the Asian market as in the U.S. or is it different in some way?

Yes. I mean we've tried in the past to have good KPIs to show this to the market, but it's difficult because of the fluctuations a little bit. And I don't know exactly what the utilization rate is. It's more the shipping. I'm seeing that some of the best accounts we have in the U.S., they are now reaching a compliance rate of about 90%. So despite them being protocolized, used in every single standard of care surgery, there's always going to be 10% that are not using the technology for legacy types of reasons. I do see that in the high-end European centers where they have installed this, the utilization rate is very high, in line with this 90% compliance. And so it's hard to kind of to give you a good answer to that if it's different rates between...

Yes, I think it's -- you see the European market is more price-sensitive perhaps to your sensors than...

Yes, it's more sensitive to sensors, definitely. Americans are more prone to disposables to sensors, while Europeans are more trying to minimize disposable and recurring costs.

And how -- what's your view on the pricing and the rebate you have to get to customers?

So I mean we had a little bit of a dip of our gross margin in the U.S., specifically last year because of larger volume deals, we had some different ways of selling the hardware to really drive long-term sales of sensors. So that affected a little bit of our gross margin. But I continue to see with new products, I have margin improvement. I see that the sensor prices have definitely stabilized in the market. And with new types of business models that we're introducing as well, we're seeing various ways of actually increasing the sensor price. So -- and we will tie it to compliance and the usage and other types of metrics.

Okay. Sounds good. Also interesting to see that you have now connected to Mindray stations. And just a little bit curious -- is there any of these guys that you would like to sort of have a deeper collaboration that perhaps could help you sell your systems and your sensors?

There could be. I mean for us it's very important to be independent. It's incredibly important to be able to have this nonexclusive connectivity with various types of players. We're looking at -- there's always various opportunities for us to scale this in parallel to our own direct efforts. So always looking for the best ways for the shareholders and the best way to get increase here. So I'll keep you posted if things happen.

Yes. Sounds good. And we're talking about the best interest of the shareholders. We could talk a little bit about your financial as well SEK 101 million ending 2024. How far does it take you?

I mean we show cans with the auditors, and it's very clear that we have enough cash to take us through the next 12 months. So that's all good. We did signal -- I did signal clearly in -- as we did the directed shares issue in Q3 that there will be a little bit more funding needed to take us to cash flow profitability. We are looking at lots of different ways of long-term funding the company, which necessarily does not have to be equity. We're still looking at it. And as time goes, I'm seeing that the offers on the table are getting increasingly more competitive and better. So I'm very positive that we will find a very attractive long-term funding to take us the last mile to profitability.

That sounds very good. And maybe we should round this up. But you touched upon this new administration in the U.S. It's, of course, very difficult to know exactly what will happen. But what specific risks or opportunities have you [indiscernible] so far?

Yes. I mean we're working diligently to eliminate kind of the dependence of Chinese sub-suppliers. So if you look at the next-gen device today, it's very driven by Nordic suppliers. And so that's one big step. And then as we've now set up our facilities in St. Louis in the U.S., so we're in the middle of the U.S. continent where we have the ability to do various types of assembly and manufacturing. So we are looking at ways of doing parts of final assembly in that office and making it enough parts that we can say that the country of origin is actually the U.S. And by doing that, having a labeling where it's made in the U.S. So we're keeping a close eye on that and so is the whole industry, which the whole industry is, in large, very dependent on Chinese sensor supply and a disposable technology, et cetera. So I'm letting the big boys spearhead and take the hit in lobbyism, but we have smart ways to -- and we have the readiness once and if this happens.

Okay, then to sum this up then, you are pretty confident that you will continue to grow to the business very strongly?

I'm always bullish, but I think -- we have -- like I said, we have the technology, we have the team. The drive is out there, the guidelines are there and the underlying market pool and the science is backing this. And so I think we're in a phenomenal strong and a very exciting year ahead of us.

And we should just wait for more communication from your side to see this...

Promise to have more communication coming out and more exciting deals. I think we -- I mean I want to mention some of the -- we packed some deals together here in the January release, which was a very large Southeast U.S. university hospital systems. In total, 79 monitors rigorous clinical evaluation, slightly also delayed because they shifted to the next gen that we've now shipped to them. And we had also a number of other major U.S. hospital systems including the #1 ranked U.S. hospital system that took on the next gen also. So that with orders now coming in into Europe and a very accelerated drive from our Asian partners to get this out in the Asian market during the year. Again, it summarizes our view on the market that it's -- we're on good route to be the undisputed market leader in this clinical and technology change that's happening right now.

Great. Thank you so much, Phil. I'm looking forward to see your progress.

Thank you.