M&A Announcement

Nov 4, 2020

Press Release

Good morning and welcome to this webcast with Ostdesign and CEO Morten Henewelt. My name is Matthias Boullin and I'm from Finwire TV and I will be moderating this webcast about the OsterSine acquisition of Syracos. If you have any questions after Morten's presentation, you can enter them in the form and I'll then receive this question and I'll bring it up with Morten after the presentation. With those words, I'll leave the word to you Morten. So good morning, everyone and welcome to a very important day in the history of OsterSIGN. As always, when we do these presentations, there are some disclaimers relative to forward looking statements. But today I really want to talk about the many important events that happened yesterday. So first and foremost, we acquired the Scottish bone graft specialist, Ceracos. We also raised 65,000,000 Swedish krona in a directed share issue. And last but not least, we published preliminary Q3 results ahead of schedule with some really strong growth and also a very strong recovery from COVID-nineteen and actually reported volumes being back at pre COVID-nineteen levels. But today I really want the focus to be on the very transformational and very strategic important acquisition of Syracross. And as we also announced yesterday, we will be publishing our full Q3 report as per our financial calendar on November. But just before we get started, I want to set the context for the announcement and the acquisition of Ceracos. So as you've heard me saying before, Osterstein has a very clear vision of becoming a global leader in regenerative solutions for bone repair. And it's in that context and it's within that vision that you need to think of the acquisition of Syracos. But just before we get started, we're going through a number of things today. I want to start with a brief background on OS design to essentially for any new investors, but also to talk a little bit about the platform that we have built, which we are now adding Cerocos on top of. I also wanna explain why the bone graft is a very attractive space to be in. And then of course, why we think there is a strong strategic fit to us design and our future. And at the end, we will of course finish with Q and A where you're more than welcome to ask any questions. So some of you may have heard and seen this before, OS design is a company about nine years old. A lot of things have happened in those nine years, really commercialization started around 2014 and we've seen acceleration in recent years. We sold 500 of cranial implants, personalized patient specific implants in 'eighteen and we just reached a thousand implants recently. And of course, we are working on things in Japan and the extended launch of CranioPlug as we move into 'twenty one. So a lot of things has happened. A very strong foundation has been built over the last in particular six years or so. And to me, there are really three key things that I would like you to think about as we think about the OsteSyme platform for growth. So one is the commercial platform. We have reimbursement, we have regulatory approvals in place where we are operating. I'll come back a little bit to the commercial infrastructure. But as I said, we saw more than a thousand implants. We are serving more than a hundred hospitals globally, including some very big known American hospitals like Johns Hopkins, UCLA and so on. And we have consistently delivered more than 50% growth on an annual basis. So the commercial platform that we have is really geared to launch new product. We also have a very strong technology platform. As you've heard me talk about before, we're showing clinical data that are significantly outperforming the average in the market. It's a combination of calcium phosphate, three d printed titanium. It's a very well protected IP portfolio. And we also recently shown that it can actually be applied also outside the CMF space where we're operating in today. And last but not least, it's the people platform to me. We are about 45 employees today between those people and also our board, of course, we have a deep knowledge, not just in the CMF space where we operate, but actually across the orthopedic field. And it's a strong mix of scientific and commercial capabilities. And we have demonstrated past successes in a number of fields, not least the bone graft market, which we're now entering. The portfolio, as you know, before the announcement yesterday is really that we operate in the CMF, in the cranio maxillofacial space. We're very much focused on patient specific implants. Obviously, vast majority of sales are now coming from what we call the cranial PSI. And then we also launched our first cranial block just before the pandemic hit, really in The US and of course that is something that we will continue to launch because that launch was of course a little bit blocked with the pandemic. But that is the portfolio that we have today that we are now adding bone graft to. And this is really the important thing for me here. As you think about our commercial infrastructure, you can see on this slide, we have people, we have distributors in place in all the key markets you wanna be in. If we start with The US, we went direct last year, we have a direct sales force of seven people, but we have more than 40, what we call sub distributors and agents. So agents working on our behalf with customers, which of course gives us a much, much broader reach and a much deeper reach in The US. In Europe, we have our direct sales forces in The UK, in Germany, in Sweden, And we have main distributors in Southern Europe where we're still working on the final deal in France, but we do have an agent in place. And then as you know, over the summer, we crossed the very big hurdle of actually getting regulatory approvals, of getting reimbursement. And then we also signed with Murunaka in Japan, where we expect a first sale to come in here in Q4. So as we think about this commercial infrastructure, we fundamentally believe, I fundamentally believe that this is a very strong structure that we have in place that we can use for more than what is used for today. And therefore we can take in more products. Bone graft. I want to talk a little bit about why we're moving into this, why it's a very attractive market. I want to talk a little bit to why there is a very strong underlying need in this space. And then of course, I also want to talk to why the technology that we're now buying with Syracos is something that we truly think will have a significant impact on the market. But if we just start with the attractive market. So bone graft is a very attractive place to be. It is a market worth approximately $4,000,000,000 It has high growth. It has historically high growth. It's projected with high growth around 8% CAGR. It's also a very profitable space. When you look across the space today, most products that you see out there are operating with gross margins above 90%. And then I think what's also very important for me and of course also very important for us to sign is that this is another product where we have high scalability. So it's volume production. So these four things in combination makes bone graft a very attractive place to be. If you look a little bit where the market is coming from because bone graft and I'll talk a little bit to what bone graft really is in a second, for those of you who may not know. But bone graft is used across the orthopedic space from essentially top to bottom of the skeleton, but really the big opportunity is within spine. So cervical spine fusion, which is the upper part of the spine and thoracolumbar, which is the lower back. And so that represents by far the biggest opportunity and with The US really being 70% of that and also The US in itself growing at approximately 8%. So as you think about this opportunity, it's very attractive and it's very much the biggest opportunity that lies within the field of using bone graft in spinal surgeries. So what is really a bone graft? A bone graft is used when a patient comes in and this is an example from spinal surgery where that comes in with some kind of degenerative disease and that degenerative disease cause some kind of spinal instability and pain. And what you're then doing is you're doing a procedure that you call fusion. So you're trying to fixate the spine. A very important part of that fixation is that you grow bone around the hardware, essentially the screws and the rods or the cages that you're using in that procedure. And this is where bone graft comes in. If you look at The US today, it is estimated that approximately eighty percent of all Americans at some point will experience low back pain. And then you need to think about that this is a need that will only continue and it will get bigger and bigger as we live longer. We now have the second world war baby boomers. So we will see this need in terms of underlying volume actually increase in the years to come. Today, is approximately one point five million spinal procedures performed each year. And of course there are different studies in terms of outcome, but up to one third of all spinal procedures do not achieve what you're trying to do, which is essentially to have a fusion. So one third half what we call a non fusion. And this is the unmet clinical need. And this is the reason why bone graft has a big opportunity in this space because bone graft essentially is an addition that you put, as you can see in the picture here, that you actually put either within case, spinal cases for instance, or you put it around screws and rods to ensure that you get a much, much stronger bone in growth and therefore you have a fusion of the metal that you use for fixation. So this is again similar to where we operate in CMF. We see a very big unmet clinical need here. There is big room for improvement and there is an opening in the market if you can come in and deliver that. And then of course, we see that solution being Ceracos. So why do we do that? Well, Ceracos is a company, we have been following them for a period of time. There are some overlaps from the people working at Syracos and to us design historically. And we have been following what they were working on. And when they got the five ten clearest, when they got the FDA approval in June year, we felt that this was the time where we would entertain an acquisition of Ceracos. And why is Syracos really that interesting? I don't know some of the technical things you see here on the right hand side. I think it's important to note here that Syracos is obviously pre commercial. So they haven't started commercialization. That's also why we went in now. But they have some very strong superior clinical results actually, which is animal testing that they used for the five ten clearance where they not only outperformed the market leading competitor, but they actually also outperformed what has been the common practice for many years in the past, which is what we call autograft. So where you use the patient's own bone. That procedure has generally been very strong. It's giving good results, but it is a very painful procedure on the patient where you take bone from the patient's own body, typically the hip and use that. It leads to pain for the patient. It also often leads to further hospitalization. So that's why in recent years, we see more and more of the market moving towards what we call synthetic bone graft. And this is what we see with Syracost. This is what we see with the Osteo three party that you see here on the picture. So it's a party bone graft. It's delivered in a syringe. So it's a very easy handling for the surgeon. It has a high level of silicon, which also makes handling even easier. And then one of the uniqueness, which is not what you see in the bone graft space, because of course there are other products out there, but Syracos also has a five ten clearance for osteoinductive potential. So essentially means that you can grow bone where there is no bone to attach to it. So you can put it in a muscle pouch and it will grow bone within that. So some very strong clinical results. And that's why we felt that Syracos actually represents the next step in synthetic bone graft and we believe it will have a tremendous impact. And it's fully reimbursed. There are codes approved in hospitals and healthcare systems. So this is not a matter for us of going out and creating new codes. It is a matter of just getting this on hospitals list, the vac approvals that we've also gone through with our cranial PSIs. And just to give you a flavor for what a product like this cost, I mean, of course it varies by hospital and account and so on. But typically when you see the market, a 10cc size, which is what you see in this picture, typically costs in the area of 2,000 In a spinal surgery, it's not normal that you will be using two of those in addition to the screws or rods or cages that you're using. So again, a product that has very strong clinical results. We feel that it's very unique, not least because of the oxygen inductive potential that it has demonstrated. And we feel that this is the right product and this is a product that will actually be a very strong competition to what's in the market today. So what is it gonna give us design? Well, it's gonna give us design a number of things. First and foremost, you've heard me talk about this before. Today we operate in a market which is give or take 500 to $600,000,000 So it's still a market where we believe we have ample room for growth in our CMF business, but this immediately gives us a five times bigger playing field. So yesterday we operated with a market opportunity of just over half a billion dollars. Now we'll be operating in a market with an opportunity above $3,000,000,000 So that is of course, a major change and also gives completely different opportunities as you think of Orthosyne into the future. The second thing it gives us is access to a much larger customer base and much more relevance and visibility in the account. So if we just start with the access to the customer base, so of course today we've been working with neurosurgeons up until now, typically in brain surgery and cranial surgery, but there are also a number of clinics working with neurosurgeons that do a lot more spinal surgeries and so on where we really didn't have a reason to go yesterday. So we will have a much larger customer base that we can go to, many of whom we already know, but a much larger customer base in particular in The US. And I think increased relevance is also relevant because Ostezine has for a long time established a very high level of credibility with surgeons because they're using us, they have been using us for the very difficult cases, cases that they couldn't solve with conventional products in the market. That of course also means that your relevance, you're not used in that many percent of the cases, but you have built an enormous amount of credibility because we felt surgeon solving those. So as we think about the before and the after, so yesterday we were probably relevant saying about five percent of all cases with patient specific implants. And now we're adding a bone graft. You could actually argue that we should be a hundred percent, but realistically we are relevant now in more than ninety percent of the procedures. And that of course gives us a much more frequent contact. It means that we will be staying on top of surgeons' minds. And overall, of course, this will give us a much strengthened US position. U. S. Is the biggest medtech market in the world. It is the most important market for us. So the acquisition of Syracos is also a direct play into that ambition of really building a very substantial US business. We also see very significant synergies with our customer base and with our sales organization. So if you take a typical neurosurgeon today, they will probably spend about 20% of their time in brain surgeries, in cranial surgeries and they will actually spend 80% of their time doing spinal surgeries. And remember, these are the neurosurgeons where we have a very high credibility because we've helped them solve the very difficult cases. So we of course also can use those relationships directly as we think about using bone graft in the spinal part of their businesses. Similarly, when you think about our, I talked about that we had more than 40 sub distributors and agents in The US, the same eightytwenty rule actually applied to them. So they will probably have 20% of their business in brain surgery and they will have 80% in spinal surgery. So here we have distribution. We have a network of people that not only know the neurosurgeons we are working with today, but also the orthopedic spine surgeons that typically operate in the lower back in the furor columbus space. Again, a network that we can go to, we can add the product to the contract, we have this with them and we will immediately get a very broad reach and we will also get relationships into the spinal business that us design, our direct sales force may not even have themselves today. And last but not least, just when you look at our hospital list, more than 100 hospitals, without exceptions, all these hospitals and clinics are using bone graft in their hospitals today. Maybe it varies by surgeon, maybe it varies by department or function, but they are all using a bone graft today. So of course, we will also be going to those. We have the VAC approvals of close to 100 hospitals today. And that of course all means that all things equal, it will be easier because we don't have to get registered as a company on those, we just need to register another product. So as we think about this, I just want to reiterate some very strong synergies with our customer base, with our sales organization, which of course means that we feel extremely confident in our ability to get traction in the market much faster than if this commercial platform had not been in place. And then I think last but not least, this is a space that we know. So you see here, if we just take the Us design part of the team, many of us, both in the board and in the management team and also Eric Paturma, our US Sales Leader fundamentally know this space. We've either worked within very directly even with demonstrated success with Apotec, where our chairman and our global sales leader Rick comes from and that was exited to Baxter some years ago. So we know this space. We know what we are talking about. We know who the customers are. We know who the surgeons are that are using bone graft, who's not using it. We also know the spine space, which is where we also need the relationship, both myself and other people in the organization. So as we think about moving into this adjacency, which is really a transformational first step in osteosyne becoming a broader player, We know what we're talking about here and we have a very clear line of sight to how we make this a success. At the same time, of course, with Syracos, the founders and old staff will transfer to us to sign and two of the founders, professor Ian Gibson and Doctor. Jordan Conway are of course following with us. And this is a very strong scientific capability that we now get in. The Ceracos product is also based on calcium phosphate and some of these technologies behind. So we will be adding more and very strong capabilities to the technology side to of course work in a future setup as one new Us design. So I think as you think about this opportunity, it's a very big opportunity in the market. There are some very strong synergies to how we are operating and where we are operating today. And we are a team who know the market, we know the space, we know the customers. So that of course gives me extremely great comfort and trust that we can deliver to our promises. Just summarizing some of the key transaction terms. So essentially there are three parts of the transaction terms. So there is a cash component. So we're paying 11,000,000 in a cash for equity transaction. The first five million are paid upon closing the deal now. That's also why we did the direct to chase you yesterday. But then there will be two installments of $3,000,000 each at the end of Q2 and in the end of Q4. We have also, we need to pay a royalty to Serokos, a single digit royalty fee based on future sales. And then there will be some milestone payments of $2,500,000 when we reach cumulative net sales of respectively $60,000,000 and $120,000,000 So let me just summarize why I think this is a very transformational and very strategic important and really thinking about this being a first step as Us design becomes a much broader orthopedic player in the future. So we are entering a very attractive market with bone graft. It gives us immediately a five times bigger market potential. It operates with very high margins and it's very scalable as we think into the future and more volume. We are acquiring a very differentiated technology. It has already has a five ten clearance in The US. So technically it could be sold tomorrow, but we of course need to go through the VAG approvals. It has reimbursement. We don't need to apply for that. It is a play that really strengthens our US position. It's the largest and it's the most important market in the world. And this gives us access to a much larger customer group and it gives us much more relevance and visibility in that market. As I said before, we have some very strong synergies to our existing customers, both the hospitals and the clinic, but also specifically the surgeons, as well as our sales channels that we can use the existing sales channel, we will be able to use to roll out and launch these products. And last but not least, as I said, you have a very proven management, you have a very proven board who have had success with bone graft before. We understand the space. We know the customers. We know exactly who to introduce the products to first. So to me, those are really the highlights and why I'm extremely excited about the announcements that we did yesterday and think very, very positive about what Osterzon will be able to achieve in the years to come. So I think with that, I think we'll stop the presentation here and we'll go to the Q and A please. Thank you very much Morten for a thorough presentation. And we've received several questions regarding this. And if you have a question, feel free to ask them and use the form on the right hand side, and I'll ask the question then to Morten. I'll start with a broad question that you partly have already answered probably. When will you start selling the new product and where will it be sold? Yeah, so the product today has an FDA approval in The U. S. Or five ten clearance, which means that it is ready to be sold in The US. What we've said is that we expect the first sales already to come in, in the second half of 'twenty one. As also alluded to before, the product technically could be sold in the market tomorrow, but of course you need to go through the VAC approval processes in the hospital. So that's why we've said it will be sold in The US in the second half of 'twenty one. But of course, over time we are thinking of bone graft to become a global product. Okay, we've received several questions here from Alexander Vilval at Erkpense Bank. I'll start with the first two. How have Q4 sales start then and how do you see overall costs for 2021 for the combined company? Yes. Well, thanks a lot for the question, Alexander. I had a feeling it was going to come. I think as we said, we will be publishing the full Q3 report and we will be having a webcast related to that. So I think for now, I'll prefer that we wait with those questions and then we deal with those and I'll answer those when we publish our full Q3 results on November 11. Okay, here's another one, maybe more specific. What level of initial sales would you expect for Syracos in second half of 'twenty one? Yeah. Right now, we are not giving any firm guidance on numbers at this level. I will stay to what we said in the press release, which is as we think about Cerecar and we think about bone graft in the future, we expect this to represent a very significant part of the business in the future. But at this point in time, I'm just not ready to share any detailed guidance. Once we are ready for that, we will be doing that. Okay. Final question from Alexander Vilval at EIC Pense Bank. How do you view liquidity for 2021 given the new issue of shares and the additional payments for the acquisition? I think we view it as we also did after Q2 announcement where we said that we are exploring and we have started a process for further financing of the company. So yes, of course, with the acquisition, there would be an obligation for payments also into 'twenty one. To me, it doesn't fundamentally change the process. We said several months ago that we have started a process together with the board to explore refinancing options and that is going as we said and as we intended. Thank you. And at ABG, we have Rickard Andekranz with several questions. Maybe you've answered some of this them already. We received this question early on in the presentation. Presumably, the agents in your US sales force already sell synthetic BGS from from other producers. How will you make sure your sales reps focus on osteoputy? Yes, I think it's a good question, Riccard. Of course, there will be some of the people and the companies that work on our behalf as agents right now who will have a product. There will also be those that don't have a similar product. So I can't say specifically how it would work out. The way I also think I would like you to at least to think about this is our offering as we negotiate and we try to find new dealers in The US is much stronger now. So yes, of course, there may be some that already carry a product. It could be that we can persuade them to carry our product instead. But this will also puts us in a very different position as we negotiate with more and new dealers in The US because we're now bringing both the CMF portfolio as well as the bone graft portfolio. Okay. Second question from Richard at AGB. If you can talk bit more about the current clinical documentation of the osteopathy and your clinical plans forward for the product. Yes, of course. So as I said, Syracuse had conducted some very thorough preclinical testing, animal testing with some very significant results that actually were published, at least abstracts were published in some of the posters that went to some of the big conferences in The US Early Twenty Twenty. Of course, it's important, as I also said, when we talk about our CMF business, when you're bringing novel technology into the market, you need to continuously build and expand and publish and communicate your clinical data. And it will be an important thing as we also think bone graft. Clinical will be one of the most important things to show to surgeons, to show to hospitals also in the future. So it will be a very important thing for us as we think about our new bone graft business. We'll continue with another question from Richard at ABG. What makes the ZP putty stand out in the highly competitive space of BGS relating to spinal fusion? Yeah, I think that's a little bit what I also said in the presentation. So you have preclinical knee data right now that shows a significant outperformance of not only another market leading product that was tested against, but also autograft, which is kind of the norm. And it is basically on the ability to grow bone. So similar to, as we also talk about our CMF portfolio, I won't go into too many technical details on that as such, but among other things, the porosity of the product, the ability, the osteoinductive potential just means that you get better bone growth, you get more bone growth and you get it faster. And the combination of those things just really means that you can deliver those very, very, very significant and strong preclinical results. So that's what we believe will set it apart from competition. Thank you. I'll bump two questions together here from Richard. Does the SETI putty have reimbursement place in The US? And when do you expect this to have a meaningful sales, the Osteo party to OsteoSign? Yeah, so I'll answer the one on reimbursement. Yes, it has reimbursement, not the party as such, but the category with which it will go into is fully reimbursed, the right existing codes and it has a five ten clearance. So it is fully reimbursed as such. To the question on sales, as I also said before, it's too early for us to come out with any specific guidance on sales numbers specifically to the bone graft business. Other than what we said that it will we do believe that it will become a very significant part of our business as we think about the future. Thanks. Final question then from Richard at ABG. What will the financial or cash position be after the transaction? I think that's something that we should talk to also when we do the Q3 announcement where we also disclose more numbers also relative to our cash position and other things. So I think I would like to defer that to the Q3 webcast we'll have. I see. I guess we'll have time for one more questions, and there's a few questions coming in. And I'll send them along to you, Morten, and to your team so you can answer them by email, but I don't think we have time to answer them all in this call, unfortunately. This one is from, Oscar Barryman at, Redeye. How do you view the hurdles surrounding the commercialization of a product that is currently lacking clinical data on human? Yeah, no, I think it's a fair question. I don't think it will hurt us in commercialization as such. There are numerous products out there that have necessarily conducted the human clinical trials. I think what you do in an animal test, you do something called a Boden model, which is really a rabbit model. So you implant in rabbits and then they jump around so that you're really stress testing the system because obviously a human being wouldn't be moving around like that. So I think when you pass that and you do it in that model, that in itself is very, very strong data and it's something that will be convincing also as you engage in conversations with surgeons and hospitals. But of course, we will continue to build on that also conducting human trials. I see. Several of the questions we've received is about more financial stuff, which you will cover in an upcoming webcast. So I'll finish up with the last one about this transaction. When do the account managers receive training for this? Yes. So I just need to understand how what we refer to when we use account managers. But yeah, if you think about it, so let me just, I'll tell you how I think of this. So if you're referring to our account managers as being our salespeople, then they will be trained immediately. I can actually tell you that half of our direct sales team in The US are coming from the bone graft business in the past. So they do not need any training. They are fully trained. They also have existing relationships to surgeons and key opinion leaders and so on. So of course, we will be training and that's something that will start within the next couple of weeks. Perfect. Thank you very much for all the answers Morten. And for people that haven't received an answer, I'll send them along to your team and you can either answer them by email or they'll have an answer on the upcoming webcast. But thank you very much for taking time, Morten. Thank you very much. Pleasure to see all of you. Bye bye. Bye.