Good start in the US, CERAMENT G/V growth

Bonesupport 20 March 2019 Update
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BONESUPPORT

Good start in the US, CERAMENT G/V growth

Q418 update

Pharma & biotech

20 March 2019

Price

SEK21.3

Market cap

SEK1,103m

Net cash (SEKm) at end-Q418

261.5

Shares in issue

51.8

Free float

50%

Code

BONEX

Primary exchange

Nasdaq Stockholm

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

6.5

6.5

40.7

Rel (local)

4.3

(4.9)

32.0

52-week high/low

SEK26.4

SEK9.3

Business description

Bonesupport is an orthobiologics company that has commercialised three synthetic bone graft substitutes and has several other projects in R&D. The marketed products, CERAMENT BVF, CERAMENT G (gentamicin) and CERAMENT V (vancomycin), are intended to help orthopaedic surgeons manage bone voids and defects after injuries or diseases affecting bones.

Next events

CERTiFy study results published

H119

Q119 financial results

8 May 2019

Health economic data published

2019

FORTIFY study data

2020

Analysts

Jonas Peciulis

+44 (0)20 3077 5728

Alice Nettleton

+44 (0)20 3077 5700

BONESUPPORT is a research client of Edison Investment Research Limited

With its full year 2018 results, Bonesupport reported total 2018 sales of SEK96.6m, vs SEK129.3m in 2017. US sales decreased by 56% y-o-y due to the transition to the new distribution model, whereas sales in Europe increased by 22% y-o-y. Bonesupport now has 38 distributors in the US, and achieved SEK4.2m in sales in Q418 under its new model, which we interpret as a good start. Meanwhile, CERAMENT G/V sales continue to grow in Europe (33.3% vs 2017), positive CERTiFy top-line data were announced in November and are being promoted by sales reps, and new product BONIFY launched in the US. Our valuation is higher at SEK1.74bn or SEK33.5/share (vs SEK29.0/share).

Year end

Revenue (SEKm)

PBT*
(SEKm)

EPS*
(SEK)

DPS
(SEK)

P/E
(x)

Yield
(%)

12/17

129.3

(127.1)

(3.22)

0.0

N/A

N/A

12/18

96.6

(174.9)

(3.46)

0.0

N/A

N/A

12/19e

199.9

(142.3)

(2.74)

0.0

N/A

N/A

12/20e

298.9

(80.6)

(1.52)

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items.

Positive CERTiFy top-line data with CERAMENT BVF

Top-line data from the CERTiFy study showed CERAMENT BVF to be non-inferior to autograft in treating tibia plateau fracture defects. The study was carried out in 20 level one trauma centres in Germany (n=137). These data could influence the standard of care in this indication and win market share from autograft in Europe and the US. Together with the health economic data, which Bonesupport is accumulating, these results could also help with reimbursement in Europe. Data are expected to be published in H119, but the headline results are already being promoted by the salesforce.

Q418 results: First US sales through own distributors

Total 2018 sales of SEK96.6m declined by 25% y-o-y but came in only slightly below our estimate of SEK103.8m and the consensus of SEK101m. The decline was due to the transition to the new US distribution model. The first direct US sales were SEK4.2m in Q418 under the new model. Total operating loss in 2018 was SEK174.4m (vs SEK99.3m in 2017), in line with our estimate and the consensus. Total operating costs increased by 21% y-o-y, largely due to higher selling expenses. Bonesupport is implementing cost control measures to ensure it remains funded to profitability (2021) with existing resources, as previously guided. Management expects a significant uplift in sales in 2019 and high growth beyond.

Valuation: SEK1.74bn or SEK33.5/share

We value Bonesupport at SEK1.74bn or SEK33.5/share versus SEK1.49bn or SEK29.0/share previously, as we have rolled our model forward. We keep our long-term projections unchanged. Key near-term catalysts include the Q119 financial results, which will detail the second quarter of US sales through Bonesupport’s own commercial platform, updated US sales figures at the Q119 financial results, publication of the full CERTiFy results in H119 and completion of the FORTIFY study in 2020.

US distributor network is up and running

Bonesupport was able to deploy its own sales reps quickly via the distributor network it had been building over the past few months. As result, it was able to record initial sales in Q418 in the US of SEK4.2m (Exhibit 1).

Exhibit 1: Bonesupport sales development (rolling last 12 month)

Source: Bonesupport full year results 2018 presentation

The orders in Q418 were from both existing and new customers, but Bonesupport specifically mentioned selling to loyal and long-term customers of CERAMENT BVF. The fact that some orders were from new customers is encouraging, but notably it was just the first quarter of own sales (and partial, as the exclusivity period with Zimmer Biomet ended on 23 October 2018). More details on the customer base will be shared in later quarters.

During the Q418 Q&A, Bonesupport discussed the progress made in the US (outlined below), which suggests that the picture in 2019 and beyond will look quite different to that in Q418. Focus areas for management include:

Training of sales reps. Not all sales reps have been trained yet (around 300 out of 500 have received physical/online training). Bonesupport expects that by mid-2019 all 500 sales reps will have been trained.

Market access. As highlighted at the CMD, Bonesupport must contract with group purchasing organisations (GPOs) to be able to eventually sell to hospitals in the US. This is the same for all other medical device products. As of the Q418 results, Bonesupport had secured contracts with Spartan Medical and HCA Healthcare. Spartan Medical works with many government hospitals, military treatment facilities and civilian hospitals across the US, and has a focus on orthopaedic medical devices and biologics. HCA covers 179 acute care hospitals (generally including orthopaedics) across 20 states (HCA Q318 presentation). Bonesupport did not provide any further details on its own contracts, but we have seen that vendors can pay fees to the GPO in low single-digit percentage of sales to cover the GPO’s operating expenses. Bonesupport expects to see revenues two to three months after signing these contracts. In this case, we should see revenues from these contracts, and potentially new GPO contracts, with its Q119 results.

Residual Zimmer Biomet inventories and sales. Bonesupport reported no sales to Zimmer in Q418. Although the exclusivity agreement has ended, Zimmer is still able to sell on a non-exclusive basis until 21 April 2019, which means that if it has inventories, it can still sell (ie competing with Bonesupport). Additionally, if customers have been serviced recently by Zimmer, they will not need to purchase again for a time. Bonesupport is not able to ascertain how much stock Zimmer still has. Any effect of Zimmer continuing to sell should improve once the non-exclusivity period has ended.

Europe/RoW update

Increasing traction in antibiotic-eluting product

Sales of CERAMENT G/V in Europe/RoW have continued to grow in Q418, achieving 34% growth q-o-q and 45% y-o-y (Exhibit 2). According to management, this was due to more orders from existing customers (more procedures, additional indications), and the company expects the new sales reps to add to the customer base during 2019, with an impact on sales potentially seen from Q119. An increased presence at medical conferences is also helping to promote this product. We see this growth as very encouraging ahead of the expected US launch of CERAMENT G/V in 2021 (FORTIFY study to complete in 2020).

Conversely, CERAMENT BVF sales declined in 2018 (-11.9% vs 2017). We note that CERAMENT G/V is a much more valuable product for Bonesupport in Europe, which the company is prioritising.

Exhibit 2: Quarterly sales of CERAMENT products in US and Europe/RoW

Source: Bonesupport’s financial statements

Upcoming milestones

Exhibit 3: Upcoming milestones

Source: Bonesupport

Other financials

Gross margin and operating costs

The overall gross margin for US and Europe/Row in 2018 was 84% (87% in the US and 83% in Europe/Row). Management expects a gross margin closer to 90% in the US going forward.

Total operating loss in 2018 was -SEK174.4m (vs -SEK99.3m in 2017) and was in line with our estimate and consensus. Total operating costs increased by 12% vs 2017 largely due to increased investment in sales.

Bonesupport is implementing cost control measures to ensure it remains funded to profitability, as previously guided. Administrative costs (eg consultant costs) will come down, whereas investments in the commercial side will continue to increase.

Estimate revision

We have already reflected the shift to independent distributor marketing in the US in detail in our initiation report and make no changes to our estimates (FY19 sales of SEK39.1m), as Bonesupport has been delivering on its strategy so far. Management expects a significant uplift in sales in 2019 and significant growth beyond 2019. This will come from the new distribution network in the US, improved European salesforce and new product launches.

Given that Bonesupport’s investment case is still in a turnaround phase, our estimates are subject to revision once more performance data points are in. However, currently we maintain our mid- to long-term projections unchanged as we see the initial US sales as a good start. Our near-term estimates were only slightly affected by the Q418 results.

Exhibit 4: Key changes to our financial forecasts

SEKm

FY18

FY19e

FY20e

Est

Act

Change (%)

Old

New

Change (%)

New

Revenue

103.813

96.623

-7%

213.760

199.935

-6%

298.891

Gross profit

88.241

81.466

-8%

181.696

169.945

-6%

254.057

R&D

(69.731)

(66.064)

-5%

(69.731)

(66.064)

-5%

(66.064)

SG&A

(195.037)

(191.656)

-2%

(255.161)

(248.686)

-3%

(270.801)

EBITDA

(174.366)

(174.404)

+0%

(140.902)

(142.128)

+1%

(80.229)

Operating profit

(175.995)

(174.404)

-1%

(142.721)

(143.890)

+1%

(82.133)

PBT (norm)

(174.260)

(174.869)

+0%

(142.525)

(142.322)

-0%

(80.625)

Profit after tax

(176.596)

(176.405)

-0%

(143.532)

(145.230)

+1%

(83.613)

EPS (SEK) (norm)

(3.44)

(3.46)

+1%

(2.72)

(2.74)

-0%

(1.52)

Source: Bonesupport accounts, Edison Investment Research.

Valuation

We value Bonesupport at SEK1.74bn or SEK33.5/share versus SEK1.49bn or SEK29.0/share previously, as we have rolled our model forward, which offset the lower cash position and the slight downward revision of the near-term estimates. We have also made minor adjustments to our working capital. Our DCF model uses a 10% discount rate and includes a forecast period until 2028. The terminal value assumes a long-term 2.0% growth rate.

The main catalysts for the share price in the near term include publication of the results of the CERTiFy study expected in early-2019 and an update on sales under the independent distributor network in the US at the Q119 results in May 2019. Results of the FORTIFY trial are expected in 2020.

Exhibit 5: Assumptions, projected cash flow and DCF valuation

2019e

2020e

2021e

2022e

2023e

2024e

2025e

2026e

2027e

2028e

EBIT* (risk adjusted)

(143.9)

(82.1)

30.7

165.7

223.9

258.7

267.8

273.2

276.0

277.4

Tax**

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

D&A

1.8

1.9

2.0

2.2

2.3

2.4

2.6

1.8

1.7

1.7

Change in WC

(17.9)

(9.4)

(12.8)

(33.3)

(14.4)

(10.2)

(2.8)

(1.8)

(1.3)

(0.9)

Capex

(1.4)

(1.8)

(1.4)

(1.6)

(1.6)

(1.5)

(1.6)

(1.6)

(1.6)

(1.6)

Operating FCF

(161.4)

(91.4)

18.4

133.0

210.2

249.4

266.0

271.5

274.9

276.6

NPV (SEKm)

Free cash flows FY19-28e

651.7

Terminal value (2.0% growth rate assumed)

822.7

Total NPV

1,474.4

Net cash (est end-Q418)

261.5

Valuation

1,736

Valuation/share (SEK)

33.5

Discount rate

10.0%

Tax rate (long term)

22%

Source: Edison Investment Research. *EBIT here includes risk-adjusted cash flows associated with CERAMENT G launch in the US in 2021. **Tax loss carry forwards (SEK604m as end-2017) offset taxes during our forecast period.

Exhibit 6: Financial summary

SEK'000s

 

2016

2017

2018

2019e

2020e

December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

104,599

129,301

96,623

199,935

298,891

Cost of Sales

(16,312)

(16,871)

(15,157)

(29,990)

(44,834)

Gross Profit

88,287

112,430

81,466

169,945

254,057

Research and development

(38,233)

(60,636)

(66,064)

(66,064)

(66,064)

EBITDA

 

 

(87,399)

(98,116)

(174,404)

(142,128)

(80,229)

Operating Profit (before amort. and except.)

(87,601)

(98,486)

(174,404)

(142,518)

(80,682)

Intangible Amortisation

(1,144)

(799)

0

(1,372)

(1,452)

Exceptionals

0

0

0

0

0

Other

0

0

0

0

0

Operating Profit

(88,745)

(99,285)

(174,404)

(143,890)

(82,133)

Net Interest

(20,821)

(28,600)

0

196

56

Profit Before Tax (norm)

 

 

(108,422)

(127,086)

(174,869)

(142,322)

(80,625)

Profit Before Tax (reported)

 

 

(109,566)

(127,885)

(174,869)

(143,694)

(82,077)

Tax

(625)

(1,007)

(1,536)

(1,536)

(1,536)

Profit After Tax (norm)

(109,047)

(128,093)

(176,405)

(143,858)

(82,161)

Profit After Tax (reported)

(110,191)

(128,892)

(176,405)

(145,230)

(83,613)

Average Number of Shares Outstanding (m)

25.8

39.8

51.0

52.6

54.1

EPS - normalised (SEK)

 

 

(4.22)

(3.22)

(3.46)

(2.74)

(1.52)

EPS - normalised and fully diluted (SEK)

 

(4.22)

(3.22)

(3.46)

(2.74)

(1.52)

EPS - reported (SEK)

 

 

(4.26)

(3.24)

(3.46)

(2.76)

(1.55)

Dividend per share (SEK)

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

84.4

87.0

84.3

85.0

85.0

EBITDA Margin (%)

N/A

N/A

N/A

N/A

N/A

Operating Margin (before GW and except.) (%)

N/A

N/A

N/A

N/A

N/A

BALANCE SHEET

Fixed Assets

 

 

5,091

8,591

9,771

10,607

11,135

Intangible Assets

4,469

5,244

5,511

5,371

4,505

Tangible Assets

442

3,099

3,885

4,861

6,254

Investments

180

248

375

375

375

Current Assets

 

 

183,718

588,093

316,370

174,520

94,571

Stocks

14,489

22,079

23,681

32,866

36,850

Debtors

20,242

20,678

18,683

27,388

32,755

Cash

141,501

533,367

261,468

101,727

12,428

Other

7,486

11,969

12,538

12,538

12,538

Current Liabilities

 

 

(69,742)

(145,725)

(47,321)

(47,321)

(47,321)

Creditors

(44,639)

(47,105)

(47,321)

(47,321)

(47,321)

Short term borrowings

(25,103)

(98,620)

0

0

0

Long Term Liabilities

 

 

(84,763)

(173)

(289)

(289)

(289)

Long term borrowings

(84,599)

0

0

0

0

Other long-term liabilities

(164)

(173)

(289)

(289)

(289)

Net Assets

 

 

34,304

450,786

278,531

137,517

58,096

CASH FLOW

Operating Cash Flow

 

 

(70,184)

(95,060)

(168,652)

(155,827)

(85,387)

Net Interest

(11,640)

(11,737)

(822)

196

56

Tax

(109)

(737)

(2,151)

(1,536)

(1,536)

Capex

(67)

(2,344)

(2,719)

(1,401)

(1,846)

Acquisitions/disposals

0

0

0

0

0

Financing

103,714

504,833

0

0

0

Other

4,091

7,993

1,065

(1,172)

(586)

Dividends

0

0

0

0

0

Net Cash Flow

25,805

402,948

(173,279)

(159,741)

(89,299)

Opening net debt/(cash)

 

 

(5,994)

(31,799)

(434,747)

(261,468)

(101,727)

HP finance leases initiated

0

0

0

0

0

Other

0

0

0

0

0

Closing net debt/(cash)

 

 

(31,799)

(434,747)

(261,468)

(101,727)

(12,428)

Source: Bonesupport accounts, Edison Investment Research

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This report has been commissioned byBONESUPPORT and prepared and issued by Edison, in consideration of a fee payable by BONESUPPORT. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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Australia

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New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

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United States

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