Welcome to the BONESUPPORT Q2 call. My name is Richard Davies, I'm the CEO, and joining me today on the call is Björn Westberg, BONESUPPORT's Chief Financial Officer. This morning, we intend to take around 20- 25 minutes with the presentation covering our Q2 results, and we'll follow that on with a Q&A session afterwards. Moving to slide three. Before starting the presentation, I would like to draw your attention to the disclaimers covering the forward-looking statements that we will make today. Moving now to slide four. As this is our first quarterly results call, we intend to present a brief outline of BONESUPPORT. We are a commercial stage, rapidly growing orthobiologics company with three products on the market today. Our three products are based on our unique CERAMENT platform and are for the management of bone voids.
Bone voids can be caused by trauma, revision arthroplasty, or bone tumors. If not managed properly, bone voids can become infected, leading to a condition called chronic osteomyelitis. The key benefit of all of our products is that they are clinically proven to remodel the bone void back to host bone within a 6- 12 months period. In the case of CERAMENT Gentamicin or CERAMENT G and CERAMENT Vancomycin or CERAMENT V, the bone healing process is also protected by the elution of the antibiotic into the void. Our products target a significant addressable market of some 650,000 procedures a year based on data from only the U.S. and EU5 alone. These include major orthopedic indications such as simple and complex trauma, as well as revision arthroplasty.
Our rapid sales growth is driven by an increasing surgeon adoption and supported by a growing body of clinical evidence that demonstrates the clear benefits that our products deliver. We are developing a pipeline of product candidates based on CERAMENT's drug eluting properties, which are targeted to enhance bone growth. We are well-funded and in a position to achieve our 2020 targets. Moving now to slide five. I'd like to now provide you with an update of our Q2 progress. Björn will go into these numbers and figures in much more detail later in the presentation. BONESUPPORT had a very successful Q2, and the key highlights are as follows. Firstly, we completed our listing on Nasdaq Stockholm in June, raising a total of SEK 559 million gross.
Secondly, we also continued to deliver strong sales growth of 48% as more surgeons in the U.S. and Europe use our CERAMENT products due to the clear benefits they provide to patients and payers. We enrolled the first patient in the FORTIFY study, which is being conducted to support a targeted filing for CERAMENT Gentamicin or CERAMENT G in the U.S. The potential of our pipeline was also evidenced by an Indo-Swedish research group receiving an SEK 8 million grant to conduct research on enhanced bone growth using CERAMENT. Finally, we were very pleased that Dr. Michael Diefenbeck has joined the company as Chief Medical Officer. Michael is a well-known orthopedic surgeon and has published papers in his own right, highlighting the benefits that our CERAMENT products deliver. Moving now to slide six.
As you can see from this slide, the rapid sales growth that we have delivered in Q2 is in line with a trend that we've seen over the last two years, where quarterly revenues have increased nearly 2.5x over this period. This growth reflects the increasing surgeon comfort in the benefits of our CERAMENT technology. The growing body of clinical evidence that I mentioned earlier, investment in our sales and marketing organization, and increasing awareness in the U.S. market have all contributed to this growth. Moving now to slide seven. At the time of the IPO, we established clear financial targets for 2020, and Q2 is another strong quarter as we work to achieve these goals. As a reminder, by 2020, we're targeting to have sales of over SEK 500 million.
We expect to maintain a current attractive gross margin of greater than 85%, and we intend to become an operationally profitable company in the same year. Björn will provide more color on our progress in the financial section of the presentation. Moving now to slide eight. I would like to turn to the strategy that we're executing to deliver these targets. As you can see, it comprises three elements. The first is to drive the rapid sales growth of our existing products in existing markets. We drive sales by generating clinical data to increase surgeon comfort that our products remodel host bone in 6- 12 months, and that for the antibiotic eluting products, the presence of the antibiotic in a bone void does protect the healing effect.
To achieve this, we're conducting a range of clinical studies, such as the CERTiFy study, which compares CERAMENT BVF versus autograft and existing standard of care. We are also supporting clinical studies with CERAMENT G, assessing its utility for major indications such as complex trauma and revision arthroplasty. We also generate compelling or are generating compelling health economic and outcome research data to improve market access for our products and to underline their attractiveness to payers. In parallel with the data generation, we're increasing our marketing and promotional spend, as well as our sales footprint, both in the U.S. and in Europe. The second key element of our strategy is to expand the use of CERAMENT G into the U.S., and in Q2, we recruited our first patient into the FORTIFY study.
This study is designed to generate the clinical data needed to support our planned PMA filing for CERAMENT G in the U.S., and this filing is planned for 2020. CERAMENT G has been a key factor in our recent strong sales growth in Europe, and we believe that access to the world's largest orthopedics market would represent a major commercial opportunity for us, particularly given the focus on value in this market. The final element of our strategy is to progress our pipeline. We believe that the eluting characteristics of CERAMENT provide an ideal platform for a range of therapeutics known to enhance bone growth. Again, we believe there is a significant commercial opportunity for products that will enhance bone growth.
Moving to slide nine, and given the importance of our sales growth to our strategy, I would now like to provide you with some background on our commercial activities both in the U.S. and in Europe. Starting with the U.S. and moving to slide 10. In the U.S., we have our own commercial organization of 14 people. It comprises a leadership team, regional managers, product technical specialists, as well as marketing personnel. As you can see, we have been investing in our U.S. team over the last six months. Their role is to support the sales of CERAMENT BVF via the Zimmer Biomet distribution network, and it is Zimmer Biomet who distributes our products for us in the U.S. A key development for the company was the appointment of Patrick O'Donnell towards the end of 2016.
Patrick has brought broad leadership, sales, and marketing expertise in the U.S. orthobiologics space and has brought significant momentum and new ideas to our U.S. business. In Q2, we reached a major milestone where we achieved end-user sales via all 54 independent distributors in the Zimmer Biomet distribution network. As I have said previously, the success is underpinned by the benefits that CERAMENT BVF delivers to surgeons and patients and is supported by the new sales initiatives we have introduced. Turning now to slide 11. In Europe, our commercial team consists of some 20 sales representatives and leadership. The team is focused on driving sales in the five markets where we sell directly and in supporting specialty distributors who provide access to seven additional countries. In Q2, we continued to focus our sales efforts on top trauma centers.
These centers are important as most of the patients that we are targeting our CERAMENT products for are managed in these trauma centers. We have initiated several new initiatives to drive sales of CERAMENT G and V, including educational seminars where surgeons come together to discuss their positive experiences of using these products. Given the growing focus on value, we are continuing to generate health economic and outcome research models that are designed to highlight the economics that our CERAMENT products deliver. Finally, we are making preparations to enter the French market and expect to provide an update on this in our Q3 report. Moving to slide 12. I would now like to turn attention to our clinical and pre-clinical activities. Moving on to slide 13. You can see we are conducting clinical studies to achieve two different goals.
In Europe, we are conducting a number of studies which we plan to generate data with, which, if positive, should expand the adoption of our products in existing and new clinical settings. This is either by comparing them with current standards of care, using such as the CERTiFy study, or by providing important clinical data about their use in specific indications. A good example of this is the planned revision arthroplasty study in Italy. In parallel, we are also conducting the FORTIFY study, which as I have said previously, is designed to provide the clinical data we need for our planned PMA submission for CERAMENT G to the FDA. Moving now to slide 14. I would like to provide you with an update on our CERTiFy study.
As a reminder, this study is a controlled non-inferiority study investigating the use of CERAMENT BVF in tibial plateau fractures in comparison to autograft. An autograft is still considered as a gold standard option for bone void filling. The study is planned to complete patient enrollment around the end of 2017, with a publication covering the study results anticipated in the first half of 2019. Positive data from a randomized study like CERTiFy could open a significant opportunity for CERAMENT BVF, allowing us to expand the market for bioceramic bone graft substitutes. These data would also be a significant step in supporting our reimbursement activities both in Germany as well as further afield. Moving to slide 15. On slide 15, we have set out our planned timeline for completion of the FORTIFY study. As you can see, we plan to submit the study outcome to the FDA in 2020.
Moving on to slide 16. We are continuing to progress our pipeline of four CERAMENT-based pre-clinical products that are targeted to enhance bone growth. As you can see, we are looking at CERAMENT in combination with several therapeutics. Both alone and or in a combination that are known to enhance or impact bone growth. We intend to assess each of these pipeline projects in a range of preclinical models before deciding which ones to take forward into clinical development. The data we have generated with our pipeline over the last several months continues to be very encouraging. At this point, I would like to hand you over to Björn, who will provide you with a review of our Q2 financials.
Thank you, Richard. We continue to slide 18. The sales in a quarter increased by 48%, with significant growth in both segments. The increase is eight percentage points better than the 40% growth it achieved in the first quarter 2017. I will provide more information in the next segment slides. The latest 12 months net sales increased by 54%, which is above the implied growth rate of 48% CAGR needed to reach our year 2020 target of SEK 500 million. Continue to slide 19, North America. Sales increased by 44% in the quarter, driven by better access to more surgeons and increased usage. The second quarter was the first quarter where we had end-user sales from all 54 distributors within the Zimmer Biomet network. Gross margin was 90.4%, two percentage points better than the second quarter 2016, driven by positive product size mix.
The contribution, which includes our direct costs, increased despite increased cost related to the FORTIFY Study. Slide 20, Europe and the rest of the world. Sales increased by 54% in the quarter, also driven by increased adoption and usage. Drug-eluting products, CERAMENT G and CERAMENT V, increased by 60%. The gross margin was same as second quarter last year, positively affected by the increase in the drug-eluting products in Europe, offset by increased sales in territories with products which lower margin. The increase in gross profit is offset by increased investments in the commercial activities facilitating the increase in future sales. Slide 21. Operating result development. Overall, it is improved by SEK 2.4 million in the quarter versus last year. The gross profit improved by SEK 10.7 million, offset by increases in R&D costs. Selling expense increased in both segments, offset by less cost in general marketing activities.
R&D expenses increased by SEK 12 million, mainly driven by the increased cost for the studies, especially FORTIFY Study. Administration expenses decreased by SEK 6 million, mainly due to a reclassification of SEK 4 million as an issue cost, and that was booked in the first quarter as costs but reclassified as equity in the second quarter. The cost for the employee options decreased by SEK 1 million, mainly due to less vesting than before. This will be even more evident next year. Slide 22, the KPIs. The three key things to focus on here are proceeds from the IPO share issue. Secondly, operating results similar to second quarter last year.
Thirdly, the strong increase in sales. First, the share issue in conjunction with IPO generated SEK 500 million gross, minus SEK 34 million in transaction costs. Note that in July, an additional SEK 59 million, of which net SEK 55 million, was generated from the over-allotment option. Once again, that latter part is not part of the second quarter numbers because it was in July. This SEK 500 million issue had, of course, very big impact on cash, net debt and equity. Once again, the second quarter operating results are similar to second quarter last year despite the increase in R&D costs. The sales, an increase of 48% in the quarter and 54% latest 12-month increase. Really see good development in our key markets.
Summarizing the tracking towards our targets on slide 23. We are progressing very well towards our plan and targets. The implied CAGR growth from 2016 to 2020 to reach SEK 500 million is 48%. As mentioned, the LTM net sales is 54% above that 48%. The LTM gross margin was 86%, already above the target of 85%. The operating result is in line with our expectations, maybe a bit better as some marketing activities are scheduled later this year. Overall, strong financial position and very well on track. I would now like to hand back to Richard.
Thank you, Björn. Slide 24. I'd now like to wrap up today's presentation and move to slide 25. I'd like to conclude the presentation by saying that we've had a very successful and very positive first half of 2017. We continue to deliver very strong sales growth, as witnessed by our 48% increase in Q2. We've recruited the first patient in the FORTIFY Study with CERAMENT G for the U.S. submission. We've made good progress with our pipeline of product candidates. The milestones that we have delivered to date in 2017, along with the funds that we raised from our recent IPO, mean that we are on track to deliver against our 2020 financial and operational goals. I'd now like to open the call, operator, for the Q&A session.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press zero followed by the one on your telephone keypad. There will be a brief pause while questions are being registered. Thank you. Our first question comes from Sten Gustafsson from ABG. Please go ahead. Your line is open.
Yes. Hi, good morning. Sten Gustafsson from ABG. Perhaps I should start with the operating expenses. How do you see them progress in the second half? I noticed that the selling expenses actually came down in Q2 compared to Q1. How should we look at that ramping up phase on selling expenses and also our R&D expenses? That would be my first question. Thank you.
Okay. Thank you, Sten. Good morning to you. Starting with the selling expenses. We have the number of reps, et cetera, that I still think is relevant for this stage. We are planning, of course, to increase it a little bit, but not very much. As mentioned, we had a bit less general marketing activities. I also mentioned that during my presentation in the finance section that there are some activities scheduled later this year. So we will see some increase in that. Of course, the R&D expenses, they very much depend on the milestones achieved. As mentioned here as well, we had an increase due to the FORTIFY study mainly. It is difficult to say exactly which quarters they are incurring these costs.
As I said during the IPO process, we have funds allocated to both the pipeline and also to the clinical studies, especially FORTIFY. Of course, they will increase this to next year. I cannot be a bit more specific than that.
Okay. That's good. We should expect the selling expenses to increase gradually, I suppose.
Yeah, I think gradually driven by our marketing programs, which you always tend to weight towards the end of the year, but nothing-
Yeah, sure. My second question would be on the recruitment of patients. If you could give us an update on where you are on both the two major clinical projects.
Yeah. We don't intend to disclose our recruitment rates at this point unless there's some major deviation. As we've said in the presentation for CERTiFy, we're anticipating or it's a plan that that study would complete towards the end of this year. For the FORTIFY study, it's still very early days. We're not going to report detail on those at this stage.
Okay. Fair enough. My final question would be on the long-term targets and how SEK 500 million target is dollar sensitive. Do you have a comment on what kind of exchange rate we should, what you have used in your model, so to speak, to achieve that target?
I will not specify an exact exchange rate here, but in the second quarter we had 63% of the sales coming from the U.S. Of course, that impact on the target. We have some flexibility on the exchange rate, but I will not detail that.
Okay. Well, thank you very much, and congratulations on a good fitting quarter. Thank you.
Yeah. Thanks, Sten. Yeah. Thank you very much.
Thank you. As another reminder to register for a question, please press zero followed by the one on your telephone keypad. There will be a further pause while questions are being registered. Thank you. There appear to be no further questions. I will return the conference back to you speakers.
Great. Well, thank you very much. We are looking forward very much to our next interim report and call for Q3. So thank you for your participation today.