Earnings Call: Q3 2020

Nov 5, 2020

Thank you very much, operator, and good morning, everyone, and welcome to the Bone Support Quarter 3 2020 Result Call. So this is Emil Bilbeck, talking the CEO of Bone Support and also joined here in the room by Hakan Johansen, our CFO. We will start off by presenting the quarterly results. And after that, we will open up the line for a question and answer session. Before starting the presentation on Slide 2, I would like to draw the attention of everyone to the disclaimers covering any forward looking statement that we will make today. So operator, if we could go to Slide number 3, we will start the presentation. So first of all, I would like to give some highlights from the report that we released this morning. Overall, quarter 3 results sales were at SEK 48,000,000, which is up 23% year over year. Sales have been negatively influenced by the COVID-nineteen pandemic, which I will cover later in my presentation. But despite the challenging times, we're seeing strong progress in several areas, providing confirmation on our business model and our strategy. Compared to quarter 2, sales were up 36 percent in segment Europe and Rest of the World and 31% in North America, showing a positive trend in the number of orthopedic surgeries compared to the strong negative impact the pandemic had in late spring. Sales in Europe Rest of the World was SEK20 1,000,000, down 4% year over year with the same year on year drop for antibiotic eluting product sediment GMV. In this segment, North America, where we are leveraging a strong increase in customer base, we delivered SEK28 1,000,000 in sales, which corresponds to a growth rate of 53% year over year. And EBIT was significantly improved over last year as sales grew, while expenses were reduced. Speaking a bit about operational highlights. The direct sales team in Holland is now fully operational, and we are phasing out the previous distributor. We have appointed a well established distributor partner for Australia. We're making good progress on the path towards 7 gs approval in the U. S. And we have recruited a strong project leader within reimbursement and health economic outcomes in order to step up the activities in this area. So all of these highlights I will come back to in my presentation, but first I want to speak a little bit more about the impact of the pandemic, which is on Slide 4. As you all know, the pandemic initially made hospitals redistribute resources and many elective surgeries were deferred to a later date. In the quarter, we saw a gradual return of elective surgeries region by region. The capacity within the hospital for orthopedic surgeries is nevertheless limited by the implementation of strict corona safety protocols. University Hospitals with resources tied to infection departments have seen an over proportional reduction in surgeries. In several U. S. Metropolitan hospitals, the orthopedic patients have been deferred to specific ortho clinics to keep a patient continuum of care. The incidence of trauma cases have been markedly reduced in regions and geographics influenced by lockdowns, stay at home orders and quarantines. And this is due to the reduced mobility of the population in those areas. The most common reason for severe trauma cases is normally traffic accidents. Minor orthopedic injuries such as sprains and exercise related injuries has actually increased during the pandemic, but these rarely involve surgery or the use of Ceramant. There has been a slowdown in the recruitment rate of new customers as the interactions between potential customers and our company representatives have been limited. Our sales process includes physical demonstration of the product at the first two to three cases and this is of course difficult when the representatives are not allowed into some of the hospitals. Furthermore, there has been an influence on patient recruitment rate and data collection in some of the clinical trials. This has affected the timeline for our reply to FDA's questions on our de novo application. We could potentially have an approval for Cerimen G within osteomyelitis in quarter 1 of 2021 and probably not as early as quarter 4 2020 as we previously hoped for. I will get back later to the details on this in my presentation. Now being a company in active in commercialization phase, a large part of our operational expenses are related to selling activities. With almost all conversions and physical events being canceled or moved to a later date, our expenses have naturally been reduced. So despite challenging times, Ceramant continues to take market shares from other options, other treatment options, as we are outpacing the total market development. Several public orthopedic companies has just recently published their quarter 3 results and we see samples of sales developing with between 2% 3% positive in the U. S. And sales decline of between 5% 10% in EMEA. So these reference numbers are for the big public orthopedic companies that have just published their results. So all in all, I would like to reiterate that COVID-nineteen has no impact on the underlying need for Cerrovant nor does it influence the need to treat skeletal injuries. We are certain that the number of orthopedic surgeries will return as the pandemic wears off. We believe that the benefit of a one step procedure that could be enabled with Ceramant along with the clinical outcome offered will be valued even greater as healthcare systems around the world will face even longer queues to surgery and treatment than before the pandemic. Let's go to Slide 5, please. So here I would like to just shortly guide you through our quarterly sales performance. You will recognize this slide that we update for every call. It shows the last 12 months with the red and orange part of the bar representing Europe and Rest of the World and the blue part of the bar is displaying sales in the U. S. You're aware that we terminated the contract with Zimmer Biomet based on a strong vision to bring CerroMet to its full potential in the U. S. And we are now successfully leveraging our new U. S. Distribution model. And I think the results speaks very much for themselves. In Europe and Rest of the World, the strong sales trend has been disrupted by the pandemic, as you can see. And I also would like you to pay attention to the split in Europe and Rest of the World between CEREMENT G and V on one hand and CEREMENT BVF on the other hand. We believe this gives a very nice and strong indication on the potential for antibiotic eluting products that exist in the U. S. Once we have the approval. On the next slide, I will focus on the details of segment North America. So that's Slide 6, please. The strong sales growth that we've seen in the U. S. Is to a large part attributed to leveraging the successful GPO listings as well as adding several new customers over the last 12 months. The recruitment rate of new accounts during the pandemic has been slightly lower than it was before the pandemic. The restrictions in access to hospitals and customers has been more regional in the U. S. Compared to Europe, still allowing salespeople to initiate product trials, product demonstrations and conversions of GBL associated clinics. With the pandemic restrictions and high capacity constraints at major university hospitals, Ceramant has increased its presence in the U. S. With specific ortho clinics to where the patients have been deferred in an effort to secure the continuum of care. On July 3 this year, we received several clarifying questions in line with the regular and formal process for the de novo application. From that day, the FDA sends clarifying questions to an applying technology the company has 180 days to respond. The questions we received have been on a quite detailed level in regards to data from previously conducted clinical trials in Europe. Due to the pandemic, the collection of data from external parties has been somewhat slower than what we first anticipated, and we expect to send our reply to the FDA in mid December. This is still well within the official timelines, as I will show on the next slide. With regards to the FORTIFY study, the last patient was, as you know, enrolled in June 2020. Patient follow-up is progressing as planned. And the centers that have completed all their 12 months follow-up are being closed and we expect all patient follow ups to be completely finalized by July 2021. Despite the disruption from the ongoing pandemic, our commercial team has made great progress in increasing Cerrovant market presence, the geographic coverage and building a rapidly expanding customer base. And just as in Europe, we have converted a large part of our customer interactions to digital meetings as well as attended interactive webinars that have been hosted by Bone Support, but led by our key opinion leaders. Slide 7, please. So here you can see the milestones and the detailed view of how we intend to bring Cerrovant G to the market either through the de novo pathway or the PMA pathway. So as you can see on this slide, de novo is above the big arrow and the PMA is below the big arrow. You can also see that we're only a few weeks away from submitting our answers to the questions that we received from FDA. And what I would like to emphasize in this picture is that from the point of Bone Support submitting the answers and FDA confirming that they received them, FDA has 60 days, excluding any save days from expedited handling in previous steps to give final response to the application. And this is why we have updated our expectations of a potential approval in early 2021. Next slide, please. I will now go through shortly the highlights of Europe in the period. As you can see at the top, the sales performance, I think I've already covered sufficiently. But what I've mentioned also in the beginning of the presentation of the presentation, we saw a gradual return of elective and non critical orthopedic surgeries during the quarter. Even though hospitals and orthopedic clinics are well below the pre pandemic surgical capacity, Quarter 3 saw indeed a significant increase of number of surgeries compared to quarter 2. Selling Ceramant requires the ability to present a surgeon with the scientific evidence and to support the surgeon to replace the habit of using, for example, autograft, something which they might have done for many, many years. Our direct pilot markets, where we have dedicated sales specialists, represents around 85% of sales in segment Europe sorry, in segment Europe. But these pilot markets does for sure not represent 85% of the European population. On July 1, Netherlands was turned into a direct market to further accelerate penetration in this attractive market. And I'm convinced that our proven and scalable business model will successfully drive market penetration for Ceramond as we now have 2 direct sales representative recruited that are visiting both existing and potential customers, new customers in Netherlands. In the quarter, we also made an initial market establishment in Australia by contracted a distributor and a local service provider. And of course, we don't have the bandwidth nor do we have the intention to set up our own organization in every market. But we have decided to combine the best out of 2 models by moving into a hybrid structure in Spain and Italy. We have initiated the recruitment of 4 market development managers that will work alongside our valued distribution partners locally and by this accelerate the market penetrations in these high potential markets. These positions that we have started the recruitment for will directly assist the distributors in the customer interface and support the implementation of our sales model. And just to put some perspective on this, the sales of Ceramant in Italy and Spain in year to date is actually less than the sales we have in Norway. And this is something that we will definitely change during year 2021. So with that brief update on the performance and the highlights of the segments, I will now hand over to Hakan, who will cover the financial overview. Thank you, Emil. So let us go to Slide 10, please. And this is a graph representing net sales by quarter as bars and last 12 month sales as a line. Net sales in the 3rd quarter amounted to CHF 48,100,000 compared with SEK 39,100,000 in the same period previous year, equaling a growth of 23%. The Q2 this year was substantially impacted by the COVID-nineteen pandemic and a decline in mainly elective surgery, but also from a reduced number of trauma surgeries. This quarter reported a strong recovery and a growth of 33% compared with the 2nd quarter. Net sales for the last 12 months amounted to SEK 173,000,000 compared to SEK 132,000,000 last year, an increase of 31% despite the impact from the pandemic. The segment North America increased last 12 months sales with 189%, and the segment Europe and Rest of World reported a minor drop in last 12 month sales with 4%. Both segments impacted by the COVID-nineteen pandemic, but with a slower recovery in Europe. Next slide please. In the segment, North America sales for the period amounted to 28,300,000 dollars compared with $18,500,000 previous year, a growth of 53%. The new distribution structure has resulted in improved geographical coverage and allows for broader market penetration of different indications. The continuously strengthened customer base, together with the larger DPO contracts that were signed during last year contributed to the sales increase. The contribution from the segment was minus SEK 6,000,000 compared to minus NOK9,800,000 last year. The improved contribution is due to increased sales, improving gross profit with NOK 10,300,000 as well as lower costs. Sales and marketing expenses during the quarter amounted to SEK 22,900,000 compared with SEK20,400,000 last year, of which sales commissions to distributors increased from SEK6,000,000 to SEK9,200,000 following the sales growth. Sales for the Europe and Rest of World segment decreased as a direct impact of the COVID-nineteen pandemic by 4% and amounted to CHF 19,800,000 compared to CHF 20,700,000 previous year. The segment showed recovery from the COVID-nineteen pandemic in the quarter, reporting a 36% sales growth compared with the Q2 this year. Sales in key markets accounted for 87% of the segment sales and sales of the antibiotic eluting product Ceramant G and Ceramant V followed the sales decline in the segment and decreased by 4%. The contribution from the segment was $1,400,000 compared to $0,600,000 previous year. The increased contribution is mainly explained by lower costs. Sales and marketing expenses decreased by $1,500,000 and amounted to $15,400,000 compared to $16,900,000 previous year. The decrease is partially due to a transition to cost effective meeting on digital platforms as a direct effect applied. Next slide, please. Sales in the 3rd quarter reported a growth with 23% and has already been well covered during the presentation. Increased sales in the U. S. Had a positive impact on the gross profit reaching 91.4% compared to 87.7% previous year. This shows a strong recovery from the Q2 this year that was temporarily suppressed by fixed production cost in combination with the low sales in the Q2. Operating loss in the quarter improved by CHF 13,500,000 to minus CHF 90,200,000 compared to minus CHF 32,700,000 previous year. The reduced loss is mainly explained by higher sales and lower costs. The 3rd quarter ended with a net cash balance of SEK 378,000,000 and we remain well funded to execute our strategy after the new share issue conducted earlier in the year, which brought the company $362,000,000 after issue cost. Next slide, please. Total expenses in the last quarter was down with $3,300,000 compared with the same period last year despite an increase in sales commission of 3,200,000 dollars The reduction in selling expenses was driven by lower travel costs as well as by canceled congresses and meetings as an effect of the pandemic. The increase in selling expenses from the Q2 this year mainly relates to the reversals made of reduced working hours and voluntary salary reductions. Research and development reported low expenses in the period as the FORTIFY study has recruited the last patient and thus entered a new phase and that the pace of implementation in other studies was temporarily affected by the pandemic. So with this, I hand over back to Tim Il. Thank you, Hakan. So let's go to Slide 15 of the presentation, operator. And with this, I would like to sum up some key findings from the presentation and also give an outlook on the journey ahead. So apart from the effect of the pandemic, I'm very glad to say that the quarter showed strong progress and further confirmed the strength of our implemented strategy. While most orthopedic companies are in double digit negative growth in the year to date, Bone Support is growing with 17%. Above all, our organization has shown agility, focus and decisiveness during this pandemic and the strong performance in quarter 3 is fully attributed to the efforts of our great organization. Our distribution structure in the U. S. Is now enabling us to pursue GPU contract in a more efficient way than before and has also resulted in a better geographic and indication coverage. We are continuously increasing the Cerro Lind customer base and have stronger control of market penetration and market segmentation. The U. S. Market for bone grafts is worth around US330 million dollars where the cases with infections represent around US100 $1,000,000 The de novo pathway for CIRMGR can potentially bring approval in the indication bone infection in early 2021 and that means that Cermin G would be the 1st ever synthetic bone graft with infection management properties on the U. S. Market. A PMA registration will follow and will broaden the indications band versus the novel pathway. The clinical evidence and patient outcome data for Ceramant are very strong. We're now ramping up our efforts to show how these can deliver positive health economic effects. Combined, we believe that the current evidence together with the results from the upcoming FORTYFI and SOLARIO studies will help to transform the outdated standard of care for treating bone injuries and bone infections. Our strategy is market penetration focus rather than expanding into completely new geographies. We have already a foothold in large markets such as Italy and Spain, and we're now moving towards a hybrid setup to make sure that these markets benefit from our proven business model and will have an accelerated market penetration as a consequence. All in all, we are well positioned for growth and we are navigating with a clear strategy and objectives through the challenging market conditions that we see that this pandemic has brought. As you can understand, our confidence in our corporate target of an annual growth of 40% remains very high. And finally, as usual, I will leave you with all the milestones of our journey ahead as the final slide of this presentation. But as there has been no changes to this slide, I will not go through it. And with that, we can conclude our presentation and open the line for questions. Our first question comes from Richard Anderkrans from ABG Sundal Korea. Couillard. Good morning, Haakon and Emil, and thank you for taking my questions. So first question here on the digital application for Ceram Energy in the U. S, should we think of 1st sales contribution in Q2 rather than Q1 next year realistically from what you see today? Yes. Thank you, It's difficult to give an exact date, but as you see from the time line, FDA has 60 days, which means we expect the approval to come early in 2021. And from there, what I've said, we need maximum 3 weeks before we're going to get started. So it will be somewhere between quarter 1 and quarter 2. So quarter 2, I think, is a fair guess, yes. Great. And I noticed that the gross margin in North America came in at an all time high of 96 percent. What was the driver there? Has there been any change in pricing? And how should we think going forward? There has been no change in pricing. That's purely up to the products market mix and so on. And probably also somehow it's within the decimals sound walls, but no major changes. Right. Thank you. And can you talk a bit more about the Dutch registered study here that you co financed with financing with 2 university hospitals. So you're targeting roughly 400 patients here over the next 4 years. Will you be able to use interim data in your sales process? Or will the data only be valuable once the study is completed, if you understand my angle there? I cannot answer that question, unfortunately, because that we haven't had that conversation with the 2 university hospitals yet. The ambition is that we will be able to get an early readout of some of the results, but I have to refer to a later date to give a confirmation on that point. As you can imagine, during COVID, to start up an initiative like this, it has all physical meetings has been replaced with digital meetings and there are a few details still to be fleshed out here. Sure. And how should we think about the cost structure for that study in relation to other trials, such as CERTIFIED and FORTIFIED, just to get a sense of the cost impact in the coming years here? Yes. I mean, we never give exact cost figures, of course, on the investments we do in the clinical studies. But a registry study, it's significantly cheaper than if a similar study would be done with same amount of patients as a randomized controlled trial. Registry study rather means that each patient treated with a one step procedure for fracture related infections will be all the data will be captured and then aggregated at the end of the study. So it's cost overall significantly less, but the value of the study we believe to be very big, given that it will answer the questions on health economic effects also on one of the most commonly caused infections, which is after a trauma fracture. Sure, sure. Thank you. That's very helpful. And how should we think about pricing for Ceram Energy in the U. S. The months before you receive a potential add on DRG reimbursement in September next year, just to get a sense of that? Well, we can only rely on what we see in Europe that pricing for, sorry, G and V is significantly higher than BVF simply because it is perceived also to have a much higher value to the surgeon and the consequences in patient outcome. And I think a similar perspective should be applied on the U. S. When you guys populate your models. Great. And just a final one from my side. So are clinics and surgeons open to trying and buying new products such as Ceramint during COVID-nineteen? Or you alluded to it in your presentation here, but how should we think about new contracts and your ability to communicate the benefits in terms of saving time and resources compared to other treatment alternatives and such here in the coming quarters? Yes. I mean, it's a very good question. I wish I could give good granularity in my answer. The it has been more difficult in Europe than it has been in the U. S. To get access and win new accounts. Overall, it depends on what access we have to hospitals. So in regions or cities or countries where the hospital system is completely dedicated to care for COVID sick patients, There are very few orthopedic surgeries taking place and also very few orthopedic sales representatives being admitted to go into the hospital and then meet or allowed into the hospital and meet the surgeon. So it is difficult, no doubt. As long as the COVID is focusing all the priorities of the healthcare, we have some challenges to recruit new customers. We see that the existing customers are staying very faithful and loyal to Ceramant. And when they do have surgeries, of course, then procedures take place where Ceramant is used. But to convince a new surgeon or a new department in a digital meeting has not been very successful. Sure, sure. Great. Thanks a lot. That's all from my side. I'll get back in the queue. Thanks again for taking my questions. Thank you, Ricky. There are no further questions at this time. Please go ahead, speakers. Good. Well, then I would like to thank everyone for making the time to join our conference call when we presented our quarter three numbers. We live in turbulent times. And I think what you've seen from our presentation today is that we have stayed low and we have put our shoulder against the challenges and pushed as hard as we can. And with that, also delivered a very fine result for this quarter. So I thank everyone and hope that you continue to follow us for the next quarters as well. Thank you. Bye bye.