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).
Written by
BONESUPPORT |
Good start in the US, CERAMENT G/V growth |
Q418 update |
Pharma & biotech |
20 March 2019 |
Share price performance
Business description
Next events
Analysts
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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* |
EPS* |
DPS |
P/E |
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).
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Exhibit 1: Bonesupport sales development (rolling last 12 month) |
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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.
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Exhibit 2: Quarterly sales of CERAMENT products in US and Europe/RoW |
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Source: Bonesupport’s financial statements |
Upcoming milestones
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Exhibit 3: Upcoming milestones |
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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 |
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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) |
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Operating FCF |
(161.4) |
(91.4) |
18.4 |
133.0 |
210.2 |
249.4 |
266.0 |
271.5 |
274.9 |
276.6 |
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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% |
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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 |
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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) |
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Average Number of Shares Outstanding (m) |
25.8 |
39.8 |
51.0 |
52.6 |
54.1 |
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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 |
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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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