Earnings Call: Q3 2020

Nov 5, 2020

And good morning and welcome all. I hope you are all well and that you are also staying safe as the pandemic has unfortunately started accelerating again across the world. We go to the next slide, please? The Q3 was the weakest in several years for Bactigar, and I am not satisfied. External factors have clearly had an impact on development as COVID-nineteen has led to reduction in general health care and elective surgery, and this has affected both us and our licensing partners. The demand for medical devices, including our catheters, has been very low. At the same time, the global backlog in health care is accelerating and the need for infection prevention is greater than ever. BactiGuard's products save lives and we can do better than we did in the Q3. We should have shifted gear much faster, and therefore, we are focusing on our sales strategy. And during a transition period, the sales organization will report directly to me. We now go to Slide 3, please. Now let's look at the numbers. Sales declined by 49% 46% if we adjust for currency to just over SEK 30,000,000. Now the Q3 of 2019 is, of course, a tough benchmark as we signed the biggest licensing deal since 1995 with Zinnabaya Met in September of last year. Having said that, license revenues from Becton Dickinson and Company BD have been stable for many years, but their sales are not immune to COVID-nineteen either, which has resulted in lower revenue license revenues for VACLIGAR. Based on the stronger order intake at the end of the 3rd and the beginning of Q4, we expect that BD revenues will return to more normal levels in the 4th quarter. BIP sales increased somewhat in the quarter, but not at all in line with our ambition. Consumption of consumable medical devices like our catheters has been very low in all regions as a result of the focus on COVID-nineteen patients. However, the broader portfolio acquired from vigilance contributed to a small increase in sales. Our EBITDA was also affected by the decrease in revenues and a weaker Swedish kroner than last year. Let's now turn to picture number 4 and focus on licensing. The collaboration with Zimmer Biomet continues with very high intensity and this is very encouraging. We are using the fast track to the European market that opened when the new European regulatory framework, which some of you know and call MDR, was postponed by a year until May 2021. This means that we can use our existing CE Mark for orthopedic trauma implants to reach the European market already at the beginning of next year. The milestone payments that are in the agreement with Zimmer are linked to the U. S. Registration process, and that is also ongoing at full speed. But it's a little behind Europe as we are determined to use the current window of opportunity to start generating recurring sales. So from the beginning of next year, we will have 2 recurring revenue streams in our licensing business, and that is the one from Bibi and from Cimab Biomet. Our agreement with Welllead is also moving ahead, and the fact that trade barriers are increasing supports our decision of localizing production in China. We are confident in the strength of the VAC2Guard technology for various types of medical devices, both for short term and long term use. And we have several interesting license projects in the pipeline and see new existing business opportunities. The strategy of establishing 1 to 2 new licensing fees per year remains unchanged with focus on orthopedic and dental implants and different types of products for the bloodstream, for example, dialysis catheters in the near term. Vascular stent is another interesting area and animal studies are currently ongoing at the Caroleansia Institute. The purpose of this study is to verify that Bactriguard's technology not only reduces the risk of infection but also prevents thrombosis, which reduces the need for taking blood thinning drugs. The commercial negotiations in current projects are a bit slower than you'd show due to budget constraints caused by COVID-nineteen, but we are convinced that the products, the studies we are involved in will pave the way for new licensing. Let's turn to Page 5, please. Media reports that the number of planned interventions in the U. S. Decreased by 60% to 80% during the summer months. And in Stockholm, a 50% drop has been reported. Add to that, that 25% fewer cancer cases were diagnosed in the Stockholm region and this doesn't mean that we have become healthier, simply that we are pushing an accelerating health care backlog ahead of us. Let's turn to Slide 6. Many countries continue to have far reaching restrictions and some are introducing new restrictions, the U. K. Most recently today, making access to hospitals and day to day sales difficult. The fact that physical meeting can't take place as normal means that we and our distributors must develop our digital presence and communication at a much faster pace. One example of new opportunities is that the Indian government has established an e commerce platform for medical devices. We have already registered Pachygyle Central's venous catheters and are now waiting for the urinary catheters and endotracheal tubes to be lifted and more accessible to the health care providers. Another example is that we are conducting training of health care professionals to participate in panel discussions with key opinion leaders digitally to strengthen our brand and awareness. So you can see that our Chief Medical Officer, Doctor. Stefan Graf, can travel across the globe without getting on an aircraft. Let's turn to Slide 7, please. The global launch of Hydrus in Aqua is well underway, but tender processes and local regulations means that it will take some time before they seriously take off. The strength of hydrocyn is that it's proven effective against the virus that causes COVID-nineteen. It's also effective against most bacteria, viruses and fungi that lead to infection. At the same time, it is tissue friendly and contributes to faster wound healing, making it useful for wound care, dental, baby and animal care, to name a few potential, line extension. Hydrogen doesn't sting nor is it flammable, and that makes it superior to alcohol based alternative. Let's turn to the next slide, please. We increased pressure in our own sales organization to make BactoGuard more visible and influential. Our product should be the obvious choice for infection prevention and established as a standard of care like it is in the U. S. To strengthen our communication and marketing, we are expanding our management team with Pietra Kaur Jungmann. We successfully developed several companies, brands and digital strategies. At the same time, we have initiated the recruitment of the new global sales director, and we are adapting the regional sales team to local condition. You can also see here that we have recruited a new general manager for the Nordic market who will focus on the health care providers, home care providers, pharmacies, B2B and B2C segments. And he has had a flying start in the months that he has been with us. Following the acquisition of Vigilance, we have also recruited a new General Manager for Southeast Asia to lead our sales team in Malaysia and also to manage our distributors in the region. During the period that we're recruiting a new global sales director, I have temporarily taken over the responsibility for leading the global sales team to increase the sense of urgency. With that, I would like to hand over to Gabriela for financial review. Thank you, Cecilia. Next slide please and good morning everyone. This is our business model. The strength of VaxiGuard is our technology, which can be used for a variety of medical applications. We have 2 business areas, the licensing business and our own VaxiGuard infection protection product, also called the big portfolio. To the left, you can see the license business. We license our unique technology to other medical device manufacturers. This business generates upfront revenue subsigning. This is what we call new license revenue. And then we receive royalty on the sales going forward. To the right, we have the big portfolio with our own product of medical consumables for infection control. With the acquisition of vigilance in the Q2, we have added 2 new product lines, advanced disinfection and advanced wound care. Our product portfolio is sold mainly through distributors. And now, in the new sales strategy, we are further strengthening sales with our own sales force. Next slide, please. To summarize the Q3, we have a negative EBITDA of SEK 3,100,000. This is driven by the low revenue of SEK 34,100,000 compared to previous year's SEK 67,200,000. We are monitoring the cost closely, and we have good cost control. And as Cecilia has already mentioned, the underlying reason for the low revenue is that the health care has focused on COVID and other activities are postponed And the number of canceled elective surgeries is increasing and that's also the health care debt. This is not impacting our own this is not only impacting our own sales, but also sales for other distributors and licensing partners. The difference comparing the Q3 with Q3 2019 is that we had new license revenue from Zimmer Biomet regarding the orthopedic trauma implant, which was not repeated in Q3 2020. This is the yellow part of the bar in the diagram. And the strategy of establishing 1 or 2 new licensing deals a year remains the same. Even though COVID-nineteen has had a negative effect on revenues during the second and third quarters, we have a stable revenue stream from BD, our licensing partner of 25 years. That is visualized in the blue part of the bars. The revenue from BD varies slightly between the quarters. And due to COVID, this quarter, we see a 20% decrease compared with Q3 2019. On a yearly basis, the revenues from BB are about SEK 100,000,000. Sales of our own products, that is the big portfolio, have been approximately at the same level between 2018 2019. As a result of the Vigilance acquisition earlier this year, the extended product portfolio contributes with a more stable revenue flow in the rolling 12 month analysis. And looking forward, we see opportunities in the product development area. Next page, please. For the Q3, the revenue totaled SEK 34,000,000 and EBITDA negative SEK 3,100,000. And looking at year to date, the revenues totaled SEK 130,000,000, which is slightly lower than the actuals from previous year, and this is without any new license revenue. It shows that with the acquisition of Vigilance, we have a more stable underlying business, and we are reducing our dependency on individual customers and markets. EBITDA year to date landed on SEK 21,800,000 despite of the negative 3rd quarter. And following the EBITDA margin year to date was 17% and for the Q3 isolated negative 9%. The net result year to date of negative SEK 27.6 million is related to depreciation of the technology by SEK 6,000,000 per quarter according to plan. And furthermore, the value of our technology increases as we sign new license agreements and also when we have increased sales of our own product portfolio. In addition, we have a technical accounting effect of negative SEK 10,900,000 linked to the acquisition of Vigilance, where the set off is reported as a forward contract in the Q1. Neither the depreciations nor the set off impact the cash flow. Next slide, please. As you can see, this is an overview of our cash flow. I should start by mentioning that in Q2, new shares were issued as part of the payment for the acquisition of vigilant. For the Q3, we had a negative cash flow of SEK 3,300,000 caused by the weak revenue development. We have a credit facility of SEK 30,000,000. And at the end of the Q3, we had utilized SEK 13,900,000. The available liquidity including credit facility, amounted to SEK 35,500,000 compared to SEK 36,600,000 same time last year. To summarize, looking forward, we are confident that our technology will play an important role in addressing the postponed demand of medical consumables for infection prevention, a situation due to the COVID pandemic. Over to you, Cecilia. Thank you, Gabriela. And let's now turn to the next page. COVID-nineteen affects all of us, and we unfortunately see a second wave of the pandemic around us, which makes near term development difficult to assess. What is becoming increasingly clear is that the need for infection prevention has never been greater. Although the current situation is tough, the pandemic has made Bakstegard even more relevant. Our job is to convince the market that Baxigar's product and technology can help reduce the risk of infections from serious complications for patients, shorten the treatment period and reduce the use of antibiotics. The antibiotic resistance is often referred to as the violent tsunami, and I think that gives a very good image of what it is. It lurks in the background. It is very serious, but we don't give it enough attention. Vastigar's technology is effective and safe in reducing infection. It is well documented and clinically proven, which gives us a competitive advantage when the regulatory requirements increase. This morning, we reiterated our growth strategy, which is very clear. Our aim is to convert ongoing license partnership into recurring sales. The Zimmer Biomet agreement for trauma implant, to take one example, has a long term potential, which is 3x the size of our BD business if all that former implants are coated. This will, of course, take time, but it gives you an idea of the potential. In addition, we aim to sign 1 to 2 new license agreements a year. The near term focus is on orthopedic and dental implants as we already have clinical data and products approved for long term use, supporting expanded use of our coating for new applications. We are also targeting different types of products for the urinary tract, bloodstream and airways for the global market. Baxigar's own portfolio for infection prevention continues to grow through the development of new products and new areas of use. In 2020, we have added advanced disinfection and wound care through the acquisition of Vigilance. We now have a much broader base and better market coverage in Europe, the Middle East, India, Southeast Asia and China. To accelerate growth, we invest in sales and marketing and take a step forward in the value chain in order to better control activities and priorities. Let's turn to the next page. Based on our growth strategy, which I've just outlined, our unique technology for infection prevention, a scalable business model, broader market portfolio and market coverage. We reiterate our financial targets for the coming 5 year period. Our ambition is to grow sales by 20% per year on average and generate an EBITDA margin of 30%. Let's turn to the finance slide, please. I am the first one to admit that there are challenges out there, but I can't see a better mission and better business opportunities than infection protection in this time. Thank you. And over to you, operator, And our first question comes from the line of Matthijs van Steyn of SEB. Please go ahead. Yes. Hi, there. Three questions from my side. I guess we can take them one at a time. So firstly, your comment on proactive measures to bridge this temporary decline. Would it be possible to just elaborate a little bit on this and to what extent this can help? Yes, of course. Thank you, Matthias. To name 1, we are pushing expanded use of hydration, both in the Swedish market. We had a bit of a low period in Q3. As you all know, we entered into major agreements or signed major deals in Q1 and Q2. We have had a lower level of activity in Q3, which we are now accelerating again with focus on both B2B and B2C clients. We are working on signing up new distributors and a pharmacy change so that our products will be available to more people. We are also finding distribution agreements in other markets and pushing sales in other geographies and introducing the wound care products in the European market. In Southeast Asia, we are both packaging the AVAC2Guard portfolio in Malaysia, where we have our own sales force. And we are targeting those distributors across the region who have the best potential of both expanding hydrogen sales but also sales of the Vaxigard portfolio. And of course, increasing our digital presence so that we can meet customers even though we are not physically able to meet them face to face in many cases. Thank you very much. And my next question, I mean, you comment that order intake from BD at the end of Q3 and in the beginning of Q4 improved and that it will I mean, that sales will return to normal levels in Q4. I guess, just elaborate a little bit on under what assumptions this has made. And it would also be interesting to hear what you think one can hope for in terms of sales in other geographies in coming quarters, I mean, given what you initially have seen out here in Q4? Yes. As you know, Matthias, we don't make forecasts, but I'll still try to elaborate a little bit to give you some idea. The BD license revenue is in a normal year about CHF 100,000,000 product. And if you look at the year to date numbers, it has been lower than that, although we had a strong Q1. In the Q4 of last year, we made substantial deliveries, which were above. So order intake and deliveries vary a bit between quarters. But to say that on average, about $25,000,000 per quarter is a more normalized level. And then as regards the other business, the BIP portfolio and sales, the acquisition of Vigilance has added a broader base, which gives us recurring sales of sutures and wound care products in Southeast Asia. And we are now seeing increased activity in some regions, to mention 1, the Middle East, where the private hospitals were effectively closed for admissions until September, and we are now seeing that they are opening up, which has given us confidence that we will see increased activity. And even if COVID-nineteen continues for a relatively long period of time and hospitals need to give attention to ICU patients. We cannot see a situation that we continue to put off elective surgeries and cancer treatments, but health care system has to return to a somewhat normalized level. Yes. And just on that topic, I mean, can you just I mean, if we see a pent up demand coming after when COVID-nineteen situation is a bit, I mean, how well is that you got prepared to deliver on a potential stronger demand? I mean, sort of a quick pickup when it is up a bit. We are getting into the starting blocks. We're doing that. But we cannot maintain huge inventories. So we stay in very regular contact with our distributors to forecast demand and to prepare our production accordingly. Thank you very much. Very clear. That was all from me. Thank you. And there are no further questions at this time. Please go ahead, speakers. Thank you, operator, and thank you all for listening in this morning. I know that there are a lot of companies reporting today, so I think it's a busy day. But I'd like to conclude that by saying that our growth strategy is the same. It's to generate recurring license revenues from our current partners, to add new license business and to grow sales of our own portfolio for infection prevention. And we are convinced that we will make that. And with that, I'd like to conclude today's call. And if there are any follow-up questions, please don't hesitate to contact either me or Gabriela. Thank you.