Earnings Call: Q1 2021

May 6, 2021

Thank you very much, operator, and welcome, everyone, this cold spring morning to Bonne Sevoort's Quarter 1 2021 result call. I'm Emil Bilbeck. I'm the CEO of Bone Support. And sitting next to me today is Hakan Johansen, our CFO. So we will use the next 25 minutes to guide you through the presentation of the Q1 results, and then we will open up the line for questions. Slide 2, please. So in regular fashion and before starting this presentation, we'd like to draw your attention to disclaimers that are covering the forward looking statements we might make today. Slide 3, please. So I would like to start this presentation with some condensed highlights from the report that we released this morning. Overall, quarter 1 sales were at SEK45 1,000,000, which was a reported growth of 3% year over year, currency movements have been significant in the quarter and the organic growth looking at constant exchange rate was 14%. The EBIT was significantly improved over last year, mainly as an effect of lower expenses. Among the business operations highlights, I would like to bring to your attention the strong improvement that has been made in market access. This improvement has been made through the signing of contracts with Veterans Affairs and Premier. The latter took place after the closing of the quarter. Naturally, we saw also a strong influence from a second and third wave of the pandemic with rising infections incidents leading to deferred and canceled surgeries. At the end of February, we received a notification from FDA that additional data regarding our de novo application for Ceramin is required, and we're making good progress in securing the required data. All in all, despite challenging times, we are seeing strong progress in several areas, providing confirmation on our business model and strategy. So I will cover all of the topics above more in detail in the presentation. I will start talking about the impact from the pandemic. So let's go to Slide 4, please. So as you well know, the pandemic has made hospitals redistribute resources, and many non acute surgeries have been deferred to later dates. The onset of the quarter presented a very high infection incidence, which brought a near to complete stop to surgeries in several regions. We see an almost complete correlation between the sales in the region and the infection rate in the population. In the U. K, as an example, the COVID-nineteen incidence dropped dramatically throughout the quarter, driven by effective vaccinations. Sales in the U. K. Developed very strongly from January to March. The opposite was true for markets such as Sweden and Netherlands, where the infection incidents dipped in mid February and then rose rapidly again with sales following the opposite pattern. Significantly reduced customer access forced us to go into part time for several of our sales team, and we did this with a region by region implementation depending on where the orthopedic departments were still running. Thanks to early and strong investments in digital communication tools, we have kept good customer interactions despite restrictions for physical meetings. I would like to reiterate, though, that COVID-nineteen has no impact on the underlying need for Ceramint nor the influence to treat skeletal injuries. The reduced number of surgeries that we saw in the period is completely related to procedures being postponed. The current accumulation of orthopedic procedures is estimated to take some 1 to 3 years to clear, and we are certain that there will be an acceleration of orthopedic surgeries during this year as the pandemic gradually recedes. It is fair to expect that there will be a material impact on sales from the pandemic in the first half of twenty twenty one with expected gradual improvement until normalization in the second half of the year. Next slide, please. So now I'll go through the development of our quarterly sales performance. So this slide, which most of you know, shows sales in the last 12 months, where the red and the orange part of the bar is representing Europe and rest of the world and the blue part is displaying the sales in the U. S. So in this graph, I think it's visibly obvious how the pandemic has somehow paused the strong growth trajectory in Europe and Rest of the World. Now despite this, and admittedly not with a big margin, we see the highest result ever in quarter 1 of 2021. This is attributed to several 1 GPOs, Group Purchasing Organization Contracts in the U. S. During 2019, which provided increased sales penetration throughout 2020 and well into Q1 of 2021 despite the ongoing pandemic. So let's go to the next slide and look at the details for North America. So Slide 6, please. So in the quarter, we delivered sales of SEK 25,000,000. This represents a reported growth of 18% year over year and a growth of 36% in constant rates. At the onset of the quarter, we saw a high surgical deferral rate. But despite the disruption from the ongoing pandemic, our commercial team has made great progress in increasing Ceramet market presence, geographic coverage, GPO coverage and continued building the customer base. After the end of the quarter, we signed our largest GPO contract to date with Premier. The contract will be effective July 1 and will provide access to 4,100 hospitals. Now a contract with Premier does not mean immediate sales, but it is rather a license to hunt. The contract almost doubles the number of contracted hospitals in the U. S. For us. And our sales team in the U. S. Are prepared with a list of potential customers to visit after July 1. During the quarter, we also signed a contract with Veterans Affairs, which gives us access to 170 medical centers. The Veterans Affairs contract covers health care for about 9,000,000 people in the U. S. That were previously deployed in the military service, and these people have a rather high healthcare consumption. The key priority right now for us, of course, is to complete the Ceramant G registration in the U. S. In March, we had a clarification meeting with FDA regarding the feedback we received on our de novo application for Serumene gene osteomyelitis. The FDA wants to have additional data in a few different areas, mainly related to special controls. The work on this topic has been initiated by exploring published studies with detailed patient data, So that means data which is already in the public domain as well as Bone Support entering a project with university hospitals in the U. S. To extract treatment data from their databases on patients with the history, with the size of injury and the treatment history that would qualify them as special controls. With regards to FORTIFY study, it is in its final phase. We have a few more patients to follow-up with the last patient to be followed in July of 2021. As the study is coming to its end, there was already in quarter 1 a noticeable drop in expenses for the study. If we go to the next slide, we will take a quick look at the time line of bringing Ceramajit to the U. S. Market. So here really the only thing I want to say is that our clinical, medical, regulatory and commercial team are all up and running, pursuing the data collection to meet the FDA request. We're making good progress. But of course, the speed of actions are influenced by the ongoing pandemic. But you see this also reflected in the time line and the October 2021 de novo submission milestone. Now new on this slide is a box with an orange frame. This is the NTAP application in October of this year. We felt that we should add some clarification on this point as we have just received positive ruling from CMS honor application from October 2020 for Ceramgy. The application to receive the NTAP is always filed in October, a year prior to final ruling and implementation. So for Ceramide G, we fell we sent in a full dose here in October 2020. So if you go please to the next slide. A couple of days ago, we received a favorable ruling from CMS. However, the NTAP, which means the new technology additional payment, will not go into effect in October of this year as such matters only happens when a product is approved by FDA latest in July the same year. So very short, what does it mean? Well, a product with an approved NTAP and FDA pool gets an extra reimbursement payment when the doctor or the clinic use that specific product. And the favorable ruling from CMS would have granted Ceriman G an additional payment of about US3.9000 dollars Now why are we mentioning this? We do that because a favorable ruling will be posted on the government website on May 11. We are, of course, very happy about the positive ruling. But we can also conclude that it will not turn into the effect this year. So we will prepare for a resubmission in October of this year, hopefully with the same positive result next year and also then with an FDA approval in our back. So from here, I will go to the details of Europe and Rest of the World if we go to the next slide. So as already mentioned, COVID-nineteen had a strong impact on sales. All in all, sales were down with a reported 11 percent and in constant exchange rate, minus 8%. So the record infection incidence and hospital surgery departments in many regions closed have, of course, had an impact on the sales that Bonne Seaboard has reported. We have though seen positive contribution from the new markets we entered recently with increasing number of cases in, for example, Australia, where the pandemic influence had been less severe. Sales is also advancing well in Middle East and South Africa. We have increasingly stronger health economic data, and we are gradually moving to a phase where we will elevate our conversations to purchasing managers and hospital managers. For this reason, we have made some changes to the German sales organization. We have recruited a new well experienced sales director and we have added a strategic account managers that have the ability to address health economic aspects with decision makers and to secure contracts with hospital clusters and purchasing organization syndrome. We believe that this could further help us to advance our positions once the pandemic recedes. As you know, so Bone Support was very fast out of the gate offering an extensive number of live digital meetings and webinar programs. I I would like to especially highlight the webinar that we held end of February that Bone Support hosted together with the European Bone and Joint Infection Shen Society. More than 280 surgeons participated. The webinars that we've held are, most of them at least, available via link from our webpage. So with that brief message, I hand over to Hakan, who will cover the financial overview. Thank you, Emil. So let us go to Slide 11. Net sales improved from $43,400,000 to $44,800,000 equaling a growth of 3%. The organic growth in the segment North America measured in fixed currencies was 7,700,000 or 36%, while Europe and the rest of the world reported a decline of $1,700,000 or 8%. Changes in currencies had a negative impact in comparison with the Q1 last year of in total $4,600,000 of which $3,700,000 relates to a weaker U. S. Dollar. Next slide, please. The contribution from the segment North America improved with $10,200,000 and was reported to minus 2,000,000 the improved contribution was due to both increased sales and lower costs. Sales and marketing expenses during the quarter amounted to $21,600,000 compared with $24,500,000 previous year, of which sales commissions to the distributors increased with $800,000 to $7,900,000 following the sales growth. The reduction in sales and marketing expenses was mostly the effect of a weaker U. S. Dollar. The contribution was also burdened by R and D costs that, however, decreased from $7,400,000 last year to $3,700,000 this of the quarter. The decrease was mainly related to the fact that the FORTIFY study in contrast to previous year's focus on patient recruitment was in a patient follow-up phase. From the lower graph, showing net sales as bars and gross margin as the orange marker, it can be noted that gross margin in this quarter was in line with previous year. The drop in gross margin compared with previous quarter was explained by lower sales in relation to fixed production cost as the pandemic impacted 1st quarter sales. In Europe and Rest of World, a contribution of $2,200,000 was reported to be compared with $3,900,000 previous year. The decreased contribution was partially explained by the lower sales this year. Sales and marketing expenses decreased by $800,000 compared with the corresponding period last year and amounted to $14,200,000 compared with $15,000,000 previous year. The lower expenses were driven by reduced travel costs as well as canceled congresses and meetings as an effect of the ongoing pandemic. Savings was also made as our as walkout reductions were made. At the same time, the repatriation and investments made in the Netherlands resulted in somewhat higher expenses. Also in Europe and rest of the world, a drop in gross margin was reported and explained by lower sales in relation to fixed production costs as the COVID-nineteen pandemic impacted 1st quarter sales. Next slide, please. In summary, we can see that despite an intensified pandemic, sales grew with 3% compared with the Q1 last year, a 14% growth in fixed currency. Gross margin remained at the same level as last year, but reported a minor drop from previous quarter following the fixed production cost in relation to lower sales in the period. The operating loss was reduced with $9,500,000 and was reported to minus $19,700,000 compared to minus $29,200,000 for the same period last year. The lower loss was mainly related to lower total expenses reported $7,500,000 below previous year. And I will share more details on this as we move to the next slide, please. Selling expenses reduced with $3,800,000 despite the investments made in direct sales teams in the Netherlands mainly relating to temporary work hour reductions and the conversion from physical meetings and events to digital meetings and webinars. R and D expenses reported low in the quarter as the 4 to 5 study has recruited a lost patient and thus entered a new phase and at the pace of implementation in other studies was somewhat affected by the pandemic. We expect the R and D expenses to normalize and stabilize after pandemic ends. And with that, I hand back to you, Sven. Thank you, Hakan. So let me then sum up some of the findings from the presentation and give you a bit of an outlook for the journey ahead. So despite the pandemic disruption, I feel we're making strong progress of building a foundation for further market penetration. The reason for going to a new distribution strategy in 2018 in the U. S. Was to reach a broader customer base. With a track record of securing GPO listings and the most recent contract additions with Veterans Affairs and the Premier, we are confirming the validity of this strategy going after a large potential for settlement in the U. S. We have advanced our efforts to register Ceramint G on the U. S. Market. Of course, we experienced a delay in bringing Ceram and G to the market when FDA requested more data. However, one of the reasons for the request from FDA originates in the fact that there is no established market standard in the U. S. For managing bone infections. With a potential approval in quarter 1, 2022 for CEREMG, it would be the first ever solution of its kind, and we hope to create and establish a future market standard. With the foundation of Fortify and PMA application, we expect to take this new standard even to further indications. Last year, we hired a health economic manager, and we're ramping up parts of the organization to leverage benefits seen with Cement with patient, doctors and society. With data from the FORTIFY study, the Solargis study and the CONVICTION studies, we believe that we will have a continuous stream of evidence to help us transform the outdated standard of care for treating bone injuries and bone infections. All in all, we are well positioned strong growth, we're navigating right now with a clear strategy and strong objectives through a challenging market condition that the pandemic has brought. We have high confidence in our corporate target of an annual growth of 40% once the pandemic recedes. And that concludes our presentation, and I would like to open up for questions. Thank Our first question comes from the line of Richard Aitken from ABG. Please go ahead. Your line is open. Good morning and thank you for taking my questions. So first one, it would be very interesting if you could talk a bit about the dynamics in terms of the surgical Procedure volumes underlying in the later part of Q1 and if you could say anything about the early parts of Q2 as well. It would be interesting to understand the delta as the vaccination rollout continues. Obviously, it's a moving situation, but any info there would be helpful. Yes, absolutely. Thank you. Yes. Rick, I think we were, as everyone else, taken a bit by surprise how the infection incidents rose dramatically at the end of last year. And we started this quarter, I think the peak of daily incidents was on January 10. And basically what you could do, I mean, you could even though we don't disclose sales per week and per country, you could almost see it if you go to either of the sites that show the current incident or the capacity utilization at the hospital. So if we take U. K. As an example, in terms of incidence per capita, U. K. Was definitely above most other European markets in beginning of January. And it has dropped at the end of March to one of the absolute lowest. And in complete, let's say, mirror effect to this, our sales in the U. K. Has gone from quite poor in January to hit new records at the end of the quarter. We don't give, let's say, guidance on an ongoing quarter, but the trends that we saw in quarter 1 are definitely continuing into quarter 2, meaning that the U. K, which is one of our biggest markets, continues with a very strong growth trajectory as the pandemic seems to have been taking under control. We saw the opposite in Germany, as an example, where there was a dip in incidents also in Sweden and Netherlands and our Nordic neighbors, where the incidents was coming to controllable levels in mid February. Surgeries orthopedic surgeries started to come back. And then at the end of the quarter, there was again a significant reduction in the number of orthopedic surgeries as the hospitals were struggling with capacity due to the high volume of COVID infected people. Sure. Thanks. That's very helpful, Emil. And a quick one as well on the NTAP. So congrats to that. Even though you can't really use it just yet, it would be interesting to hear if you could, first of all, comment on what that would imply in terms of sort of boosting the margin in the U. S. For Cermangi? And also just for my understanding, if you could explain if that the whole sum of US3900 dollars approximately would go to Bone Support or if that would go to the clinic and you would get the piece of that, just to understand the dynamics a bit? Yes, of course. So if a procedure when everything is like this, every procedure that the patient has is being reimbursed by the central authorities. So if a regular fracture before had a procedure reimbursement of $20,000 the reimbursement will now instead be $23,900 Now what does it mean? It means that when the doctor use Ceramint, the clinic will receive a bigger reimbursement. The when they switch also to Ceramant, the treatment is most likely slightly more expensive than what they used before. But the difference will be less than the 3,900. So the clinic will have a better cost to reimbursement ratio with such an NTAP. The other thing to note here is that Ceramant G is quite an expensive product and has proven health economic benefits. In Europe, we see the penetration mainly on quite severe indications, so bone infections or severe trauma. In the U. S, where everything is more financially driven, before the end up, there could even be some indications where the reimbursement was so low that hospitals would see a negative cost benefit from using Ceramant. But with the NTAP, that dynamic has completely changed. So even now for less severe indications, it would make perfect sense both for patient health for the doctor and for the payers to prescribe and use Ceramgy. So those are the consequences. Now All this is, of course, theoretical. We are incredibly happy with the NTAP, which shows that CMS have found Serum and G to be a very valuable contribution to treatment, but only when we have the FDA approval does it come into effect. Sure, sure. Thanks a lot. And just a final one on the FORTIFY trial here. We have covered it previously, but I just think it would be extremely helpful for us to once again sort of check. Let's say that with the top line results come out and you failed to show an improvement in the PCS questionnaire in the quality of life survey, but you do show a statistical significance in the absence these infections, for example, would the you would obviously fail the primary endpoint given that the variables are tied together. But how would the outlook be if you only hit the mark on the absence of deep infections, for example? So yes, well, you're asking me to interpret a theoretical potential situation, of course, and I will try then to anyhow answer the best I can. If the quality of life parameter is compromise and doesn't show the expected effect. I will be disappointed. But as long as the level of deep infections is significantly less with Ceram and G then with standard of care, I will be a very, very happy person. The reason for that is that it is an aggregated primary endpoint, but the individual parts will also be displayed and communicated and hold their own statistical significance. So I don't think that there will be any consequences for the plans we have communicated ahead if such a scenario would be the case. Sure. Great. That's very helpful. Thank you. That's all for me. Take care and thanks again. Thank you. Our next question comes from the line of Karl Malueg from SVB. Please go ahead. Your line is open. Yes. Good morning, and thank you for taking my questions. Starting off with cost levels in the quarter, you mentioned that shorter working hours Voluntary salary reductions, some of the sales reps helped you in the quarter. Would be helpful if you could elaborate to what extent we should extrapolate this into coming quarters as well? And then secondly, in terms of the novel application, would be interesting to get some more flavor on the initial progress here in terms of data collection And the continued dialogue with the FDA? Or if I put it differently, are you where you would have wanted to be at this stage? So yes. Well, thank you, Karl. I'll start with some of our answering your question on cost level. And again, as we mentioned, these are temporary tools that we've implemented during periods where we clearly have had substantial impact from the pandemic on sales. This is not our long term plan. We want to have a full throttle and make sure we use all sales resources to be out there and meeting customers on as well a full level, etcetera. So As soon as we have the reducing incidence levels and as soon as we can go back to normal sales operations, well then also these candle tools will be reversed. And by end of the quarter, it is very limited work hour reduction that is remaining in place. And we have been gradually reversing them during the quarter. Okay. Thanks. Very helpful. In regards to the de novo, the FDA had a more narrow definition of the patients, comparable patients than what we had in the original submission. So of course, the patient population when we speak about bone infection is bell shaped curve. And when FDA had a more narrow definition, they ended up with fewer patients than what we felt was appropriate. So the job we have now basically, among a few others, but is to identify patients either through public records from published data that have had bone infection the same amount of months that's the treatment group. The treatment group is all done. We're not doing anything to that, of course. We also have to find patients with the same age, comorbidities. Of course, if someone has maybe diabetes or nutrition conditions, that could also influence the healing rate. So we're digging through very detailed patient data where they have also measured the injury. The injury, it makes a difference if the injury is 1 centimeter or 2 centimeter in the leg, for example. And to our help here, we have contracted a few people that are supporting us. And also we're digging through some really good databases in the U. S. That belongs to some of the university clinics that have used this material for research purposes. I would say that we are currently in our progress where I expected us to be. And I'm very grateful to have such an excellent and competent team working on these topics, which is helping us progress even though we have a pandemic. Okay. Thank you. That's all for me. Thank you. Our next question comes from the line of Oscar Baumann from Redeye. Please go ahead. Your line is open. Hello, guys. I am the other analyst asked a lot of irrelevant questions. So I only have 2 or 3 questions for you. You've managed to grow the customer base in the U. S. And this could demonstrate the success you have with the new distribution network. And if we compare this customer base as to how it looked like with Zimmer Biomet. How are things progressing in terms of volumes? Yes, when you say volumes, you mean sold units or volume of customers? Good to say both. Okay? Volumes, I would say, are almost back to the same level as with Zimmer Biomet, not really, but give or take. Given this year, we will be back at the volumes that we had when Zimmer Biomet distributed the products. In terms of customer base, we are much better represented. So you could say Zimmer Biomet has fewer really big accounts where they had accomplished quite a decent penetration. We have now attracted a much broader base of big university hospitals that we look forward to in the next coming years now work on our penetration. So we have a better and more solid foundation now that we can work off. All right. Okay. Thanks. And I'm also very interested in This hybrid sales model in Spain, Italy, has this progression been delayed anything from this quarter? Or How are things looking? Thanks, Oscar. I mean, we share that excitement actually. Spain and Italy are very attractive, very interesting and exciting markets. And we made this decision to go with a hybrid situation, hybrid sales team. But with the raging pandemic, we had really no chance of implementing this because the hospitals would anyhow be closed for any of our interactions. So we rested a bit on our laurels. However, now we have signed contracts both in Spain and Italy, and the implementation is happening in quarter 2, just as promised. Okay. And then just a final question before I get back into the queue. Now it's Premier As a GPO, you said that sales are not to be expected immediately, but some sort of time line of when that could be seen on the income statement. Is that maybe 6 months or more? No, I think you're right. It's about 6 months from now because the contract kicks in July 1. And we know from experience from the GPOs, the big ones we won in 2019, that it takes about 3 months to get the first customers on board. And then it continues for quite a while. So the strong sales development we saw during all of 2020 despite the pandemic and also in the beginning now, organic growth in the U. S. Of 36% in quarter 1 is very much thanks to the GPOs that we have previously secured. And with Premier, we're basically doubling the number of contracted hospitals. So say 6 months from now and then going forward, we should start to see effect. Yes. And With your GPOs, you're now covering some 6,500 or even more centers, and you have 2 of the 3 biggest. But the third one, I don't remember its name. It's been something on Exactly. How many hospitals do they cover? So Vicente is the biggest. And we are in contact with them. And they represent some 5, I have to check, but I think it's from 5,200 hospital or something. They are definitely the biggest. So if you look at beds instead, because the hospital size could vary a bit. Premier has 330,000 beds, and I think Vistiant is as high as between 450,000, 480,000 bps. Okay. Perfect. Well, break a leg and thanks. Thank you. Well, if I break the leg, we know what to fill it with. Yes, sure. Thank you. Our next question comes from the line of Christopher Liddeba from Carnegie. Please go ahead. Your line is open. Yes. Hi, guys. Sorry, I didn't listen to your presentation. I've been at several conference call this morning. So I guess you have comment on this. But I just wonder when it comes to sales momentum here short term and the pandemic effect, do you expect with vaccinations, lower number of effects and etcetera, do you expect the sales run rate should be back at maybe the Q4 level or that in the second quarter. Is that how quickly this could improve again, you think? Yes. Thanks, Christophe. It's very difficult to give a precise expectation. I admit that I was completely wrong on how big impact we would the end of quarter 4 last year and quarter 1 this year. I thought it would be much less. I also thought that vaccination would come more rapidly in Europe, which it hasn't. I cannot unfortunately give such a prediction. The only thing I can say is if we look at the quarter, we see that when the infection incidence goes down as it has in the UK, we have scored record sales at the end of the quarter. So I tend to think that once the vaccination gets more widespread, there is a mountain of backlog procedures that have to take place. And I think we're very well positioned to benefit from that because we can allow a one stage procedure instead of multiple stage procedure, which would give make it easier for the health care system. So my expectation is that we will see influence of the pandemic all the way through the 1st 6 months of this year, lessening at the very end of quarter 2. And then I think sales will accelerate pretty strongly for quarter 3 and 4. Because one reason I'm asking is that I think you and the autumn, I was surprised about the sustainable strong sales trend in North America despite the challenges with the pandemic. But I think you have said also that you benefited from the fact that you have added so much New customers, what that is before the pandemic started. And now there is a year with More difficult just to be out meeting with customers. Of course, you have signed those GPO contracts, etcetera. But also That's not you need to meet with the customers and learn them about the product, etcetera. So is this something you think We're now is that what we're seeing also a little bit in the Q1 that it's maybe more difficult to See that's there the sequential growth in North America now when you're not out meeting with customers to the same extent? Yes, you're absolutely correct. So the I think 36% growth organic it's fine, it's okay. I mean, I always want to have more, but it's definitely a sign not of any kind of saturation with a customer base, but simply our inability to meet those potential customers and convert them. Our sales people have been grounded to a large extent. And however, we wish that digital communication is working, it can never replace a physical meeting when it comes to taking care of patients. Okay. Okay. Thank you. Thank you. Thank you. We have no more questions from the line. I'll hand it back to our speakers for closing comments. So then thank you, everyone. I appreciate you joining our quarter 1 result call. As I said, I believe that Bone Support is making really good progress. And I think also we are stronger than ever in our foundation to hopefully benefit from a pandemic, which will soon only be a nasty memory. I believe that spring is upon us and that we will see how our business can go back to a more normal stage within short. We will keep you updated. And until then, thank you so much. Bye bye.