Earnings Call: Q2 2020

Jul 17, 2020

Ladies and gentlemen, welcome to the Baltic Seaport Q2 Reports twenty twenty. All along the call, all participants will be in listen only mode and afterwards there will be a Q and A session. Just to remind you, this conference call is being recorded. Today, I am pleased to present the CEO, Emil Bilbak and CFO, Akan Johansson. Please begin your meeting. Thank you, operator. And to everyone, very warm welcome to Bone Support's quarter two twenty twenty result call. I'm Emile Bildek. I will cover the first part of the presentation. And next to me is Hakan Johansen, our CFO, who will cover the financial part today. So this morning, we'll take around, twenty to twenty five minutes to run through the presentation of the second quarter results, and then we will open the line for questions and answers. If we could please go to Slide two. Before we actually go into the details of the presentation, I would like to draw your attention to the disclaimers that covers the forward looking statements that we will make today. Next slide, please, Slide three. So I would like to begin this presentation with some highlights from the report that we released this morning. Overall, two sales were 36,000,000, which is down 3% year over year. Sales has been negatively influenced by the COVID nineteen pandemic, which I will cover a bit further later in my presentation. Despite these challenging times, we're seeing strong progress in a number of areas, providing confirmation that the company is indeed continuously moving in the right direction. Sales in the segment Europe and Rest of the World were down 35% to SEK15 million, and for the antibiotic alluding product, sales were down 34%. In the segment North America, where we are currently leveraging a strong increase in customer base, we delivered million in sales, which corresponds to a growth rate of 46% year over year. A significant improvement on EBIT was registered due to reduced expenses in the period. I would like to mention a few operational highlights in addition. In May, we raised $378,000,000 through a directed share issue, and we are happy, of course, to welcome a number of well renowned long term shareholders. Shortly after the exciting news in March that G had been granted breakthrough device designation by FDA, we submitted a de novo application. The de novo application for Serumin G in The US is aimed at the indication osteomyelitis or bone infection, and can potentially result in an approval in The US in the 2020. We also closed the recruitment of patients to the FORTIFY trial. And I will come back to some of these operational details later on, but we'll first cover the impact that the corona pandemic has had on the company. Next slide, please. This is Slide four. The outbreak of the pandemic has had hospitals redistributing resources, and many elective surgeries have been deferred to a later date. According to industry estimates, non critical surgeries in the field of orthopedics have decreased by around eighty percent to ninety percent in March and April compared to the previous year. There's also been a larger impact on university hospitals compared to regional and local hospitals, as the university hospitals have been assigned to take care of COVID-nineteen cases with extended intensive care units. In several cases, the beds dedicated to orthopedic patients have been remodeled to instead be proactively ready for anticipated COVID-nineteen cases. The incidence of trauma cases have been markedly reduced in regions and geographies influenced by lockdowns, stay at home orders or quarantines. These have all caused a reduced mobility of the population in those areas. And as many of you know, the most common reason for trauma cases is normally traffic incidents. Furthermore, the pandemic has restricted and delayed BullSport's recruitment of new customers, as interactions between potential customers and company representatives have been limited. Bullsport is in a commercial phase, and a large part of our operational expenses, is related to the selling activities. With restrictions being imposed, close to all congresses and events have been canceled or moved to a later date. Simultaneously, we have taken measures to reduce expenses without interfering with the business or our ability to quickly scale up activities when the pandemic so permits. As an example, we have made work time reductions, mainly for salespeople, and we've also had voluntary and temporary salary reductions across the organization. COVID-nineteen has no impact on the underlying need for Sarament, nor is there influence on the need to treat skeletal injuries. We are certain that the number of orthopedic surgeries will return as the pandemic wears off. We believe that the benefits of a one step procedure as conducted with Cerment will be even greater as healthcare systems around the world open up to an even longer queues to surgeries and treatment than before the pandemic. Slide five, please. Next, I will guide you through the development of our quarterly sales performance. The slide you see here shows sales in the last twelve months, with the dark orange part of the bars representing Europe and the light blue and dark blue part of the bars displaying sales in The US. Total LPM sales or last twelve month sales in quarter two twenty twenty was more or less flat versus quarter one, and this is due to the pandemic impact. The pandemic also caused the first euro quarter that was not being a consecutive all time high. However, encouraging is that The US LPM, last twelve months sales, has surpassed the peak sales that was accomplished under Symbiomed with a strongly growing and solidified customer base. We terminated the contract with Cimar Biomass based on a strong mission to bring Cerements to its full potential, and we are making progress on that journey. Next slide, please. Focusing a bit more on the details regarding Europe and rest of the world. So at the top of the slide, you can see the sales performance that I already covered at the beginning of this presentation. Our direct market represents around 85% of sales in Europe, and on July 1, The Netherlands was turned into a direct market for bone support. The Netherlands is a country with very similar market dynamics as our surrounding direct markets, but over the last two years, sales has not grown as strong as it has with the direct markets. I'm convinced that our proven and scalable business model will successfully drive market penetration for Searmint, and we are well underway with recruiting sales reps for the market. And we have already hired a well experienced sales director. In the first quarter, we appointed new and upgraded distributor partners in Italy and France to better capture the sales potential in these markets. In the second quarter, we could see a slight short term disruption on sales related to this change. But in the longer term, we are convinced about the great potential from these tactical alterations. We have converted a large part of our customer interactions to the digital meetings and digital communication during the pandemic. We have hosted several webinars with key opinion leaders on our digital platforms, sharing the science and the experience made with Cerement. We have been presenting and the key opinion leaders have been presenting both clinical studies and case series where Serment has been used. And there has been a very high presence and participation from surgeons with up to two forty participants. Next slide, please. So turning the focus now to North America. The strong sales depicted at the top of the chart I have already mentioned. The sales growth is attributed to the ongoing buildup of a solid customer base in The US. Cerement BBF has a developing foundation of both heritage and new customers, as well as received endorsement and high cadence use from several national key opinion leaders. The establishment of customer structure bodes very well for the future launch of Serumin G. The de novo application to the FDA for the indication osteomyelitis of bone infection was submitted in April. And on July 3, we received a number of clarifying questions in line with the regular and formal process. And those questions were on the level that we expected. With regards to the FORTIFY study, we have finalized enrollment in agreement with FDA and thereby ended the patient recruitment at two hundred patients. Despite the disruption from the ongoing pandemic, our commercial team has made great progress in increasing settlement market presence, geographic coverage and building rapidly expanding customer base. Just as in Europe, we have converted a large part of our customers' interactions to digital meetings, and they have been well intended with interactive webinars hosted by key opinion leaders. And finally, am happy to welcome Michael Roth as Head of our Commercial Operations in North America. Michael is well experienced in the orthopedic market, but above all, he is a strong commercial leader. Next slide, please. Slide eight. So in light of the communicated use of proceeds from the directed share issue, de novo application file, and the close of the fortified patient recruitment, I would like to elaborate a bit further on The U. S. Market potential and the route to market strategy. The de novo application, if approved by the FDA, provides potential to commercialize Serumin G in the market for indications bone infectious by the 2020. The market size for bone infections is represented by the orange segment in the chart below right. The PMA pre market approval application will be based on the results from the large FORTIFY study. As a refresher, the FORTIFY study is a trauma study, and it's designed to deliver level one evidence. After careful consideration and with the anticipation that the pandemic outbreak will slow down the recruitment pace, we worked with our independent advisers to conclude that it is a wise decision to close the recruitment early. This decision was made after the study statistician reviewed the blinded material and after consultation with the FDA. A total of 200 patients were enrolled, and the last patient was included in June. So follow-up is in twelve months, which means the last follow-up is in June. The primary outcome of the study will give answers to the ability with Serumin G to avoid infections and also to avoid the additional procedures that otherwise are required. Of course, bone healing is measured throughout the whole period, but the efficacy of Serumin in relation to standard of care is already well proven, and is of less interest specifically in this study. A successful outcome and PMA registration will be giving a broadened indication span versus the de novo pathway. What is visible in the red segment in the chart, is that broader indication anticipated. The study will also give strong arguments for a modification of the standard of care. Enabling a one stage treatment will have significant financial incentives for The US hospitals and clinics. The FORTIFY study is, as you know, a superiority study. So with that brief update, I will hand over to Hofran, who now will cover the financial overview. Thank you, Emil. Let us go to Slide 10. This is a graph that presents the net sales by quarters as bars and last twelve months sales as a line. Net sales in the second quarter amounted to SEK 36,200,000.0 compared with SEK 37,300,000.0 in the same period previous year, equaling a decrease of 3%. We noted the first signs of impact from COVID-nineteen already in February and bone support was affected in both The U. S. And Europe during the second quarter, due to a decline in mainly elective surgery, but also from a reduced number of trauma surgeries. The North America segment reported despite the pandemic an increase in sales with 46%, and the Europe and Rest Of World segment reported a 35% decline compared with the same period last year. Net sales for the last twelve months amounted to 165,000,000 compared to SEK 107,000,000 last year, an increase of 54%. The segment North America increased its last twelve months sales with 178%, being a strong confirmation of our strategy to reach The U. S. Market more efficiently with a new distributor structure. And the segment Europe Rest of World increased last twelve month sales with 4%, both segments impacted by the COVID-nineteen pandemic. Next slide, please. In the segment North America, sales for the period amounted to SEK 21,600,000.0 compared to SEK 14,800,000.0 previous year. The continuously strengthened customer base contributes to a sales increase that exceeds the temporary sales decline of several established customers as a direct effect of the ongoing COVID-nineteen pandemic. The contribution from the segment was minus SEK4.2 million compared to minus SEK23.4 million last year. The reduced loss is due to increased sales as well as savings and lower cost because of the pandemic. The previous year included a one off charge of SEK 11,000,000 regarding the repurchase of inventory items from the former distributor. Sales and marketing expenses during the quarter amounted to SEK18.66 million compared to SEK18.8 million previous year, excluding the one off charge, of which sales commission to the distributors amounted to SEK6.9 million compared to SEK4.7 million previous year. Next slide please. Sales for the Europe and Rest of World segment decreased as a direct impact of the pandemic by 35% compared with the previous year and amounted to SEK 14,600,000.0 compared to SEK 22,500,000.0 previous year. The decline is explained as we are mainly established in university hospitals, which are the hospitals most affected by the pandemic. Sales in direct markets accounted for 84% of the segment sales, and sales of the antibiotic eluting products Cerement G and Cerement D followed the sales decline in the segment and decreased by 34%. The contribution from the segment was SEK2.3 million compared to SEK3.8 million previous year. The reduced contribution is explained by lower sales and lower gross profit of close to $12,000,000 offset by lower cost and savings. Sales and marketing expenses decreased by $5,700,000 compared with the corresponding period last year and amounted to 9,400,000.0 compared to 15,100,000.0 previous year. The decrease is partly due to a lower level of activity in the market as a direct effect of the pandemic and the restrictions on physical meetings that have been applied, and partly due to lower staff costs as a result of the working time reductions and voluntary salary reductions implemented during the period. Next slide, please. Sales in the second quarter declined with 3% and has already been well covered during the presentation. But if we look at the gross margin, gross margin reached 6.7 in the quarter and was in line with previous year, but was temporarily suppressed in the quarter by fixed production costs in combination with lower net sales. Operating loss improved by SEK 24,300,000.0 to minus SEK 23,500,000.0 compared to a minus SEK 47,800,000.0 previous year and improved by SEK 5,600,000.0 compared to the first quarter this year, as a material cost reduction and cost saving compensated for the net sales impact from the pandemic. And after the second quarter, we are well funded to execute our strategy after the successful and oversubscribed direct new share issue conducted in the quarter, which brought the company million before issue costs. Next slide, please. Total expenses in the last quarter is down with SEK25 million compared with the same period last year despite an increase in sales commissions of SEK 2,100,000.0. The previous year included a one off charge of SEK 11,000,000. The substantially reduced cost level confirmed the company's ability to quickly adapt the business to current circumstances. Reduced working hours for sales staff and a temporary voluntary salary reduction for the organization have led to significant cost savings in the quarter. Selling expenses in the quarter was impacted by the COVID-nineteen pandemic as restrictions on physical meetings and switching to digital contacts in Europe and in North America resulted in fewer and lower costs for virtual events and other completed marketing activities. We plan to start reversing some of the savings in the third quarter this year at the pace determined by how quick the level of surgeries are returning. We also believe that the adaptive digital way of working, such as virtual events, are here to stay and will result in somewhat lower expenses also going forward. And with this, I hand over back to Emile. Thank you so much, Vulcan. Let me sum up the presentation and the journey ahead. I would ask for the operator to take us to slide 16 of the presentation with the headline strategic execution and situational adaptation. I would say that apart from the effect of the pandemic, I'm I'm very glad to see that the quarter has further confirmed the strength of our implemented strategy. Our focused distribution strategy in The US has resulted in a continuously increasing customer base. We now have a stronger control of the market penetration and are constantly adding new important accounts in areas that were not covered under relationship with Zimmer Biomet. The US is the largest and most important market in the world for bone grafts and bone infections. We have made two advancements towards registering seven gs in The U. S. Market by filing a de novo application and by finalizing the four to five patient recruitment. To further secure and advance the rollout of our strategy, we successfully raised $378,000,000 SEK before costing a direct share issue. The direct issue was oversubscribed with a factor of three. The proceeds are aimed to be used in commercializing Cerment in The US, continued investment in the European commercial rollout, and capacity increasing improvements in the manufacturing process. We are grateful to the current shareholders supporting the share issue and that we have broadened the shareholder base with several long term investors such as Alcure, Vondo, Degas, Allianz, Svensk Nairnsli, and Gideon Specialiste. We're continuing to leverage the value of our rich amount of clinical and health economic evidence, which we believe will help to transform an outdated standard of care. In the quarter, we have shown that we effectively can adapt to challenging market conditions and reach out to our customer base with our evidence through digital communication and new interactive tools. All in all, I believe that we are well positioned for strong market growth. We are navigating with a clear strategy and objectives through the challenging market conditions that the pandemic has brought, the impact of the coronavirus is making the outlook for 2020 very hard to assess. But beyond this, we have high confidence in our corporate target of an annual growth of 40%. On the last slide of my presentation, slide 17, you can see the milestones on our journey. There has not been any changes to the slides since the last update. So that concludes my presentation, and I would like to open the forum for questions and answers. We already have a question from Riccard Undercrant from ABG. Sir, the floor is yours. So my first question relates to elective surgical procedures. Can you say anything on where we are currently in terms of volumes year over year? And do you have any estimates of how long it could take to reach similar levels as we saw in 2019? Obviously, it's a moving target, but we have seen some estimates of clinics initially opening up at 30%, 40% of normal volumes in the ramp up phase to maintain social distancing and such. Are these any figures that sounds accurate? Or can you say anything about the elective ramp up here? Absolutely. So, I mean, as always, Rickard, you are very well read on the material. And when I when I read your reports, we have usually the same numbers as as you, from the same industry sources. I don't dare to give any predictions. I don't dare to give any estimates. The industry associations and the various different orthopedic forums are speculating that the, volume of surgeries will only return to the normal or to the 2019 level, sometimes, during the first half of, 2021. I can confirm that in the '2, we saw pickup in the level of surgeries, both acute surgeries and the elective surgeries. But it's very patchy, and it's very much region to region. So if you look at Europe, for example, the lockdowns and the stay at home orders have influenced the whole country in a in a quite binary fashion, while The US had been more influenced, state by state or metropolitan region by metropolitan region. So that also explains a bit in The US why we can show a very strong sales growth because the lockdowns have influenced, mainly the Northeast Coast, Texas and California, and other states have been, less influenced, and and that's also where a significant portion of sales, has been generated during the quarter. With the with the recent rising cases in The US, it makes it even more difficult to give any kind of predictions. I I think we both have to rely just on what the the industry association is assuming here. Excellent. Thank you for that, Emil. And moving on to understanding a bit of the dynamics in The U. S. In the quarter. I suspect that the growth we're seeing here comes from, as you confirm in the report as well, from new accounts. And I suppose they have been signed in the last six to nine months. And is this correct? And will this sort of new account dynamic on sales be hampered in the second half given the reduced ability to sell products? So I guess, will be a sort of a push and pull between increasing volumes of surgeries and perhaps hampered ability to add new contracts. Is that fair assessment, would you say, in The U. S? I think that's a fair assessment, Riccard. What happened in quarter two is we saw some of the big and very well reputed orthopedic clinics in The US, let's say key opinion leader clinics, that have, started to use, cerumen with a high cadence had a limited use, given the high level of COVID patients. While the the new accounts that we have acquired and generated over the last six to nine months had a quite a ramp up in use. With the outbreak of of COVID, there will be certain delay in disruption in the acquisition of new accounts. So that will somehow be visible. At the same time, the accounts that we have won over the last six to nine months, the use that we have seen with them in quarter two is nowhere near their full potential. So difficult to say how these two parameters will play, against each other for quarter three. We are we are very cautious to give any indications on what to expect for the rest of the year simply because the the situation is changing day by day. But your assumption on the underlying drivers are definitely correct. Excellent. And just a quick question on gross margin there. Just to clarify, as you said, was somewhat hampered by fixed costs. Can you could you perhaps quantify that or at least add some details on the meaning or the background of this effect? Obviously, it's transient, but I would just like to understand. It's fair enough. And it's a good question. And again, we don't quantify the exact amounts, but this relates to standard production overhead and depreciation of equipment related to our production chain. And I think that if you look backwards and look into the third quarter last year, where we had net sales levels at equal level as the second quarter this year, you would see a correlation to that gross margin and how then the sales relate and improve margin the following months. So we're expecting gross margin to improve with increased net sales going forward. Great. Thank you. And just a final question from my side. Do you have any update on the conviction study going on in France? Or do you have any guidance as well what we can expect in terms of upcoming updates there for for a readout, just so so we can get a bit of a sense of what's going on there in France? Unfortunately not. The the study is, government sponsored, so, and and managed through the French Cryoac network, which is a network of hospitals specifically dedicated to treating, patients with bone infections. And we get data from them on a regular basis when there's something to report, and no data has been released. So this is not a study that we are controlling, and therefore we can also not give any, information today, unfortunately. But as soon as we have anything to report on this, we will definitely share that with the market. Great. Thank you very much, and and thanks for taking my questions again. And and, have a great weekend. Take care. Thank you. Thank you. Same, Richard. Another reminder, ladies and gentlemen, if you do wish to ask a question, please press 01 on your telephone keypad. Sounds like we have provided a very clear report with few questions, which is delightful in a way. Well, it seems indeed that we have no further question for the moment. That is fine. That is fine. Well, then we conclude this session by thanking everyone that joined this call. After this, now follows a vacation both for me and, Hakan, my CFO. And, we believe that we have, today delivered a report that shows that both support, despite the challenging circumstances in our environment, are making a really good, progress on those strategic targets and visions that we have outlined. And, we continue to do so and look forward to report back to the market on the progress we're doing. Thank you so much, and have a great summer, everyone.