Earnings Call: Q4 2020

Feb 17, 2021

Yes. Thank you very much, operator, and welcome, everyone, to Bone Support's Quarter 4 2020 Result Call. So this morning, we will take about 20 minutes to run through the presentation of the 4th quarter results and then we will open the line for Question and Answers. On Slide 2 of this presentation, you will see the regular forward looking statements potentially that could be made today. And we go to Slide 3 and start the presentation. So I would like to start first to give a few highlights from the report that we released this morning. The overall quarter 4 sales were SEK 53,000,000, which is up 15% year over year. EBIT was significantly improved over the last year as sales grew and expenses were reduced. A few important business operation topics to mention. We saw a strong influence from the 2nd pandemic wave with the rising infection incidents from the end of November. However, despite the disruption from the pandemic, we opened up a new market with high prevalence of bone infections, that is South Africa. A large focus has been placed on preparing the organization and the distributor representatives in the U. S. For the potential approval in quarter 1, 2021 of Ceramant G and the sequentially following launch. All in all, despite challenging times, we are seeing strong progress in several areas, providing confirmation on our business model and our strategy. I will come back to each of the points relevant for quarter 4. And in this presentation, I will start by covering the impact of the pandemic. If we go to Slide 4, please. So as you well know, the pandemic has had hospital redistributed resources and many elective surgeries have also been deferred to a later date. Furthermore, orthopedic surgery capacity within the hospitals during these times has been limited by implementation of strict corona safety protocols. In the quarter, we saw a sharp rise in infection incidents moving into December, halting and actually even reversing the gradual return of elective surgeries that we saw in the early part of quarter 4. In several countries and regions, there has been a reintroduction and reimposing of restrictions, which has reduced the physical and on-site interactions between potential customers and our company representatives, leading to a slowdown in the recruitment rate of new customers. As a consequence, parts of the sales Team in Continental Europe are again placed on part time work. We have, however, fared better than the orthopedic overall market, which in 2020 was estimated to have declined with 10%. Looking at the regions where Bone Support is present, meaning the U. S. And the 5 biggest market in Europe, the market downturn was at a combined minus 12% to minus 13%. Thus, we are outpacing developed the total market development. And I'm pleased that Ceramint, despite challenging time, continued to take market share from other treatment options. The disruption caused by the pandemic has moved the finalization of the Solario study to quarter 1 2023 and the Dutch registry study is currently on hold. I would like to reiterate that COVID-nineteen has no impact on the underlying need for Ceramant nor influence on the need to treat skeletal injuries. The accumulation and backlog of orthopedic surgeries is estimated to take some 1 to 3 years to clear depending on geography. Looking ahead, we see that there will be a material impact from the pandemic in the first half of twenty twenty one and we anticipate gradual improvement during quarter 2 this year until full normalization in the second half of the year is achieved. We'll go to Slide 5, please. So next, I will guide you through the development of our last 12 month sales performance per quarter. So as you know, the slide shows sales in the last 12 months with the red and orange part of the bar representing Europe and the blue part of the bar display is the U. S. I believe that this graph is pretty straightforward. It's displaying the trending that we have seen over time in reportable. We see a new all time high in quarter 4 2020, even though this year turned out very differently than we had originally anticipated. The split between Ceramant G and V, meaning the antibiotic eluting product, and Ceramant Bone Void Failure in Europe and the rest of the world gives a strong indication on the potential for antibiotic eluting products in the U. S. Once we have that approval. When we present the quarter 2 2021 results, I hope that I will have the chance to add one more color on top of the U. S. Blue bar representing the sales launch of Cerner G. Let me cover some details on North America on the next Slide 6, please. So in the quarter, sales was close to SEK 29,000,000, ZEC, which is up 23% year over year. We saw a sharp production of surgeries as infection incidents rose at the end of November. The largest regional impact was in the Southwest states such as Texas, Arizona and also in Southern California. We also saw a big impact in the Northeast states Those are regions where Ceramint has a good and strong previous representation. Despite the pandemic, we saw continued progress yet at a much lower pace with new customers' recruitment mainly under the GPO contract that we have previously been awarded. In April, we submitted a de novo application for Ceram and G in osteomy light, it's also known as bone infections. And we have had a continuous dialogue with FDA, and we replied to the agency's questions in mid December of last year. We also submitted a substantial amount of documentation, and we are now awaiting a notification by the end of February or latest beginning of March on our registration approval. We have put significant efforts into the preparations for a potential launch of 7 gs in early 2021, focus efforts have been targeted on market access to ensure proper price levels, coding of the product and reimbursement. The sales teams have been trained in a series of mandatory digital education sessions as well as developed individual customer launch plans. We have also structured our relationships with key opinion leaders and advisory boards with clinicians actively working with patients in care of bone infections. We will submit an application for additional broader indications such as trauma at a later stage. That application will be based on the FORTY 5 study, which is proceeding according to plan with patients follow-up running up until July 2021. On the next slide, you will see the 2 pathways that include the milestones of bringing Ceramici to the U. S. And I think this is well depicted with the de novo and for the Fortify based PMA process. As you can see on this slide, We are basically expecting an answer from FDA within the next 2 weeks. As soon as this happens, we will get back to all of you with more information. Below the arrow on this slide, you will see the milestones for Fortify and also the preparations that are being done for a wider span of indications. This work continues as planned without any disruption from COVID. Go to Slide 8, please. Let me cover some details regarding the segment, Europe and Rest of the World. We had also here a strong start to the quarter, but that reversed towards the end of the quarter as the impact from COVID-nineteen accelerated. All in all, sales were just short of SEK 25,000,000 at a growth rate of 24% quarter over quarter and 7% year over year. Some of the highlights of the quarter were that we entered the Republic of South Africa with a very well qualified appointed distributor. The first surgeries in South Africa have already taken place at some of the university hospitals. We also saw several repeat orders with orthopedic clinics in Australia. Our partner in Australia has introduced settlements to a few clinics and the fact that surgeons are using the products with patients successfully and have ordered even more products is for us a very good sign. Eventually, the COVID-nineteen pandemic will reside and we will resume our quest to transform the standard of care for treating bone injuries. As previously announced, we are convinced that we can combine the best of 2 business models and create a hybrid structure in Spain and Italy to accelerate sales penetration in these important markets. This setup is expected to be implemented in quarter 2 2021. So with that brief update, I will hand over to Jorgen to cover the financial overview. Thank you, Emil. So let us go to Slide 10. This is a graph that presents net sales by quarter as VARs and last 12 months sales as a line. Net sales in the 4th quarter amounted to NOK 53,200,000 compared with NOK 46,200,000 in the same period previous year, equaling a growth of 15%. The 4th quarter continued to report recovery from the COVID-nineteen pandemic even if a certain slowdown was noted at the end of the period. This quarter reported an 11% growth compared with the 3rd quarter, involving a 24% growth in the segment Europe and Rest of the World. Net sales for the last 12 months amounted to $181,000,000 compared to $155,000,000 last year, an increase of 16% despite the impact of the pandemic. The segment North America increased last 12 months sales with 46% and the segment Europe and Rest of the World reported a minor drop in last 12 months sales with 7%. Next slide please. In the segment North America, sales for the period amounted to $28,600,000 compared with $23,300,000 previous year, a growth of 23%. The new distribution structure has resulted in improved geographical coverage and allows for a broader market penetration of different indications. The continuously strengthened customer base together with the larger GPO contracts that were signed during previous years contribute to the sales increase. The contribution from the segment was plus $100,000 compared to a minus of $9,300,000 last year. The improved contribution is due to increased sales, improving gross profit with NOK 5,400,000 as well as lower costs. Sales and marketing expenses during the quarter amounted to CHF 21,500,000 compared with CHF 25,700,000 last year or which sales commission to distributors increased from CHF 8,000,000 to €8,400,000 following the sales growth. Sales for the Europe and rest of the world increased with 7% compared to previous year and amounted to CHF 24,500,000 compared to CHF 22,900,000 previous year. The segment showed continued recovery from the COVID-nineteen pandemic in the quarter reporting a 24% sales growth compared with the Q3 this year. Sales in key markets accounted for 86% of the CEMIN sales and sales of the antibiotic Antibiotic eluting product, Cerment G and Cerment B followed the safe development in the segment and grew by 5%. The contribution from the segment was $5,600,000 compared to minus $500,000 previous year. The increased contribution is explained by higher sales and lower costs. Sales and marketing expenses decreased by CHF4.3 million and amounted to CHF15 million compared to CHF19.3 million previous year. The decrease is partly due to a transition to cost effective meetings on digital platforms as a direct effect of the pandemic and the restrictions on physical meetings that have been applied. Next slide please. Sales in the 3rd quarter reported a growth of 15% and has already been well covered during this presentation. Increased sales in the U. S. Had a positive impact on the gross margin reaching 89.8% compared to 88.9% previous here. The minor drop from the high gross margin level in the Q3 this year is explained by the market mix and the higher ratio of sales in the segment Europe and Rest of World. Operating loss in the quarter improved by $11,900,000 to minus 20 CHF 6,700,000 compared to a loss of CHF 38,600,000 previous year. The reduced loss is explained by higher sales and lower costs. The 4th quarter ended with a net cash balance of $354,000,000 and we remain well funded to execute our strategy after the new share issue conducted in the Q2 of 2020, which brought the company NOK362,000,000 after issue costs. Next slide please. Total expenses In the last quarter, we're down $8,000,000 compared with the same period last year despite an increase in sales commission of $400,000 The reduction in selling expenses was driven by lower travel costs as well as by canceled congresses and meetings as a direct effect of the pandemic. Research and development expenses picked up after reported low expenses earlier in the year as the pace of implementation in ongoing This was temporarily affected by the pandemic. And with this, I hand over back to you, Lemen. Thank you, Hakan. If we go to Slide 15, I will sum up this presentation a bit. So all in all, I must say, I'm very pleased with how strong progress has been made during the year by the pandemic disruption. We have been following our strategic plan, but we have adapted to the situation and circumstances present. Both the quarter and the full year showed strong progress and further confirmed the strength of our implemented strategy. We are hopeful to, within short, receive a notification on the de novo application for Ceram and G on the U. S. Market. The bone infection market in the U. S. Is currently worth US100 $1,000,000 In our view, we are supported by strong clinical studies. Ceramant G offers a more modern and effective way of addressing these Difficult Conditions. Upon approval, Ceramant G will be the first of its kind on the very much underserved U. S. Market. Atherment, as you know, has strong clinical studies providing the data on improved patient outcome. And many of these are from prestigious European University Hospitals and Clinics. But during 2021, we will have Level 1 clinical data in direct head to head comparison with standard of care on trauma patients from prominent U. S. Centers by the FORTYFI study. We believe that this will further fuel the ability on market penetration. Our geographic market expansion is gradual and very focused with the repatriation of Netherlands market entry in Australia and South Africa and even more so, the solidification of commercial platform and foundation in the U. S. In Europe, we feel that we're in a strong position to leverage our business model and enter a phase of strong sales acceleration. We are, as everyone else, eager to see the distribution of vaccines and the development of herd immunity to allow the business progress to go beyond the current limitations of the pandemic. Our confidence in our corporate target of an annual growth of 40% remains very high. And the Final slide of my presentation, which is Slide 16, is a time line with the pivotal milestones mentioned in today's call. And that concludes our presentation of quarter 4. And I would like to open for the forum for questions. Thank And we have a couple of questions in the queue so far. The first is from Richard Anderkans of ABG Sundal Collier. Please go ahead. Your line is open. Good morning and thank you for taking my questions. So first one here at Cermans G, the potential launch in the U. S. Do you expect a rather rapid cannibalization of serum and BVF sales? Or do you still expect The growth in the BBS segment, it will be interesting to hear on the dynamics you expect for in terms of the Competing situation with BBS, if you will. Yes. Absolutely. Well, thank you, Rickard. Appreciate your presence here and the question. There will naturally be some cannibalization, most likely because some of the sales in the U. S. Are most likely used already in combination with different antibiotics. Exactly the size of that business is difficult to say if I would give a guess an estimate, even though I don't have any data on this, I would say, maybe between 10% 20%. Other than that, I do not expect much cannibalization. If we look at the BVF sales in Europe, When the antibiotic products were launched, they seem to have attracted more or less all new customers. But The BVS sales remain quite constant over the years and even grew with a CAGR of 9%. And given that the patients and bone infections have similar anatomy in the U. S, I Could also anticipate that we have the similar development there. Great. That's very helpful. And given that we Should expect a higher price point for CermG going forward versus the BVS in the U. S. Do you expect any Pushback in terms of pricing because obviously, you do have sort of a premium pricing strategy. And if you expect to push back, how do you mitigate that? Yes. Thank you. To the first question, I do not anticipate pushback on the price. The current alternatives are quite old fashioned used in the U. S. Market, The biggest or most chosen treatment option is PMMA beads, which drives the clinic to multiple surgeries. And I think we already know from conversations with U. S. Advisory boards that it will be a great benefit with Saramant that they can have a one stage procedure. So despite the fact that the price could be seen as a premium. There is a financial incentive anyhow for using a product which is more modern and more efficient. Sure. Makes sense. And do you believe That a potential positive readout from the FORTIFY study could have a positive impact on the global sales of Ceramenta. Are there any surgeons sort of Waiting to see the readouts from that study before getting more confident in the product. I really think so, because we know that orthopedic surgeons are quite a conservative cluster. And the FORTIFY study will be the 1st ever level 1 randomized clinical trial similar to heavyweight pharma study to compare Ceramant with the standard of care, mostly in American centers, but also in European centers. So a positive readout, I think, will work as a very strong encouragement for those surgeons maybe within trauma that have not yet considered Ceramant to make that switch. Great. And thanks a lot. And the final one on South Africa. It is a large market opportunity in terms of Population, but with its 2 tier health care system with a smaller sort of high quality private sector. Can you comment on how we should think about the addressable market for Ceramint there? And I guess also approval is already in place. Yes, approval is in place. The product has already been used in a few cases and those cases have gone very well. You're absolutely right that I mean, it's a country of about 60,000,000 people. But there's The big differences in income levels between different groups and also in terms of healthcare coverage. So we look at the part of the market, which has The standards and affordability for this kind of products and we estimate that the market there currently addressable market is just south of US10 $1,000,000 But this is a rapidly increasing market and there's a very high prevalence of bone infections. So we believe that this could be a developing market where there are a lot of synergies and similarities to the other Commonwealth markets that we have entered recently. Great. Thanks a lot, Emil. That's all from my side. Thanks Again, and congrats to the strong results. Thank you, Richard. Thank you. Our next question comes from the line of Three questions from me. First, in Europe and the comment you made that sales slowed in December, is it possible to Describe a little bit how bad it was in December versus earlier in the quarter and also what you have seen so far in the Q1. I also wonder about Europe, which were despite this, better than what I expected. Were there any launch orders, for example, in South Africa here To the distributor initially. So that's the first question. Then the U. S, I think you have done very well considering the situation. But at the same time, I believe you have benefited from Adding a lot of customers before the pandemic started, and I guess it has been more difficult to add additional clients The last year now, do you think that's something that's going to impact the continued sales criteria in the first half before Saramajee hopefully picks up. And then coming back to the question previously on the FORTIPHY study, How do you view the risks around that, Stade? I remember that it's rather high bars to reach all the primary endpoints. And do you still think it's important to reach all of them when you hope when they already have the product approved for bone infection in the U. S? That's all for me. Thanks. Okay. Well, thank you very much, Christophe. Thanks for being part of the call today. It's difficult to comment on the first question exactly what kind of impact we had, but I will give you and the others this information that The 2nd wave of the pandemic was much stronger and had as big of an impact as the impact seen in 2020 during the March April month. And I think we can all see The available data that the 2nd wave picked up significantly in pace at the last week of November and it continues well into 2021. And as I said, the impact was the same as what we saw during the worst period in the spring. The Have you seen the market starting to come back again as things are improving a bit in Europe? We're being tossed back and forth. And while we might see A little bit of hiccup in England, for example, where there's been a very high degree of vaccination taking place. We still see that big markets such as Germany is equally sluggish. Okay. There were no major orders in quarter 4 that inflated the results. But you're right, Christophe, there were a few clinics that What has happened during the pandemic is that more and more private clinics have tried to take patients away from the government based health care system. And these private clinics tried to get a few patients out of the line before there would be a new calendar year and new insurance policies. So that probably supported sales a little bit in Europe despite the grim circumstances. There was one more question. Did I miss that? U. S. Yes, not U. S. You as a customer recruitment and Right, right. You're absolutely right. Yes. No, your statement is absolutely So for the we have seen a strong quarter 3 and also strong quarter 4 based on accounts that were won before the pandemic and also a few months into the pandemic. And since then, the new customer recruitment has dropped significantly. And this is likely to have an impact in quarter 1 until the pandemic resides to the extent that we can get that machinery started again. When it comes to 45, what is the risk? Very good question indeed. The 4 to 5 basically mimics the ongoing business that we have in Europe but placing it under the architecture of the study. So we have a strong confidence, of course, because we see that Clinicians all over Europe are having superior results with Cerner and it's also proven in specific European studies. The Study is of such size that we will be able to read the different effect parameters individually and not only as a bundle. And I think this answers specifically your question. It's a very tight It's a tight definition of success for the study with all three parameters, but They can be read also individually and provide significant data. So you think it's Going to be possible maybe to get this product approval for this indication without succeeding in all three endpoints? Yes, I think that could be possible, especially if the Novo has been positively approved. I think so. Okay. That's great. Thank you. Thank you. We have one further question queue in the queue at this time. The next question comes from the line of Steen Westerberg of analyst guidance. Please go ahead. Your line is open. Thank you very much for taking my question. If you just could remind me of your claims behind the de novo application. Since there are other alternatives for the infected treatment in surgical procedures, both on and off label. Could you please wrap up Your arguments for the Novo claim? Absolutely. So there's a lot of different options to treat bone infections. What we are stating clearly is that none is as effective as CERNM and G, when it comes to preventing reinfections. The most common used Method right now in the U. S. Is cement, bone cement beads that are attached to a string and then covered in antibiotics. But this cannot stay in the body, so it has to be removed, which requires one more surgery. Reinfection rate varies very much depending on the indication of the patient. But and made the analysis an aggregate of a lot of different studies, most of them done in the late '90s because there hasn't been much study since, show a recurrence rate up to 36%. So we believe that 7 gs, of course, will have the benefit of a one stage procedure And the well documented clinical data on CEMNG shows an infection reinfection rate of rather 4%, which will be then a remarkable improvement. But there are also other options, of course. Systemic antibiotics is used to a large extent and also autograft and allograft mixed with local antibiotics. But all the Current treatment options local antibiotics has the disadvantage that the antibiotic level concentration goes quickly below the minimum concentration levels needed to fight these pathogens. So yes, there are options. We call the U. S. Market significantly underserved because Many of the methods used are developed 10, 15, 20 years ago. Okay. Thank you. That's very helpful. One last question. What about These two components in your R and D investment, I guess, it is overwhelmingly dominated by development costs. But as for your research programs, any new ideas about bringing them into clinics? Yes. No, the R and D cost we have is a mix, of course, of some of the heavyweight clinical studies that we're running. And they're a mix of internal staff and external. And the rest of that is the development work where primarily we're pursuing the combination of Ceramant with bone active substances, bisphosphonate, which could potentially be turned into a product that will address osteoporotic fractures. We have no update as to when this would move into the next stage. We communicate the infection incident in Netherlands was dramatic at the end of November, but has, as many other European countries, reduced significantly from the middle of January. I am confident that we will see the pandemic reside and that we can give also more specific data on how Netherlands is then developing sales wise, maybe when we come to quarter 2. Well, the hybrid structure is basically Both Spain and Italy are very big orthopedic markets. And we believe that it would be taking a lot of our efforts if you would go direct in these. We are very happy with the distributors we have. They can take care of all the logistical work and they can also cover the entire country with a portfolio of product that is not competing with Ceramant. So the salespeople by the distributor there. They have metal products for fixation of fractures, for example. But we do believe that with 2 specialists, medical specialists in each market, we can further build the strong relationship with university in a very competent way. And we can also constantly coach and work with the distributor sales reps so that we have a model similar to being direct, but we have the advantages of distributor support. So we believe it's worth that investment to further accelerate sales penetration in these markets. And we have clearly seen what a strong effect that can have in UK, Denmark, Sweden, hopefully Netherlands and Germany. So we'll try to combine the best of 2 worlds and have these people in place early quarter 2 to be fully up and running in the beginning of quarter 3. Okay. Thank you. And I think I have a short follow-up question. You decided on Italy and Spain. And I was just wondering why, for example, France didn't fall into that category. Yes, good question, Oscar, of course. I believe the French market on Orthopaedics is incredibly interesting. And Let's say that we run Itlins Spain as a pilot of a hybrid structure, I think similar to what Cellavision, for example, has used back in the day. If successful, we're definitely open to implement it in other countries. In France, We are also waiting for the results of the CONDICT study to show this is a study with the Cryoact network showing the efficacy of Ceramint. And once that comes, That also gives opportunities for an even stronger reimbursement. And that time could maybe then be the right for a similar model. Okay. And then is my last question. Some of the costs are now lowered because of the So meetings that you have, is there some trend that you think you will keep to any degree even after corona? Or are you eager to get back to fiscal meetings? We are incredibly eager to get back to physical meetings. We believe that nothing beats the human interactions and really explaining the product. Orthopedic surgery is very Mechanic is tactile and showing how to apply the product, different techniques, different variants gives an unbeatable experience to the orthopedic surgeons and a confidence in using the product. So cost has been suppressed and forced to be suppressed by the pandemic. But we have no ambition to try to save ourselves through this. We are full speed ahead. Perfect. Good to hear. Well, thank you for asking my questions. And once again, very good report in my view. Okay. There seems to be no further questions coming through at this time. So I'll hand back to our speakers for the closing comments. Thank Well, I would like to thank everyone for taking time out of your busy schedules to participate in our Quarter 4 result call. I believe, in summary, that we have done very well during Q4 and also during the fall of last year under very difficult circumstances. I appreciate all of you following our journey, which I believe will be very successful. And the message to all of you is that spring is coming. Thank you so much.