Welcome to BONESUPPORT Q2 Report 2019. Throughout the call, all participants will be in a listen-only mode, and afterward, there will be a question-and-answer session. Just to remind you, this conference call is being recorded. Today, I'm pleased to present CEO, Emil Billbäck, and CFO, Håkan Johansson. I'll now hand the word over to Emil Billbäck. Please go ahead with your meeting.
Thank you very much, operator, welcome everyone to BONESUPPORT's Q2 2019 result call. My name is Emil Billbäck. I'm the CEO of BONESUPPORT, sitting next to me today is Håkan Johansson, our CFO. This morning will take about 20 minutes to run through the presentation of the second quarter results then open up the line for question-and-answer session. I apologize to everyone that we're having our reporting in the middle of the Swedish vacation. Before starting the presentation, I would like to draw your attention to the disclaimers covering the forward-looking statements we'll make today. You will find those on page 2 in our presentation. If we can go to slide 3, please. I would like to begin this presentation with some highlights of the strong figures we released in this morning's report.
Overall, quarter two sales were at SEK 37.3 million, which is up 32% versus previous years. Sales-wise, this is the best quarter ever in BONESUPPORT's history, and I find this especially pleasing, given that it's only 8 months ago since we started implementing the new distribution model for the U.S. Overall, our performance in this quarter is a confirmation that the strategy that we launched in 2018 is taking the company in the right direction, and the results are now becoming visible in our performance. The segment Europe and rest of the world grew with 59%, reaching SEK 22.5 million. I think it's worth highlighting that this strong sales development has come from comparable markets. No new markets have been opened in the period to achieve this growth.
The strong growth continues to be driven by broader and more frequent use of CERAMENT G and CERAMENT V, mainly among the existing customer base. The antibiotic-eluting products grew with 64% in the quarter. In the segment North America, we also saw a strong continued progress, with sales reaching 14.8 million SEK. Our distribution setup in the U.S., which was initiated in October last year, enables us to address the entire market potential, and we can conclude that this strategy is working. In regards to operating results, the quarter was affected by an 11 million SEK provision position, which relates to product returns from Zimmer Biomet. Operationally, I would like to highlight that we have done some adjustments to our U.S. distribution network within the quarter, but despite the fine-tuning, sales in the U.S. rose both quarter-over-quarter and year-over-year.
We're seeing strong progress in our market access in the U.S., we have closed a number of GPO contracts, of which I especially would like to highlight the contract with Kaiser Permanente. This is one of the most well-renowned medical organizations in the U.S. In Europe, our sales organization has been fine-tuned during the quarter with some replacements as well as management changes. Sales growth has accelerated further compared to previous quarter. When it comes to our clinical development, we have decided to focus on CERAMENT plus bisphosphonate and CERAMENT plus DBM, as we think this will give the best leverage from CERAMENT's unique features. Last but not least, a study was published in the quarter in the Journal of Orthopaedics, showing impressive results for our antibiotic-eluting product, CERAMENT G, more on all of this will come later in the presentation. Go to slide 4.
Now, I would like to provide you with some more details on our quarterly sales development. This slide shows sales in the Last Twelve Months, with the dark blue part of the bar representing Europe and the light blue and also purple part of the bar displaying sales in the US. Excuse me, the purple part, visible in Q4 2018, Q1 2019, and Q2 2019, shows sales achieved in the new distribution set up in the US. All the LTM, Last Twelve Months, sales in Zimmer Biomet is now gone and replaced with growing sales with the new distribution setup.
The decline in the U.S. sales from quarter four of 2017 to quarter three 2018 can be attributed to Zimmer Biomet's internal struggle, certain inventory depletion, as well as the effect of our termination of the contract. This chart also confirms the steady growth in Europe and the rest of the world. To the left of the bar, you can see the buildup in momentum from 14% growth in the first half of 2018 to an impressive +59% growth in quarter two of 2019. This gives a good confirmation that the business is on the right track. Go to slide 5. Focusing a bit more on the details of segment Europe and rest of the world, I have already mentioned the strong momentum in the segments in total, and especially with the antibiotic-eluting products.
With a growing base of strong clinical data and the release of the top-line results from CERTiFy at the end of last year, we are experiencing strong and accelerating acceptance of CERAMENT in favor of other treatment modalities. Last year, we announced that we will close to double the sales team in Europe. During the second quarter, we still had some fine-tuning to do. We decided to separate from the Executive Vice President of Europe and rest of the world. We have also done replacing of staff in a few territories and recruited people to territories that previously were empty. Especially, we have filled now positions in Germany and in the U.K., which is our priority market.
I can say that now finally, we have closed all the vacancies in the sales team, and we have a strong sales coverage in all the important and previously under-penetrated areas. This is especially true for areas such as Berlin, and Saxony in Germany, as well as the Midlands in the UK. It is encouraging that the strong growth in the quarter was achieved even without being fully staffed. Recruitment has also been made to strengthen our regulatory department and enable us to eventually open up new markets. We'll go to slide 6, please. Turning to North America, sales in the quarter was SEK 14.8 million, which is up 28% sequentially. Sales continue to be made up of a good mix of new accounts and legacy accounts.
The average number of monthly orders has steadily increased during the year, as has the number of reordering accounts. Since October last year, the new distribution network is up and running, now with 40 distributors, which together deploy more than 500 sales reps. Distributors work on a commission basis. Our best distributors are making great progress with CERAMENT. In order to get the best possible leverage out of the network, we place great emphasis on education, often through webinars and follow-up on distribution, as well as sharing systems. In the quarter, we have done some fine-tuning to the distribution network. We have replaced a handful of less successful distributors, and it's very positive to see how fast our organization has acted when distributors have not delivered according to plan. Out of the 40 distributors, 6 have in total been replaced.
I would say from previous experience, I dare to state that it takes about 10-12 months before a new distribution structure has completely settled, and we will continuously adapt our network in the U.S. Our commercial team is making great progress on market access, and in the quarter, we closed a number of important GPO contracts. In this context, I would like to highlight Kaiser Permanente, which is one of the most well-renowned medical organizations in the U.S. The contract gives us further access to almost 700 hospitals, 40 medical centers, and 23,000 physicians. The signing of further GPO contract is an important part of our future growth and should have a significant impact on sales in 2020. Please go to slide number 7.
At previous calls and at previous presentations, I have mentioned that we would come back with a firmly view on where our focus will be in regards to R&D efforts. Our clinical development focuses on further developing CERAMENT's properties, broadening clinical application areas, and utilizing CERAMENT's unique drug-releasing properties through the development of combination products that promote bone healing. In the quarter, we have made a careful evaluation of market potential, clinical benefits, therapeutic innovation, and preclinical results when deciding on where to put our focus of R&D resources and efforts. After this careful evaluation, we have decided to prioritize CERAMENT plus bisphosphonate and CERAMENT plus DBM. DBM is demineralized bone matrix. Bisphosphonate is a very well-established substance in the treatment of osteoporosis, as it's improved bone and regeneration, as well as bone density.
CERAMENT plus bisphosphonate has the potential to add an important therapeutic dimension in the treatment of low-healing bone defects and fractures induced by low bone density. Demineralized bone matrix, DBM, is based on allograft, and it's allograft that has been reduced on minerals, and the material is often used in cases where weak natural regrowth of bone is present, so as an example, following an injury or a trauma. The total market for DBM is about $250 million, of which the United States represents $180 million. The combination of CERAMENT and DBM gives rise to a product with both osteoconductive and osteoinductive properties, which is suitable, especially in the trauma segment, which is one of our focus areas.... We have previously announced research done on CERAMENT plus BMP, and BMP stands for bone morphogenetic proteins.
This combination product will still be available for partnering, but we are not prioritizing this candidate with current resources at the moment. Let's go to slide 8, please. As I have said on many previous occasions, strong clinical evidence and health economic data are cornerstones of our strategy. In this quarter, a new study was published in the Journal of Orthopaedics, showing significant outcome improvements with CERAMENT G. This study is a prospective study on 51 patients with Type IIIB open tibia fractures. Type IIIB means that this is an open fracture with extensive injuries to skin and to muscles and visible bone. These fractures are associated with massive contamination, and infection rates have been reported in several newer publications to be up to 52%. Amputation rate for these kind of injuries has been reported to be up to 16%.
Open fractures of the tibia are the most common open long bone fractures reported in the literature, and these are usually caused by road traffic accidents. All patients in this study was followed up until the fracture union and wound healing had been completed, and the mean follow-up time was almost 14 months. The impressive results from this study showed a deep infection rate of 0%, which in turn means that these patients had a significantly lower reoperation rate. There was only 1 amputation in this group, meaning a limb salvage rate of 98.1%. The authors conclude that CERAMENT G provides high local antibiotic concentration at the fracture site, which could be beneficial in local prophylaxis to reduce the risk of biofilm formation on metalwork, while the hydroxyapatite of the product and the scaffold that it creates could improve union rates.
This will lead to improved outcome and to reduced healthcare costs. Studies like this equip our sales team with yet another unique set of arguments for promoting CERAMENT. That concludes my introduction, and with this brief update, I would like to hand over to Håkan, who will cover the financial overview.
Thank you, Emil. Let us move to slide 10, please. This is a graph presenting net sales by quarter as well as our 12-month net sales line. Net sales amounted to SEK 37.3 million, compared to SEK 28.2 million for the same period last year. This is an increase of 32% compared with the previous year. The quarter was our best ever in terms of sales. Net sales for the last 12 months amounted to SEK 108 million, compared to SEK 190 million last year. It's a decrease of 10%, at the same time, an increase of 9% from the first quarter this year. Segment Europe and rest of world increased last 12-month revenue with 40%, and net sales in the segment North America decreased with 50%.
This being an effect of very low sales in the fourth quarter of 2018, as impacted by the terminated distribution contract with Zimmer Biomet. Next slide, please. Sales for the period in North America reported an increase of 6% compared with the corresponding period last year, and a continued sequential increase of 28% from the previous quarter, from SEK 11.5 million in the first quarter to SEK 14.8 million this quarter. The distribution rights for the former distributor, Zimmer Biomet, ceased on May 23, and BONESUPPORT's own organization in the U.S. is working to accelerate market penetration and enter into agreements that give contracted hospitals access to CERAMENT. The contribution in the segment was minus SEK 23.4 million, compared to SEK 5.9 million last year.
The increase in loss is mainly attributed to the provision made for the product return from Zimmer Biomet. Also an effect of ongoing commercial investments, with sales and marketing expenses increased to SEK 29.8 million, compared to SEK 10.1 million last year. This related to the expansion of the organization in the US. Next slide, please. Sales in Europe and rest of world increased by 59% compared with the corresponding period last year. Amounted to SEK 22.5 million, with SEK 14.2 million last year. Sales in our direct key markets accounted for 84.7% of the segment's sales and reported an increase of 60%. Sales of CERAMENT G and CERAMENT V, our antibiotic eluting product, increased by 64% compared to the second quarter last year.
The contribution from the segment was SEK 3.8 million, compared to a loss of SEK 1 million second quarter last year. The improved contribution has been achieved in spite of increased commercial investment and is the result of increased sales and gross profits. Sales and marketing expenses increased with SEK 2.1 million to SEK 15.1 million, compared with the corresponding period last year, and mainly being an effect of new recruits made to the sales organization in our key markets. Next slide, please. Net sales with the strong growth in Europe and rest of world, as well as the gradual recovery in the US, is reaching the highest level in 6-quarter net sales and reached an all-time high in this quarter, second quarter this year.
Gross margin continued to show recovery with favorable effects from product mix and the strong growth in the antibiotic eluting product, CERAMENT G and CERAMENT V, as well as the gradual U.S. recovery. Operating profit in the second quarter amounted to SEK 47.8 million in loss, compared to SEK 37.8 million last year, where the increased loss was mainly due to the reported provision of SEK 11 million for the product returns from the previous U.S. distributor, Zimmer Biomet. BONESUPPORT remains funded to realize its commercial strategy and to reach profitability and positive cash flow. Next slide, please. Total expenses in the last quarter is up with SEK 15 million compared to the same period last year, of which SEK 11 million relates to the product returns from Zimmer Biomet.
Selling expenses and commercial investments, less the provision for the product returns, are up with SEK 10 million. Our research and development is remaining on a stable level, ensuring continued support in line with our commercial strategy, and administrative expenses is stabilizing on a lower level for the last 3 quarters, and cost-saving programs have enabled savings, such as lower spend on consultancies, worthwhile mentioning. With this, I hand back to Emil.
Thank you, Håkan. We should be then on slide 16 to start the wrap up of this presentation. Since the beginning of last year, we have undertaken several important strategic initiatives to enable an accelerated market penetration of our product, both in the U.S. and in Europe. Above all, our new strategy has driven commercial discipline as well as commercial decisiveness. The results are now showing. For the rest of the year, we continue to expect an increasing trend sequentially in both Europe and in the U.S., which will lead to a significant uplift in sales in 2019 versus 2018. This growth is built on several factors. With the new U.S. commercial platform, we're able to pursue the full potential of CERAMENT.
Our market access is improving every day. Our monthly sales numbers are pointing in the right direction. In Europe, our expanded sales organization will continue to grow sales by a combination of better geographic reach and increased penetration of important indications markets such as trauma. With the new salespeople coming on board, we expect to increase the rate of new customers towards the end of the year. With strong clinical evidence, we believe that we have the key to transform the treatment standard for the 650,000 procedures every year that is addressing insufficient bone healing. The clinical evidence base that we are building supports our quest and paves also the way for further market penetration.
In the quarter, or in the quarter three, we which we're in now, we expect the publication of the CERTiFy study to come, which will show that CERAMENT BVF is as good as autograft. The top-line result of this study was released only end of last year. In our mission to transform the treatment standard, our antibiotic-eluting products play a key role, and we have increased the growth rate continuously, reaching an impressive 64% in this latest quarter. All in all, I believe that we're well positioned to have a strong 2019. Beyond that, we have high confidence in our corporate target of an annual growth of 40%. We are funded to reach profitability. I'm confident that we can deliver significant shareholder value on the journey ahead.
On my final slide, you can, which is number 17, you can see the calendar of value-generating milestones, many of which I have mentioned today in the presentation. With that, I conclude my presentation and would like to open the line for questions.
Thank you. If you would like to ask a question, please press 01 on your telephone keypad. If you wish to withdraw a question, you may do so by pressing 02 to cancel. Our first question is from Kristofer Liljeberg from Carnegie. Please go ahead. Your line is open.
Yes, thank you. I have two questions. The first one is on the U.S. sales and the sequential improvement which we could expect here. We saw a little bit of slowdown in the second quarter versus the first quarter, of course, coming from very low levels. Should we expect accelerating sequential growth in the U.S. now in the coming quarters? If so, what will drive that? My second question relates to cost and how we should think about them going forward. They have been quite stable now in the last three quarters, which is positive. I could believe also with more efforts to drive sales, that we should maybe expect operating costs increase a little bit going forward. Thanks.
Okay. Thank you very much, Kristofer. Thank you for your questions. When it comes to the U.S. sales, we had in the quarter some changes in the distribution setup. My experience having done this exercise a few times in the U.S., is that over a period of 12 months, you have to evaluate distributors, and some of them need more training, some of them get replaced, and we replaced 6 of them that we were not happy with. This, of course, causes a little bit of disruption. We don't give specific guidance in what to expect for the quarters to come.
We can only say that the sales development that we had in Q2 was perfectly in line with our expectations, that, if we look also historically, quarter by quarter, there is a little bit of movement, usually where Q1 and Q4 are stronger than Q2 and Q3. I don't think you should interpret Q2 specifically as a slowdown. There was a question on cost, and I think I'll let Håkan comment on that, what we can expect going forward.
Thank you. I will do that. As noted, looking at the quarterly development, the last three quarters has been stable. Saying that, we mentioned that in terms of sales and marketing, we do have a few vacancies in the period, and we will also see a cost development following increased U.S. sales, as we also have commissions that will impact going forward.
When it comes to the, to the other lines, R&D cost, with the FORTIFY study now well underway, could we expect R&D costs to be stable and also administrative costs, are they also going to be rather stable there in the next one, two years? Thanks.
I would say that again, some of the last three quarters give you quite a good guidance on expected levels.
Okay, very good. Thank you.
Thank you, Kristofer.
Just as a reminder, if you would like to ask a question, please press zero-one. Our next question is from Niklas Elmhammer, from Carlsquare. Please go ahead. Your line is open.
Hello, thank you for taking my question. One follow-up regarding the U.S. Maybe you could give us some idea if there were any, did you record any sales under the GPO contracts so far? Regarding GPO contracting, you have already made contracts with some good names. How important is it going forward to get the really big organizations, i.e., the HealthTrusts and so on board to support the sales growth you're aiming for? Thank you.
Yep. Yeah, thank you, Niklas. Your question relates to the GPO contracts, and first, how much of our sales is coming from GPO contracts. Where I have been positively surprised and impressed by our U.S. team is the ability for how they have secured GPO contracts. That has gone a little bit better than I anticipated, I must say. We don't release data exactly how our sales is split between old or new accounts or GPOs and standalone. What I would say is that traditionally, in general, you can say that about 70% of the U.S. market for this type of product is controlled by GPOs. This shows me the importance of securing these contracts.
I think if you use a 70-30 rule, that's not too far off also on what to expect to say in cement sales. We are working also with trying to secure the ones you mentioned, like HealthTrust. The HealthTrust, of course, is the absolute biggest of the GPO, the most prestigious. If you look at the track record we have so far with Ascension and with Kaiser Permanente most recently, I think there is good indication that we are on a very good way to secure a stronger GPO position than we even had under the custodian of Zimmer Biomet. This is one of the benefits we mentioned of going indirect, and it seems to be playing out very nicely.
Okay, that sounds encouraging. Just to be clear, have you recorded some sales already under the GPO contracts? Maybe because you signed them, the Ascension, in during the spring. I guess maybe you would not expect any sales from that channel already.
Right. Usually, signing a GPO contract, getting the first sale takes somewhere between 3 to 5 months. To get sales before, say, 3 months is very unusual and happens only in rare circumstances. We signed, we mentioned only the big contract that we win. There's also a smaller contract that we win, which we don't announce to the market because we think it's part of regular business. I can confirm that, yes, indeed, we have quite some sales with GPO contracts that we signed end of last year and beginning of this year.
Okay. Thanks so much.
Thank you.
Our next question is from Ailsa Craig, from Edison. Please go ahead. Your line is open.
Hi, Emil and Håkan, thanks for taking my questions. I'm also interested in the kind of breakdown of the U.S. sales. I don't know if you can give any other forms of breakdown.
Mm.
Like geographical or any other types of, breakdown of how the US sales are developing?
We don't specifically give that data. We're contemplating if we at the capital markets day, we haven't released the data, it will be sometimes in late autumn, if we by then have enough data maybe to share a little bit more on trending. The only thing I can really tell you is that Zimmer Biomet, when we were under their distributorship, had access to about one-third of the U.S. market, where they had their contracts on metalware. With going to an independent structure of distributors, we're getting access to all states, all customers, and all indications. We made this decision because we believe that the technology is so strong, and the technology has proven itself so strong, both in the U.S. and in Europe, that we are willing to do this big investment.
If you compare our sales now, even though it's very, very early, with the one we had at Zimmer Biomet, we have a better geographic coverage. We have a better coverage of indications. We're not just selling it for one indication, but we are broadly looking at more indications. We've opened up a bigger potential, but that's as much as we can say about this topic right now, and we'll see in the near future if we will be able to give a little bit more details.
Okay, thank you very much. Regarding the kind of fine-tuning you said you were doing with the U.S. distribution model, did I hear you said you had some management changes as well? I was wondering if you could talk us through all the changes that have happened in this quarter with the, with the U.S. kind of commercial structure.
Right. There are two things. When we established the distribution structure, the network of independent distributors in the US, we also set up monitoring systems. Every distributor had to come with a marketing and promotion plan. There are clear obligations on what the distributor has to deliver, not only in sales, but also in terms of activities. During then, say, 2019, we have followed up. We follow the metric. We have specific dashboards that indicate how each of the distributors is performing. The ones that do not deliver the sales nor the activities agreed upon, there is a corrective action taking place. There's conversations and discussions and support given, and eventually, if the performance doesn't pick up, then the distributor is replaced.
This is, of course, one of the great benefits versus working with one distributor, you cannot all of a sudden disqualify them in one state and go to someone else, but you're locked into, like we had with Zimmer Biomet. Here we have the chance to then replace maybe disengaged distributors in one state and instead get distributors in place that are excited and eager to sell our product. There hasn't been any major management changes in the U.S. Those relate to Europe, where we had separated from our previous Executive Vice President of sales, and we're doing a replacement here.
Oh, okay. Okay, thank you very much for the clarification. Finally, I was just wondering if you could talk a bit about the health economic data that is going to be released in Q3.
Yes, absolutely. The last 12 months, we have been working on data to put in numbers, what it means, with all the benefits that CERAMENT with antibiotic-eluting capabilities, will bring not only to the patient and the surgeon, but also to society and to the healthcare cost in total. We know, by, let's say, anecdotal evidence, that if you do one procedure instead of three, four, or five procedures, of course there should be also a health economic benefit. We haven't before been investing in actually showing this number. What you will see in quarter 3 is where we can also put dollars, euros, and pounds, and Swedish krona benefits on using the CERAMENT product versus-...
more traditional treatments such as autograft, for example, where you take, tissue from the patient's own hip, or where you use, plastic capsules with antibiotics, which are, placed into the injury, but then has to be removed and replaced. I think it's quite obvious that if you have one procedure, there should be some benefits. This is what we intend to show.
Okay, thank you very much. That's all from me.
Thank you.
Just as a final reminder, if you do wish to ask a question, that is 01. Our next question is from Erik Cassel, from ABG. Please go ahead. Your line is open.
Hi. Thank you for taking my question. For CERAMENT drug eluting, you did mention 64% growth year-over-year. However, it seems to only have grown by 4% in EU, quarter-over-quarter in Q2. The growth rate has been trending down now for a couple of quarters. Is there any particular reason for the slow growth rate?
You're absolutely right, and that's because also each quarter has its own sales based on seasonality. If there is fewer surgeries in a quarter, that means there's less use of CERAMENT. That's why usually quarter 2 and quarter 3 have less sales than quarter 1 and quarter 4 in comparison. That's why we compare always quarter over the same quarter last year. The exception would be the U.S., because we're in a ramp-up phase. If we look at, what I had presented, slide 16, there's a steady and strong growth rate of the antibiotic eluting products, and I think that can be subscribed to the fact that these products are completely unique in the market.
One of the worst scenarios when trying to heal injury to the skeleton is to have an infection. Despite all the precautions, there's always a risk for infection. We saw that with severe fractures, like the study that was recently published, the infection rate can be as high as 52%. This study, also from Jahangir, shows that when you use CERAMENT G, there was zero infections. Since there's very few side effects, actually no side effects of using local antibiotics, the surgeons are more and more prone to use a product such as CERAMENT G or CERAMENT V, to be absolutely sure that they are preventing an infection and have a problem-free healing of the patients.
There is no other product that can do this. That's why we have such strong acceptance and such strong growth.
All right. Thank you. Very helpful.
As there are no further questions, I will hand the word back to the speakers for any final comments.
Thank you, everyone, for joining the call this morning. We are very pleased to have reported the quarter two numbers. I think once again, that's a strong confirmation on that the company is on the right track and that the performance is now start to show. I also would like to thank everyone for joining, despite the fact that it's in the middle of Swedish vacations, of course. I wish you all a great summer and look forward to talk to you soon again. Thank you, everyone. Bye-bye.
Now, concludes our conference call. Thank you all for attending. You may now disconnect your lines.