Earnings Call: Q1 2020

May 8, 2020

Welcome to the Bone Support Q1 Report 2020. Throughout the call, all participants will be in listen only mode and afterwards there will be a question and answer session. Just to remind you, this conference is being recorded. Today, I am pleased to present CEO, Emil Bilbak and CFO, Hakan Johansson. Please begin your meeting. Thank you very much, operator. Welcome everyone to the Bold Support's quarter one twenty twenty results call. I am Emil Bilbeck, the CEO of Bold Support. Also with me here today is Hakan Jawonsson, our CFO. So this morning, we'll take around twenty minutes to run through the presentation of the first quarter, and then we will open the line for a question and answer session. Next slide, please, operator. So before starting the presentation, I would like to draw your attention to disclaimers that are covering any forward looking statements that we will do today. Next slide, we will start the presentation. So I would like to begin by giving some highlights from this morning's report. So overall, quarter one sales were SEK 43,000,000, up 32% year over year. Sales has been negatively influenced by the COVID-nineteen pandemic, which I will get back to later in my presentation. Despite these challenging times, we are seeing confirmation that our strategy is working and that the company is continuously moving in the right direction. Segment Europe and Rest of the World grew 4% reaching SEK22 million. Growth of our antibiotic eluting products grew only with 2%. This is a direct effect of the pandemic and the deferred surgeries of chronic osteomyelitis that has been done in the key European markets. In segment North America, we saw a strong continued progress with sales reaching SEK21 million, up 84 year over year. The gross margin in the quarter was 89%. Speaking a bit about operational highlights, during the latter part of 2019, we finally filled the vacant sales territories in Germany as well as the newly established direct territories in New York City, New Jersey and the region we created in New England. We saw increasing use of SarMed and hospital contract awarded in these new territories being off to a very promising start before the influence of the corona pandemic became visible at the February. We're now revitalizing our distributor markets following a similar methodology as used when selecting distribution partners in The US. We have an established and effective matrix for partnership selection and performance engagement. This work has resulted in the appointment of new distributor partners in Italy and in France, two of the biggest European markets where our sales so far has been very low, but where there has been a very attractive market potential. In March, we released the very exciting news that a breakthrough device designation for Serumin G was received from the FDA, which makes us which made us also confident in submitting de novo application in April. The application is aimed at the indication of tumor litis, also called bone infection, and can potentially result in an approval at the later 2020. I will come back to some details on the operational highlights, but first I would like to talk about the pandemic and its effect on the company. Slide four, please. We saw the impact of the coronavirus outbreak in mid February for several of the European markets and on The U. S. East And West Coast about one point five weeks later. Hospitals were then freeing up resources in anticipation of need for critical care of infected patients. The outbreak of the pandemic has led to temporary adjustments and reprioritizations within the entire health care system, especially in the countries that have been the hardest hit by the virus outbreak. With hospitals redistributing resources to the intensive care unit, elective surgeries have been given a lower priority. Non critical orthopedic surgeries have gotten deferred to later dates. However, non elective procedures such as acute orthopedic surgery related to trauma or severe bone infections have been influenced to a lesser extent. The regional lockdowns and geographical quarantines can be expected to lead to a smaller number of trauma surgeries for as long as the restrictions are in force. We also see that the pandemic could delay recruitment of new customers as the interactions between potential customers and company representatives are restricted. Meanwhile, we have launched a series of webinars and facilitated electronic communication to conduct training, education sessions, and customer interactions. We have had several key opinion leaders post webinars on our platforms, sharing experiences of Cerement and presenting case studies and clinical studies on Cerement. The webinars have had on average more than 80 participants each. In addition, we have taken proactive measures to minimize the risk to our employees and to ensure our business continuity. We have an internal task team that is monitoring and responding to the evolving situation of the pandemic. Bone Support has good inventory coverage and is shipping product without any disruptions. We have taken measures to reduce expenses without interfering with business or our ability to quickly scale up our activities when the pandemic so permit. As an example, we have made work time reductions mainly for salespeople and also made voluntary and temporary sales sorry, salary reductions across the entire organization. These measures will be visible at significantly lower cost in quarter two. I'd like to emphasize that COVID-nineteen has no impact whatsoever on the underlying need for Saramund nor the influence on the need to treat skeletal injuries. We are certain that the number of elective orthopedic surgeries will return to normal as the pandemic wears off. All in all, all previously communicated, we have predicted sales in the 2020 to be impacted by the COVID-nineteen outbreak and as the impact on the full year sales for 2020 is, at this stage, unpredictable, we cannot give any guidance for 2020. That said, we're not making any changes to our long term outlook and still expect growth of 40% per year as of 2021 and forward. Slide five, please. So now I would like to provide you with some more details on our quarterly sales development. So this slide you will recognize shows the last twelve months with the dark orange part of the bar representing Europe and the light blue and dark blue part of the bar displaying sales in The US. The dark blue part visible from quarter four twenty eighteen shows sales achieved with the new distributor setup, and all LTM, all last twelve month sales of Cinder Biomet is now gone and replaced by growing sales from our new distribution setup. Quarter one twenty twenty represented a new all time high despite influence from the corona pandemic. This chart also shows and confirms the steady growth in Europe and rest of the world, but of course, you can see a slowdown in growth in quarter one attributable to COVID nineteen. Antibiotic eluting cerament represents now 85% of total sales in Europe and is one of the biggest growth driver of the business. Going to the next slide, Slide six, we will focus more on the detailed segment of rest of the world. The segment delivered million of sales corresponding to growth of 4%. The antibiotic alluding product grew 2%. In the quarter, our direct markets, which are Sweden, Denmark, The UK, Germany, Switzerland represented 86% of sales. Now this is a strong indication of the enormous potential we see in the rest of Europe. Large markets such as France, Spain and Italy have very low sales penetration. Even countries like Netherlands with similar market dynamics as our direct market is far away from its full potential. Following the successful geographical coverage by ramping up sales resources within our direct market, we are now gradually steering our focus towards revitalizing our distributor markets and the large part of Europe that has a low penetration. We have installed strict criteria for engagement, specific Cerement market promotion criteria and performance criteria. Early in the quarter, we appointed new distributor partners in Italy and in France. This gave a slight short term disruption on sales, but we are confident in the longer term that we will see great potential from these changes as we have engaged with partners that can promote settlement more decisively and better. In the quarter, we also recruited a a direct sales director in The Netherlands to accelerate sales penetration by working with a present distributor and direct with key customers. This person is reporting directly into our European sales management. And by having a dedicated person in place in one of the key geographies, we believe we will increase focus and secure the implementation of our proven and successful marketing strategies. In the quarter, we received a large order from Australia. This order relates to several procedures conducted by three orthopedic surgeons that all have applied for and been granted specific authorization to use Serament ahead of registration. This order underlines the market need and the unique benefit with Serament, and we are anticipating to receive regulatory approval soon in Australia, giving us the ability to provide access to settlement for all patients in need. Slide number seven, please. So we go then to the segment North America. Sales in the quarter was 21,000,000, which is a growth of 84% year over year. Sales was reduced with nine percent versus 2019. This is due to regular and usual seasonality, but also from the COVID-nineteen pandemic. During the 2019, we had a dialogue with the FDA to investigate whether CellMinG could obtain market approval for osteomyelitis, also known as bone infection, through a de novo application. Such an application can be made when there is no comparable established alternative on the market. The dialogue with the FDA resulted in a breakthrough device designation for Suriname G, and encouraged by that strong recognition, we decided to file the submission for de novo in early April. The breakthrough device categorization can be assigned to product that are considered to provide more effective treatment of severe patient conditions. The purpose of this designation is to provide an expedited review for the application of market approval. Osteomyelitis, as a reminder, is a severe condition where the infection damages and prevents the natural bone from healing. Bone infection is estimated to account for about fifty percent of all non trauma related amputations in The US. Each year approximately fifty thousand patients with osteomyelitis are treated with bone graft, and this market for these treatments is estimated at around $100,000,000 Serumin G enables local antibiotic release, which protects the bone healing process and efficiently reduces the risk of reinfection and amputation. Being able to provide high local delivery of antibiotics may also decrease the volumes of systemic antibiotics and thereby reduce the risk of developing antibiotic resistance, which is a very important aspect. We see a very large potential for Serumin G in The U. S. The corona pandemic could have influence on the recruitment and follow-up compliance to our studies, it is too early to give a firm statement of what the impact and consequences of this impact could be. With regards to the FORTIFY study, the study that will be the foundation of our PMA application, we have now recruited 196 out of two thirty patients. We intended to have we intend to have a dialogue with the FDA to determine how the final stage of this study should look like given different scenarios of pandemic influence. Despite the disruption from the ongoing pandemic, our commercial team has made great progress in increasing settlements, market presence, the geographic coverage and building a rapidly expanding customer base. Leading the U. S. Team starting from June 1 will be Michael Roth, who will be Bone Support's General Manager and Executive Vice President in The U. S. Mike has extensive experience from the field of orthopedics, and he is a strong commercial leader. I really look forward to having Michael on the team as we take our journey into The US to the next level. So with that brief update, I will now hand over to Hakan, who will cover the financial overview from the quarterly report. Thank you, Emil. Let us move then to Slide nine. This is a graph that presents net sales by quarter as BOSS and last twelve months sales as Align. Net sales in the fourth quarter amounted to 43,400,000.0 compared with 32,300,000.0 in the same period previous year, equaling an increase of 32%. In March 2020, COVID-nineteen reached a pandemic level and bone support was affected in both The U. S. And Europe due to a decline in mainly elective surgery. The Europe and rest of the world segment reported a growth of 4% compared to the same period last year. North America segment reported an increase in segment 84% as an effect of the transition to the new distribution model and thereby low sales in previous year. Net sales for the last twelve months amounted to $166,000,000 to $98,000,000 last year, an increase of 69%. The segment Europe and Rest Of World increased last twelve months sales with 28% and last twelve months sales in the segment North America increased with 163%, being a strong confirmation of our strategy to reach The U. S. Market more efficiently with a new distribution structure. Next slide, please. In the segment North America, sales for the period amounted to €21,200,000 compared with €11,500,000 previous year. The low level last year were explained by the new distribution structure initiated in the fourth quarter twenty eighteen. As a result of the ongoing COVID-nineteen pandemic and a decline in mainly elective surgery, sales decreased by 9% compared to the previous quarter. The contribution from the segment was minus €12,200,000 compared to minus €15,700,000 last year. The reduced loss is related to increased sales. Sales and marketing expenses in the period amounted to €24,500,000 compared with $19,400,000 in the same period last year. This includes cost for sales commission growing from 3,500,000.0 to $7,100,000 Next slide, please. Despite effects of the COVID-nineteen pandemic, sales in the segment Europe and Rest Of World increased by 4% compared to last year and amounted to 22,200,000.0 compared to 21,200,000.0. Sales in direct tea markets accounted for 86% of the segment sales, and sales of the antibiotic eluting products Cerement G and Cerement V increased by 2% compared to the corresponding quarter last year. The contribution from the segment was €3,900,000 compared to €900,000 last year. The improved contribution is a combined effect of an improved gross profit of 1,000,000 and the decrease in selling and marketing expenses by 2,000,000 compared with the corresponding period last year. Next slide, please. Net sales performed by an inflow from COVID-nineteen with a slowdown in sales as mainly led to surgeries on down, however, with lesser impact in acute surgeries. Gross margin confirmed a high level from the gradual improvements made during previous year, following sales growth in The U. S. And a favorable product mix with the growth in the antibiotic elliptine products Serumant G and Serumant B. Operating loss improved by $9,800,000 to minus $29,200,000 compared to $39,000,000 previous year, where the decreased loss is mainly explained by higher sales both in Europe and rest of world, but above all in North America. Liquidity is supported by the agreement signed with SEB in January on a $60,000,000 working capital facility. Next slide, please. Total expenses in the last quarter is up with only €600,000 compared with the same period last year, despite an increase in sales commission of 3,600,000.0 Selling expenses in the quarter is impacted by the COVID-nineteen pandemic by marketing activities being canceled due to social distancing orders, less travel expenses and initial impact of implemented cost savings. R and D expenses are down due to quarterly variations related to projects and clinical studies, and administrative expenses remained stable on a reduced level since mid-twenty eighteen. With this, I hand over back to Timiel. Thank you, Hakan. So we'll go to slide 15. So apart from the effects of the pandemic, I'm I'm glad to say that the quarter has further confirmed and validated the strength of our strategy. Our strategy has driven discipline and commercial decisiveness in the direct markets and The US, and we're now revitalizing our distributor markets in Europe. With strong clinical evidence, we believe that we have the key to transform the treatment standard for the 720,000 procedures per year addressing insufficient bone healing. The clinical evidence base that we are building supports our quest and paves the way for further market penetration. Strong health economic data of the kind that we now have are important confirmation of the benefits of our antibiotic eluting product and equip our sales team with a unique set of arguments for promoting Saramen. The US is the largest and most important market in the world for bone graft and bone infections. If we are successful with our de novo application in The US for Saramen G, we could have a market clearance in late twenty twenty, which is at least one and a half years earlier than what was previously planned. We have already communicated that we intend to submit a pre market approval, a PMA, for seven gs in 2021. So while the de novo application applies to the indication osteomyelitis, the PMA application is intended for additional and broader indications, including trauma. The FORTIFY study will form the basis of our PMA application at the 2021. And we are about to initiate a dialogue with the FDA to determine how the final stages of the study should be conducted. All in all, I believe that we are well positioned for strong market growth. We are weathering the storm that the pandemic has brought on all of us, and we keep working on our strategy execution and clear objectives. The impact of the coronavirus is making the outlook for 2020 hard to assess. Beyond this, we are in firm confidence that our corporate target will be an annual growth of sales of 40%. On the final slide, Slide 16, you will see our calendar of value generating milestones that I have mentioned today in the presentation. There are two boxes added in dark orange that marks important milestone for the de novo pathway. And with that, I wrap up my presentation and would like to open the call for questions. Thank If you find it answered before it's your turn to speak, you can dial 02 to cancel. So once again, that's 01 to ask a question or 02 if you need to cancel. Our first comes from the line of Ricard Ambekans of ABG Sundal Collier. Please go ahead. Your line is open. Morning, Emil and Hakan. Thank you for taking my questions. So my first question is, could you possibly break out the approximate split between elective surgeries and more acute surgical procedures in terms of twelve month rolling sales? Thank you, Victor, for your question. Well, that is that is, of course, a bit difficult as sales is constantly evolving, and we have presence in quite a few markets. But what we have done before is we have shared, of course, how the market looks like for bone grafts and which indications where bone grafts are applicable, where you have bones that do not heal by itself. So if you just look at, let's say, slide that we've shown previously with acute trauma, for example, chronic osteomyelitis, revision arthroplasty, which means, replacing, hip joints or knee joints. I would say revision arthroplasty, close to ninety percent of the surgeries are, elective. And this is what we see across the health care system that that all joint replacement more or less are deferred to a later date, while, acute osteomyelitis and trauma are, surgeries that still take place. So if we use that as a rough sketch, I would say that around fifty percent, five zero, of the surgeries where Ceramet is used can be considered elective and 50% nonelective. Excellent. Thanks. That's very helpful. And could you provide some more details on obviously, it's an extremely it's a moving target at this point. But could you provide some more details magnitude of the sales drop in late March and potentially even if you could comment on as we went the dynamic into April, just to get an understanding of the dynamics as we move into Q2 in terms of sales? That would be excellent. Yeah. Thank you, Richard. Well, I know that this is information that every analyst, of course, is keen on understanding at Dome Support. What makes it difficult is that sales is changing every week. There's no clear trend to be read out. What we see is that when there is a complete lockdown, as we have seen in Italy, for example, now we also changed distributor in Italy, so sales, dropped significantly in quarter one. But when there's a lockdown and a and a quarantine of that nature, of course, the the level of procedures go down dramatically. So you can almost look at a map, of the world and and and predict, let's say, where the sales will be influenced. But we cannot give any guidance for quarter two. There's been a few of the big orthopedic companies giving guidance, let's say, how April has started, but we have decided not to do so. Right. I understand. Thank you. And just as a final question, we've seen some reports of elective surgeries gradually opening up in quite a few states in The U. S. And that the German healthcare system has managed well so far given their overcapacity of ICU beds. Could you comment on how these markets in general, just as a general market observation, progressed in March and perhaps in April as well, not digging into the details, but just the elective surgery status progressing going forward? Yeah. UK has definitely been, hit the worst, of the direct markets that that we are present in, and it's related to chronic osteomyelitis, meaning where you've had a bone infection for more than five, six months, the health care has clearly decided that having continuing, let's say, your condition for another two months possibly is not gonna make life or death difference. So all of that has been shut down. In Germany, as you say, with a much better also capacity for intensive care, there has been a higher degree of also, these kind of surgeries. So exactly what you anticipated is also what we have seen in ourselves. As the businesses, societies, and health care systems are gradually opening up, we expect that '2, a lot of these surgeries will start to return. And also with societies opening up, people will be more engaged, active in in traffic, in industry construction sites, which also will have effect on the trauma surgeries required. So that is probably as much as I can share on my insight right now on what we have seen at the end of quarter one and what we can anticipate for quarter two. Excellent. Thank you very much. That's all for me. Thanks. Thank you. And our next question comes from the line of Christopher Lillebei of Carnegie. Please go ahead. Your line is open. Thank you and good morning. Related to the last question here about starting elective surgeries again, the thing that you get from your customers, is that that this will happen very late in the quarter? Or do you expect June, for example, to be better than May? Yes. Thank you, Christoph, and good morning also to you. I I wish I could answer your question. I'm not I don't have that knowledge and and holding it back from anyone. It's it's simply so difficult to say. I spoke to a a couple of, physicians earlier, this week, and they anticipated, some increase in surgery already this week. And they had specifically scheduled, some surgeries where sediment would be, used. One of them also said that as societies opens up, there's a high likelihood that more people will get infected, and there could be a rebound that again suppress, these surgeries. So it's it's it's very difficult to say, but what we can see is that, a few key states in The US are opening up this week and next week, Texas among others, Georgia, Arkansas, the Carolinas, parts of Florida. We also see that that several of the European countries are are opening up. I think the pace that they will open up and and the surgeries will return has everything to do with how the infection might be increasing in prevalence as society opens up. So almost impossible to predict right now. I totally understand that. Thank you very much. Something you could control is, of course, the cost. And you said you expect quite bit lower cost in the second quarter. Is that something that you could quantify? It's not something we're quantifying at the moment. And so we're expecting the savings in the second quarter to be material as much of guidance as we gave them. And as Emil mentioned as part of the presentations, I'd say a wide set of activities and support from all parts of the business in achieving those savings. They are partially related to then lower activity levels in the market due to the pandemic, but then also by the mitigating actions made by the company. Yeah. We Yeah. I mean, we have asked we have asked also the organization to say, here's what the situation looks like. We know that there will be canceled, surgeries in quarter two, but we are equally confident that it will come back. And the entire organization has done a voluntary, salary reduction that will have a material impact in quarter two. And looking at the selling cost, is it possible to split that into salaries and or personnel related employee related costs and how much is other external for conferences, marketing activities, etcetera? Thank you, Christoph. Well, it's in the quarter report as part of the financial statements and the explanation behind the different lines of expenses, you would find such a a a split. Okay. And another thing, yeah, you said you're gonna discuss with FDA about 45. Is it it sounds a little bit like you're trying maybe to include less patients in in the study. But if if that's the case, would that also increase the risk considering the that statistically is considering the rather difficult threshold that you that you need to reach. Yeah. Both yes and no, I would say. So the FDA did proactively, make statements in March already that they are going to look at, current clinical studies running and wanted to discuss with all medtech pharma companies across the world, how they could potentially look like in different, infection scenarios. Basically meaning, if recruitment is compromised or if follow-up is compromised, where where do you go with the different studies? And they will they will do that on a study by study judgment. So we are waiting, let's say, to have our conversation. We have displayed now for the first time how many patients we have recruited. And and as you can see, the recruitment, in the last couple of months before corona has been has been good. So we are at one hundred and ninety six patients. The target of two thirty, of course, also includes a certain buffer. So, we feel pretty strong about the results we have even though we haven't seen any results yet. So what we now need to discuss with FDA is, should fewer patients be included in the study? That would be one scenario. Or should we try to do an accelerated recruitment? Should we put measures in place to secure follow-up? All those topics are things we will discuss with FDA. And they're very similar to some of the conversations that have been released only by pharmaceutical companies that have also devices that or pharmaceuticals that fall in categories of breakthrough. Okay. Thank you. Just one last question. This large order in Australia, how much did it impact, you know, growth? Or how much weaker would Europe have been without that? We we don't release country data, but probably you can say that the actions we took in France and Italy, appointing distributors there, harmed sales probably slightly more than what the Australian order brought in. Okay. Thank you. Thank you. Thank you. There seem to be no further questions coming through at this time, so I'll hand back to our speakers for the closing comments. I would like to thank everyone for calling in this morning. We have presented our quarter one twenty twenty results, and we believe that despite some challenging circumstances in the middle and the end of the quarter that, again, we have shown with the results that our strategy is sound and is delivering the expected results. We are weathering the storm, I think, very strongly. We are confident that the market is fully coming back, and we look forward to talk to you all in July when we present our quarter two results. Thank you, and goodbye.