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BONESUPPORT — US sales rebound and new clinical study

BONESUPPORT — US sales rebound and new clinical study

Recent updates indicate Bonesupport has been making progress in all key strategic directions. Sales have started to rebound in the US since the company started commercialising its CERAMENT bone void filler in Q418. The top-line results from the clinical CERTiFy study released in Q418 are also helping to increase awareness. CERAMENT G/V will be included in a new, large investigator-led SOLARIS study, which could potentially change the standard of care in osteomyelitis treatment. Our valuation is largely unchanged at SEK1.73bn or SEK33.1/share (vs SEK33.5/share).

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BONESUPPORT

US sales rebound and new clinical study

Company update

Pharma & biotech

14 June 2019

Price

SEK28.8

Market cap

SEK1506m

Net cash (SEKm) at end-Q119

206.0

Shares in issue

52.3m

Free float

51.4%

Code

BONEX

Primary exchange

Nasdaq Stockholm

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

15.7

37.1

175.3

Rel (local)

12.2

32.3

162.8

52-week high/low

SEK29.5

SEK9.4

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

Q219 financial results

25 July 2019

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

Recent updates indicate Bonesupport has been making progress in all key strategic directions. Sales have started to rebound in the US since the company started commercialising its CERAMENT bone void filler in Q418. The top-line results from the clinical CERTiFy study released in Q418 are also helping to increase awareness. CERAMENT G/V will be included in a new, large investigator-led SOLARIS study, which could potentially change the standard of care in osteomyelitis treatment. Our valuation is largely unchanged at SEK1.73bn or SEK33.1/share (vs SEK33.5/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.

Gathering clinical evidence

A retrospective case study supporting the use of CERAMENT G was published by surgeons at the Oxford Bone Infection Unit in March 2019. The study demonstrated bone remodelling with CERAMENT G for the first time through radiology and histology in patients with chronic osteomyelitis (level IV evidence). This is one of many case studies published by various key opinion leaders (KOLs) indicating interest in Bonesupport’s products.

Large investigator-led trial to include CERAMENT

A new, large investigator-led study SOLARIO has been initiated (n=500) in Europe. The study aims to show that the use of local antibiotics plus a short course of systemic antibiotics (<1 week) is as good as the current standard of care, which is local antibiotics plus >4 weeks of systemic antibiotics. Although the results are not expected until 2022, if successful this study could lead to a treatment paradigm shift and show that local antibiotics play more of a role in managing bone infections than previously thought.

US sales rebound

Q119 US sales through Bonesupport’s distributor network grew by 174% q-o-q to SEK11.5m, through a mixture of new and old accounts. The network includes 40 distributors totalling over 500 sales reps and a new group purchasing organisation (GPO) contract has been secured with Ascension (150 hospitals) in Q119, which should lead to sales in Q319. We leave our medium- to long-term projections unchanged because we see the initial US sales rebound as a good start.

Valuation: SEK1.73bn or SEK33.1/share

We value Bonesupport at SEK1.73bn or SEK33.1/share vs SEK1.74bn or SEK33.5/share previously, due to lower net cash partially offset by rolling our model forward. Key near-term catalysts include updated US sales figures in the Q219 financial results, publication of the full CERTiFy results and health economics data in Q319.

US sales rebound looks promising

Q119 sales of CERAMENT BVF in the US were SEK11.5m. This represents growth from SEK4.2m in Q418, which was the first quarter that Bonesupport’s own distributor network started promoting CERAMENT in the US. US sales were down 28% y-o-y, but in Q118 US distribution was managed solely by Zimmer Biomet. After Bonesupport terminated the agreement it booked no sales in Q318 because Zimmer had exclusivity until 23 October 2018. Over the last two quarters Bonesupport’s sales have been via its newly established network of independent distributors, including 40 distributors totalling over 500 sales reps. In its Q119 call, Bonesupport explained there was a ‘good mix of new and legacy accounts’ and the top-line CERTiFy study results are helping increase awareness of CERAMENT.

Bonesupport has secured a new GPO contract with Ascension (150 hospitals) and management expects to start generating sales from end of Q219/start of Q319. This is in line with Bonesupport’s previous guidance for all GPO contracts (see our previous note). We expect additional GPO contracts to be added gradually.

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

Source: Bonesupport

Sales of CERAMENT products in Europe grew 41% to SEK21.3m y-o-y. The main contributors to this were the antibiotic-eluting CERAMENT G/V, which saw sales increase by 54% y-o-y. This increased traction is due to the expansion of the sales team in 2018 starting to have an impact and due to the CERTIFY top-line results being promoted.

The total operating loss for Q119 was SEK39.0m (vs SEK33.1m in Q118) 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. Administrative costs will reduce, whereas investments in the commercial side will continue to increase following the change in the distribution model. We reflected the shift in our model previously. Given that Bonesupport’s investment case is still in a turnaround phase, our estimates are subject to revision once more performance data points are announced. For now, we leave our medium- to long-term projections unchanged since we see initial US sales rebound as a good start.

KOL relationships underpin CERAMENT G/V acceptance

In the field of orthopaedics, we believe building and maintaining relationships with surgeons is essential for commercial success. The continued growth in CERAMENT G/V sales is underpinned by strong KOL engagement and multiple case studies now published by surgeons using the antibiotic-eluting CERAMENT G/V in Europe help increase awareness of the product.

We attended the Oxford Bone Infection Conference in March 2019. Bonesupport has a strong relationship with the Oxford Bone Infection Unit, one of the most important centres for treating bone infection in Europe. KOL Martin McNally is head of this unit and has influence across Europe in this field, especially because he is the president of the European Bone and Joint Infection Society (EBJIS). McNally and colleagues presented several patient case studies at the conference, where CERAMENT G was showcased. In addition, they have published several articles about CERAMENT G, including patient case studies.

Bone remodelling shown for the first time with CERAMENT G

The most recent case study was published in March 2019 by the Oxford Bone Infection Unit supporting the use of CERAMENT G. This was a retrospective study in patients with chronic osteomyelitis having a single-stage procedure. The study found that using CERAMENT G resulted in an infection recurrence of just 4.3% and mean void filling was 73.8% at final follow-up. For the first time in humans, bone remodelling with CERAMENT G was demonstrated by radiology and histology.

Case studies are a type of observational study providing level IV evidence (whereas the FORTIFY study will provide level I clinical evidence in bone infection). They are not randomised or controlled, so results should be interpreted with care. However, they are peer reviewed and published in journals so they are still an important way for orthopaedics companies to build evidence and promote their products to surgeons. Several case studies have now been conducted with CERAMENT G across Europe, which we believe is evidence that Bonesupport is successfully establishing relationships with European KOLs.

New, large investigator-led SOLARIO study

A new, large randomised trial has been initiated by the Oxford University Hospital’s NHS Foundation Trust in collaboration with the EBJIS: Systemic Or Local Antibiotic Regimes In Orthopaedics (SOLARIO) (NCT03806166). Bonesupport is not directly sponsoring the trial (the company only donated a research grant to the EBJIS), so it will not be able to influence the design. However, the potential benefit for Bonesupport could be substantial. The study aims to show that the use of local antibiotics plus a short course of systemic antibiotics (<1 week) is as good as the current standard of care, which is local antibiotics plus >4 weeks of systemic antibiotics.

Traditional understanding in treating osteomyelitis is that long-term systemic antibiotic therapy (oral or intravenous) is the mainstay approach, while local antibiotics were perceived as more of a supportive therapy. The SOLARIO study investigates whether using local antibiotics allows shorter courses of systemic antibiotics to limit antibiotic resistance, side effects and cost. The rationale of the study is that locally delivered antibiotics can achieve much higher concentrations than those administered systemically due to poor bone tissue perfusion. Although the results are not expected to be released until 2022, if successful this study could lead to a treatment paradigm shift and show that local antibiotics play more of a role in managing bone infection than previously thought. A positive study outcome could also support the premium pricing of CERAMENT, because a shorter-duration antibiotic therapy should save costs and help combat antimicrobial resistance.

The study (n=500) is designed as non-inferiority, randomised, controlled trial comparing the two treatment regimens. Products from different manufacturers are allowed, but they must contain an antibiotic and be approved by the regulatory authorities. This limits the product selection to PMMA beads, Collagen fleeces plus antibiotics, CERAMENT G/V, Herafil G (Heraeus) and Osteoset T (Wright Medical). We discussed how these products differ in our previous reports (most details in the initiation report), but we view CERAMENT G/V at the top in terms of innovation.

Exhibit 2: Overview of the SOLARIO study (NCT03806166)

Aim

To determine whether treatment with local antibiotics can allow for shorter courses of oral or intravenous antibiotics following surgery for bone or joint infection to limit antibiotic resistance, side effects and cost.

Summary design

SOLARIO: a randomised open-label multi-centre clinical trial

No. of patients

500

Key inclusion criteria

Orthopaedic infection, undergoing surgical treatment for the infection, locally administered antibiotics at the site of orthopaedic infection, would ordinarily be managed with a prolonged course (>=4 weeks) of systemic antibiotics

Endpoints

Primary endpoint: Definitive treatment failure (infection recurrence)

Secondary endpoints: Possible or probable treatment failure, serious adverse events, antibiotic side effects, quality of life measures

Sites

UK: Wrightington Hospital, Royal National Orthopaedic Hospital, Bone Infection Unit Nuffield Orthopaedic Centre, Royal Liverpool Hospitals

Completion date

March 2022

Source: BONESUPPORT, clinicaltrials.gov

Valuation

We value Bonesupport at SEK1.73bn or SEK33.1/share versus SEK1.74bn or SEK33.5/share previously, due to lower net cash partially offset by rolling our model forward. 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.

Bonesupport has changed the way it accounts for leases under the new IFRS 16 rules. It now records remaining financial leases in the balance sheet as short- and long-term liabilities of SEK5.2m and SEK8.0m respectively. This was balanced with a corresponding increase in tangible long-term assets. The net effect on P&L was minor. Bonesupport had cash of SEK219.1m at end-Q119 and, according to our model, this is sufficient to finance the company to break even in 2021.

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 Q219 results in July 2019. Results of the FORTIFY trial are expected in 2020.

Exhibit 3: 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

677.7

Terminal value (2.0% growth rate assumed)

848.1

Total NPV

1,525.8

Net cash (last reported)

206.0

Valuation

1,732

Valuation/share (SEK)

33.1

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 4: 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)

(172,847)

(142,088)

(76,454)

Operating Profit (before amort. and except.)

(87,601)

(98,486)

(173,664)

(143,112)

(81,284)

Intangible Amortisation

(1,144)

(799)

(740)

(778)

(849)

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)

(465)

196

56

Profit Before Tax (norm)

 

 

(108,422)

(127,086)

(174,129)

(142,917)

(81,228)

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)

(175,665)

(144,453)

(82,764)

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)

(3.45)

(2.75)

(1.53)

EPS - normalised and fully diluted (SEK)

 

(4.22)

(3.22)

(3.45)

(2.75)

(1.53)

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

24,716

22,143

Intangible Assets

4,469

5,244

5,511

6,019

6,311

Tangible Assets

442

3,099

3,885

18,322

15,458

Investments

180

248

375

375

375

Current Assets

 

 

183,718

588,093

316,370

173,525

96,677

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

100,733

14,534

Other

7,486

11,969

12,538

12,538

12,538

Current Liabilities

 

 

(69,742)

(145,725)

(47,321)

(52,499)

(52,499)

Creditors

(44,639)

(47,105)

(47,321)

(47,321)

(47,321)

Short term borrowings

(25,103)

(98,620)

0

(5,178)

(5,178)

Long Term Liabilities

 

 

(84,763)

(173)

(289)

(8,249)

(8,249)

Long term borrowings

(84,599)

0

0

(7,960)

(7,960)

Other long term liabilities

(164)

(173)

(289)

(289)

(289)

Net Assets

 

 

34,304

450,786

278,531

137,493

58,072

CASH FLOW

Operating Cash Flow

 

 

(70,184)

(95,060)

(168,652)

(155,786)

(81,612)

Net Interest

(11,640)

(11,737)

(822)

196

56

Tax

(109)

(737)

(2,151)

(1,536)

(1,536)

Capex

(67)

(3,037)

(1,609)

(2,323)

(1,966)

Acquisitions/disposals

0

0

0

0

0

Financing

103,714

504,833

0

0

0

Other

4,091

8,686

(45)

(1,286)

(1,141)

Dividends

0

0

0

0

0

Net Cash Flow

25,805

402,948

(173,279)

(160,735)

(86,199)

Opening net debt/(cash)

 

 

(5,994)

(31,799)

(434,747)

(261,468)

(87,595)

HP finance leases initiated

0

0

0

0

0

Other

0

0

0

(13,138)

0

Closing net debt/(cash)

 

 

(31,799)

(434,747)

(261,468)

(87,595)

(1,396)

Source: Bonesupport, Edison Investment Research

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Low & Bonar — Slow trading start to FY19, disposals underway

May trading newsflow causes us to lower earnings estimates significantly. Improvements to operational performance and further de-leveraging are firmly on management’s agenda and the disposal of the construction fibres operation will help in the latter regard. Metrics point to attractions for deep-value investors.

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