OssDsign AB (publ)

Hello and welcome to today's WebScout presentation where we have Aas Design who will be presenting the Q1 report for 2024. With us presenting we have the CEO Morten Henneveld and CFO Anders Svensson. If you have any questions feel free to use the form that is located to the right and we'll take that up during the Q&A section and with that said please go ahead with your presentation.

Thank you very much and welcome to this first quarter of 2024 webcast. which is also our first quarter as a pure play of the biologics company. My name is Morten Hennevald and I'm the CEO of OsterSign and with me I have our CFO Anders Venson. Today we want to walk you through our Q1 results and highlights of the quarter. As always, when we do this presentation, the normal disclaimer. Overall, we've had another good quarter with sustainable growth and some very positive developments in the company, both during the quarter and after the quarter ended. We'll go into details on all of these. So the key takeaway here is that we continue the strong momentum we've seen previously, where we keep building border access in the US market with some significant contract wins with Premier and the VA. The meaningful investments we are making in clinical programs have also started to pay off, with a strong 93% fusion rate published from our first clinical trial to fusion. And last but not least, we are delivering on our strategic guidance with a significant uplift in gross margin, and we are showing clear signs of operating leverage. Anders will now take you through our financial performance, and then I will come back to talk more about the highlights in greater detail.

Thank you, Morten. So before we go into the numbers, I just want to clarify that given that the company no longer operates in the cranial space, so going forward, we will only compare to previous periods of orthobiologic cells. But when it comes to gross margin, this can't be separated out. So therefore, we will compare gross margins to the previous blended period. Now, if we turn to the results for the first quarter, we reported 27 million SEC in sales, which equals 207% growth versus the same quarter last year. That's quite a pleasing number. And this is the same actually on constant currency basis. There was no big difference in exchange rates. Now, as Morten mentioned, we are seeing sustainable and accelerating growth in the business with another underlying uplift this quarter. So what you see here on the slide is now the last nine quarters, with the bars being quarterly sales and the circles above showing the reported growth rates against the same quarter the previous year. Now, for 2022, of course, we have no comparison period. Now, as you can see, sales are increasing at a very meaningful rate, quarter on quarter, and we continue to be a high growth company, significantly outperforming the industry peer average. But in terms of the quarter on quarter sales between Q4 and Q1, we really have to adjust for the large extraordinary orders that we saw in Q4, which we mentioned at the time. And we've also indicated that in the slide. Otherwise, you won't really have a a reasonable comparison on the development in Q1. Now, as usual, I want to deep dive into how the US continues the exponential growth trajectory. And perhaps we've done this for many quarters now, but perhaps it's especially relevant now that we only sell in the US. Now, what you see in this bar chart is the last 12 months sales in each bar. And we've seen this trend for many quarters now starting in Q2 of 22. and we see good underlying acceleration in the first quarter again. An excellent performance, we are really satisfied with that. Turning to the gross margin then. In the first quarter, the gross margin continued to develop favorably compared to last year, and we reached 93.7%, which is an increase of 23.3% against a blended rate in Q1 2023. As we previously guided, we expected to operate with a gross margin at or above 90% as a pure play of the biologics company. So it's very pleasing to see that we're actually delivering on that. So just one thing I just want to remind everyone is that given the nature of this business that we're in with manufacturing biologics products, they undergo significant testing and so on. we will inevitably have some products that occasionally don't pass these tests. And combined with the fact that we're still in the early stages of commercialization with relatively low volumes, it means that the gross margin may be subject to some percentage point fluctuations between quarters going forward. Looking at the operating leverage then, if we go to the income statement, which I don't plan to go through in detail, I just want to call out how we now, as a pure play author biologics company, can see clear signs of improved operating leverage in the business, with a significant improvement in the net result year on year. Just to set the right expectations, though, I also want to remind everyone that the company is currently in full motion to transition more functions to the US. And consequently, the start of year operating expenses were somewhat lower than the expected level going forward. Now, once the transition is completed, which we believe will be during Q2, we expect to see a somewhat higher operating expense level, which will then also naturally impact the operating leverage development. Nevertheless, we are extremely pleased that, as we also mentioned during our strategy announcement last year, we already see operating leverage in the very first quarter as an orthobiologics company. I will now hand you back to Morten to talk about the other significant developments.

Thank you, Anders. I know we've covered this before, but I want to spend some time recapping the strong clinical outcome we reported from Top Fusion at the end of January, which were published in the peer-reviewed journal, Biomedical Journal of Scientific and Technical Research. Top Fusion included 17 patients to evaluate the safety and efficacy of Osteosyne catalyst in patient undergoing spinal T-lift surgery. Of the 17 patients recruited, three were withdrawn for reasons unrelated to Catalyst, and all of the remaining 14 patients completed the follow-up 12 months after surgery. The post-operative follow-up took place at six weeks, three months, six months, and 12 months, and we had CT scans taken at three, six, and 12 months post-operatively to assess the presence of fusions. Quite importantly, because there is unfortunately a lot of bias in many clinical publications, the CTs were independently radiologically reviewed by medical metrics. So we've tried to take out the bias in the assessment of the fusion rate, which means that you can read them with a higher level of credibility. There are four important clinical points I want to draw your attention to. One, we reported a 93% fusion after 12 months. And albeit this is not statistically significant, it is above the average in the industry, which as you know, is typically around 75 or maybe up to 80%. Perhaps even more importantly, we saw a very fast progression to fusion, which you see on the right side in the red box. All patients were either fully fused or had progression to fusion after only three months. And this confirms the high potency we see in the technology, which we also saw in the preclinical data. And it's a strong confirmation of everything we've seen on the product so far. And as you know, speed of bone formation is directly correlated to reduction in complication, such as implant loosening infection or other adverse incidents. The third data point is looking at all the scores that were used to quantify pain and function, which showed an improvement in quality of life over time at all postoperative follow-up evaluations. And finally, no device-related adverse events were reported during the study. This is again a confirmation of what we previously reported in our first post-market safety report. The authors were therefore very clear in their conclusion and I quote, This prospective series indicated osteosin catalyst bone graft substitute demonstrates consistent and rapid bone healing and remodeling with correspondent improved patient outcomes, end of quote. So therefore, the publication of these outstanding clinical results coming from TOF fusion is a crucial step in our process to establish osteosin catalyst as a clinically proven synthetic bone graft And we're very pleased with these first results. Now moving on to some of the more recent news that came after the quarter ended. Just in case anyone don't know what Premier is, then I can tell you it's one of the absolute giant GPOs in the US, covering approximately 4,300 hospitals and health systems. and 300,000 other type of providers and organizations. And that means essentially they cover a very large part of the entire U.S. market. As you can imagine, we are extremely pleased with winning this contract, which is a very clear recognition of our market offering. And it opens a large, valuable network, providing many more hospitals and patients access to our design catalyst. But whilst the contract in itself doesn't provide immediate access to hospitals and therefore will not generate sales overnight, it does represent a very significant building block for future sales and it removes a very real obstacle when submitting for new back approvals. And just to clarify, the contract starts on July the 1st and it runs for three years. And the pricing is volume dependent and within our standard market pricing tiers that we have used since we went to market a few years ago. The second exciting news that we shared after the quarter ended was that we have won a new contract with the Veteran Affairs, what's also just called VA. that gives us immediate access to approximately 100 additional VA orthopedic hospitals nationwide. The new contract is a continuation of our collaboration with Red One Medical, which is one of the most respective medical technology private sector representatives to the US government. The distribution and pricing agreement, which is also called the DARPA contract that we entered in 2021 has gradually been expanded. Last year with the ECAT, which provided access to all active military sites and now to all veteran orthopedic hospitals nationwide. So this essentially means that with this new contract, we are now in a position where we have complete and full access to everywhere in the military system in the U.S. From the beginning of our entry into Orthobiologics, we've been highly focused on building access to hospitals throughout the US, including active military and veteran hospitals. And this contract therefore signifies another important step in improving this as well as a deepening access of our military presence. And lastly, besides the obvious sales opportunity that this will bring us, It will also be accretive to profitability as military pricing, as you know, is well above the average selling price in the U.S. market. So as a final remark, I know we've mentioned it a few times today, but I want to remind everyone that OsterSign is now a pure play orthobiologics company. And we have been that since the start of the year in a strategy shift, which is expected to generate much higher shareholder value. It means that from now on, and at least for the foreseeable future, we will have a sole focus on the US market which is the biggest market in the world, characterized by high volume, high pricing, and solid underlying growth. We are seeing high scalability in this business, one that we have proven over the last two years, and which is also very evident in our first quarter results today. As Anders mentioned, We may see some fluctuations in the gross margin going forward, but we do expect it to operate at 90% or above. And even though we are now reallocating much of the cranial savings into biologics to accelerate growth in both the short and the medium term, as this business grows, we will naturally start to see a positive effect on cash flow over time. So with those words, I want to thank everyone for listening to the presentation and I'll hand back to the operator for questions.

Thank you very much for that presentation. And like you said, now it's time for the Q&A section here. We'll start with the first one. In how many hospitals is Austin Sign established today? And how should one think about the new contracts that has been signed?

Yeah, I'll... After Q4, in the beginning of April, we shared that we were approved in approximately 90 hospitals. So I don't think we'll update that statement. Of course, we keep adding hospitals on a weekly and monthly basis. When you think about the two new contracts, you have to think about them in two different ways. So if we start with the last one, which is the VA contract, that is immediate access. It is a system we are in. We actually did our first case under that contract on Friday last week. So it is still... exactly the same dynamics as before. You still have to find a doctor and persuade a doctor that Catalyst is a better product for use for his or her patients. And you still need to find a distributor to get into those hospitals. So nothing changes on the dynamic, but it is a more immediate access. When you win a GPO contract, that in itself doesn't bring you access. You still have to also go through the same dynamics with finding a doctor to champion your product and go through the normal back approval processes in each hospital. It does happen that a hospital is part of a premier or different GPO and insist on only buying under that contract. And we have had cases where we are all the way through VAC approval. And then the question is raised, by the way, are you on the premier contract? And we had to say no, in which case they couldn't do business with us. So the way to think about GPOs is that these are potential obstacles for growth. that if you don't get on them over time, then you will be carved out from a certain portion of the market. And then I think, quite importantly, because that is generally a worry for many medtech companies as they're dealing with GPOs, because of their bargaining power that they have to give up on price and therefore essentially cannibalize on the existing sales. As we also disclose when we send out the press release on the contract, that contract is signed on absolutely standard market pricing terms, which means that we do not expect any kind of adverse impact at all on pricing. So we see it as being a creative to the company going forward.

And sales commission at 45% of sales feels exceptionally high. Will it remain at that level going forward?

I think the sales commissions we see in Q1 is probably a level that we should expect to see in the next few quarters as well. It's a combination of distributor commissions and internal sales commissions, but I think the general level is probably where we will be at.

And can you elaborate on the strategies that led to the continued strong growth in the US business over the past eight quarters?

Yeah, well, I think it's pretty simple. It's some good thinking and blood, sweat and tears and hard work, to be honest. You know, we went to market having lots of experience in this field, having strong relationship with doctors, knowing dynamics, knowing competitor products, already having a strong network of potential distributors, which as you know, is not the easiest network to build. And that is essentially what we've worked on since we went to market, very targeting a select number of surgeons and that list keeps getting expanded. And then, of course, over time, once you have more users, then you can do two things. You start to have a stronger user base that you can leverage because at the end of the day, a surgeon is by far the best ambassador for your product also to his or her peers. And as you have a broader usage generally in the market, it also means you can start to approach more of the large institutions because you have evidence of broad usage in the market. So I think that's the only thing that has changed. Other than that, we haven't fundamentally changed the strategy. We went to market with a very strong positioning on the product. which is called dual bone formation, a chemical way, or not chemical, but I think the biocomposition of the product drives bone formation in a very similar way to what surgeons are seeing on the most potent product in the market called BMP2, which is a drug, not a bone graft. But essentially we are sticking to our guns and we are executing on the exact same plan that we went to market with and things are going well.

And have you stopped announcing numbers of treated patients?

No, but we don't want to dilute the message by keep reporting every 500. So we will be announcing that going forward when we hit, I would say, new bigger milestones. But it's not going to be at the same cadence as we did earlier on. Just remind everyone that as we've also said before, one of the reasons we did that is because when you are new technologies, it is extremely meaningful to surgeons to know how many patients that have been treated. So that was the main reason why we reported it with essentially 500 patient cadence. But we'll do it when we hit bigger numbers going forward.

Understood. What are the potential implications of the long-term agreement with Premier and the expansion of military access for AusterSign's future revenue and market penetration?

It's a big question. We don't have a crystal ball, but of course, you know, the all things equal the broader access you have the bigger potential to drive drive higher sales numbers and incremental sales going forward so we've said from the beginning that building access which is probably the hardest part as a new technology that is the most important thing for the company and i think we've done exceptionally well we we have Even though we think we have really good coverage today, and we have, there was still a very, very significant part of the market, the majority of the market that we're not even touching today. So we will keep building access. And of course, with these big contracts in place, it certainly increases the likelihood of us meeting our financial ambition.

Yep. And you have previously talked about the cash flow positive at a revenue level of 150 to 200 million SEC. It sounds like you're taking on a bit more cost now going forward. Will this be revised?

I don't think we are saying that we are taking on more cost. What we're saying is that we are reinvesting the savings from the cranial, which means that we'll be operating at give or take a same OPEX level as we were in 23. I think when you think of that in that context, then you should probably think more about the 200 than the 150, but essentially we'll stick to the statement that we gave earlier.

What initiatives has been implemented to achieve such a high gross margin especially compared to the previous year?

I mean that's it's pretty much a natural consequence of the new strategy. Previously we were a company with two franchises and the gross margin in the cranial business was a lot lower. than in orthobiologics. And also the European business had a lot lower margin than the US. So just the fact that we're concentrating now on the US and only on orthobiologics, that drives gross margin up to the level that we see today.

And if I can just add to that then, We did also establish OsterSign Catalyst in the absolute premium segment of synthetic bone graft, which means that we've also gone head to head with some of the most prominent other synthetic bone graft in the market from a pricing perspective. And we can see that we are able to get the price that we estimated. Maybe we even slightly ahead of our initial pricing estimates. So I think the combination of what Anders said and the fact that we are able to maintain a high price level on the product, that is what's causing the strong gross margin.

Can you provide more details on the factors influencing the cash flow from current operations, especially the impact of year-end bonuses and non-recurring accruals?

Sure. As we We mentioned in the report that we had a very good and improved underlying cash flow, even if that's not visible in the reported figures. And as you can see, the change in current liabilities was huge compared to last year. So at the end of the year, we had larger ordinary accruals than the year before. We certainly had larger bonus accruals. And then we had a whopping 12 million in accruals the non-recurring costs that hadn't been paid in 2023. A big part of that has run out and been paid in Q1, which is why you see 17 and a half million in change in current liabilities instead of five from the previous year. So that's obviously a one-off thing. It's not going to happen again. And we'll see that stabilizing in next quarter.

Okay, and we'll take one final question here. How do the recent appointments of key executives, such as a chief technical officer, align with your strategic objectives?

That was a very fundamental appointment. You know, being a... Being a biologics-focused company, clearly we need someone to head up not only the production side, but also the regulatory and the quality side that has not only a strong track record specifically within this field, but who also happens to be a PhD in this field, which means a profound technical understanding of the product. And Tom, as you know, came with us from the acquisition of ZeroCost, where he was heading up as a CEO. So to me, it's probably the most natural appointment we've done in recent years. to put Tom at the helms of these areas since they are the ones that needs to be significantly scaled not least on the production side in the coming quarters and years.

Okay, thank you very much Morten and Anders for presenting today and answering all of our questions and also thank everyone to followed along for this Q1 presentation with AusDesign and until next time, thank you very much.

Thank you very much. Thank you.