Welcome to the BONESUPPORT Q1 Report 2019. All participants will be in listen-only mode. Afterwards, there will be a Q&A session. Just to remind you, this conference call is being recorded. Today, I am pleased to present CEO, Emil Billbäck, and CFO, Håkan Johansson. Please begin your meeting.
Thank you very much, operator, welcome everyone to BONESUPPORT's Quarter 1 2019 results call. My name is Emil Billbäck. I'm the BONESUPPORT CEO, I'm also here with Håkan Johansson, our CFO this morning. We will start with a presentation of about 15 minutes and run through the results of the first quarter before we will finish with the question and answer session. Please, operator, next slide. Before starting the presentation, I would like to draw your attention to the disclaimers covering any forward-looking statements that we will make today. Slide 3, please. I would like to begin this presentation by quickly highlighting some of the strong figures that we have released in this morning's report. Overall, Quarter 1 sales were at SEK 33 million, which is up of 5% versus previous year.
The performance in the quarter is overall a confirmation, a confirmation that the strategic programs initiated during 2018 have put the business on the right track. The segment, Europe and Rest of the World, grew with 41%, reaching SEK 21 million. The strong growth is driven by broader and more frequent use of CERAMENT G and the mainly among existing customer base. The antibiotic-eluting products grew in the quarter with 54%. In the segment North America, we also saw a strong continued progress, with sales reaching SEK 11.5 million, which is more than double the sales we saw in the previous quarter.
Last year, as part of our strategic program to accelerate market penetration, we made an important decision to change our distribution setup in the U.S. so that we now can address the entire market potential. We start to see the first sign that the strategy is really working. In terms of earnings, we have a significant improvement on the EBIT level versus previous quarter, which is, of course, driven by improved sales, but also an effect of our implemented cost control programs. Operationally, I would like to highlight that we're seeing strong progress in our market access in the U.S. Here I would especially like to highlight the GPO contract with Ascension, which was signed in the quarter, giving us access to additional 151 hospitals for CERAMENT BVF.
One of the key strengths of BONESUPPORT is our industry-leading clinical evidence, and in the quarter, the first study ever validating both by radiology and histology data that CERAMENT remodels into human bones was published. This study equip our sales team with yet another unique set of arguments for positioning CERAMENT against autograft and other treatment modalities. We have established a strong innovation pipeline, which will allow us to launch a steady stream of new products over the next several years, and in this quarter, we launched the product line of BONIFY in the U.S. I will speak more about that later. Slide four, please. This slide you will remember from previous calls.
It shows the last 12 months, with the dark blue part of the, of the bar representing Europe and Europe, Rest of the World, and the light blue and the purple part of the bar is displaying sales in the U.S. The purple part, which is visible in quarter four of 2018 and quarter one of 2019, shows the sales that we have achieved with the new distribution setup. We can see the effect on sales development when Zimmer Biomet started to have their internal challenges and couldn't keep up with the market demand for CERAMENT. We also see the effect of Zimmer Biomet canceling their orders after BONESUPPORT terminated the agreement in May of 2018. The chart also confirms the very steady growth we have in Europe and Rest of the World.
We have started this year with a strong beat rate. If you look to the left of the bar chart, you can see the buildup in momentum from +14% in the first half of 2018 to an impressive 41% growth in quarter one of 2019. We believe this gives a very good confirmation that the business is on the right track. Slide 5, please. Focusing a bit more on the details of segment Europe and Rest of the World, I have already mentioned the strong momentum in the segment in total, and especially with the antibiotic eluting product. Last year, we announced that we will close to double the sales team in Europe, and we're almost there.
We currently have three vacant territories, which means we have 22 salespeople on the ground, and we expect soon to be 25. We have also recruited in Scandinavia and in Spain. Historically, much of the sales growth for CERAMENT has come from the indication osteomyelitis, which is chronic bone infection. On the strength of the top-line results from CERTiFy study, we are starting to see some very encouraging momentum and sales growth in the indication trauma. As you are aware from our previous presentation, the trauma market is a significant opportunity for CERAMENT. As I have said on many previous occasions, strong clinical evidence and health economic data are cornerstones of our strategy. In the quarter one, the first patient was enrolled in a new clinical study called SOLARIO.
This study will investigate if the use of a synthetic bone graft containing antibiotics will allow shorter course of oral or intravenous antibiotics to limit the risk for antibiotic resistance, to limit the risk for side effects, and to reduce cost. The SOLARIO trial is a randomized European multicenter study, which is conducted in collaboration with a prestigious European Bone and Joint Infection Society. It is expected to recruit 500 patients. Traditionally, treating bone infections has required multiple procedures and hospital visits. We have previously shown in a British study on 100 patients that with CERAMENT G, chronic bone infection was eradicated on 96% of the patients with only one single-stage treatment. A positive outcome of the SOLARIO trial could lead indeed to a paradigm shift in the treatment of bone infections. Slide 6, please, operator.
Turning to North America, sales in the quarter was SEK 11.5 million. This is up significantly from Q4 2018, sales was made up of a good mix between new and legacy accounts. Since October of last year, the new distribution network is up and running, now with 40 distributors, which together deploy more than 500 sales reps. Our former distributor, Zimmer Biomet, canceled all their orders last year when we terminated the agreement. However, they do have the right to sell any remaining products in inventory up until May 20th of this year. After this date, CERAMENT BVF will only be sold exclusively by BONESUPPORT. Our commercial team in the U.S. is making strong progress on market access, in the quarter, we closed yet one more important GPO contract. This was with Ascension.
This gives us access to additional 161 hospitals. I expect the signing of further GPOs contracts to be an important part of our future growth. In March, we launched BONIFY. This is a unique bone graft composed of 100% demineralized bone matrix, DBM. This offers osteoinductive potential to aid in the bone healing process. Osteoinductivity means that it stimulates creation of new bone. As such, BONIFY is a great complement to our CERAMENT platform, which offers osteoconductive properties. Osteoconductivity, as you know, means that it creates a scaffolding for new bone to be formed. As you can see in the pie chart, DBM is almost a third of the total US market for treating damaged bones. As such, BONIFY open up great untapped potential for us in indications and procedures where we before did not have a complete portfolio.
BONIFY is the first product coming out of our strategic partnership with MTF Biologics. Slide 7, please. Clinically, we've had a milestone in the quarter when, for the first time ever, bone remodeling of CERAMENT was verified in humans through radiology and histology data. This study is truly unique, as it is the first time it has been validated that with biopsies in humans, bone remodeling has been seen from a graft substitute. The trial design was a retrospective review of 138 patients who had at least 12 months of radiography follow-up. In the pictures to the right, you can see the early biopsy, and you can see the bone-forming cells, which is called osteoblast. They're covering the surface of CERAMENT, which is marked within the number 2.
In the picture of the late biopsy, you can see some remaining hydroxyapatite from CERAMENT, this is number 1, surrounded by healthy regenerated bone that has been formed and that has replaced CERAMENT, and this is in number 2. The publication shows that the radiology and histology images match the positive clinical outcomes in the patient series. Just a short comment. In the first picture on the early biopsy, the CERAMENT is number 1 and the osteoblast is number 2. I cannot enough stress how unique this study is and how important it is for our salespeople when promoting CERAMENT and explaining its unique benefits to surgeons. CERAMENT is the first bone graft substitute that has strong bone remodeling, validated by both radiology and histology examinations, which is published in a clinical paper.
With that brief update, I will now hand over to Hakan, who will cover the financial overview.
Thank you, Emil. Let's move to slide 9, please. This graph presents net sales by quarter as bars and last 12 months net sales as a line. As you can see, the net sales in the first quarter amounted to SEK 32.8 million, compared with SEK 31.1 million in the same period previous year, equaling an increase of roughly 6%. The period showed continued strong growth in Europe and rest of world, and a continued gradual improvement in U.S. sales, both supportive to the net sales improvement. Net sales for the last 12 months amounted to SEK 98 million, compared to SEK 123 million last year, a decrease of 23%.
The segment Europe and rest of world increased with 26%, net sales in the segment North America decreased with 59%, as effect of the changes made in the distribution platform as of May, during 2018. Both in first quarter this year, as well as in the fourth quarter, 2018, shows really that Q3 2018 was a clear turning point in the execution of BONESUPPORT's commercial strategy, with sales and marketing investment in both the U.S. and in European direct markets. Next slide, please. In the segment North America, sales for the period showed a decrease of 28% compared with the corresponding period last year, at the same time, displaying a significant increase to $11 and a half million in the period, compared to $4.2 million in the last quarter of 2018.
The contribution from the segment was -SEK 15.7 million compared to SEK 2 million same period last year. The increased loss relates to the lower sales and the ongoing commercial investments. Next slide, please. In the segment Europe and Rest of World, sales for the segment increased by 41% compared to the corresponding period last year and amounted to SEK 21.3 million. Sales in direct key markets accounted for 87% of the segment's sales of the antibiotic eluting products, CERAMENT G and CERAMENT V, continue to show strong performance and together increased by 54% compared to the first quarter last year.
The contribution from the segment was SEK 0.9 million, compared to a slight loss of SEK 0.8 million last year, an improvement despite substantial sales and market investments on our direct markets, where we see an increase in expenses of SEK 4 million. Next slide, please. Net sales with the strong growth in Europe and rest of world, as well as the gradual improvement in the U.S., means that we, with the first quarter this year, is reaching the highest level in six quarters. Gross margin continued to show improvement with favorable effect from product mix, with strong growth in the antibiotic eluting product, CERAMENT G and V, but also from the improvement in U.S.
The implemented cost control measures continue to follow plan and ensure that we can focus and allocate, move to commercial acceleration and more details to come on next slide. BONESUPPORT remains funded to realize its commercial strategy and to reach profitability and positive cash flow. Next slide, please. Total expenses in the quarter is up with SEK 9 million compared to the same period last year, as a result of the commercial investment initiated in 2018, with selling expenses up with SEK 13 million. R&D is remaining on a stable level, ensuring execution within our clinical and research activities. Administrative expenses is stabilizing on a lower level the latest two quarters, mainly as effects of general cost savings and lower spend on consultants, as well as lower cost for stock and warrant programs. With this, I hand over back to Emil.
Thank you, Håkan. If I could ask operator, please, to take us to slide 15. This is my summarizing slide. Thank you. Over the last 12 months, we have undertaken several important strategic initiatives to enable an accelerated market penetration of our products in both the U.S. and the E.U. We have established a new foundation, a vision, a roadmap for the company by delivering a clear strategy that defines priorities as well as the journey ahead. We have done what we said we would do, and the results are confirming that we are on the right path. The implemented changes have, above all, driven commercial discipline and commercial decisiveness. For the rest of the year, we expect an increasing trend quarter by quarter in the E.U. and in the U.S., which will lead to a significant uplift in sales for 2019.
This growth is built on several pillars. With the new U.S. commercial platform, we're able to go after the full potential of CERAMENT, and our market access is approving every day. In the quarter, we were very pleased to secure additional GPO agreements, and we expect more to come. In Europe, our expanded sales organization will continue to grow sales by a combination of better geographic reach and increased penetration of the important indications, such as trauma. A strong sales drive in the U.S. is complementary product launches, and this quarter we launched BONIFY. This will show effect as well for the full year. With strong clinical evidence, we believe that we have the key to transform the treatment standard for the 650,000 procedures per year, addressing insufficient bone healing.
The unique histology study published in this quarter is an important part of the clinical evidence that we are building. These results are supporting our quest and are paving the way for future market penetration. In our mission to transform the treatment standard, our antibiotic-eluting products play a key role. We have increased the growth continuously, reaching an impressive 64% in the latest quarter. All in all, I believe that we are 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, and I'm confident that we can deliver significant shareholder value on the journey ahead. Slide 16, please. On this slide, you see the updated calendar of value-generating milestones, many of which I have mentioned in this presentation. This concludes my presentation.
Thank you very much. I would like now to open up for questions.
Ladies and gentlemen, if you have a question for the speakers, please press zero-one on your telephone keypad. We have our first question from Erik Cassel, from ABG. Sir, please go.
Hello, everyone, this is Erik Cassel. Thank you for taking my question. My first question, you presented BONIFY in March. When are we going to start seeing sales contribution from the product?
Yeah, thanks, Erik. Thanks for the question. We're very excited about the BONIFY launch that took place on the big American Academy of Orthopaedic Surgeons, which this year was held in Las Vegas and had about 18,000 participants. We had a lot of traffic in the booth, and people were excited to see this high-quality DBM product. What happens now is that we put it in the hands of our strong sales teams, and they are out promoting it. It will take a couple of months to get, to say, on the right contract and to add this to the GPOs that we're already on. We should start to see some first sales, I would believe, around summertime and then accelerating throughout the end of the year.
Thank you. Very helpful. Regarding the new GPO contract you signed during the quarter, could you add some color on how it impacted sales in Q1 and expectations going forward?
Absolutely. All the way since the foundation, Erik, going live, which was in October 23rd, we have continuously won GPO contracts, and a few of these are really prestige contracts, like the HCA that we announced in the previous quarter call, and now the Ascension. When winning one of these contracts, there is an administration period, and there is a transition period. I expect sales from Ascension to be visible maybe end of quarter two, at a minimum, beginning of quarter three, but that's the lead time that we usually see with these contracts.
Okay. Thank you. That's all from me.
Next question comes from Jonas Peciulis from Addison Research. Sir, please go.
Good morning, all. Congratulations with a good pickup in the U.S. Could you please give us a quick update on the FORTIFY trial? How is the enrollment ongoing? I think the data was expected next year, if I'm correct.
Yes. Thank you. Yeah, for everyone's benefit, the FORTIFY trial was initiated 2017 with the ambition of providing data that will give approval of CERAMENT G, which is CERAMENT together with gentamicin in the U.S. It was set out that enrollment would finish at the end of this year, and we're sticking to that plan. Recruitment is going well, is going according to plan. Some months better, some months worse, but overall, we're sticking to plan. We expect the data from the trial to be available in 2020, and that's also when we expect the submission to take place for FDA.
Okay, great. A follow-up question, a bit probably high-level question. Presuming that all will go well with this trial and data and the FDA interactions, what are your sort of plans or current thinking, how to introduce this product to U.S. market? Because this will be a new product in the U.S. market, right? Do you think it'll be as straightforward as, you know, giving your current distributors the new, you know, GNV CERAMENTs, or do you plan any more like, specialized marketing activities? Just, I mean, what is your current thinking about how to introduce this product?
Yeah, I was in the U.S., I was in Las Vegas, two months ago, for the big AAOS Congress. I must say there's an enormous interest for CERAMENT G in the U.S. from basically all available big orthopedic companies. I expect that excitement comes from two things. One is the very strong sales success that we're seeing in Europe, secondly, the government and healthcare providers' efforts in the U.S. to address antibiotic resistancy and the strong preference for treatment with local antibiotics. This is, of course, also very encouraging for us in terms of looking at the market potential. The current plan is to provide the CERAMENT G to the network of independent distributors that we have built.
That's why also it was important to cancel with Zimmer Biomet to get this network established well in time before CERAMENT G, so that we have existing relationships, and that we have existing account base to roll this very important product out.
Mm-hmm. Okay, thank you. Just a quick question on the CERTiFy trial data. If I may have missed, but I will you publish a peer-reviewed article for the data anytime soon?
Yes. Apologies, I should have mentioned that. The CERTiFy data is, of course, a very important piece of information, and it has taken a little bit longer than we anticipated to get all the different centers, the 20 centers that have participated, 20 trauma centers in Germany. To get everyone to agree how the report should be written. The manuscript is now submitted to one of the most prestigious orthopedic magazines, and we're expecting the publication to come early quarter three.
Okay. Okay, that's great. The last one from me, also the question a bit more in general. Before the strategic shift to your own distribute network in U.S., I think you mentioned that Zimmer had only partial access, market access, In the U.S., and I think your thinking was that with your own distribution network, you could access, you know, well, you know, have wider coverage. Is this happening? I know that you're mentioning that you have sort of incoming orders from new customers and old customers, but sort of just probably a different question about the same. The market access, yes, has the market access improved compared to, you know, what's the Zimmer coverage?
Yeah, thank you for that question, Jonas. I think time will tell, but what I see so far, the quarter one was strong. It has started off in a nice way. We have secured hospitals and contracts where we never before had access during Zimmer Biomet. If I give a short answer to your question, is the strategy working? Very well, indeed.
Okay. Okay, that's great. That's all from me now.
Next question comes from Niklas Enhörning from Carlsquare. Go ahead.
Yes, good morning. This is Niklas from Carlsquare, formerly Geostratix. Congratulations on return to growth. I was wondering, relatively sort of weak thought if the sales for BVF in the other rest of the world, the same time you say that the CERTiFy results are leading to increased traction. Could you maybe elaborate a bit on that? Are the CERTiFy results pushing sales mainly in for the antibiotic-delivering products or?
Yeah. Okay, thank you. Excellent question, Niklas, and, I'll do my best to answer it. The CERTiFy study is a trauma study done on BVF. What we are out is promoting that CERAMENT is now equally good alternative or equivalent to autograft. What we see in the clinical practice is that most of the surgeons have a preference to use the antibiotic product. Even if there is no sign of infection, they take it as a very convenient and cheap insurance for preventing and avoiding getting an infection. The treatment with CERAMENT G and V, local antibiotics, you get a very high doses locally in the tissue, but a very, very low systemic influence. It's a perfectly safe modality to use, and that's why the surgeons feel extremely confident with using this therapy.
Many of the orthopedic surgeons that used to use CERAMENT BVF are switching to either CERAMENT G or CERAMENT V, because they feel that it's such a unique value proposition in either eradicating possible infection or preventing infection. As it doesn't come with any side effects, they are very generous to use it.
Okay. Okay, understand. Also regarding the GPO contracting, you mentioned this new contract with Ascension. Is this an organization that covers sort of the old CERAMENT customers as well? I mean, those kind of customers who you reached with, you know, Biomet, or this entirely new customers?
Yes, that is correct. Ascension, these hospitals we had not access to before. It's one of these wins that we're very happy with. Ascension also has, they're not so many hospitals, 150 only, approximately, but they have a very strong compliance and very strong treatment protocols. When they decide on a treatment modality, you have all the hospitals following. If we wouldn't have gone, well, you never say never, but most likely, if we wouldn't have gone independent, Ascension would still not be customers of ours, and they would use something else. Thanks to now setting up our own organization with a strong group of people working specifically on market access, we have been able to secure this new customer.
Okay, good. One last question on expenses. It's increasing at quite a odd pace given the sequential growth. Is there anything special in the quarter or is this due to your cost reduction efforts? How could you just give us some outlook going forward, giving maybe increasing sales activities or the RD?
Again, Niklas, it's Hakan here. I think that the slide that we presented showing the quarters order from 2017 up to the first quarter this year, shows or give you some guidance on your question, where you see that research and development is maintained on a stable level, where you see the investment done in selling, sales and marketing, that is gradually leveling out, giving some of what was done in 2018. You also see administrative expenses staying on a quite stable level for the last two quarters.
I think what Hakan mentioned also before in his presentation is, we have said goodbye to quite a lot of consultants, which we felt didn't add any value because we could do it better ourselves.
Okay. Thank you very much.
Next question comes from Lala Gregorek from Trinity Delta. The floor is yours.
Good morning, everyone. I have a handful of questions, basically about growth potential. There were a few comments made through the presentation, where you're sort of hinting quite subtly about the sort of various growth drivers coming through. First of all, sort of follow back to Erik's question about GPOs and the progress and the sort of lag and lead time before we really start seeing sales coming through there. I wanted to ask, with respect to the programs that you currently have, are there any sort of significant orthopedic centers that are included within those? Because obviously, that may have an impact on your sort of KOL outreach work there.
Secondly, going into Europe, you'd mentioned that G and V sales have mainly been with existing prescribers, and I was wondering what the sort of traction was like with getting into, I suppose, sort of the, the new areas. Thirdly, with respect to the innovation pipeline, BONIFY, all sounds very, very positive, but that's obviously your first new product. What sort of time frames might we see for additional products coming through MTF or even the collagen matrix deal that you have?
Thank you, Lala. Very insightful questions. Yes, there were a handful of them. I will do my very best to respond to them.
Thank you.
The first one was regarding the growth potential and matching this to the GPOs. What I should maybe clarify is that if we look at sales for the first quarter and also sales in the fourth quarter of last year, sales is coming both from GPO contracts and outside of GPO contracts. I would say that GPO contracts covers about 70% of the U.S. market, and about 30% of the U.S. market is outside of GPO. There are GPOs that are very strict, and the member hospitals must follow a very strict protocol like Ascension. There are others where, it's more down to the individual physician and individual hospital. They have different shapes and forms.
The one of the absolutely biggest contracts in the U.S. is the Health Trust. The Health Trust GPO is a bit of a holy grail. Of course, we're working the best we can to possibly secure a settlement on this contract one day. To the composition of their hospitals, I couldn't reply with a specific number, but I can say that there are a few south and southeast major orthopedic clinics that are part of HCA and Ascension, where we previously didn't have presence. This gives us a great hunting license, so to say. This gives us access to our salespeople. We do believe that this will be highly visible in quarter three results.
The next question was on Europe. Basically what you're asking is, why are we telling that sales growth comes from existing customers? We do that because we see that once a clinic, once an orthopedic clinic in Europe has started to use CERAMENT, more and more colleagues of the original surgeon who tried the product are then coming on board. This is, for us, very positive because almost every orthopedic surgeon that tries CERAMENT becomes a positive ambassador to talk to their colleagues about the product and to publish paper. Eventually, what we see is that a big part of the whole clinic eventually is using the product. We have been limited in, example, Germany, before we had only four salespeople.
Since our salespeople many times participate in the surgery room, our sales resource was a scarce factor, was a limiting factor. The new salespeople we hired came on board end of last year and beginning of this year, and they're starting now to also be very comfortable with their customers, to build relationships and to penetrate geographical areas where we haven't been before. The way to read this is that for the first quarter of this year, most of the sales growth came from existing clinics, where the popularity of CERAMENT makes it used more broadly. We haven't yet seen so much sales coming out of totally new customers, but that is what we expect for later this year as a result of the new salespeople ramping up in capacity.
In terms of innovation, we had the BONIFY launch, and we have more to come. Also given, let's say, the competitive environment, we prefer actually not to give any timings on when those products will be available to market. The collaboration with Collagen Matrix and MTF is continuing, as well as our own development and internal portfolio.
Wonderful. That was very comprehensive. Thank you very much, Emil. Next question comes from Franc Gregori from Trinity Delta. The floor is yours.
Thank you. Good morning, gentlemen. I've been sat here listening. It's become increasingly clear that it's the quality of the clinical data that really differentiates you from other competitors out there. That means I'm going to ask a longer-term question. We still have CERTiFy, we still have these studies to come. That's going to be good. If we look beyond that, what plans do you have for other clinical data? I'm guessing that trauma would lend itself to have some clinical study and some clinical data longer term.
Yeah. Thank you, Franc. Absolutely. You're totally right that in an industry, I would say, where competition is laser sharp, of course, we are differentiating ourselves by not only having unique benefits for the product, but also having the ability to show that it's validated by strong, significant clinical data. This will continue. What we announced in this quarter, which is new, is the SOLARIO study, and this is a massive study which will have 500 patients included. Needless to say, these studies are quite expensive. Both the SOLARIO study, the CERTiFy study, and the FORTIFY study are enormously expensive, and I must say I'm grateful to be part of a company that is making deliberate choices to invest in their future so much by these studies.
Those are the threre big ones. Unfortunately, I'm not able to disclose other studies that we are planning or discussing with collaboration partners. Right now, I think we are fully busy with taking care of these three studies, and we should be aware that once a study is published, like CERTiFy will be published in quarter three, it will probably take many months before our salespeople have been out in all geographies to speak about it and before all the magazine has been distributed. It's something that we will work on for many years to come, the results from these studies. Both FORTIFY and CERTiFy are indeed trauma studies, as you mentioned.
Yes. Yes. Lovely. Thank you, Emil.
Thank you, Franc.
We have no further questions for the moment. I remind you that if you wish to ask a question, you need to press zero-one on your telephone keypad. There are no further questions this time. Please go ahead, speakers.
Thank you, everyone, for joining our quarterly call this morning. Very appreciated. Thank you for your very insightful question. We're very happy to continue the dialogue with you, I hope that you, just as me and Håkan now, look forward to this very exciting time that BONESUPPORT is experiencing. Thank you very much, have a great day.