BONESUPPORT — Taking control of the US market

BONESUPPORT

Taking control of the US market

Q218 financial results

Pharma & biotech

3 August 2018

Price	SEK13.48
Market cap	SEK685m
Net cash (SEKm) at end-Q118		368.4

Shares in issue	50.8m
Free float	50%
Code	BONEX

Primary exchange	Nasdaq Stockholm
Secondary exchange	N/A

Share price performance

%	1m	3m	12m
Abs	37.8	(7.3)	(54.8)
Rel (local)	32.3	(8.8)	(56.8)

52-week high/low

SEK30.2

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	H218
Capital markets day in Stockholm and London	19 and 20 September
New investigator-initiated studies	2018
First US commercial platform sales reported during Q418 results	Q119

Analysts

Jonas Peciulis	+44 (0)20 3077 5728
Alice Nettleton	+44 (0) 20 3681 2527

healthcare@edisongroup.com

Edison profile page

BONESUPPORT is a research client of Edison Investment Research Limited

During its Q218 results presentation, Bonesupport provided an update on its US commercial platform. It is working to secure distributor contracts so that sales can commence as soon as Zimmer’s exclusivity period ends on 20 October 2018. In Europe, (where all three products are marketed) trauma surgeons are showing strong interest in CERAMENT G and V. Positive outcomes from the CERTiFy (CERAMENT BVF) and FORTIFY (CERAMENT with antibiotics) studies should drive adoption in this large market. In the meantime, Bonesupport is increasing sales efforts in Europe. Our valuation is SEK1.16bn or SEK22.8/share (vs SEK22.2/share).

Year end	Revenue (SEKm)	PBT* (SEKm)	EPS* (SEK)	DPS (SEK)	P/E (x)	Yield (%)
12/16	104.6	(108.4)	(4.22)	0.0	N/A	N/A
12/17	129.3	(126.7)	(3.21)	0.0	N/A	N/A
12/18e	113.8	(164.0)	(3.26)	0.0	N/A	N/A
12/19e	210.9	(128.6)	(2.54)	0.0	N/A	N/A

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

Taking US marketing into its own hands

Following the termination of the US distribution agreement with Zimmer Biomet in May 2018, management is building its own distributor network in the US and is confident that at least 18 distributors will be ready to start selling CERAMENT BVF end-October 2018. No revenue guidance has been provided yet, but we believe that there could be a certain level of retention of existing customers as surgeons who work with CERAMENT tend to be loyal to the product, according to the company. Bonesupport plans to support its distributor network by providing training through its own US S&M team, which should be expanded from 14 to 23 this year. The commercial team in Europe will also be boosted by 13 new hires this year.

Financials: Sales down due to Zimmer destocking

Q218 revenues were SEK28.2m versus to SEK37.1m in Q217. The decrease came from reduction in US sales (40.9% y-o-y), due to the termination of the Zimmer distribution agreement causing cancellation of June orders, which will last into Q318, as Zimmer is destocking now. As previously, we expect only marginal sales from the US distributor during Q318, if any. Sales in Europe grew 18%, but the company mentioned that this was still hindered by sales rep vacancies, suggesting better growth ahead. Gross margin in Q218 was 87.4%, similar to 87.2% in Q217. Total operating expenses in H118 were SEK59.9m compared to SEK50.2m in H117. This was due to a ramp up in S&M with new hires and distribution. The Q218 results leave us comfortable with our estimates; we therefore make no changes. We estimate net cash of SEK368m will be sufficient to reach profitability by 2021.

Valuation: SEK1.16bn or SEK22.8/share

We value Bonesupport at SEK1.16bn or SEK22.8/sh versus SEK1.13bn or SEK22.2/sh previously as we roll our model forward. Key near-term catalysts include the CERTiFy study results in H218, and the Q418 financial results, which will detail the first quarter of US sales through Bonesupport’s own commercial platform as well as sales dynamics in Europe.

Increased trial activity in Europe

CERTiFy and FORTIFY studies are progressing as planned. According to management, a positive CERTiFy study outcome in tibial plateau fractures treated with CERAMENT BVF would add convincing data to support the product’s wider use and even taking market share from autograft. FORTIFY is Bonesupport’s most important study, as it will gather controlled clinical data with CERAMENT G (entamycin) and V (ancomycin). This will support an FDA PMA filing for CERAMENT G, which will allow Bonesupport to market the product in the US, but will also be used to increase sales of these products in Europe, where they are already being sold and perform well. The status of these trials is shown in Exhibit 1.

Exhibit 1: Overview of ongoing clinical studies

Product	Study title	Location	Number of patients	Trial readout (estimated)	Indication	Status
CERAMENT BVF	CERTiFy	US	136	Top-line data H218	Compares CERAMENT BVF with autograft for tibial plateau fractures (trauma).	Patient follow-up ongoing. Last patient was enrolled in December 2017.
CERAMENT G	FORTIFY	US	230	2020	Part of the surgical repair of severe tibia fractures.	Patient recruitment ongoing. Launch of CERAMENT G in US estimated 2020 (upon positive trial result).
CERAMENT G	Chronic Osteomyelitis study	France	200	TBC	Evaluate the effect of CERAMENT G in patients suffering from chronic bone infections.	Preparation phase
CERAMENT G & V	Diabetic Foot study	Italy	35	2018 TBC	Evaluating the effect of CERAMENT G and V for patients with diabetic foot.	Enrolment and treatment completed
	Revision Arthroplasty Study	Germany	40	TBC	Evaluating the effect of CERAMENT G and V for patients receiving revision arthroplasty in the hip or knee.	Planning phase

Source: Bonesupport

Management provided expectations of a significant uplift in sales after 2019, possibly 40%+. We take this as an indication only, but it certainly adds to our expectations for a quick rebound of the top line. The CERTiFy results are expected in H218, positive results from which are expected to drive adoption of CERAMENT BVF in the US and European markets. Additional growth may come from new product launches (first agreement with Collagen Matrix signed). Sales growth in Europe will come from increased sales of CERAMENT BVF, G and V, helped by increased number of sales reps and targeting the large trauma market.

Valuation

Using DCF-based model we value Bonesupport at SEK1.16bn or SEK22.8/share versus SEK1.13bn or SEK22.2/share previously, due to rolling our model forward, which was partially offset by a lower cash position. We keep our estimates and valuation assumptions unchanged, as described in our initiation report in June 2018. Key near-term catalysts are:

■

the CERTiFy study results in H218;

■

the Q418 financial results, which will detail the first quarter of US sales through Bonesupport’s own commercial platform as well as sales performance in Europe; and

■

any new investigator-initiated studies and an update on the progress of building the independent distributor network in the US.

Bonesupport will conduct its capital markets days in Stockholm on 19 September and in London on 20 September.

Exhibit 2: Assumptions, projected cash flow and DCF valuation

(SEKm)	2018e	2019e	2020e	2021e	2022e	2023e	2024e	2025e	2026e	2027e
EBIT* (risk-adjusted)	(167.5)	(131.5)	(67.7)	78.0	149.2	193.8	215.2	211.4	204.3	195.2
Tax**	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
D&A	1.6	1.8	2.0	2.2	2.4	2.6	2.8	3.0	3.2	3.4
Change in WC	0.9	(35.7)	(45.1)	(57.6)	(36.1)	(26.3)	(18.4)	(4.4)	(2.9)	(1.9)
Capex	(0.3)	(0.3)	(0.3)	(0.3)	(0.3)	(0.3)	(0.3)	(0.3)	(0.3)	(0.3)
Operating FCF	(165.3)	(165.7)	(111.0)	22.3	115.2	169.8	199.2	209.6	204.3	196.4
											NPV (SEKm)
Free cash flows FY18–27e												183.9
Terminal value (2.0% growth rate assumed)												605.8
Total NPV												789.7
Net cash (end-Q118)												368.0
Valuation												1,158
Valuation/share (SEK)												22.8
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 at end-2017) offset taxes during our forecast period.

Exhibit 3: Financial summary

	SEK000s	2014	2015	2016	2017	2018e	2019e
December		IFRS	IFRS	IFRS	IFRS	IFRS	IFRS
PROFIT & LOSS
Revenue		40,961	61,755	104,599	129,301	113,813	210,917
Cost of Sales		(6,374)	(9,507)	(16,312)	(16,871)	(17,072)	(31,638)
Gross Profit		34,587	52,248	88,287	112,430	96,741	179,280
Research and development		(17,020)	(18,999)	(38,233)	(60,636)	(69,731)	(69,731)
EBITDA		(38,055)	(52,614)	(87,399)	(97,898)	(165,866)	(129,663)
Operating Profit (before amort. and except.)		(38,267)	(52,817)	(38,267)	(52,817)	(87,601)	(98,146)
Intangible Amortisation		(1,036)	(1,089)	(1,144)	(1,139)	(1,328)	(1,506)
Exceptionals		0	0	0	0	0	0
Other		(1)	0	0	0	0	0
Operating Profit		(39,304)	(53,906)	(88,745)	(99,285)	(167,495)	(131,482)
Net Interest		(11,770)	(5,509)	(20,821)	(28,600)	2,156	1,405
Profit Before Tax (norm)		(50,037)	(58,326)	(108,422)	(126,746)	(164,010)	(128,570)
Profit Before Tax (reported)		(51,074)	(59,415)	(109,566)	(127,885)	(165,339)	(130,076)
Tax		8	(140)	(625)	(1,007)	(1,007)	(1,007)
Profit After Tax (norm)		(50,030)	(58,466)	(109,047)	(127,753)	(165,017)	(129,577)
Profit After Tax (reported)		(51,066)	(59,555)	(110,191)	(128,892)	(166,346)	(131,083)

Average Number of Shares Outstanding (m)		2.5	2.5	23.5	25.8	39.8	50.5
EPS - normalised (SEK)		(20.32)	(2.49)	(4.22)	(3.21)	(3.26)	(2.54)
EPS - normalised and fully diluted (SEK)		(20.32)	(20.32)	(2.49)	(4.22)	(3.21)	(3.26)
EPS - (reported) (SEK)		(20.74)	(2.53)	(4.26)	(3.24)	(3.29)	(2.57)
Dividend per share (SEK)		0.0	0.0	0.0	0.0	0.0	0.0

Gross Margin (%)		84.4	84.6	84.4	87.0	85.0	85.0
EBITDA Margin (%)		N/A	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	N/A

BALANCE SHEET
Fixed Assets		5,756	5,892	5,091	8,591	8,986	9,581
Intangible Assets		5,091	4,934	4,469	5,244	6,171	6,750
Tangible Assets		382	588	442	3,099	2,567	2,583
Investments		283	370	180	248	248	248
Current Assets		39,864	105,741	183,718	588,093	335,326	216,242
Stocks		9,295	15,032	14,489	22,079	15,164	28,102
Debtors		9,005	17,600	20,242	20,678	26,702	49,485
Cash		18,386	68,881	141,501	533,367	281,491	126,686
Other		3,178	4,228	7,486	11,969	11,969	11,969
Current Liabilities		(26,544)	(91,305)	(69,742)	(145,725)	(47,105)	(47,105)
Creditors		(22,341)	(28,418)	(44,639)	(47,105)	(47,105)	(47,105)
Short term borrowings		(4,203)	(62,887)	(25,103)	(98,620)	0	0
Long Term Liabilities		(62,593)	0	(84,763)	(173)	(173)	(173)
Long term borrowings		(62,593)	0	(84,599)	0	0	0
Other long term liabilities		0	0	(164)	(173)	(173)	(173)
Net Assets		(43,517)	20,328	34,304	450,786	297,034	178,545

CASH FLOW
Operating Cash Flow		(41,187)	(58,941)	(70,184)	(95,060)	(152,382)	(152,789)
Net Interest		(4,674)	(6,302)	(11,640)	(11,737)	2,156	1,405
Tax		(62)	(49)	(109)	(737)	(1,007)	(1,007)
Capex		(424)	(497)	(67)	(2,344)	(329)	(329)
Acquisitions/disposals		0	0	0	0	0	0
Financing		0	119,606	103,714	504,833	0	0
Other		(10,433)	587	4,091	7,993	(1,695)	(2,085)
Dividends		0	0	0	0	0	0
Net Cash Flow		(56,780)	54,404	25,805	402,948	(153,256)	(154,804)
Opening net debt/(cash)		(8,370)	48,410	(5,994)	(31,799)	(434,747)	(281,491)
HP finance leases initiated		0	0	0	0	0	0
Other		0	0	0	0	0	0
Closing net debt/(cash)		48,410	(5,994)	(31,799)	(434,747)	(281,491)	(126,686)

Source: Bonesupport accounts, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by BONESUPPORT and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. 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. This document is provided 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. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

295 Madison Avenue, 18th Floor

10017, New York

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

295 Madison Avenue, 18th Floor

10017, New York

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

295 Madison Avenue, 18th Floor

10017, New York

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

295 Madison Avenue, 18th Floor

10017, New York

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Equities

Equities by Sector

Sectors

Investment Strategy

Latest

Equity strategy and market outlook – April 2024

Equity strategy and market outlook – March 2024

Equity strategy and market outlook – February 2024

Thematics

Latest

Listed private equity – Performing a balancing act

ConsumerWatch – At least someone loves me

MediaWatch – Rinse and repeat

Audiovisual

Latest

Checkit – executive interview

International Public Partnerships – executive interview

Unlocking US capital: Strategies for non-US-listed businesses

About Edison

About Edison

Careers

BONESUPPORT — Taking control of the US market

Latest

Henderson Far East Income — Repositioning to raise total returns

Freelancer — AI to drive return to growth

Renewi — Solid trading and better cash generation

Filtronic — Agreement with SpaceX drives upgrades

Checkit — Signposting the path to profitability

Celyad — Allogeneic trial approved in colorectal cancer

Subscribe to Edison