Hello, welcome to this Q3 presentation with OssDsign AB. With us today we have CEO Morten Henneveld and CFO Anders Svensson. My name is Kristofer Berggren and I work for Finwire Media. After the presentation, there will be a Q&A session, so if you have any questions, please visit finwire.tv and click on this Q3 webcast where you can write your questions. With that said, I hand over the word to Morten.
Good morning, everyone, and welcome to this Q3 webcast. As was mentioned, my name is Morten Henneveld, I'm the CEO of the company, and today and also going forward, Anders Svensson, our CFO, will also join me in this quarterly earnings call.
Good morning.
As always, when we do this presentation, the normal disclaimer around forward-looking statement. The highlights of the quarter for me really are that we had another record-breaking quarter on sales. As we also talked about last time, we won some main and very large GPO contracts in the U.S. We also started our TOP FUSION clinical study for OssDsign Catalyst. We launched and did our first cases just after the quarter ended with OssDsign Catalyst, and we also received an expanded market clearance so that the FDA now acknowledges the osteoconductive capabilities of our OssDsign Cranial PSI product. I'm very proud of these profound achievements because they continue to increase the potential that we have, and in particular in the U.S., which as you know, is by far the biggest and most important market for us.
Just before we get into all the details on the quarter itself, we are in process of building a broader potential, broader company with a lot more potential. I would like to talk a little bit about the clinical challenges that we as a company are addressing. What we see is that current bone replacement products today fail to heal a wide range of skeletal defects. If we look at the two specific businesses we are in, then for Cranial, people get injured, unfortunately, have traumatic brain injuries, some will need an implant. What we see today is that at least 10% of those have a very serious infection, often one that leads to an explantation of the implant. It's a very high number that we are addressing here.
If we go to Spine, u nfortunately, as we grow older, we do start to suffer from degenerative diseases, and sometimes you need to have a spinal implant to stabilize your spine. What you want in that situation is what we call a fusion. You want the implant to grow together with the spine or the vertebrae. For spine patients today, the common denominator in the literature is that one in five does not achieve that outcome. Ultimately, for both patient groups, it means that they have to undergo revision surgery, which is not only painful for the thousands of patients that this happened to, but is also extremely costly to the healthcare system and therefore the society.
What OssDsign brings to the market and what makes us different is that we have cutting-edge biomaterial science, and we are working in very close collaboration with world-leading surgeons to develop the really what are the next generation bone replacement products. What makes those products unique is that they stimulate the body's own healing capabilities. They are designed to get the best out of what the body itself can do. That is what is different to what we bring to the market. I'm sure most of you are familiar with our Cranial PSI. This is a product that was developed on which the company was founded. It's a 3D printed medical-grade titanium covered by a regenerative calcium phosphate composition.
What that means is that the titanium skeleton reinforces the implant and makes it possible to create even larger implants that can resist the physical and mechanical stress. The unique calcium phosphate composition provides healing and regenerative properties, essentially enabling growth or regrowth of the patient's own bone. Over time, the calcium phosphate composition degrades and is replaced with bone, leaving the patient with a well-integrated implant, potentially lasting a lifetime. I'm sure you're all aware also of the very strong results we've had. I just talked about 10%, average, maybe even more in the marketplace, having an infection that often leads to an explantation. What we've consistently demonstrated is an explantation rate of around 2% due to infection. It is a very significant, observed clinical outcome that we have constantly proven for our Cranial PSI.
If we go to Catalyst, this is an innovative synthetic bone graft, which is really composed of a proprietary nanocrystalline structure, again made of calcium phosphate. Similar to the body's own bone mineral architecture. The patented nanocrystalline structure of OssDsign provides a much more favorable bone biology environment for rapid and reliable bone formation. This really differs from what I would call the traditional synthetics that are much more similar to bone on a macro level rather than a nano level, essentially leading to a less profound bone biology response. We received the FDA clearance on this product in 2020, and that was based on some extremely promising preclinical data where we used probably the most discriminating preclinical model you have, something called the Boden model.
What we saw in that model is that Catalyst showed better results than any other synthetic bone graft, and actually showed outcome data fusion rates of relative 90%, around 90% after 12 weeks and 100% after 26 weeks, which is actually comparable to what you see on BMP-2, which as you know, is not a bone graft, but it is the largest seller in the U.S. market right now. Therefore, we believe that OssDsign Catalyst really has the potential to dramatically improve the success rate for spinal surgeries. That is a much welcome development for the millions of patients that suffer from severe back pain where their only option is to have a successful spine surgery. This is really what OssDsign is bringing to the market.
These are the two key pillars of the future of the company. I think with that, let's go to the purpose of today, which is to talk about the third quarter. In the third quarter, we reported SEK 8.9 million revenue, which is another record-breaking quarter for us. That translated on a constant currency basis into an outstanding 39% growth versus the same quarter last year. It means that year- to- date we are showing a 33% growth despite the pandemic being out there. This is something we are extremely pleased with. Of course, as we'll talk about a little bit later, there is an impact on the pandemic still. Given that, these are results that we're extremely proud of.
In particular, also, as we see a big part of this is being driven by our U.S. operations. One of the other things, as we also discussed last time, was that we won two large GPO contracts. As you know, we were accepted with our Cranial PSI for Premier, a very large GPO covering more than 4,000 hospitals. That's of course something we're extremely pleased with because it opens up a very valuable distribution network and a significant sales opportunity. The agreement is also a very clear recognition of the high quality of our Cranial Reconstruction Portfolio. Early August, we also announced that we've partnered with Red One and have been awarded a contract with the Department of Veterans Affairs and the Department of Defense.
Through this Distribution and Pricing Agreement, which is also called the DAPA agreement, American veterans and active military personnel will have access to our innovative products. Here it's really worth noting that not only do we have Cranial PSI on there, we actually also managed to get OssDsign Catalyst on there before we even launched the product in the market. I'm extremely proud that we've entered into the partnership with Red One Medical. It is one of the most respected medical technology private sector representative that is appointed by the U.S. government. Red One Medical and the VA really only accept the best, and we see this as a very clear recognition of the high quality of the products we are bringing to market.
As you know, in July, we also announced that we've been selected to showcase our unique solution for the reconstruction of cranial defects to Vizient, which is another one of the major GPOs in the U.S. The exchange is an exciting part of the Vizient Innovative Technology Program, which if you are a qualified product, ultimately result in a contract. That is something that we are still awaiting the decision on. As we await that decision, we are excited about the significant sales potential. Showcasing our products really is with Vizient and also just the fact that we were invited to showcase our Cranial PSI to members of its network. Again, this is another clear acknowledgement of the high standard of innovation that we are bringing to market. In September, we also announced the start of our clinical trial for OssDsign Catalyst ahead of time.
As we said, we had anticipated this would start in Q4. We worked very intensively with the site and Dr. Varga in Hungary, and we managed to get this off the ground sooner or faster than expected. The clinical study will run over 24 months, and it will include 17 patients. Our TOP FUSION study will primarily evaluate the safety and efficacy of OssDsign Catalyst in patients undergoing spinal surgery. The study's primary endpoints will be assessed by the rate of bone fusion as well, of course, as any device-related adverse events during the period. We are in the process of enrolling patients, and we expect the patient inclusion to be completed early in 2022. I think the step that we are now taking, we launched Catalyst in the U.S. for preclinical data.
Of course, we're extremely glad to take this next important step in the clinical development of OssDsign Catalyst, which has previously shown, as I said, some very promising preclinical data. We do look forward to work closely with Dr. Varga and Dr. Lazary, which are really two of the world's foremost experts in spinal surgery, who are the lead investigators for the TOP FUSION study. Just after the quarter ended, we also announced the first patient had been treated with OssDsign Catalyst in the U.S. As I've said before, our key focus this year is really to establish a base of users that allows us to set up centers of excellence and engage deeply with selected key opinion leaders. I also want to show you a little bit from one of our first cases.
What you see on the picture is from one of our very first surgeries where OssDsign Catalyst is mixed with the patient's own bone. What you clearly see in this picture is the very, very excellent result that is making. This is exactly what you want to see in a bone graft when you're mixing it with the patient's own bone, which as I'm sure you know, happens in the vast majority of surgeries. The two final mixed products, which you see on the right picture, will then be applied on the vertebrae, which is exactly what you see in the more graphic image on all the way to the right. That is how the product is being used in practice. I just wanted to show this.
I think it gives a better understanding of how the particulate composition of our OssDsign Catalyst is actually used in practice. I just want to reiterate, the mixing you see here and the final result is exactly what you want to see in a bone graft. It's certainly also something that the surgeons who have used it so far have commented positively on. In October, we also received an expanded market clearance from the U.S. Food and Drug Administration, the FDA, for our OssDsign Cranial PSI. The new 510(k) clearance builds on the initial market clearance we got in 2017 and means that the FDA has now cleared that the osteoconductive ceramic component of OssDsign Cranial PSI is resorbed and replaced with bone tissue during the healing process.
Just as a side note, what I can say is that we are not aware of any other cranial products in the U.S. market that can say this, essentially saying that the product is osteoconductive, resorbs, and turns into bone during the healing process. This is something that we've worked on for quite some while and discussed with the FDA, and I think this is a really true testimony to the innovative capability of our Cranial PSI product. As we look forward, the path forward is very clear for us. We will continue to execute on our new ASCENT25 Strategy.
The strategy will focus on neuro and orthopedic spinal surgeons and means that we will move away from being a niche player in the cranial space to now also enter the biologics of bone graft and spine spaces. To achieve this, we set five very clear strategic priorities. We will disproportionately direct investment towards the U.S. We will also invest in building a true Global Bone Graft business. We will leverage our two technology platforms that we now have to increase and accelerate innovation and keep expanding the portfolio. Clinical programs going forward are extremely important for us, and we will significantly invest and accelerate work in both programs and registries. Last but not least, we already have started very actively pursuing operational efficiencies with a particular focus on bringing down Cranial PSI lead time and COGS level.
Those are five very clear strategic priorities that keep guiding how we apply our resources and where we focus our time and effort. I just wanna also give a little bit more insight into some of our clinical progression and our how we think about this going forward. If we start with our Cranial franchise, as you know, the post-market surveillance data is really the key source of data to assess the efficacy of products, and that is of course something we will continue to focus on. It's an annual publication, and the updated report will come out in the foreseeable future. In addition, we also know that in every comparison surgeons are making on cranial products, Cranial PSI come out better.
Therefore, we are engaging with key opinion leaders in both Europe, but also now in the U.S. to really set up prospective regional registries. These will be at arm's length principle. It means that the investigators and the university clinics will be the owner and the driver of these registries. It is certainly in our interest to support that this is happening and to support that we get more and more data and more and more publications by the investigators. Those are two really important focuses for our Cranial PSI business. For our Bone Graft franchise, already highlighted the TOP FUSION study we are doing. Of course, as you're running this and you have 24-month follow-up, we will get access to data on an ongoing basis.
Really the key data point when you look at spinal surgery is the 12-month primary data. That is where you can say absolutely what your fusion rates are. That is the key thing we are targeting as, of course, we get access to data on an ongoing basis. In addition, we are working very intensively on setting up a prospective registry in the U.S. for Astera and Catalyst, and we are already in very deep dialogues with numerous centers. These registries will not only give us data on a lot of patients, for instance, much faster than what you get in a clinical trial, but it will also provide us with a much broader data set on patients, meaning that we'll be able to do data mining on the data and, for instance, talk to how we're performing against certain comorbidities.
As you know, smokers and diabetics are two particular issues when you're doing spinal surgery. The centers will be enrolled on an ongoing basis from now on until the end of Q2 next year. We hope with a bit of luck that we may already have the first one in this year, albeit it will be subject to the standard regulatory processing time that you need to follow when you're setting up these registries. I think this clearly shows that we are putting our money where our mouth is. We are investing very significantly in more clinical data, and we look forward to, of course, seeing the outcome and start seeing the data of that during 2022. I also want to give just a very brief update on the COVID situation.
As you know, and as you hear in the media, we're certainly not out of the pandemic yet. For the quarter, we started actually with having a very minimal impact. We didn't see a lot. We saw significant improvement. U.K. continues, though, to suffer from a backlog situation that they are finding somewhat hard actually to work through, given the capacity levels in the hospitals. As you also know, in Europe from around October, we have seen a new surge. That is, of course, something that we are monitoring carefully. The U.S. was a little bit different. Actually the beginning of Q3, we started to see some impact. It was generally getting better, but then we started to see closure, in particular in certain states.
That started to impact. As you know, we have a certain delivery time. That started to impact the results in the second half of the quarter, and we're also seeing that slightly extending into the early part of Q4. Having said that, situation definitely seems to be improving right now. Of course, one of the new things that have come up is the medical staff shortages that we see in numerous hospitals. It's more evident in the U.S. due to some of the vaccine mandates being put in place. Last but not least, when it comes to Japan, we're definitely seeing an improved situation there. We're seeing vaccination rates now extending into the seventies, so more promising data. We also see the state of emergency has been lifted. We still have not seen hospital access and the surgery scheduling being normalized.
I think that's likely from what we hear also from our partner, there's gonna be a lag time here before that happens, but we're definitely seeing an improved situation in Japan. As we talk about the important milestones, and look, there's not a lot of time left, of course, in 2021. We have three important milestones, as we announced last time. The first one was to start our TOP FUSION program in Q4. We did that ahead of time in September. As I also said, we also want to launch our clinical prospective bone graft registry in the U.S., and we are targeting with a bit of luck to have the first site up and running in December. For Japan, we will be making a launch decision during the month of December as well.
Those were the three remaining key milestones we had in 2021. I think with that, I would like to hand it back to the operator and thank you everyone for listening to the presentation.
Great. Thank you, Morten, for the presentation. Let's start the Q&A session. Just a reminder, if you have any questions, please visit finwire.tv and click on this Q3 webcast, where you can write them to us. First question. You have won some big GPO contracts. Why are these so important for you?
Well, I think, you know, they're important in a number of ways. If you—we start off looking at the sales potential, then of course, when you win a GPO contract, it doesn't come with any kind of volume commitment. It's still hard work every day, hospital by hospital, surgeon by surgeon. What you experience in the MedTech world is that you can have deep conversations with surgeons who actually want to use the product, and then you have to buy through the GPO, and if you're not that GPO on that GPO contract, you will not be able to sell a product. Essentially what it is that it's removing a barrier for increasing sales in the future by being on that contract.
Of course, there is the signal value of being one of the companies that have been awarded a contract with the largest GPO in the country. Of course, that is a testimony to the innovation we are bringing out. Of course, these are extremely important. If you talk about the contract, we got the DAPA contract with the Department of Defense and Department of Veterans Affairs, then that is a much more binary contract because if you're not on there, you are simply not allowed to sell to all the military and the VA hospitals. That is of course a much more linear. Once you're on the contract, you can go into hospitals, and you can start selling immediately.
There is a more one-to-one translation between sales and contract on the DAPA than what you will see on a Premier contract, which is just extending and continuing the hard work every day over time.
Okay. Thank you. Next question, it's regarding the gross margin and the revenue growth. Could you please elaborate on these strong figures? What were the main drivers?
Yeah. I think this one I'll answer. I'll ask Anders to take.
Well, the revenue growth, I think Morten has elaborated on already with the increased success in the U.S., and that's actually the main key driver also behind the improved gross margin. We have, as you probably know, higher prices in the U.S. When we see a market mix change which favors the U.S., then our gross margin automatically goes up. It's also an effect of increased volumes in production. We're getting scale economies and scale benefits in our production of the Cranial PSI.
Okay. Thank you. Next question. Have Premier and Red One had a positive impact on sales in the quarter?
No, I think it's too early to say what the impact will be on those kind of things on these GPOs. As I mentioned, some of these will take time. It is simply removing a barrier. What I can say, though, is we already have started to sell into the military and the VA hospitals with the impact of course in the quarter fairly minimal, but we have started the work, and we do have the first customers.
Okay. Thank you. When will you start reporting Catalyst sales separately?
I think we will let you know when we intend to break that out. Right now it's still too early days to start doing that in a meaningful manner, and that's something that we will inform about when we're ready to do so.
Okay. Thank you. If we look at your clinical programs, which one of them is most important to you?
That's a good question. I don't think I'll say one is more important than the other. I think they are all extremely important. As I said, I think overall clinical for the company is an area that needs a lot of heightened attention and needs more investment, and that is what we are doing right now. I think they all contribute in various shapes and form. As I said, around our Cranial PSI, really the key data that surgeons will be looking at is your post-market surveillance data and the explantation rates, and this is where we know we come out extremely strong.
That's also why we are supporting surgeons and key opinion leaders in driving more publications, case series, other comparative studies that they wanna do, because we know the more it gets published, the better it will be for us. For bone graft, the two things that we are now working intensively on essentially covers two different things. The first is a first-in-man study. You need to show, of course, it also works well in human being as it did in animals. I think the bone graft registry that provides us with scale data. It is not, as you know from other clinical trials, double-blinded randomized trials and so on.
It will give us access to a lot of patient data and a very broad data set, that we can use for multiple purposes, of course, to sell for marketing purposes, but certainly also to drive new regulatory approvals over time. I don't think one is more important than the other one. I think it's the sum of all parts.
It's like choosing between your babies or kids.
Yeah. Well, you're not gonna get me to choose one, right? Because I think overall my key message here is that clinical is an area that needs heightened attention, and it needs more investments, and that is exactly what we're doing right now, ultimately, because that also contributes to increasing the potential in the company and the value of the company.
Okay, thank you. Next question here then. Your gross margin in the quarter was almost 80%. Is this to be seen as a one-off? What long-term gross margins are you expecting, and how does the profitability differ between different products? So three questions in one there. But let's start with the high margin. Should we see that as a one-off, and if we look at the long-term margins, what can we expect there?
Anders, do you want to answer that?
Yeah. Yeah. I think I don't think it's a one-off. I think you will see a trend of up to now of increasing margins, and I think that trend is likely to continue. Probably not linearly, but I think we'll still see continued good margin growth going forward.
If we look at the profitability between different products, how does that differ?
Margins, I think we've been clear on this, that margins in the biologics sphere are slightly higher. We have higher margins on the Catalyst, or expect to have, when sales take off, than we see in Cranial PSI. It's now we only sell Catalyst in the U.S., so it's hard to compare. You have to compare them country by country if you wanna compare with the Cranial PSI. There's different margins in different countries.
Okay, thank you. Next question. You announced a new strategy earlier this year. How are the overall progress with this going?
Yeah. Well, I think the numbers speak for themselves. I also think we're giving some insights into our clinical programs and other things. It's going well. It's going according to plan. In a few cases we managed to launch a little bit sooner, the launch of Catalyst in the U.S. being one. We also start our clinical trials of TOP FUSION a little bit sooner. We are working on some of the other clinical programs, as I said. We've won big GPO contract that will increase our potential in the U.S.
Then of course, you know, sitting underneath as a more fundamental factor, in January we already moved into new, more purpose-built facilities, bigger facilities, which means that we can scale PSI production without any further investment in that space. Of course, you know, we also completed a very successful rights issue just before the summer, where we raised SEK 270 million before transaction costs. It was 185% oversubscribed. That essentially also give us the funding, so we can execute on the strategy. I'm very pleased with how we are progressing on the strategy and as I said, actually ahead of our own internal plan in a number of places.
Okay, thank you. Next question, on the technical side here. Do you always have to mix Catalyst with the patient's own bone? Can Catalyst be used as a standalone product like BONESUPPORT's product?
Yeah, I mean, it depends. Catalyst right now has a 510(k) clearance where it's being mixed with a patient's own bone. When you look at the marketplace, there is a mix. Some will have what we call a standalone indication, so you could use it as a standalone. In all fairness, I think a very high percentage of surgeons will ultimately choose to mix it with at least a proportion of the patient's own bone because simply it is the belief that when you as we also for instance do in our overall philosophy in OssDsign is that we want to really do something that stimulates the body's own healing.
I think the fundamental belief for the majority of surgeons is that you also stimulate that by using at least a portion of the patient's own bone. Right now you have to mix Catalyst. Is that a hurdle for sales? I wouldn't say it is. Of course, you know, other people have a standalone, but ultimately the surgeons will choose to mix anyway in most cases.
Okay, great. Thank you. That was the final question for this Q3 presentation. A big thank you to Morten and Anders for the presentation and for all the answers to the questions. Thank you very much to all of you who have sent in questions during this presentation. I hope to see you again on the next quarterly presentation with OssDsign AB. Thank you and have a good day.
Thank you very much.
Thank you.
Have a good day.
Bye.