Earnings Call: Q2 2021

Jul 15, 2021

Good morning, and welcome to the Backloguard Q2 Report 2021. Throughout the call, all participants will be in listen only mode and afterwards, there will be a question and answer session. Today, I am pleased to present CEO, Cecilia Ekstrom and CFO, Gabriela Caraccihilio. Please go ahead with your meeting. Thank you, operator, and good morning, everyone. I hope you're well, safe and enjoying this summer. This quarter, we closed our books in record time and We brought the Q2 report forward by almost a month compared to last year. And I hope this will add some value for you as investors As an analyst, although I do know that we are competing with several other companies reporting today, so it's a busy day. The temperature is rising in Sweden, and I can say the same about our business. So let's start Let me start by looking at some business highlights on Slide number 2. So if we go to Slide number 2, please. We have a lot of activities ongoing and made significant progress both in the licensing business and through new partnership for our own portfolio. The most important breakthrough is, of course, the launch of ZNN BactiGuard. In Europe and select MIM markets, less than 2 years after the strategic partnership with the study And only 1 year after we took the strategic decision to shift focus and launch in Europe ahead of the U. S. To take advantage of the CE mark that BactiGuard already has. I am so excited About our partnership with CimabioVet, I'm proud of the progress we have made thus far. It's a major achievement by our joint development team And the results of an excellent cooperation, and this bodes very well for the future. At the same time as we're launching in Europe, multicenter clinical trials are being initiated in several European countries Together further evidence that DNN BactoGuard implants reduce postoperative infection in permanent or semi permanent application. Healthcare is still under strong pressure in major parts of the world because of the pandemic, And sales of BIP products has not developed at the pace we expect due to reduced regular health services and postponed elective surgery. However, the interest in infection prevention is increasing, and this has resulted in new strategic partnership. In Sweden, we have entered leading pharmacy chains, most recently, Apothec Jestas. We have also entered a partnership with Shilke, a leading global manufacturer and distributor of infection prevention and hygiene solutions targeting German hospitals. In Spain, we have partnered with Saniban, a company with significant expertise in wound care and clear intentions to grow. These are 2 large and important European markets with the potential to generate significant growth for our wound care portfolio going forward. And I look forward to following developments in this Q3 when the launch will take place. We have also entered a completely new market segment, Veterinary Care, a sizable segment with significant potential We took the first step together with Musty Group, the leading chain for pet products in the Nordic region with more than 300 stores in the Nordic as well as online sales. So those were the business highlights. Let's now turn to Page number 3 or Slide number 3 and look at some of the financials. Sales in the quarter were 5% lower than last year, but organically, we grew by 5%. This is below our growth target, of course, and not in line with our ambition. The business with BED has been negatively affected by lower general occupancy and postponed selected surgeries over the past year, but the recovery we began to see in the autumn has continued. So in this quarter, revenues were at par with last year, although significantly affected by weaker U. S. Dollar. We also received a milestone payment for from SINA VIMAT, 1 of out of 2 Under the license agreement, which increased total license revenue. And as the implants now reach They will start generating royalties to Baxdiguard and increase our recurring license revenues going forward. Ship sales were significantly lower than last year, and there's some explanations to that, that we'll come back to. However, we do see positive developments in some regions like Europe and the Nordic where sales are developing positively. The investment in our own sales force in the Nordic countries is already beginning to show results, and that's very reassuring. EBITDA was significantly lower than last year, as you can see, and the main drivers were lower sales and one off costs and investments in sales and marketing, which will generate increasing revenues ahead. Gabriela will come back to more details on the rest of the financials, so I leave the rest for now. Let's take a global outlook and see where we are in terms of COVID. In the Q2, the center of gravity, we are now on Slide 4. I must remind myself to say that Slide 4 global outlook. The center of gravity has shifted to East Asia and MENA, as you can Previously from the slide on the purple bars. There have been lockdowns in several countries In Southeast Asia as well as in India. India is stabilizing but still facing enormous challenges And Healthcare and also with the vaccine rollout. The U. S. Is ahead of the curve and EU is gradually opening up, but increasing rates are being reported based on travel To the southern parts of Europe and linked to the European Cup in the book course. And to date, there have been more than 180,000,000 cases and more than 4,000,000 deaths. That's a horrible number. But again, if you put that in the context of antimicrobial resistance, That runs the risk of taking 10,000,000 people's lives by 2,050. So We need to focus on prevention, and that has been coming very clear. So let's turn to Page 5, how has this impacted our business in the quarter? The U. S, as I mentioned, we see recovery following massive vaccination programs, and they are well ahead Of the rest of the world in terms of opening up elective surgeries and other regular health care. So we expect to see that the stabilization we've had with BB will continue. And it also bodes Well, for cinemas, Iemet, who have a big part of their business in the U. S. In the Nordics and Europe, Alexis surgeries are Still low, but gradually catching up. But I'd also like you to remind you that there's a huge backlog To start managing and that will remain at least until 2020, but it also opens up opportunities for infection prevention. In the Middle East and Africa, we've had major impact on the business. Elective surgeries have been at a Some planned tenders have also been delayed. The existing ones have been extended. We now see that increased activity, and I'm very hopeful that this will generate more business In India, there's been a major impact on the business because effectively, the Hospitals have been shut to outside visitors, but we have developed our distribution network with channel partners who have Their foot in the door, which has meant that we have been able to access the surgeons, the hospitals, and we've also conducted a lot of training Online across India and many other countries. The situation in China is stable, but there's still some travel restrictions, which It means that there's limited physical access to the hospitals and health care professionals, but we're working on supporting Training and Digital Activity. In Southeast Asia, We've had a temporary impact on the business. It still looks healthy. Malaysia has been in lockdown for 2 months Effectively, but we are in a prioritized and critical industry, which means that we can continue operating, but at limited So our manufacturing capacity has been temporarily reduced, something that we've been able to overcome And manage both our own orders and also as well as deliveries within the biomass. Let's now turn to Slide 6. Just over a year ago, we acquired Malaysian Vigilance, and that has been a lucky strike for us. We knew what we were buying, but not exactly how good it was because in addition to having the CE Mark orthopedic implant, They also have an attractive portfolio of wound care products for infection prevention. So in connection with the outbreak of the pandemic, we quickly developed products for disinfection based on the effective and nonalcoholic wound care solution, Hi, Tristan. And we are now expanding the business further. So based on the BactiGuard coated trauma in plant that was CE marked in 2018. We signed the agreement with CIMA Biomet In 2019, that was a clear door opener. We acquired Vigilance in 2020 and in February. And already in March, we launched this inspection. In 2021, in January, at the beginning of the year, we We extended the mark that we already had to include BNM BactiGuard. And in April, we started production. Major breakthrough was the European launch in June. And at the same time, we are also expanding and launching Wound Care in Sweden. And as I mentioned earlier, in the Q3 of this year, we will launch wound care in Germany and Spain as well as Aniocin for pets and animals. So let's take a closer look At the Zimmer Biomet launch on and turn to Slide number 70. Imagine that 1 in every 10 drivers of a car would be involved in an accident Or that one in every 10 cyclists would also be involved in an accident. That is luckily far from reality, but we still wear seatbelts and helmets and as life insurance. In health care, 1 in every 10 patients is exposed to complication, infection, which leads to longer hospital stays, increased complication and sometimes even death. This is how the Navai Method positions the BactiGuard technology to their customers. As life insurance, That everybody is there. Let's turn to Slide 8, please. If we take a closer look at the European data, there are more than 3,000,000 cases of Hospital acquired infections every year, resulting in 16,000,000 extra hospital days. Huge cost to society, but most importantly, a very big sacrifice for the patients and their families. This increased stay in the hospitals results in cost of €7,000,000,000 per year. 65% of the hospital acquired infection cases are related to biofilm on medical devices. There's a 30% infection rate in orthopedic trauma cases And as high as 80% in olfactory cases. So to me, this It's a clear indication that the BactiGuard coating is very much needed in this application. And we Very much look forward to following the rollout. Let's turn to Slide 9. So the BioMed is making significant investments in this launch, one being the investment in multicenter clinical studies in several European countries to further validate the BactiGuard technology as efficient and safe in reducing cost operative infection. And this will clearly be beneficial for other applications. What has been initiated initially is a multisulted study for patients with severe tibial fractures, I. E, the lower part of the leg, where they need fixation with intramedullary nails, which you see on the right. The total study is for 500 patients, and we're looking to further Verify that there will be reduced infection rates after fracture fixation. So The primary endpoint is to look at fracture related infections after 12 months. There's also secondary endpoint related to fracture healing and quality of life. And this is an important aspect as the environment is following closely to see How can the patient regain quality of life after an accident or after an elective surgery? The total study will last for 3.5 years, but there will be intermediate measure points. And this will continue to be rolled out. Let's now turn to Page 10, What I alluded on initially, how we've expanded the business in vigilance. Started with a portfolio of wound care solutions that Vigilance was offering to hospitals, primarily in Malaysia. That expanded to hydrazine disinfection, which we are Selling in Sweden. We are still waiting for the European clearance to sell disinfection solutions across Europe because it follows a different regulatory framework than Wound Care Solutions. The Wound Care Solutions, we've expanded To under the frame of BactiGuard Wound Care Solutions, and we are gaining very good traction through partnership. Last but not least, Amusein Veterinary Care for veterinarians based on effective infection protections that we will continue exploring in Sweden, in Europe and many other markets. So let's turn to Page 8. We are developing our business model By broadening our product portfolio for infection prevention, Slide number 11, sorry, Slide number 8, which is actually Slide number 11. We're developing our distribution model We broadened our product portfolio for infection prevention, which gives us a stable base, It gives us more relevance visavisend customers, but also visavis distributors. We will be capitalizing on the increasing need for infection prevention and making investments in sales and marketing activity. We have our own sales force in the Nordics and in Malaysia, and we will employ more staff. Moving to a hybrid distribution model where our sales force will be maintaining the contract, developing and maintaining the Contact with the key opinion leaders and major hospitals and where distributors will be more responsible for physical distribution. The after sales service will be provided both by us and by our distributors. By moving to this hybrid model, we expect to see positive outcomes like we have seen in the Nordics and Thanks to see more of going forward. And with this, we believe we are very well positioned for the bounce back once healthcare services return normal activity level. With that, I'd like to hand over to Gabriela for financial update. Thank you, Cecilia. So good morning, everyone. My name is Gabriela Bjorklejkaraksuluk and I'm the CFO of BactiGuard. And I will go through the financials. So if we can go to Slide 13, please. On this slide, we look at the sales development and profitability in the rolling 12 months perspective. Looking back at the last 15 months, there is a clear negative impact on our sales due to the pandemic And the backlog of regular health care and elective surgery continues to build up and still need to be addressed. We now start to see a sign of recovery mainly in licensing business, but also a stabilization of sales of the big portfolio in certain markets. Starting with the licensing business, the blue bar in the chart. We have a solid platform in the recurring license revenue from BD. Revenues from BD vary slightly between the quarters, but are essentially stable on a yearly basis. The revenue from BB is impacted by the weaker U. S. Dollar rate. The royalty income decreased slightly in the Q2 due to the negative currency effect of negative SEK3.8 million. Currency adjusted, the total revenue from busy resulted in organic growth of 18% compared with Q2 2020. One of the highlights of this quarter, as Cecilia mentioned, is that we have initiated Zimmer implants and this will start to generate license revenue and contribute to the recurring revenue later this year. During this quarter, we reached a milestone payment with Zimmer Biomet of SEK8.5 million connected to the launch of coated trauma insulin in selected EMEA markets shown as the yellow part of the bar. Due to the Vigilance acquisition last year, we have a broader product portfolio generating revenue streams adding to the BIP sales, here shown in the green bars. And to mention a few highlights, the growth was primarily driven by wound care products And new agreements will have been signed. We have also launched Wound Care in the Nordics for the veterinary segment together with Muster Group. All these agreements will start to generate revenue later this year and most likely start to generate revenue end of Q3. During Q2, the sales of BIP products accounted for approximately a third of the revenue, which is roughly at the same level as for the previous 6 months. The main drivers for the EBITDA development The current level of revenue streams from the different segments in combination with investments in sales and marketing. And due to the pandemic, there is an uncertainty in the market and the future development is still a bit difficult to assess. Next page please. Looking at the financial overview for the Paired with the same quarter 2020, the revenue totaled SEK46.8 million, but revenue dropped compared Same quarter last year totaled SEK48.2 million, a decrease of negative 5% and currency adjusted an increase of plus 5%. If we look at the 1st 6 months compared to the same period 2020, Revenue totaled SEK87.8 million and in 2020, SEK96.3 million, a decrease of negative 9% and currency adjusted to a decrease of negative 4%. In both quarter 12, 2020, BactoGuard had a large order intake for disinfectants due to the outbreak of COVID-nineteen. EBITDA for the 2nd quarter landed on SEK1.8 million and with an EBITDA margin of 4%. Last year, EBITDA for the same quarter was SEK10.5 million with a 22% EBITDA margin. This quarter, EBITDA is impacted by inventory write down for obsolete inventory. The inventory was planned to meet higher demand than the actual sales during the last year. That's Combination with higher shipping and purchasing costs for raw materials driven by lower global transportation capacity and currency movement I've also had a negative effect on the item raw materials and consumables. For the 1st 6 months, The EBITDA amounted SEK3.7 million with a margin of 4% compared to last year SEK24.9 million with a margin of 26 The net result of the 2nd quarter is negative SEK12 1,000,000 and is related to depreciation of our Technology of negative SEK6.4 million, which is the same for every quarter and according to plan. The cash flow is not impacted by the depreciation. Now turning to the next page. Here we have an overview of our cash flow. For the Q2 2021, we had a positive operating cash flow of SEK5.5 million, mainly impacted by the new license revenue and increase of accounts receivables at the end of the period and also by a minor stock increase. At the end of the period we had utilized SEK14,300,000 of the overdraft facility. To summarize, with deep high activity level And forward looking, we are optimistic and convinced that our technology will play an important role when it comes to infection prevention. And with that, back to you, Cecilia. Thank you, Gabriela. We now turn to Slide 16. We've had a challenging first half, mostly related to the COVID situation globally. But we do see an increasing interest in infection control and the BactoGuard technology. And we are building a very strong base for future growth and balance back. We start by looking at the license business. The rollout of the NN BactoGuard in EMEA is very important. And our partnership with Cimabimet has the potential to expand BactiGuard's license business significantly. Now that we are have introduced the products in Europe and other select India markets, we will to intensify the focus on the U. S. And the rest of the world. At the same time, multicenter clinical trials We'll be initiated for long term applications, strengthening the clinical evidence, but also giving us There's 2 very important key opinion leader network across Europe who will now be exposed And experience in the MaxiGuard technology, and that is very valuable. If we were to look at the potential For the SimaBiomet cooperation, you could say that if all SimaBiomet trauma implants We're coated with the MaxiGuard technology. License revenues would be about 3x those we receive on an annual basis And as we look at the potential in EMEA, that represents about 20% But it's not only Important for those purposes. It's also our partnership is also important as it provides a quality stamp to our technology. And also, it verifies the application in permanently implanted devices. But we're also looking at expanding into new applications. And as I mentioned, we have several interesting dialogues Ongoing and the temperature is rising in those dialogues, which means that we also need to strengthen And our team, and we are recruiting a few new team members to strengthen the licensing team, and that will be a very welcome addition. Looking at the BactiGuard portfolio, we are expanding into new applications segment. And the veterinary segment is clearly exciting. I think there will be more to come. We're enhancing our distribution model for better access to end customers and key opinion leaders to drive the growth By focusing on generating recurring sales to hospitals as well as home care and veterinary care. The consumer segment is also something that we haven't looked into, but that will be an important brand builder for Backloguard. And we are establishing new strategic partnerships, for example, the one we've established with Schulke with Germany and MasTee Group for the Nordic conference. In order to enable this growth, we are investing in training and marketing And COVID has actually accelerated our digitalization. So we've been able to provide Seminars and training to many more health care professionals than we have done in the past by traveling digitally To India, to the Middle East, to China and Southeast Asia. The clinical studies we're investing in are important. And the clinical evidence we have is the strength and assets that we have. And it also creates a barrier to entry to new technologies and new entrants. And we are very well positioned under the new regulatory framework MDR for Europe, and we've also added MDSAS to have easier access Let's turn to Page 17. So our financial targets Remain the same. We reiterate them. We are looking at average revenue growth of 20% per annum over the 5 year period and an EBIT margin of at least 30%. Clearly aware that we've not reached that level in the first half, We are positioning ourselves for future growth. Let's turn to Page 8, actually, in that quarter From this deal, but gradually picking up as we produce more implants and as we implant region customers. For this portfolio, I expect that we will see growth in the portfolio. There were a lot of tenders that were postponed from Q2 that we see And now, of course, it's always difficult to assess exactly when they will happen. As you rightly mentioned, Q3 is the main Holiday quarter and typically the biggest quarter of the year, but the signals we are receiving is that there is Positive momentum, I should say, in effectively all regions. Thank you for that. Next question, I mean, is it possible for you to disclose how much of the sales That were related to the sales of trauma intents in the EU out of the total license revenues. And I guess that's a minor number, but And then will you disclose that number in future interim reports just for modeling purposes? Not at this rate. It was a small number in both Q1 and Q2, we will disclose new license revenues, but we will not make separate announcements of exactly how much it is in the recurring business. I mean, we will generate from the Trauma business, we will generate production related Sales and royalties will be slightly delayed as we need to base it on actual sales in the quarter, so they will come in the following And then thirdly, on the multicenter study here of Fluentence and Consumer, I mean, it sounds interesting. You talked about Total value duration, if I remember correctly, 3.5 years. But when can one expect interim readout, which I guess is Interesting as well before the launch. Yes. Patients will start being recruited As of this quarter, and then the follow-up will be up to 12 months with them. So depending on How quickly they can recruit patients, I would expect interim results year and a half up roughly a year and a half of some interim or a little longer. Thank you. And in terms of bit sales, just to return to that, we all know that electric procedures have been down and that COVID-nineteen situation was very bad primarily in the first Quarter, can you comment anything specific about the development at the end of the quarter, let's say, June, how that's progressed? Is that increased activity that you talked about also for the fixed Correct. Excluding then the vigilance of sales. Yes. Vigilance Also, Southeast Asia was affected in May and I did this in May, and then we had a recovery in June, and we see that continuing. It was a complete lockdown for a few weeks in the Country people were not able to move. And as the bulk of the sales are from Malaysia, That had an impact, but we see better momentum in June and going on from there. In India, we as I mentioned, it's been slow, but we are seeing increased interest in Primarily, it's our PBC, I should say. Very strong interest because this is for critically ill patients, And we managed to open more accounts. There's also interest in our Foley, and we are registering our Sichu as well as the hydrogen wound care and disinfection range also in India, Hansi Strong Yes, Andrew, that will take a couple of months to get that through, but we should see improved momentum there as well. The Middle East has been very slow in Q2, but there are now The tender is coming on. We see increased activities in the region and the various countries, and we should see Obviously, there's momentum there as well. Europe has been remarkably strong comparing the other countries, and we continue The very healthy recurring sales for the market that we've been in for a long time, and it will be interesting to follow the new partnerships that we have I will start on from September. Nordic, a lot of interest. We see gain traction, A lot of the visits have been postponed until September time because as we all know, the health care staff have been under heavy pressure I'm focusing on delivering care and not really interested in looking at other opportunities. But now I think there's a great need of Getting new inputs and getting into more regulatory and development. Regular care and development of the activity. Thank you for the flavor there, very helpful And lastly, I mean, the launch of Anewzin here together with Mokti Group as Amazon Looks like a major opportunity. Can you talk a little bit more detail around the partnership setup? And also, should we expect sort of a gradual launch From September onwards, or can the launch be quite swiftly done given production, etcetera? Yes, reduction is not an obstacle there. That can be quite quick. So we expect to see Most of their retail outlets having products and also that they will be pushing through online sales. It's difficult to say the exact magnitude, but pet owners are really focusing on the Care of their pets, and we see also great potential in expanding this to other markets. COVID has also meant that a lot of people have want to have pets. And I think Back into our children, our pets are our most valuable family members. Thank you. Our next question is from Hans Bostrom of Trinity Delta. Please go ahead. I have a couple of questions. I'm new to the company. So I just want to understand your expectations for your Increase in your own sales force, is this across the product range? Are there any particular markets you're looking at? And I'm curious also to understand your target of 30% EBITDA margin over a 5 year period. What assumptions are you making in terms of the composition of revenues from license sales royalties versus your own sales in that? Thank you. Thank you for those questions. Very good questions, by the way. So with respect to Yes, geography. We'll be strengthening our team in licensing with a few team members Because licensing is mostly business sales and project management of our major projects. If we look geographically again, we made investments in the Nordics. We need to make new And there's been more staff in Europe, very, very big countries, and we have relatively few members of the team covering those. They're looking at First thing, people in the major markets to drive sales and support distributors. Maybe 1 or 2 more in India, 1 or 2 more in Southeast Asia, but those are relatively low cost Investments. So yes, across the product portfolio, both in licensing and in our existing product portfolio, Some specialists in some markets where we are doing cross selling, where we've had sold a lot of wound care, Where we need to push more of the traditional BactiGuard portfolio like Southeast Asia, but yes, across the portfolio. Then on the question of how do we build profitable growth, It's a combination of growing sales of our own proprietary portfolio. In the past, we've had The ambition of doubling it every year, that's a very high ambition. But we see by adding new Product ranges, product lines, new segments, we can accelerate that growth. Growing the licensing business will clearly also be important, and that has a higher substantially higher gross margin than our own portfolio, essentially because the investments are behind us. And most of the investments that we are making and the cost And of course, I mean, we can also look at selectively look at acquisitions. The acquisition we made As I clearly increased our appetite, we will not become an acquisition machine, but there may be Thank you very much. That's very helpful. Thank you. Thank you. There are no further questions at this time. So I'll hand back over to our speakers. Thank you, operator. I heard that there was a breakup in the web transmission just before the Q and A. Do you know Which part that was and in case I need to repeat anything? I'm not sure, sorry. Okay. Well, then I'll just repeat my main conclusion anyway. We've had a challenging first part. COVID has had an impact on the healthcare sector. But COVID has also led to opportunity as it has increased the interest in infection control And in the Baxiguard technology. And we will capitalize on that and build a stronger base for profitable growth, both by strengthening our team and growing into new market segments and developing new license applications. Because our technology is effective and safe and deserves to be present on all medical devices that stay in the body for a longer period of time. We have substantial clinical evidence to back it up, And I see major market potential going forward. With that, I'd like to invite you to follow our progress And look forward to catching up again after the Q3 in October. And until then, if you have any further questions, please don't hesitate to reach out either to Gabriela or to me. And I wish you all a lovely summer. Bye for now.