2018 results call. Good afternoon, everyone. My name is Emil Billbäck, I'm the CEO of BONESUPPORT, and today I'm also joined by Björn Westberg, our CFO. This morning, this afternoon, we will take around 20 minutes to run through the presentation, and afterwards we will conclude with a question and answer session. I will talk through our business progress made during the quarter, and then I will hand over to Björn, who will cover the financials in more detail. Before I start with the presentation, I would like to draw your attention to the disclaimer covering the forward-looking statements that we will make today. That's on slide three. If you please go to slide four, operator. I would like to move to the highlights from the quarter.
During this quarter, we've had a number of important strategic decisions that are key to us achieving our goal of becoming a leading global orthobiologics company. In May 2018, we announced our plans to create our own commercial platform in the US. Having our own distribution network will allow us to penetrate this market more aggressively with CERAMENT BVF, and be well-prepared for the launch of CERAMENT G, which is planned for 2021. As a result, we terminated our current U.S. distribution agreement with Zimmer Biomet, and their exclusivity period ends on October 20th, 2018. We are currently in a prepare-and-build phase to ensure that we execute this important strategic change effectively.
Active discussions with a large number of highly suitable distributors are progressing well. We are on track to have our first 18 independent distributors active towards the end of October. In parallel with this investment in our distribution network, we are increasing the number of BONESUPPORT US personnel and have hired four new employees in the quarter. We plan to hire a total of nine employees in addition to our existing organization during 2018, to reach a total of 23 full-time equivalents. This will help us to support our new distributors and also to increase our U.S. market activity significantly.
We are also working to broaden our U.S. offering with products that are complementary to CERAMENT, and we recently signed a strategic agreement with Collagen Matrix, which is giving us access to products that will allow us to target broader orthopedic indications in the U.S. During the quarter, we also announced our plans to nearly double our European sales force in 2018. This investment is designed to significantly strengthen our geographic coverage in key markets such as Germany, and to drive the use of antibiotic-eluting products in major indications such as trauma. Turning to quarter two, the reported revenues declined by 24% to SEK 28.2 million. The reported sales in North America fell by 40% to SEK 14 million, due to Zimmer Biomet canceling the majority of its orders as a result of the termination.
In-market U.S. sales of CERAMENT BVF in Q2 declined by 5%, but with a stronger unit-by-unit sales growth. We saw this increase use of smaller volume products, which are specifically used for ankle and foot indications. There is a shift in our sales from bigger milliliters to smaller milliliters. I regard this as a very resilient performance, given that Zimmer Biomet's attention right now likely is being redirected to other products. It augurs well for what we can achieve with CERAMENT BVF with our own US commercial platform. In Europe and rest of the world, reported sales increased 4% to SEK 14.2 million. 18% sales growth in Europe was impacted by vacancies in the sales team. Rest of the world declined due to a very large order from India in Q2 of 2017.
Slide five, please. I would now like to provide some context for our recent strategic initiatives by outlining BONESUPPORT's ambition and strategy. Following my appointment earlier this year, BONESUPPORT's management has conducted a strategic review of the business. The review is now being in completion phase, and we will present the results and details at the upcoming Capital Markets Day in September. This review, however, has led to many of the important strategic initiatives that we have started in the recent months. Successfully delivering these initiatives is crucial to achieving our target of becoming a leading global orthobiologics company. Overall, I would say it's also clear to me that we need to bring a much sharper focus to the execution of our strategy. By doing this, we can accelerate the market penetration of our clearly differentiated products, particularly our industry-leading antibiotic-eluting products....
Slide 6, please. The most important strategic decision we made in quarter two is to take control of our future in the U.S. The control of the commercial operation will allow us to maximize the CERAMENT BVF opportunity by giving us access to the whole U.S. bone graft substitute market. As a result, we expect sales of our products to grow significantly as we increase the market penetration in the coming years. This is a very important change as the current and historic agreement with Zimmer Biomet only gave CERAMENT BVF access to approximately 30% of the target market. Building our own U.S. commercial platform involves three key initiatives, all of which are well underway. First of all, we're making very good progress in selecting and validating distributors that will be part of our own network.
We have received very strong interest from a lot of highly suitable distributors, and we're confident that we will have our first 18 independent distributors ready to start marketing and distribution of CERAMENT BVF at the end of October. Just to remind you all, that we are focused on working with distributors that have experienced sales reps with existing relationships with orthopedic surgeons and buying organizations, and people that spend significant time in the operating theaters. We have also recently signed an agreement with Milestone Medical for warehouse and order fulfillment in the U.S., so we feel confident on the supply side chain of the business. In parallel with building our distributor networks, we are growing the size and the capabilities of our own U.S. commercial team, and as you can see from the slide, we're making good progress with a number of important recent hires.
A further key element in our U.S. strategy is to extend our product offering. To help achieve this, we recently signed an agreement with Collagen Matrix, which will broaden our portfolio. The Collagen Matrix products, which we will have access, can be osteoinductive and osteogenic when combined with bone marrow aspirate. This will make them complementary to CERAMENT BVF, which is osteoconductive. We intend to launch these products under the BONESUPPORT brand name in quarter one of next year, giving us a suit of products that will address a broad range of orthopedic indications in the U.S. market. We are looking at further deals to come and to broaden our portfolio, and we will keep you updated on progress made. Slide seven. I would like now to update you on our plans in Europe.
Although we have seen strong sales in Europe, over the last 36 months, I believe that we're only scratching the surface when it comes to the commercial opportunity in this region. Geographically, there are still a significant number of larger cities, metropolitan areas, and other regions across Europe, where CERAMENT products generate limited or no sales. In Germany, for example, it is clear that we have the opportunity to grow our sales much more rapidly with more people on the ground. In addition, there are major indications, such as trauma, where again, our market penetration is low, which provides further important opportunities for growth. Given this potential, we are in the process of significantly expanding our sales organization in Europe, and we plan to add 13 sales representatives until the end of 2018.
The quarter two sales growth in Europe and rest of the world was lower than expected. This is mainly due to sales rep vacancies in Europe. We are working hard to fill these. We're making good progress. There was also a decline in sales in India due to the absence of order from our distributors. Our focus remain on driving adoption at the top trauma centers in our European key markets, in particular, in the countries where we sell direct. Recently, we have added some of the biggest and most reputed trauma centers to the list of CERAMENT customers. Next slide. A prominent pillar in our strategy is to generate further clinical data, highlighting the significant benefits that our CERAMENT product delivers. Our most important clinical trial is the FORTIFY study.
This is assessing Cerament G as part of the surgical repair of severe tibia fractures. Data from this study is designed to support a planned PMA or Premarket Approval filing for Cerament G in the U.S in 2020. The anticipated FDA approval could provide Cerament G with an access to a significant commercial opportunity in the US market. Our most progressed major trial currently is the CERTIFY study. In this study, CERAMENT BVF is being compared with autograft in patients being treated for tibial plateau fractures. Positive results lead to CERAMENT BVF taking significant market shares from the autograft segment. The last patient in the CERTIFY study was enrolled in December 2017, and patient follow-up and evaluation is now completed.
Initial results from the study are tends to be expected at the end of 2018. We're also doing the preparatory work for a chronic osteomyelitis study in France, which will be known as Certitude. This study will evaluate CERAMENT G in patients suffering from chronic osteomyelitis. Positive results from this study are designed to provide support for CERAMENT G to be included in the reimbursement system in France. The study plans to enroll about 200 patients across 20 centers in France. Finally, we have the diabetic foot study, where positive data from this study in Italy could indicate that amputation commonly required for this specific indication could be avoided when use of CERAMENT G and B, publication is planned.
In parallel with generating clinical data, we are progressing well to develop health, economic, and outcome data to demonstrate the economic value of our products, in particular, CERAMENT G. We are confident that more health, economic, and outcome data, in parallel with our industry-leading package of preclinical and clinical data, will allow our enhanced commercial platform to deliver rapid sales growth in the years ahead. Slide nine. At this point, I'd like to hand over to Björn, who will provide you more with a review of our quarter 2 financials.
Thank you, Emil. Let us turn to slide 10. Reported sales in the quarter decreased by 24% overall, which led to a decrease of 16% in the first half. This outcome was a result of lower sales in North America and modest growth in Europe and the rest of the world. I will provide more information on these developments in the following segment slides. Slide 11, North America. Reported sales decreased by 40% in the quarter compared to 2017 and amounted to SEK 14 million. The sales design was mainly due to two reasons. First, Zimmer Biomet's decision to cancel most of the orders it has already placed for the June, August period, and second, the continuing hardware supply issues faced by Zimmer Biomet, which had negatively impacted sales since the later part of 2017.
Data covering the market use of CERAMENT BVF indicates that end user sales for the quarter decreased by 5%. However, unit sales were higher, reflecting a growing proportion of sales coming from smaller volume products, which are used for foot and ankle procedures. Our larger volume products are usually used in conjunction with hardware. This pattern of market sales provide us with confidence that we will be able to grow the sales of CERAMENT BVF rapidly once we have our own commercial platform in place in October. Slide 12, Europe and rest of the world. Sales in Europe and rest of the world increased by 4% in the quarter compared to second quarter last year and amounted to SEK 40.2 million. The growth in Europe was 80% and was negatively impacted by vacancies in our sales organization.
The sales in our five direct sales countries in Europe accounted for 84% of the total sales in the segment. Sales in the rest of the world were lower in the period when compared to second quarter last year, which included a large order from our unique distributor amounting to SEK 1.4 million. CERAMENT G and Cerament B sales increased 15% in the quarter and 25% in the first half. Slide 13. Operating results development. In the second quarter, we reported higher operating loss of SEK 37.8 million. This was due to both the decline in reported sales in North America and an increase in sales and marketing expenses in the second quarter. This increase was mainly in North America, where costs rose by 76%, driven by the growth in our sales organization and more marketing activities.
Europe and rest of the world saw an 18% increase in selling expenses, and the expenses amounted to SEK 70.2 million, a decrease of 8%, of which SEK 7.6 million were employee costs. This increase was due to strengthening of our development resources. In North America, our expenses decreased by 23% to SEK 6.3 million and are mainly related to costs connected to the FORTIFY trial, which were high in second quarter as the trial was starting. Administrative expenses amounted to SEK 40.9 million, of which employee costs amounted to SEK 4.8 million, and other costs amounted to SEK 10.1 million. The decrease of the employee cost is due to the cost related to the employee option schemes. These were SEK 2.5 million, high in the period, same period last year.
Employee costs in the second quarter this year are also positively impacted by SEK 0.7 million due to adjustment of previous accrued costs regarding the former CEO. The increase in other cost is due to investment of SEK 3.8 million in the second quarter last year, with capitalization of costs related to the IPO, combined with high cost this year due to additional projects and expansion of the organization in the U.S. Go to slide 14, KPIs. The one figure I'd like to give your attention to is our gross margin, which has remained at a normal level, 87%, despite the decline in sales that's seen in second quarter. We're confident that we can at least maintain this gross margin on a much higher level of sales expected to generate in 2019.
At this point, I'd like to hand back to you, Emil.
Thank you, Björn. Let's go to slide 16, which is the last slide of this presentation. As a result of the strategic initiative that we have started in the recent months, it's clear that 2018 will be a transitional year for BONESUPPORT. However, we are extremely confident that changes and investments that we're making this year will provide for accelerated growth in the coming years. The strategic initiatives will also position us to achieve a very significant increase in sales already in 2019. For the U.S., we will book 100% of the CERAMENT BVF sales via our new independent distributor network. Previously, we only booked 50% of the sales that we had with Zimmer Biomet. We also expect to achieve a higher margin with the change that we have announced.
BONESUPPORT's distributors will be focused on driving revenue based on targeted incentives that we will provide. Another important factor which will support our expected rapid growth in the U.S., is that we will be addressing a much bigger opportunity and market with CERAMENT BVF. We will now have access to 100% of the market, where previously CERAMENT had only access to about 30% of the market via Zimmer Biomet. In Europe, we will have a much bigger, more focused European sales team to drive sales growth going forward. This will be the result of much improved geographic reach and also the ability to penetrate much larger opportunities such as trauma. We expect to have further data from studies such as CERTiFy to support the sales efforts of our much improved commercial platform in 2019.
Beyond 2019, we are confident that our much improved market reach will be in a position to achieve sales growth of around 40% annually. Finally, I would conclude that we have now a clear strategy, and we have a clear ambition with a focus to sharper execution and get a stronger and accelerated market penetration. We are also in a position that we are well funded to execute this strategy, and we expect to become cash flow positive in 2021 from current financial resources. We hope that in our presentation today, we have conveyed our confidence in BONESUPPORT's future success, and I look forward to providing you with more details of our focused growth strategy at the Capital Markets Day that will be held in Stockholm and London on the 19th and 20th September, respectively.
With that, I conclude this presentation and open up for questions.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press star zero one on your telephone keypad. Our first question comes from the line of Frank Gregory from Equinity. Please go ahead. Your line is now open.
Hello, it's Frank Gregory from Trinity Delta. Good afternoon, gentlemen. Two quick questions. The first, can I just clarify? I didn't quite understand when you talk about in-market sales in the U.S. being down 5%, is that really down to the fallout from the Zimmer, or is there something more fundamental in that?
Thank you. Thank you, Frank, for your question. The in-market sales in value in the US is indeed declining with 5%, and there's 2 factors behind this. One is we think it's likely that Zimmer Biomet has directed their attention to other products in their portfolio and are not actively pushing so hard for CERAMENT, that's one. The second factor is that there is a shift from 10 mL product to 5 mL product as CERAMENT resides with Zimmer Biomet's foot and ankle group, which are treating smaller limbs. If we look at unit sales, there's a positive growth, but we prefer to stick to what we have reported before, which is the value growth, which is a decline of 5%.
Okay, so these are temporary things that will wash out. In one year's time, it'll be a very different picture to what it is now?
I truly expect that, yes.
Second question, it's in Europe. We're picking up from other players in this space, admittedly much larger players, that they're having difficulty recruiting quality salespeople. Is that something you're finding as well, or do you still remain comfortable with the view that you can double your sales force in Europe?
It's a good question. I think one of the main tasks for the managers at BONESUPPORT is to recruit and retain and develop high talented people. You're right, it's something that we pay a lot of attention to, and sometimes it's also difficult to find the right people. So far, due to the progress of BONESUPPORT and CERAMENT, and the clinical data we have backing our products, it has been quite easy to attract the right talent. We have to see as this year progresses. So far, it hasn't been a major challenge, but I recognize that it could be in the later months.
Thank you.
Next question comes from the line of Jonas Peciulis from Edison. Please go ahead. Your line is open.
Yes. Hi. Thank you for taking my questions. The first one would be, could you please clarify on the market access situation in France? If I recall correctly, there was a press release late last year that you engaged a distributor, local distributor, and now you're still preparing for this study. Just to clarify, because the study is testing your products in chronic osteomyelitis. What about the trauma and other indications? Are you selling at all, or have started selling at all in France, or you basically need to wait for the trial results? Because, you know, it's a big market, so I guess.
Yes, thank you for your question. We announced last year that we have entered into a distribution agreement with OrthoMedix. We are very pleased with these partners, and sales is progressing well in France. In addition, as a parallel track, we are conducting clinical studies, and the first one out is on osteomyelitis. As you've seen also in other parts of Europe, we have shifted our focus a bit more towards trauma. This is an indication that we're also going to target in France, but we take one step at a time.
Okay, thank you. With regards to sales development in there, now that, Zimmer has canceled the orders, is it sort of fair to assume, reasonable to assume that, sales in the rest in the third quarter will be sort of zero or close to zero?
I think, I think it's fair to say that we will see very little sales to Zimmer Biomet during the third quarter, as they canceled the orders. They must have made the judgment that they can fulfill demands by depleting their current inventory. I would also not hold it unlikely that there could be a stray order here and there, but I cannot speculate the value of those. Yes, thank you.
Yes, that's clear. Thank you. Now, presuming there are some surgeons who so like your product and in the SME, and they are, you know, recurring clients, obviously, in Zimmer's interest probably is to sort of move them to their own product. I mean, will we be able to sort of somehow get access to those, let's say, loyal, you know, surgeons who would still like to continue using your product via your new distributor network?
It's a difficult question to answer. What we can see is that the users of CERAMENT are very loyal, and the surgeons that have shifted to CERAMENT are not very likely to shift the therapy. CERAMENT has clear benefits that is being recognized in the therapy of bone voids. My expectation is that, there will be a high retention of key customers once we launch our independent network of distributors at the end of October. That independent distributor network will also have a reach which is significantly higher than Zimmer Biomet, and that's why I have high confidence.
Okay, great. Last one about the development of cost base, total cost, I think the increase is mainly now attributed to selling expenses. If I'm understanding correctly, comparing half-year selling expenses, they're up around SEK 12 million. This might be a bit premature, but given now you're a few months in this new strategy, can you sort of give us any sort of guidance or at least, you know, some kind of level, how high your costs could increase, let's say, by end of this year, when you have, you know, all things up and running?
Well, as you know, Jonas, we don't make any forecast, but those of course, have an increase in the employee costs as we are recruiting headcount, the full year effect of headcount. We are recruiting now in the second quarter and also the increase in the staff, especially Europe, but also in U.S. We had in the first half of the year, also some, let's say, startup cost end of this quarter, that in the distribution et cetera, in U.S. Some are sort of one of the top up much, but there's an increase going forward.
Okay. Okay, thank you. That's all for me.
The next question comes from the line of Sten Gustafsson from ABG. Please go ahead. Your line is now open.
Yes, good afternoon. A few questions here. To start off with Europe, you talked about vacancies.
Could you say anything about how many vacancies you have had, and when did that happen, and have they, have you managed to fill those vacancies? That would be helpful, and also if you could talk a little bit more about the traction you have seen in trauma. You mentioned, I think, on the call earlier, but if you could give a little bit more color on that. Secondly, on the U.S., should we expect some sort of inventory buildup in Q4 and Q1? When will there be sort of a normalized sales level, do you think, from there? That would be helpful. Thank you.
Thank you, Stan. The vacancies that we have had in Europe has been because BONESUPPORT has also exited one or two individuals that we decided were not gonna be part of our journey going forward. There's especially one country where there's been a bit of disruption, which is Switzerland. I will not be in a position to comment on how many vacancies we have had. That's an internal topic. I will comment, though, on saying that the recruitment to fill the territories and also to do the expansion of our sales force is progressing very well. The management team at BONESUPPORT has a vast network within the orthopedic industry. It hasn't been any problems to bring the right talent.
As we're speaking, we're extending contracts to people that we believe will be very good BONESUPPORT employees going forward. The question, I missed the second part of the question. Can you help me?
Attraction.
Yeah, your if you have any more comments regarding, your initiative to focus more on trauma and how that is developing.
Yes, of course. The initiative to push more into trauma was something that we kicked off during the springtime, where we see that several surgeons, notable and reputed surgeons, have been using CERAMENT G mainly, in complex, in open traumas. That's also where when we're now recruiting additional sales representatives, we are targeting specific people with trauma experience. So far, the initiative is very much in line with expectations, where we have mentioned in the presentation that we have got big orders from Mannheim and from Heidelberg, which are some of the biggest and most reputed trauma centers, not only in Germany but in Europe.
I must say this initiative is progressing well, as we will also come for the CERTiFy study and the FORTIFY study, both of those are specifically big, randomized clinical trials on level one on trauma. I think we will have an evidence base which will be significantly stronger than any other products in the market.
Then your third question, Stan, regarding the, when can we see a normal situation in the U.S., and it's a difficult question to answer. Of course, the most normalization will be in the third quarter next year, but from the fourth quarter this year, we are selling in parallel. I think it's becoming more and more normal quarter by quarter. That, I mean, for instance, that depends on the situations in the buy-back, for instance, and as I mentioned before, we plan to have 18 distributors in place by the end of October, and a few more in this first quarter as well. I mean, quarter by quarter, we'll get there, but we anticipate good progress already end of this year, even more next year, of course.
Okay, thank you. Just a quick follow-up or maybe a clarification. How many sales rep, maybe you mentioned, will you have, let's say, end of Q4 in the EU and US per market, so to speak?
In Europe, that number will be just short of 30 sales reps.
Mm-hmm.
In spread over our direct markets, which are mainly Scandinavia, U.K., and Germany, and Switzerland. In the U.S., the total staff will be in a marketing and sales organization, will be 23 people. This is a hybrid setup. Those people are not selling directly to the customers, but they are working and coaching and training the independent distributors to perform at their maximum.
Okay, thank you very much.
The next question comes from the line of Lala Gregorek from Trinity Delta. Please go ahead. Your line is now open.
Hello, gentlemen. I am very pleased to see that your strategy will bring you and what your long-term growth prospects are. I noticed that you have the 40% per annum sales growth rate in there, and obviously, at Capital Markets Day, you'll be expanding on that a bit more, and you've laid out quite clearly in the U.S. I was sort of trying to get my head around a little bit whether this is more a sort of CAGR type of thing, or how long you feel that sort of growth trajectory would be achievable? What the various, you know, what the key factors are at different points in time, because obviously the U.S. comes in relatively soon. Speaking about, you know, the European progress, you mentioned scratching the surface.
Could you give a little bit more detail there, and also on, I suppose, the evolution of the reimbursement situation there and how that might contribute?
Yes, thank you, Lala. As mentioned, as we referred to the end of the Tuesday within the report and also the presentation today, that we foresee a CAGR of 40%, 2019 and forward. This year is a transition year, as we fully aware of, we anticipate a strong increase next year, and then on 40% on a CAGR basis, the next few years. Of course, it will be fueled by different components. Looking at the U.S. by accessing, let's say, 100% of the market instead of a third, that's a great driver for-
Mm-hmm.
Then we have, as we also have started now, we have the offering and broadening portfolio in the U.S. We have the agreement with Collagen Matrix this year, and that, as you said in the report as well, that we are initiating the sale from that in the first quarter next year. Then it anticipates more components this time, type of offering as well. Then, of course, we have great hopes and ambitions for the seven key launch, 2021 in U.S. I think these are the key drivers in the U.S., but also, as we referred to in the call today as well, that we have last quarter's been very strong in foot and ankle.
We see good, very good potential in other indications, we have been pretty good in form as well, but we see great potential there as well, but also in indications like beyond treatment as well, for instance.
I think these are key focus in the U.S. If I, if I comment a bit then also on Europe, let's say what's behind this.
Mm-hmm.
This growth. You're absolutely right, Lala, that we have a high confidence in our plan going forward. Let's be honest, the journey from being a research company to a commercial company for both of them hasn't been completely easy. We are now at the stage where we're going full speed ahead, commercializing this great technology, and it was an easy decision to double the sales force in Europe, given the very high margin we have. When we look at what the future has for us, the CERTiFy study, I believe, will be a game changer.
Mm-hmm.
We will have the results at the end of 2018, I believe it could, in several markets, start to change and transition the standard of care, which to a large extent still is autograft, taking bone tissue from the patient's own hip. I think as the healthcare systems are starting to recognize that there are more progressive ways of treating the patients, we also believe that some of the clinical studies we have engaged in could even generate better and specific reimbursement codes for CERAMENT.
Mm-hmm.
Taking all that into consideration, I think our 40% is very realistic and possibly in some aspects, maybe a bit conservative.
Great, thank you very much.
Just as a reminder, if you do wish to ask a question, please press zero one on your telephone keypad. There will just be a brief pause while any other questions are being registered. There are no further questions, I'll hand back to the speakers.
Thanks, everyone, for joining the presentation of our quarter two results. We appreciate your participation and your questions. I look forward to keep you updated. I hope to see a lot of you also at the Capital Markets Day. Thank you so much. Goodbye from us.
This now concludes our conference call. Thank you all for attending.