On track to reach profitability

BONESUPPORT 1 August 2019 Update
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BONESUPPORT

On track to reach profitability

Q219 results update

Pharma & biotech

1 August 2019

Price

SEK34

Market cap

SEK1,761m

Net cash (SEKm) at end-Q219

161.2m

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

10.8

44.7

181.0

Rel (local)

10.5

46.1

173.4

52-week high/low

SEK34.3

SEK12.2

Business description

Bonesupport is an orthobiologics company that has four marketed bone graft substitutes and several other projects in R&D. The lead 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

H219

Health economics data published

Q319

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

In Q219, total revenues were SEK37.3m, surpassing the previous peak achieved in Q217 (SEK37.1m), when Bonesupport was selling through an exclusive distributor, Zimmer Biomet, in the US. US business segment revenues were SEK14.8m (up 28% q-o-q, 6% y-o-y). Bonesupport has secured new GPO contracts including with Kaiser Permanente, and is actively monitoring and updating its distributors (six were replaced in the quarter). Europe/RoW sales grew by 6% q-o-q and 59% y-o-y, where CERAMENT G/V is still performing well. Bonesupport is now looking to its R&D projects, having decided to focus on CERAMENT plus bisphosphonate and CERAMENT plus DBM. Our valuation is virtually unchanged at SEK1.70bn or SEK32.8/share (vs SEK33.1/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

(174.1)

(3.45)

0.0

N/A

N/A

12/19e

199.9

(142.9)

(2.75)

0.0

N/A

N/A

12/20e

298.9

(81.2)

(1.53)

0.0

N/A

N/A

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

28% revenue growth in US q-o-q

In Q219, US (CERAMENT BVF) revenues were SEK14.8m (up 28% q-o-q and 6% y-o-y, Exhibit 2). These continue to be from a mix of new and legacy accounts, with an increasing number of re-orders. Management indicated that around 70% of US sales are via GPO contracts, but provided no further breakdown of revenue at this time (Q219 was the second full quarter in the US with an independent network of distributors). Europe/RoW revenues of CERAMENT G/V (Europe) were SEK18.8m (up 4% q-o-q but 64% y-o-y; Exhibit 3), while CERAMENT BVF grew 16% q-o-q and 39% y-o-y. Q319 revenue growth could be supported by new GPO contracts signed this quarter, including Kaiser Permanente, and the recent publication of further level IV evidence, a case series of 51 trauma patients.

US opex increasing, but savings in Europe/RoW

Adjusting for the SEK11m provision negatively affecting the Q219 operating loss, operating costs for the business as a whole have been relatively flat over the past few quarters (SEK40.4m in Q418, SEK43m in Q119 and SEK40.9m in Q219). We leave our medium- to long-term forecasts unchanged as we see the initial US sales rebound as a good start, and costs are within our estimates. Net cash flow in Q219 was negative at SEK45.3m (vs negative SEK43.6m in Q119). According to our model, the company should still reach break-even in 2021. Current cash and cash equivalents are SEK173.1m and total debt is SEK11.9m.

Valuation: SEK1.70bn or SEK32.8/share

We value Bonesupport at SEK1.70bn or SEK32.8/share versus SEK1.73bn or SEK33.1/share previously, largely unchanged due to lower net cash that is partially offset by rolling our model forward. Key near-term catalysts include an update on sales under the independent distributor network in the US at the Q319 results, publication of the full CERTiFy results (H219) and health economics data in Q319.

Q219 on track, best quarter ever in terms of revenues

28% q-o-q revenue growth in US, but high opex

Q219 net sales of CERAMENT BVF in the US were SEK14.8m, vs SEK11.5m in Q119 (6% growth y-o-y and 28% growth q-o-q). This represents the third quarter (second full quarter) that Bonesupport has had its own distributor network (Exhibit 1). This revenue growth is likely due to increased commercial efforts in the US. We could see some sales from the Group Purchasing Organisation (GPO) contracts signed in earlier quarters (management previously guided that sales would be seen two to three months after signing a GPO contract).

With regards to the customer base, management has not provided a more detailed breakdown for the time being, except that the percentage of sales through GPO contracts is around 70%. In Q219, Bonesupport made progress in securing further GPO contracts, including with Kaiser Permanente, which has 690 medical offices and 39 hospitals (the impact could be seen Q319). A GPO is an organisation that contracts with hospitals to help them achieve savings when purchasing medical equipment and supplies. The GPO can decide which products a hospital is allowed to use.

Exhibit 1: Bonesupport’s US quarterly sales (LHS) and 12-month rolling sales per segment (RHS)

Source: Bonesupport

Bonesupport booked a one-off loss of SEK11m in Q219, which was related to product returns from Zimmer. This had no cash effect for now and the final amount will be agreed with Zimmer in Q319. Operating costs for the business as a whole have been relatively flat over the past few quarters (SEK40.4m in Q418, SEK43m in Q119 and adjusted SEK40.9m in Q219), whereas the operating loss has been narrowing since Q318 due to revenue growth (Exhibit 2). Bonesupport is still investing in expanding the organisation, hence the US business is still in the early stages and not yet in a steady state. Management indicated in the Q219 Q&A that operating costs could increase due to current vacancies in the sales and marketing team that will be filled later, as well as commissions that will be paid. R&D and administrative costs should remain at around the same levels as the previous three quarters.

Exhibit 2: US segment profitability (adjusted for one-off SEK11m provision in Q219)

Source: Edison analysis of data from Bonesupport quarterly segment reporting. Q219 operating costs and operating loss adjusted for the SEK11m provision for Zimmer orders

Optimising European business to reach profitability

Europe/RoW revenues of CERAMENT G/V (Europe) were SEK18.8m (up 4% q-o-q, but up 64% y-o-y), while CERAMENT BVF grew 16% q-o-q and 39% y-o-y. According to management, growth in CERAMENT G/V was due to broader and more frequent use, mainly among the existing customer base. Level IV evidence continues to mount in the form of case series – a series of 51 trauma patients was recently published by an orthopaedics centre in Manchester, demonstrating a reduced infection and amputation rate.

Some cost savings appear to have been made in the Europe/RoW business, demonstrated by the reduction of 11% in operating costs relating to this segment in Q219 (SEK15.1m) vs Q119 (SEK17.0m). Coupled with growing sales, this resulted in a profitable Q219 (operating profit margin of 17%), see Exhibit 3.

Exhibit 3: Europe/RoW segment profitability

Source: Edison analysis of data from Bonesupport quarterly segment reporting

In the Q219 results, management continued to guide to overall revenue growth of 40% after 2019, and that Bonesupport is well funded to reach profitability. Following the Q219 results, our model is in line with this timeline.

Valuation

We value Bonesupport at SEK1.70bn or SEK32.8/share versus SEK1.73bn or SEK33.1/share previously, largely unchanged due to lower net cash offset by rolling our model forward. We leave our estimates unchanged as we believe the company is on track to meet our FY19 numbers, assuming overall revenue growth of around 40% per quarter through Q319 and Q419. While this growth rate might look somewhat ambitious, the recent pick-up in US sales and the solid Q219 performance bode well for the company. Costs are also within our projections. 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 near-term catalysts for the share price include publication of the full results of the CERTiFy study expected in H219, publication of the health economics study data in Q319 and an update on sales under the independent distributor network in the US at the Q319 results in November 2019. Results of the FORTIFY trial are expected in 2020.

Exhibit 4: Assumptions, projected cash flow and DCF valuation, SEKm

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

5.7

5.0

4.5

4.1

3.9

3.7

3.6

3.5

3.4

Change in WC

(17.9)

(9.4)

(12.8)

(33.3)

(14.4)

(10.2)

(2.8)

(1.8)

(1.3)

(0.9)

Capex

(2.3)

(2.0)

(2.1)

(2.1)

(2.1)

(2.1)

(2.1)

(2.1)

(2.1)

(2.0)

Operating FCF

(162.3)

(87.8)

20.7

134.8

211.5

250.4

266.6

272.8

276.2

277.9

NPV (SEKm)

Free cash flows FY19-28e

684.6

Terminal value (2.0% growth rate assumed)

856.8

Total NPV

1,541.4

Net cash (last reported)

161.2

Valuation

1,703

Valuation/share (SEK)

32.8

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 5: Financial summary

SEK'000s

 

2017

2018

2019e

2020e

December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

129,301

96,623

199,935

298,891

Cost of Sales

(16,871)

(15,157)

(29,990)

(44,834)

Gross Profit

112,430

81,466

169,945

254,057

Research and development

(60,636)

(66,064)

(66,064)

(66,064)

EBITDA

 

 

(98,116)

(172,847)

(142,088)

(76,454)

Operating Profit (before amort. and except.)

 

(98,486)

(173,664)

(143,112)

(81,284)

Intangible Amortisation

(799)

(740)

(778)

(849)

Exceptionals

0

0

0

0

Other

0

0

0

0

Operating Profit

(99,285)

(174,404)

(143,890)

(82,133)

Net Interest

(28,600)

(465)

196

56

Profit Before Tax (norm)

 

 

(127,086)

(174,129)

(142,917)

(81,228)

Profit Before Tax (reported)

 

 

(127,885)

(174,869)

(143,694)

(82,077)

Tax

(1,007)

(1,536)

(1,536)

(1,536)

Profit After Tax (norm)

(128,093)

(175,665)

(144,453)

(82,764)

Profit After Tax (reported)

(128,892)

(176,405)

(145,230)

(83,613)

Average Number of Shares Outstanding (m)

39.8

51.0

52.6

54.1

EPS - normalised (SEK)

 

 

(3.22)

(3.45)

(2.75)

(1.53)

EPS - normalised and fully diluted (SEK)

 

 

(3.22)

(3.45)

(2.75)

(1.53)

EPS - reported (SEK)

 

 

(3.24)

(3.46)

(2.76)

(1.55)

Dividend per share (SEK)

0.0

0.0

0.0

0.0

Gross Margin (%)

87.0

84.3

85.0

85.0

EBITDA Margin (%)

N/A

N/A

N/A

N/A

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

N/A

N/A

N/A

N/A

BALANCE SHEET

Fixed Assets

 

 

8,591

9,771

24,716

22,143

Intangible Assets

5,244

5,511

6,019

6,311

Tangible Assets

3,099

3,885

18,322

15,458

Investments

248

375

375

375

Current Assets

 

 

588,093

316,370

173,525

96,677

Stocks

22,079

23,681

32,866

36,850

Debtors

20,678

18,683

27,388

32,755

Cash

533,367

261,468

100,733

14,534

Other

11,969

12,538

12,538

12,538

Current Liabilities

 

 

(145,725)

(47,321)

(52,499)

(52,499)

Creditors

(47,105)

(47,321)

(47,321)

(47,321)

Short term borrowings

(98,620)

0

(5,178)

(5,178)

Long Term Liabilities

 

 

(173)

(289)

(8,249)

(8,249)

Long term borrowings

0

0

(7,960)

(7,960)

Other long term liabilities

(173)

(289)

(289)

(289)

Net Assets

 

 

450,786

278,531

137,493

58,072

CASH FLOW

Operating Cash Flow

 

 

(95,060)

(168,652)

(155,786)

(81,612)

Net Interest

(11,737)

(822)

196

56

Tax

(737)

(2,151)

(1,536)

(1,536)

Capex

(3,037)

(1,609)

(2,323)

(1,966)

Acquisitions/disposals

0

0

0

0

Financing

504,833

0

0

0

Other

8,686

(45)

(1,286)

(1,141)

Dividends

0

0

0

0

Net Cash Flow

402,948

(173,279)

(160,735)

(86,199)

Opening net debt/(cash)

 

 

(31,799)

(434,747)

(261,468)

(87,595)

HP finance leases initiated

0

0

0

0

Other

0

0

(13,138)

0

Closing net debt/(cash)

 

 

(434,747)

(261,468)

(87,595)

(1,396)

Source: Company accounts, Edison Investment Research


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This report has been commissioned by BONESUPPORT 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.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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This report has been commissioned by BONESUPPORT 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.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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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.

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This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

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.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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