Welcome to the BONESUPPORT 2023 Q1 report presented by CEO Emil Billbäck and CFO Håkan Johansson. For the first part of the conference call, the participants will be in listen-only mode. During the questions and answer session, participants are able to ask questions by dialing star five on their telephone keypad. I will hand the presentation over to the speakers. Please go ahead. This call is being recorded.
Good morning. Good morning, everyone. Thank you very much, operator, and welcome to the BONESUPPORT quarter one 2023 results call. My name is Emil Billbäck, and sitting next to me is Håkan Johansson, our CFO. We will use the next 20-25 minutes to guide you through the presentation of the first quarter results 2023, and then open the line for a question and answer session. Before starting the presentation, I would like to draw your attention to the disclaimers that might be covering any forward-looking statements that we will do today. We go to slide three in the presentation. First, I would like to begin by sharing some condensed highlights from the report that we released this morning. Overall, quarter one sales were SEK 120 million, which corresponds to a growth of 80% year-over-year.
In constant exchange rate, the growth was 66%. The operating results before incentive provision was SEK 4.6 million. This is an improvement versus last year of SEK 17.1 million. The reported EBIT was at SEK 0.8 million, making quarter one 2023 our first quarter of profitability. The main highlight of the quarter was, of course, the ongoing launch of CERAMENT G in the U.S. CERAMENT G reached sales of SEK 35 million in the U.S. for the quarter, driven by increasing use and a good pace in hospital system approvals. As an example, we have signed the very prestigious Johns Hopkins Hospital during the quarter and have immediately seen strong interest and orders from their surgeons. We were also granted access to the Veterans Affairs Administration. This concludes about 171 hospitals.
In Europe, we're now finally seeing a gradual recovery of procedures after the pandemic, and I will come back and describe these highlights further in my presentation. Let's get into it and go to the next slide. Slide four, please. This is one of our standard charts for the quarterly report. I think many of you have seen it before. It shows the last 12 months sales every quarter since early 2016, split by segment and product category. I think purely graphically it's visible that a new chapter of sales acceleration has been entered. Sales growth is strong in all segments, with the largest driver being CERAMENT G in the U.S. reaching a sale of SEK 35 million in the quarter. We're starting to see some cannibalization between CERAMENT G and CERAMENT BVF in the U.S.
Despite this, sales of CERAMENT BVF in the U.S. grew with 25% in the quarter versus quarter one 2022. In Europe, antibiotic-eluting CERAMENT, that is the G and V version combined, grew with 40% in the quarter versus last year. In the next slide, we will look at the details of each region or segment, as we call them, as we will share additional observations on CERAMENT G in the U.S. Let's turn to the next slide and start with the US. Slide five. Sales of SEK 86 million corresponds to a reported growth of 109% year-over-year. At a constant rate, the growth would have been 87%. Sequentially, growth was 17%, and that means the comparison to quarter four 2022.
The strong sales traction with both products is attributed to CERAMENT gaining strong preference of the customers and hence taking market share from all other treatment options. Let's turn to the next slide and cover some more details on CERAMENT G. Slide six. First, just a few words about the market dynamics. A small clinic or a small practice, a small orthopedic practice in the U.S. have large discretionary selection in the authority of choosing new therapies. For medium and large clinics, and for medium and large hospitals for that matter, a regular and continuous use of a new product is preceded by a contract inclusion and hospital system approval. In our case, with a breakthrough device, the hospital system approval process is usually running in parallel with a few prominent surgeon pilot users.
These surgeons are building concrete experience with CERAMENT G that is being fed into the hospital system approvals process. As reported earlier, we have succeeded with GPO inclusions slightly above our initial expectations. We have also seen more hospital system approvals and many more ongoing pilot trials. CERAMENT G has a clear positioning as well as unique, appreciated, and recognized benefits. In the U.S., there are 420 hospital systems relevant for orthopedic procedures. Up to the end of March, CERAMENT G has received approval at 50 of these with a gravity towards the medium and large ones. Where approved, we can see that the use of the product is taking off at a steady pace, yet at a low level since it's very early days of the launch still. We have sales registered in 26 states. All sales that we have reported is related to consumption.
There have been no bulk sales. The average selling price we can again confirm to be around $5,700 . We have had positive feedback on product handling as well as the transition to a one-stage procedure. All in all, the recognition of the clinical benefits have been positive. The surgeons have had the first follow-ups of patients treated in November and December last year. Outcome is positive in line with the clinical studies on which the FDA approval is based. This was of course expected, it's nevertheless positive to get a strong validation from the surgeons that have decided to switch to CERAMENT, where they see that the clinical benefits are also as promised by previous clinical studies.
We are progressing the data collection with our label extension application and expect to submit our 510(k) in quarter three of 2023. That's on the U.S. and on CERAMENT G. Let's go to slide seven and cover Europe. For the quarter, we saw sales of SEK 34 million , which corresponds to a growth of 34% year-over-year, which is then 32% at constant exchange rates. We have seen a steady recovery in general surgical procedure volumes in quarter one when comparing with quarter two and quarter four last year. However, healthcare staffing shortages remain challenging, and capacity is still some 5%-8% below pre-pandemic levels. Even though surgical capacity increased during the quarter, the inflow of patients seeking care remains higher than what the healthcare system can cope with.
In the U.K. and Sweden, we have access to public data, making them valuable data points in understanding the market dynamics. In the last 12 months, the U.K. backlog increased with 1.2 million people, meaning that 1.2 million people were waiting to get their surgery done, so more than 1.2 million are waiting this year in March 2023 versus March 2022. With CERAMENT playing an important role to influence and reduce this specific backlog, you know, with especially those people in line for waiting to get procedures on skeletal injuries, we see favorable market dynamic ahead as the healthcare systems have a need to catch up and reduce the backlog.
We have now filled all previous vacancies in the sales team, and we've also chosen to increase our marketing and sales activities to further drive market penetration as we are anticipating a continued pickup in surgical capacity going forward. We've just received information from the French CRIOAc network regarding the conviction study, and as with many other studies that started during the pandemic, there has been slow onset in the recruitment pace. We have received information that the last patient into the study will be in Q4 2024. With a follow-up of 24 months, the study is then expected to close in Q4 2026. The study is somewhat delayed. I would also like to provide a brief update on the SOLARIO study.
This study was launched in 2019 to address the growing threat of antibiotic resistance. Despite delays in recruitment caused by the pandemic, we are pleased to report that the recruitment phase is now almost complete. There is 464 patients of the targeted 500 that have already been randomized and included in the study. The study objective is to determine whether the use of local antibiotic eluting bone grafts as an adjunct therapy can help to shorten the duration of systemic antibiotic treatment, reduce antimicrobial resistance, minimize adverse events, and lower cost. If successful, this research could have significant impact on regional and global treatment guidelines. Completion is expected for early summer 2024, so the patients have a 12 months follow-up. Now, with that, I hand over to Håkan for a bit more of a deep dive into the financial statements. Håkan, over to you.
Thank you, Emil. Let's move to slide number nine. The net sales improved from SEK 66.3 million to SEK 119.7 million, equaling a growth of 80% or 66% in constant exchange rate. Emil has already spoken about the strong performance in the two segments and the major drivers behind the sales acceleration. Let me comment on the currency. Changes in currencies measured in year-to-date averages in 2023 versus 2022 had a positive impact of a total SEK 9.5 million, of which SEK 8.9 million relates to a stronger US dollar. The depreciation of the Swedish currency versus other currencies also drives expenses, as you will see in the latest slides. Let's move to the next slide.
The contribution from the segment North America improved with SEK 18 million and was reported to a regional contribution of SEK 24.9 million. The improved contribution relates to increased sales after effect from increased costs. Sales and marketing expenses during the quarter amounted to SEK 55.7 million, compared with SEK 30.1 million previous year, of which sales commission to distributors and fees amounted to SEK 29.5 million, compared with SEK 14.3 million the same period last year. The increase of SEK 10.4 million excluding sales commission and fees was driven by currency effects of SEK 2.6 million and an increased activity level. We have announced previously, the US booster positions are up and running, and there is a strong focus on medical education and increased market presence, also contributing to the cost in the quarter.
The contribution was also charged by R&D costs related to studies. These decreased from SEK 1.9 million last year to SEK 1 million this reported quarter. From the lower graph showing net sales as bars and gross margin as the orange marker, it can be noted that the gross margin is improving compared to previous quarters following a favorable product mix. In Europe and Rest of World, the table on the graph to the right, a contribution of SEK 7.3 million was reported, to be compared with SEK 5.6 million previous year. The improved contribution relates to increased sales after effect from increased costs. Sales and market expenses increased with SEK 4.2 million. The increase is attributable to field vacancies and to a generally higher level of market activity.
As Emil mentioned, we are pushing for a higher market penetration in the anticipation of the healthcare systems clearing backlogs eventually. From the lower graph and orange marker, you can see a drop in gross margin following market mix, but also minor increase in manufacturing costs. The latter is anticipated to be mitigated by increased sales price, having gradual effect during the remainder of the year. Let's move to the next slide. Selling expenses increased with SEK 13.8 million versus last year, of which SEK 2.6 million relates to currency effects. As we mentioned before, the U.S. booster is up and running, and we start to see the first results on top line. In Euro, we have increased with two headcounts on the sales side, and our total Euro commercial organization is now 30 people.
The increase in the quarter relates to a ramp up in activity level at congresses, medical education and of course, the launch program for CERAMENT G in the U.S. We see strong customer response to our programs as apparent from the top line development. R&D remains largely in line with previous year and administration remaining on a stable level, excluding effects from the long-term incentive programs, equaling SEK 11.7 million compared with SEK 10.6 million previous year and SEK 12.1 million in the previous quarter. Next slide, please. The operating profit was reported to SEK 0.8 million compared with a loss of SEK 16.5 million for the same period previous year, a SEK 17.3 million improvement following a strong sales performance.
The profit also includes expense provisions regarding long-term incentive programs, amounting to an expense of SEK 3.8 million this year compared with SEK 3.9 million previous year. Of the total cost of SEK 3.8 million in the period, only SEK 0.3 million is cash flow impacting in the future. The operating profit improvement before the long-term incentive programs was SEK 17.1 million, confirming a strong underlying positive trend. The reduced provisions for incentive programs in the quarter compared with the end of 2022 relate to the share saving program LTI 2019 that closed in the end of 2022 and reported a cost of SEK 9.3 million in the second half of 2022. With this, I hand back to Emil.
Thank you very much, Håkan. We're gonna wrap up this morning presentation. We go to slide 14, please. I think for everyone seeing our report this morning or listening to this call, that it's obvious that there is a strong acceleration in our sales growth, and that BONESUPPORT is only in the beginning of a very exciting journey. The sales uptake in the U.S. for CERAMENT G is faster than what we saw when the product was launched in Europe a couple of years ago. The clinical evidence available now that are displaying superiority in outcome are many more than what existed at that time point. The fact also that CERAMENT G is the only approved antibiotic-eluting bone graft on the U.S. market, that helps.
We also see that there's a very strong match between the health economic benefits that Cerament G offers and the immediate prioritization in the U.S. healthcare system and the U.S. orthopedic clinics. 2023 and 2024 are gonna be very exciting year. We have several milestones coming, and there are more solid evidence on the way which we are confident will support the therapy standard transformation that is taking place in the U.S., in Europe, and in other markets. With that, I would like to conclude our presentation for the first quarter of 2023 and open the line for questions.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Kristofer Liljeberg from Carnegie Investment Bank. Please go ahead.
Thank you. I have three questions. Two on cost and one related to the cash flow. First, the selling cost level in the first quarter, would you say that's a good proxy for the coming quarters or were they higher than normal number of trade shows impacting this figure?
As we mentioned, Kristofer, it's been a high activity level in the first quarter. We assume this to continue also in the quarters to come. Yes, I would say that the quarter is going to be a good reference point going forward as well.
Do you have additional questions, Kristofer?
No.
Okay.
The next question comes from Mattias Vadsten from SEB. Please go ahead.
Hi. Coming on from another call, sorry if I missed these parts during the presentation. First one would be on the gross margin. It is falling quarter-over-quarter despite sort of higher sales, you know, share of sales in North America and higher share of sales of CERAMENT G in the mix as well. That's true for both regions. Yeah, just some clarification there, maybe. Thank you.
Thank you, Mattias. As we mentioned during the call, we've seen increasing manufacturing costs in the later 2022 that has got impact in this first quarter. These are our impact that we've been mitigating by price increases having a gradual effect in the remainder of the year.
Someone is typing frantically. We appreciate it, but it's difficult to hear. If someone is typing, please pick yourself on mute.
Sorry, I guess that was me.
You're welcome.
As last time around. The next one would be, you know, demand seems obviously be significant for you. Maybe as a short question, is capacity constraints anything that is holding you back whatsoever in terms of CERAMENT G sales in the U.S.? Just to make that clear.
Well, the answer is no. There's no capacity constraint holding us back. At this accelerated pace, we will also have to look at our entire capacity infrastructure and potentially expand it further and increase our capacity more in the future than we probably earlier had anticipated. It will take planning, but there's no constraints right now.
That's good. The last one would be, you know, for CERAMENT G in the U.S., if you could, single out, you know, the deltas to think of when we enter Q2. If you could say anything about, you know, the number of customers purchasing the product, you know, when Johns Hopkins and those major, counterparties were online and so on, timing of that. Yeah, this kind of question.
The beat rate of course on CERAMENT G is a very interesting and important number for us, as it is for you when you build your models. We keep emphasize also that it's can be difficult to give a full year market penetration pace predication. What we saw in quarter one was an unprecedented high number of pilot use. This pilot use from the prominent and KOL surgeons is done in parallel to many of the hospital system processes. If those hospital system processes turn out into approval, yeah, well, then we can look forward to a very strong sales development on CERAMENT G. If that process drags out time, well then it will be this kind of staircase model that I've displayed before.
It all comes down to how that metric develops. That's what we did also different in this presentation. We released to the market for the first time that we have 50 approvals so far out of the 420. The way to look at that is that 50 is a very impressive number, that is far from the number we had when we went independent with Zimmer Biomet on the BVF. That took longer to reach to that stage. I think that gives you a hint, at least on how many doors have been opened. Of course, the sales has to come by converting procedure by procedure. That's all we can say. We don't have more insight on that ourselves really to make any predictions.
I really appreciate that. I think it helps. On Europe, last question. Good to see that it's picking up the pace. If you could just, you know, speak about the maybe trading activity in March, April, how you think about it, you know, going forward? It seems like the activity is becoming a little bit better at least. If you could shed some light on where we are versus pre-pandemic? I guess we're still below in terms of activity. Yeah, that would be the last one.
Sure. I think in activity level, we are back at pre-pandemic level. We are really fueling up the engine in Europe. I have a really good team there. They are launching a lot of activities, congresses, individual meetings, approaching new hospitals. We're actually have an attempt active right now to increase our market presence. All the vacancies have been filled. We do this because we see that the market dynamics is about to move going forward, is about to change going forward. The capacity with the hospitals are still between 5%-8% below pre-pandemic levels. We think that our activities should ramp up before the capacity starts to rise, and not the opposite around.
That's why you see also slightly higher cost in Europe because we are taking the opportunities where we see them.
Thank you.
The next question comes from Sten Westerberg from Analysguiden. Please go ahead.
Yes, good morning to everybody. Just wonder if you could attempt to break up the procedures in any way at this very early stage? Are we primarily looking for patients with existing infections in long bones? Is it maybe also related to treatment of diabetic foot? Of course, if you see any use at all outside the current approval?
Yeah. Yeah, thank you, Sten. Yeah, of course. Bone infection is a very difficult and problematic indication. Those surgeons where we have good strong use so far is with some of these hospital structures and systems that we have mentioned. Big university hospital structures and systems, and Johns Hopkins, for example, and the Cleveland Clinic. Most of the patients that have received CERAMENT G have had as such, as you said, existing infection and condition in the long bones, mostly as a result of a previous fracture or previous trauma. The other part is the diabetic feet. There are also observations. There are quite some feedback that surgeons have used it also on other indications that are not approved.
There's no way that we are endorsing this or encouraging this. We've heard about it, we tell the doctor that this is not the intended use, but that the doctor has the discretionary right. To quantify this would be impossible. You can just think that a clear majority of the sales are in those first two indications that you mentioned.
Okay. Thank you very much for that answer. Yeah, that concludes my questions. Thank you.
The next question comes from Kristofer Liljeberg from Carnegie Investment Bank. Please go ahead.
Thank you. I actually have three more questions. The first one of these is the sales commission line. It was 25% of sales this quarter versus 27% in Q4. Is there some form of seasonality here and how to think about that percentage going forward?
Thank you, Kristofer. It's a valid question. Again, somehow the commission is somewhat dependent on what distributor is performing the sale in each quarter, et cetera. There is a certain underlying volatility in that. It's been on a higher level in the final quarters 2022, giving a strong performance with certain distributors enables them to reach a higher commission level due to an underlying incentivation in the structure. Commission level can continue to show a certain variety over the periods. Maybe what I'm mentioning is that somehow in commission and fees, we see a reduced freight cost in % of sale in the first quarter, this is related to some of the every selling price in the U.S. increasing.
The cost for freight as a percent of sales is going down. That's also supporting the lower level in the quarter.
On the topic of, that it depends on how distributors are performing, does this mean that you will always have a higher level in Q4, or do you estimate already how those type of bonuses or how I should call it, do you estimate that throughout the year?
Not necessarily, Kristofer, because the quotas, that is the measurement somehow where the distributors are measured is made on quarterly basis.
Okay, that's helpful. The tied up working capital you had here, is that related to the increased number of products you must have on the shelf at hospitals or any network effect?
The increase in capital tied up is purely on accounts receivable layer, you could say. It's totally related to the sales growth.
Okay. Finally, the price increases you talked about, is it possible to quantify that?
Again, we have announced price increases in the European markets of between 3% and 5%. None of that will come to effect. It will take some time to get the effect. We also have certain underlying contracts where we have longer commitments. So, over time, we estimate the gross margins to be stable and some of the gap that we see in this quarter to be closed.
Okay. Thank you very much.
The next question comes from Erik Cassel from ABG. Please go ahead.
Hi. Good morning, Emil and Håkan. First off, the monthly cadence of CERAMENT G sales in the U.S., up roughly 60% Q and Q. Is it possible to say how much of that is driven by new customers, versus, you know, increased use of the ones you already had in Q4?
It is possible to say it. It doesn't mean we're going to say it. No, I'm just joking with you, Erik. It's important, of course, question you raise. Here is the dynamic we see. With CERAMENT G coming to market, the recruitment of new accounts has accelerated. CERAMENT BVF is a fantastic product, but CERAMENT G is even more special and have unique benefits. That also drives the attention of new customers that we can acquire. The majority of the sales that we see, though, is with customers that were already existing because those new customers take longer before they reach a certain value to have impact enough. The interesting thing is that with those customers that are existing, CERAMENT G comes in new use.
You see, there is not a one-to-one replacement of CERAMENT BVF at those accounts. When we look at those big hospitals individually.
Where we have introduced CERAMENT G and they are using it at a steady state, CERAMENT BVF is also growing. As I mentioned in the presentation, CERAMENT BVF in the quarter compared to a quarter a year ago, grew with the same quarter a year ago, grew with 25%. I think that's slightly higher maybe than what we thought before we launched CERAMENT G. Eventually, there will be some cannibalization, but I think time will tell exactly how much that will be.
Okay. Thank you. Interesting points. You, you talked about pilot approvals and if you get approvals for the ones, you know, all the pilots that's processing now, you're going to have good results. You know, the pilots that have been around and the 50 sites that you have now, as I sort of understood it, what has the so-called success rate been so far from, you know, pilots converting?
Right. It has been a strong success rate, higher than what we saw in Europe when we launched CERAMENT G, and also higher than what we saw with CERAMENT BVF when we went independent in 2019. I mean, one can quickly do the math, looking at how many hospital system approvals we have, how many pieces that SEK 35 million would correspond to, and someone can conclude that we have maybe taken between 1% and 2% in the market. I think there's plenty of room for penetrating the market, both those 50 where we have the approval, which is, by the way, a number which is constantly increasing even as we speak today, and then also to expand that further.
As an indication, CERAMENT BVF, that has been available since 2019 under our own direct control. We have about 247 hospital system approvals. That gives you a good flavor.
Perfect. Thank you. And then for the label extension into trauma, given that you can now do the 510(k), you know, normal pathway instead of the normal extension, you get a shorter review time. Does this decision from the FDA also signal some sort of change to likelihood of approval in your view?
Well, it doesn't. It shows that FDA clearly see that CERAMENT G in the first instance of approval for the bone infection has provided a very strong set of documentations so that we now can use the extended label application with predicate device to the CERAMENT G that is now on the market. We use ourselves as predicate device. That, I think that's a strength, and it shows the solidity of the data that we already have provided. Theoretically, yes, it would mean a slightly faster and a slightly more straightforward process with 510(k) versus the normal. The unfortunate thing with FDA is that it, as we've seen, it depends very much on their workload and who is actually in charge of driving it within the organization.
Theoretically, you're correct. That, that's also how FDA themselves describe it. 510(k) is the slightly less complex process of the three that are available for this kind of product.
Perfect. Would you say that it also kind of implies that you can get, basically all label extensions that you're gonna do through the, you know, easier 510(k) with 90 days review?
I have not made that conclusion, but I see, I hear your point and I understand why you think that's fair, a fair assumption.
Okay. Then lastly, can you give any information on the timing of the submission? You know, is it early or late Q3?
It depends. You know, you know my team already. I mean, you know, I have, you know, some, I would say some of the best people in the entire industry working on this. It's not just up to us. There's the data that has to be collected, just as when we got the first approval, is collected externally. We're working with several different partners and have to dig through quite extensive loads of patient material. If it will be one month earlier or one week later, back and forth, it totally depends on how we can extract this data. For now, I know it's not fully satisfying, but for now, I prefer to say that it will be in quarter three.
As we come closer, I will give more details on exactly when we expect that submission to leave the office in Lund and show up at the FDA.
Okay, perfect. That's all I have. Thank you very much, Emil and Håkan. Also, I guess, congratulations are in place.
Thank you.
As a reminder, if you wish to ask a question, please dial star five on your telephone keypad. There are no more questions at this time, I hand the conference back to the speakers for any closing comments.
Very good. Well, thank you. Well, we don't have much more that we would like to add. We believe that we have delivered a very strong quarterly result. It shows an accelerated sales growth, it shows that BONESUPPORT is in early stage of a very exciting journey ahead. I would like to thank everyone for taking the time to come to this presentation call. I know it's a busy reporting season. Thanks, everyone, and take care and have a good day.