Bonesupport Holding AB (publ)

Thank you, operator, and welcome everyone this beautiful morning to the bone support quarter two 2023 call. My name is Emil Bilbeck and sitting next to me is Håkan Johansen, our CFO. So we'll use the next 25 minutes to guide you through the presentation of the first results that we released this morning in the quarter two report, and then we will open up for a question and answer session. So before I go into the presentation, we would like to draw your attention to the disclaimers that will cover any forward looking statements that we might do today. So let's get right into it. And I would like to begin the entire presentation with some condensed highlight from the report. And of course, we're very pleased to report the quarter two sales of one hundred and forty million Swedish krona. This corresponds to reported growth of 88 percent year over year and in constant exchange rate, the growth rate was 75 percent. The operating result before incentive provision was 14 million Swedish krona. This is a profit improvement versus the same period last year of more than 23 million SEK. The reported EBIT was 6 million SEK, which marks now our second quarter as a profitable company. The main highlight of the quarter was, of course, the ongoing launch of CEREMENT-G in the US. We saw an increase in CEREMENT-G sales of 16 million SEC quarter over quarter with surge in using CEREMENT-G on a broad set of applications within the indication and a high level of pilot use in the quarter. So we are continuously improving our products and the user experience. And in the quarter, we announced the launch of the next generation of CEREMENT-G, which increase ease of use and also reduce an environmental impact. In the quarter, data from long term follow up, meaning four and a half years after using CEREMENT-G with open trauma fracture was published. So I will cover all of these topics later on more extensively in the presentation. But let's first look at the sales development. We go to the next slide. This is one of our standard charts for the quarterly report and investor presentation. It shows last 12 months sales in Swedish currency and it shows every quarter since quarter two 2016 split by region and product category. Sales is taking off really well with the largest driver being CERAMENT G in the US reaching sales of 51 million Swedish kronor in the quarter. In Eurov the antibiotic eluting CERAMENT which is the CERAMENT G and CERAMENT V combined Sales grew with 32% in the quarter versus last year. We conclude that a note that we make market share gains on other therapy options mainly autographed and bone cement on almost all markets in Europe. We see a general improvement in surgical volumes across all geographies. In Europe, we have to summarize, it's still behind pre-pandemic levels in terms of surgical volumes. There is some emerging cannibalization between Ceramen G and Ceramen BVF in the US, and I will share some more details about this also over the next coming slides. Let's start now with the US and go to the next slide. In the US, sales of 104 million SEC in the quarter, which corresponds to a growth of 126% year-over-year at constant exchange rate, the growth would have been 107%. Sequentially, growth was 21%, meaning the growth in quarter two versus what we reported in quarter one, 2023. We're starting to see some cannibalization, as I mentioned before, between Sermon G and Sermon BVF. But despite this, Sermon BVF in the US grew 14% in the quarter versus quarter two last year. In fixed currency, the growth was 8%. for the first six months of 2023 on CEREMENT BVF. So this can be compared to the growth that we saw in the second half of 2022 when CEREMENT BVF grew with around 40 percent in constant currency. So the difference between these two numbers is, of course, partly attributed to the cannibalization effect of CEREMENT G. So let's go a little bit further into details on CEREMENT G, which we prepared on the next slide. So we're on slide six. With this quarter sales of 51 million SEC, we can conclude that the quarterly sales of CEREMENT G that we have in the US is now actually larger than our entire European sales in the quarter. I believe that this shows the large unmet need, but also the efficiency of our commercial structure in the U.S. and also the huge potential that we're tapping into. Our hospital approval process is progressing well, and we have added some 10 approvals since quarter one. Among the added approvals in the quarter are the very large Atrium Health, and the prestigious Stanford Healthcare. Thus, so far, we have signed some 60 out of the approximately 420 hospital groups covering in the US. And we must say we've been off to a very good start with approvals. And now, and in the most recent period, focus is on securing implementation and driving account penetration where approvals have been given. Educating and training the orthopedic surgeon and the hospital staff is part of the contractual commitments when introducing a breakthrough therapy device like this. This is also an essential part of creating therapy ambassadors among the surgeons. The amount of pilot uses which precedes approvals and continuous use was high during the quarter. I have shared with you before that the performance and the market penetration of a completely new product like this goes in waves. Go, stop, go, as it's called in the orthopedic industry. We continue to get positive feedback on the product handling and the transition, especially to a one stage procedure. All in all, Caretakers and hospital administration see clear and visible clinical and health economic benefits. Very similar to what has been previously displayed in various clinical studies. In order to systematically build a database of experience with CRMNG and also consolidated patient data, we're starting a structured collection of data, a so-called registry study, the use of CERAMENT-G in the US. We're now selling in 38 states and during the quarter we saw our first CERAMENT-G order from Orthopediatrics. Orthopediatrics have been successfully selling CERAMENT-BVF to pediatric hospitals and they're now adding CERAMENT-G to this customer segment. Several layers of data has been processed regarding the ambition to get label extension for CERAM-NG in the US to also include prevention of infection as an example related to open fractures. The last batch of data has not yet arrived from the university hospital that we have partnered with. So with previous insight and knowledge of the time it takes to analyze and process such amount of data and also to put it together into submission, we have moved the target date for the FDA submission to the end of quarter four this year. Now, let's turn to Europe and go to the next slide, please. So, in Euro for the quarter, we saw sales of 36.5 million SEC, and this corresponds to a growth of 28 percent year over year and 24 percent at constant exchange rate. We continue to see a steady recovery in general surgical procedure volumes. However, healthcare staffing shortage remain a challenge and we will continue to pose a challenge in quarter three as strained healthcare workers will try to manage during the European vacation season. For the third quarter, we thus expect a certain accentuation of the normal seasonality. In the quarter, we announced modifications to the sediment G. This was the third major upgrade to the product. So we called it the third generation, even though the changes are not maybe that dramatic. So let's take a further look on what those changes actually are. So we're on slide eight. So important to note, first of all, is that There's no change to the formula, the composition or the mechanism of action for Cerament G. There is no change to the active ingredients, but all the components for mixing and applying Cerament G now comes in one surface sterile tray. For those that have been in a surgical theater, you know that every component must meet the requirements of the different and specific surgical zones in the theater. The improved handling and the reduced waste are factors that will matter a lot to the staff performing the surgery, as well as to procurement officers and, of course, to our continuous sustainability work. We'll go to the next slide. So continuing on the highlights, we are constantly assessing the organization in perspective of overall ambitions and deliveries. We've decided to change how we lead our efforts of indirect markets. And that means the distributor markets in Europe and the rest of the world and also the European hybrid markets. And we set up a new structure here. We've also in the quarter done some organizational upgrades and the changes that I'm mentioning now were required in order to take our performance to the next level. However, these changes have triggered severance cost and other expenses in the quarter of about 3 million SEK. Changing the structure like this and upgrading the organization is, of course, part of running a fast growing company. But to the magnitude we saw in quarter two, I think this has to be considered as non-recurring cost, of course. Also in the quarter, there were two really important studies that were published. The first one, a study by Cavartapo et al. from King's College, showed strong results on infected diabetic foot ulcers that were treated with sediment G or V. And all patients in the study were able to avoid amputation. From the University Hospital of Manchester, Withenshaw, Henry et al followed 81 patients with open trauma fractures for a median of 55 months, confirming excellent and sustainable benefits from a single stage procedure of CEREMENT-G. So on the next slide, just looking a little bit further on what the patients look like that were part of the trauma study by Henry. So this picture shows the open trauma fractures and how they're assessed on a scale from one to three in terms of severity. And the study from Henry et al was made on 81 patients in category and you see the categorization there with a red square around it. This means that the bone is really in fragments and that there is material soft tissue damage. Several previous publications have shown infection rates on these category of trauma fractures of up to 52% and then amputation rate of 16%. In the study The infection rate was three point seven percent and the amputation rate dropped to three point seven percent as well. And this is when the patients were followed for four and a half years. This is the longest follow up data ever published on use of a synthetic bone graft on 3B open trauma fractures. So very strong results also clinically delivered in quarter two. And with that, I leave over to Håkan to do a bit more of a deep dive in the numbers.

Thank you, Emil. So let's jump to slide 12. So net sales improved from 74.6 to 140.4 million, equaling a growth of 88% or 75% in constant exchange rate. Emil has already spoken about the strong performance in the two segments, and the major drivers behind the sales acceleration. So let me comment on the currency. Changes in currencies measured in year-to-date averages in 2023 versus last year had a positive impact of in total 9.6 million, of which 8.6 million relates to a stronger US dollar. The depreciation of the Swedish krona versus other currencies also drives expenses, as you will see on later slides. So let's move to the next slide. The contribution from the segment North America improved with 24.6 million and was reported to a regional contribution of 31.7 million. The improved contribution relates to increased sales after effect from increased costs. Sales and marketing expenses during the quarter amounted to 65.4 million compared with 34.8 million previous year. of which sales commissions to distributors and fees amounted to 36.7 million compared with 16.7 million the same period last year. The increase of 10.6 million excluding commissions and fees was driven by currency effects of 2.3 million and the reminder from an increased activity level. As we have announced previously, the US booster positions are up and running, and there is a strong focus on medical education and increased market presence, also contributing to the cost in the quarter. The contribution was also charged by R&D costs related to studies of one million in the quarter, same level as previous year. From the lower graph showing net sales as bars and gross margin as the orange marker, It can be noted that the gross margin is remaining strong and reported to 94.5%. Sales to orthopediatrics in the period impacted gross margin negatively in comparison to the first quarter this year. In Europe and rest of the world, a contribution of 7.6 million was reported to be compared with 7.1 million previous year. The improved contribution relates to increased sales after effect from increased costs. Sales and marketing expenses increased with 6 million and was driven by currency effects of 2.3 million, but also attributable to fee vacancies and to a generally higher level of market activity. From the lower graph and the orange market, you can see an improvement in gross margin compared with the first quarter this year, following an improved market mix. As mentioned in our first report, we have a minor increase in manufacturing costs. The latter is anticipated to be mitigated by increased sales prices, having gradual effect during the remainder of the year. In the period, finally, we also had non-recurring costs impacting sales and marketing in North America and Europe with altogether 2.9 million. So let's move to the next slide. Selling expenses increased with 17.6 million versus last year, of which 3.3 million relates to currency effects and 2.9 million in non-recurring costs. As we mentioned before, the US booster is up and running and we continue to see results on top line. In euro, we increased early in the year with two head counts on the sales side and our total euro commercial organization is now 30p. The increase in the quarter relates to a ramp up in activity level of congresses, medical education, and of course, the launch program for ceremony in the US. R&D remains largely in line with previous year, but was picking up from a low Q1 this year. And administration remaining on a stable level, excluding effects from the long-term incentive program, equaling 12.2 million compared with 10.9 million previous year, and 11.7 million in previous quarter. Next slide, please. The operating profit was reported to 6 million compared with the loss of 14.9 million for the same period previous year. 20.9 million improvement following a strong sales performance. The profit also includes expense provisions regarding long-term incentive programs amounting to an expense of 7.7 million this year compared with 5.8 million previous year. Of the total cost of 7.7 million in the period, only 0.2 million is cash flow impacting in the future. The operating profit improvement before the long-term incentive programs was 22.7 million, confirming a strong underlying positive trend. The increased provision for incentive programs in the quarter relate to the strong share price appreciation in the period. Cash flow in the period was impacted by the strong growth resulting in an increase in accounts receivable of 51.1 million. And with this I hand back over to you Emil.

Thank you very much Håkan. So let's wrap up this presentation. We're, of course, very pleased to present such strong quarterly results, and we believe this is more than confirming the high expectations on what Sarment can do to drive improved patient outcome. In the first six months of 2023, we've seen a gradual recovery of overall surgical volumes, and Sarment is rapidly capturing market shares on all markets present. Our growth rate in the first six months in constant exchange rate was 72%. Some of you have followed the company for a few years, but I must reiterate, we've only begun our journey in terms of market penetration and to deliver the full value of the CEREMON platform. Håkan and I will take a bit of vacation now, but later in the summer, we will start to plan the details and prepare for a capital markets day in the autumn. One of the focuses will be on how our continued journey will look like and also how continuous new clinical discoveries goes hand in hand with progress on further innovation based on the sediment platform. We do believe that we have quite a unique position in the market with favorable market dynamics ahead, being the only FDA approved antibiotic eluting bone graft in the U.S. with evidence supporting superior and sustainable clinical efficiency and health economic benefits. And on top of that, a very competent and passionate organization. So with that, I conclude this presentation and look forward to open up to a question and answer session.

If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question please dial star 5 again on your telephone keypad. The next question comes from Eric Castle from Danske Bank. Please go ahead.

Hi, good morning Emil and Låkan. So first question, as you said you added 10 VAC approvals during the quarter. If I remember correctly you had 50 approvals at the end of Q1. I mean, this seems like a slight deceleration compared to the VAC approvals you had in previous quarters. Is that a correct conclusion to make, or is there any good explanation for it?

Thank you, Erik.

Yeah, of course. So when we entered quarter two, as you said, we had 50 hospital system approvals. And then as we left the quarter, we had 60. So numerically, slightly less approvals were added in quarter two but that's just numerically we have not disclosed or discussed the value of the different approvals and I would like to point the attention that in quarter two we landed among others the atrium healthcare and it will go in waves also so I think in quarter one of this year we had an exceptional amount of approvals but quite few of them were also on the slightly smaller side so with the additions we had in quarter two it's absolutely in line with our expectations and that number will go up and it will go down for various quarters but as you can see from the sales number we're keeping a good traction okay perfect so it doesn't really imply

Let's call it iteration Q1, Q2, Q3 then. But then you also talk of high pilot activity. Is it possible to say how many pilots are running now and how that compares to end of Q1?

There were more pilots in quarter two than there were in quarter one. And usually from when the pilot trials are running, there is... on average, a three months delay before the notification comes from the VAC committee, as you mentioned before, on the approval or not approval. So given that we had a lot of pilot trials, we should start to see the hospital system approvals picking up again in the end of quarter three, beginning of quarter four.

Okay, perfect, perfect. And then on the sequential growth, it's quite hard now compared to Q1. Is it possible for you to share how much of that is driven by more use in existing accounts versus added accounts?

No, we have decided not to go into that depth. The only extraordinary effect that we decided to comment on is that we took an order from Orthopediatrics in the quarter. And Orthopediatrics, as you remember, is the only of our partners that actually buy to shelf. So that order was about 2 million Swedish krona on Cerament G. Okay, okay.

And then I also want to ask on the delay in the trauma application. I mean, how certain are you that you will get all the data and meet this new timeline? Or is there any sort of uncertainty to it?

Well, when dealing with huge amounts of data and very complex data, there's always uncertainties. And when dealing with FDA, there's always additional uncertainty. And why do I say that? Well, because as with CERAM-NG, we have established a completely new category with the orthopedic segment. And for both bone support and for FDA, and I think for the industry at large, it has been surrounded with a lot of learnings on what is it that have to be in place to open up such a new category. We should remember there are not a lot of new categories that are opened in the orthopedic segments in the last 10 years. We saw from our initial approval of CERN-NG that it was a bit of trial and error also from FDA side in terms of what was demanded. So we remain confident both in the team here at Bone Support and the partners we have, but we can never be fully sure. So if everything goes really well, well, then we will have the submission in end of this year. And then FDA has about 90 days for their review. But we also see several examples where FDA review the material and then comes back for for supplementary information and we have really no idea how this is going to play out we will do our best as always but then we will be also in the hands of of FDA's their interpretations and what it is that they would like to see for this extended indication okay okay I understand

And then one last question, if I may. I mean, the third generation of M&G, will that have any sort of impact on potential pricing and gross margins?

Håkan, you have reviewed the cost structure in detail for the new product.

Yes, and again, as we mentioned in the Q1 report, we have minor general cost increases in the manufacturing. These costs also impact on the third generation, but that also involves and includes in the price lists and the price updates that we have launched having a gradual effect during the remainder of the year.

And one can also see some of the changes that we do now. You saw in the picture, it's a bit of a structural change to go to a smaller package that also allows better capacity and scale. I think over time, any such cost actually will be diluted because this also gives us the ability to keep pace with a very high market demand and big economies of scales in production usually also leads to lower cost of goods eventually.

Okay, I got it. Thank you very much, guys.

Thank you very much, Erik.

The next question comes from Christopher Liljeberg from Carnegie Investment Bank. Please go ahead.

Thank you. I have three questions. First, is it possible to update on the penetration at the approved hospitals, the figure you gave in Q1, if that has changed in any way? Also, when it comes to selling costs, you explained there were some one-off effects here in the quarter, but how should we think about them going forward? Will we see now gradually increased underlying selling costs for the remainder of the year with driven by more activity and the changes you have done in the European organization. And finally, when it comes to selling commission in the US, if we look at that as a percentage of sales, that percentage has come down from the surprisingly high level in Q4. So I wonder if there's some seasonality in here that will be repeated this year so that selling commission as a percentage of sales will go up again in Q4 versus what we have seen So far this year. Thank you.

Thank you very much, Kristoffer. Appreciate your call and your questions. So we release now the report very shortly after month closing. And we actually don't have the data available on the penetration. So we'll have to take passes on that one and come back. Currently what we see, to give you some guidance though, is that the penetration is increasing. It's increasing significantly with those accounts where we have won contracts and where we have been listed so far. The work of the sales people, the focus in quarter two, which will also continue very much in quarter three, is actually to make sure that those contracts that we have been placed on the hospital systems, that all the nurses, all the staff in the surgical theater and all the orthopedic surgeons are well trained on Cerament G. We know that's a good formula for sustained growth. So right now, the focus is not so much on winning new accounts as it is to work on the penetration. I think that should give you a little bit of hint on where the growth is coming from. When it comes to the one-offs and what to expect for the autumn, Håkan, would you like to comment on that?

Sure. And again, it's true that when we reported this latest quarter, Q2, selling expenses were higher than the first quarter. But when you take the one-offs in consideration, the close to 3 million that impacted the latest quarter, etc., it is remaining quite stable to what we saw in the first quarter. And this is two quarters where there has been a very high activity level in the market. We are now moving into a quarter where we will see a seasonality slowdown in those activities, but we can also expect that later in the year and in the fourth quarter, those activities to pick up again.

And to the final question there on selling commission, good observation. This relates a bit back actually to your first question. It also relates back very much to our business model. So we are very picky on making sure that when we win new accounts, that we establish that account, that we do the clinical validation, that we do the training, and that we support the surgeons to get up and running for settlement in various different applications. Now, what does this have to do with commission? Well, it has to do with the commission because last year at the end of the year, our sales concentration was quite high, meaning that there were some of the distributors in the US that were doing exceptionally well. And their commission then sprung significantly higher than the 30%, which is the average. And that drove the mix so that the commission looked higher. And with CEREMENT-G also, we have gotten on board more distributors and we're broadening the customer base and the distributor base. So the new, also at the end of the year, the delivery of the distributors was really high. But then when we come to the new year, there are new targets again. So the commission is now closer to 30%. It's a natural effect of those two components. So could there be a seasonality and could quarter four again take off in commission? Well, it all depends on the sales concentration. But I would say that the sales concentration this year is less than it was last year. So that should actually give us a more stable commission around the levels that we have previously communicated.

Great. That's very helpful. Thank you very much.

Thank you, Kristoffer.

The next question comes from Mattias Vadsten from SEB. Please go ahead.

Hi. Thank you very much. First one would be on 7G. It's the third quarter now you sell the product, so I just wanted to really hear what deviated most from your own assessments and expectations for the product. thus far and maybe try to cover sort of feedback on price in this answer as well. That would be the first one.

Hi Mattias, thank you.

So the sales of course that we've seen is a bit better than we expected and the product is very well received. We see both from staff in the surgical theater, as well as from surgeons that they believe the product is easy to use. And then, of course, we've done a lot of clinical studies. Most of them are done in Europe. So one is anticipating that the same kind of results will be created and achieved in the US, but you never know. So when you launch a breakthrough product like this, it's always with a bit of uncertainty. uh due to different therapy traditions and and how they're using the product and and what surgical techniques they're using but we're very happy to say that the feedback we're getting now on those patients that have been followed up the results are very much mirroring what we have seen in the big european studies and that is very comforting for us but it's also very comforting for for the surgeons to see that the product performs and behaves as promised and that they can see results which are then very similar to what has been shown in the study. That gives them a confirmation that they're doing the procedure right and that they can expect also the same long-term outcome and results of the product. In terms of price and in terms of market penetration, there's been very little pushback on price. even here possibly slightly less than we anticipated, but it shows the dynamic of the US market where the decision maker on the clinical achievements, the procedures to be done on the patient and the financials are usually very close to each other. While in Europe, the surgeon responsible for the wellbeing of the patient And the person holding the wallet are usually a bit more separated. So what does it mean? Well, it means in the US that the entity making the decision on the product, the value added committee, for example, as Eric mentioned before, they look both at the clinical efficacy, the clinical benefits and the health economic impact. And we have very strong data on the health economic impact. And this is very well understood. in the US and that's why also price is a much smaller factor in the equation. They look more at what are the benefits mid-term long-term for us health economic wise but also of course in terms of saving legs and avoiding amputations for the patient.

I appreciate that answer and then to tweak some previous questions here a little bit Just to understand the dynamics on 7G, in a typical hospital you're approaching now, what kind of surgeons are using the product more regularly, would you say? I mean, it's a difficult question, but then where you are present, is there a lot of surgeons that are convinced, or can it deviate between surgeons in a given hospital, so to speak? Yeah, how difficult is it to penetrate a given hospital?

Well, I think this is a question we have to come back to many times, but I'll try to give you examples. If we compare a big hospital in Florida, in Tampa, with one in Baltimore. We have a hospital in Baltimore where one orthopedic surgeon started using the product. already in end of October. And what we've seen in February, March, April is that almost all the surgeons have come on board and are using the product. Then on the other hand, you go to Florida where you have a similar size clinic. One surgeon has started to use it. The other surgeons are monitoring and of course, listening to the experience on this surgeon but need a little bit more, a little nudge, let's say, and more possibly support also from our sales and medical staff before they take the step of starting a new treatment. So it very much depends how much do the surgeons interact with each other? How much do they listen to each other and trust each other? What does the head of the department think about the product? you look at the really really big hospital systems that we spoke before we can take atrium for example atrium is a big hospital system when we get such an approval it doesn't really have any effect other than it gives us a hunting license and then we have to put efforts in to visit as many surgeons as we can to get them from early trial to more continuous use and then we can take A smaller hospital system in quarter one, we want quite a few of those. Here it's much closer between the hospital administration and the clinicians. And when a product like Ferment GE comes on the listing, there is usually a bigger awareness and attention to such a topic. So here it goes a little bit quicker to get more surgeons to start using the product. There's a lot of factors that will influence how quick the penetration goes, but so far, we're very satisfied with the market penetration rate, and it's even been slightly above our expectations.

Thanks for that. The next one, I understand you build working capital, given the substantial sales growth, and I appreciate the few words there, Håkan, but it looks a bit high to me, at least. Anything in particular other than receivables you would want to mention here?

Or we should think of... Again, if you look at the balance sheets, you see major movements only in two areas. One is inventory. And that for us is an important way also to make sure that we have the ability to meet the growth and the volatility in growth. So it's a natural reason why we have been working actively to ensure safety stocks and levels, et cetera, in raw materials to remain with a certain flexibility. And then somehow it is primarily related to the increase in trade receivables. And again, we're happy to report a strong growth and to report a strong growth to customers in a kind of business nature that represents a very low credit risk. So again, this is cash flow and payments will come. This is purely an impact of timing.

Good, thank you. And then last one, sorry if I missed this, but did you say that you expect to hold potential CMB before the turn of the year, like during the autumn?

Yes, we plan a capital markets day before the end of this year. So it's going to be sometimes during the autumn, most likely end of October or beginning of November. And just a comment again also on the trade receivables. I think we should recognize that in the business we're in with contracts on hospital systems, the number of trade losses is incredibly low. So these are customers that even though sometimes they're a bit slow to pay, there is almost always an ability and willingness to eventually pay. So we're dealing with private hospitals and public hospitals in the U.S. It's not the same issues that the general industry saw in southern Italy and in Greece a couple of years ago.

Okay. I appreciate all the answers. Thank you very much. Thank you, Mattias.

The next question comes from Matthias Vadsten from SEB. Please go ahead. There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.

Thank you, everyone. I appreciate that you took the time. I know some of you are already on vacation. Thank you for taking time to listen to our presentation. Right now, it's full rain in Lund, but I hope that all of you, wherever you are, have sunshine and have a great vacation. Thank you for listening, and we look forward to staying in contact with you all. Take care. All the best. Bye-bye.