Episurf Medical Q4’20: Deep-Dive Comment
Redeye Research Note 2021/02/19
In the fourth quarter, order intake came in at SEK 1.3 mn (1.2), and with 57 (47) approved orders for the period. Sales amounted to SEK 1.5 mn (1.3) for the period. As press released in the fourth quarter, Episurf entered into a licensing agreement for Episurf’s software platform. It brought a one-time income of SEK 1.5 mn in the quarter. We don’t make a big deal of this business opportunity (licensing) at present, as we continue to see the implants as core in the business.
The pandemic has interrupted top-line growth. We anticipated a strong growth, albeit from low levels, during 2020 and with accelerated pace in 2021. It is disturbing. We see somewhat of a pattern among medtech companies. Later-stage companies with established distribution channels and customer base uphold sales, but where companies in the earlier stage with a new technology continue to suffer. The sales rep must be out on the field and demonstrate (‘touch and feel’) a new technology.
The operating loss for the period came in at SEK -16.0 mn (-18.6) and with free cash flow amounting to SEK -13.3 mn (-16.8). The ‘Estimates’ column below is from the fall 2020, where the licensing income was not yet materialized. Together with lower ‘Other external costs’, the operating loss was some SEK 3 mn better than we had anticipated.
The cash position at quarter-end was SEK 155.0 mn (25.3). We had rather estimated cash just south of SEK 150 mn. It came in better due to lower costs and a more favorable change in NWC.
We favor the strong cash position (which has not always been the case in Episurf) and that the company has managed its cash flow well in the fourth quarter. It was tremendously skillful to conduct a directed issue at the end of 2020. The current cash position provides runway into 2023, we judge.
Following today’s report, we make the following estimate changes for the coming years. The downward sales adjustment for the current year basically occurs in isolation.
In the fourth quarter and after period end, we want to highlight the following:
- New publication on implant survival rate
- New distribution markets in, for instance, France, Australia, and New Zealand
- 5-year follow-up data will be presented at a congress in April (announced earlier this week)
- Some milestones include; 900 cumulative Episealer surgeries, first Episealer talus surgery in Asia-Pacific, and first Episealer Knee performed in Scotland
- The company carried out a directed issue of some SEK 66 mn to institutional and qualified investors (our comment here)
- Lastly, the exciting news this morning that Episurf intends to launch a new product on the US market through a 510(k) pathway, and with a possible launch in 2022
Of those above, we want to highlight the first and the last bullet.
At the beginning of 2021, a publication by Ryd et al. (2020) was published in a peer-reviewed scientific journal. The publication reported 682 Episealer Knee implants’ survival data. Surgery was performed between 2012 and 2020. The data showed a 96% cumulative implant survival from the first surgery. The revision rate was a low 2.3%. Also important was that the revisions were in no case due to the implant itself but rather due to improper patient selections.
Further, all revision cases happened within the first 36-months. Thus, the hypothesis that revisions take place early post-surgery and may otherwise last for a long time, is strengthened by this publication. The authors further conclude that Episealer could offer a short rehabilitation, long-term relief of pain, and return to function for patients eligible to this patient-specific technology.
We have nothing to add to these data and findings, except that they are so good and so important.
This morning, Episurf press released its intention to submit a 510(k) application to the US FDA regarding a two-component patellofemoral implant system, the Episealer Patellofemoral System, with a possible launch in 2022 on the US market (which we gave the first comment to here).
Despite our limited knowledge in this subsegment at present, we are genuinely excited about this news:
- The large and important US market appears nearer
- It entails further network synergies with Episealer Knee
- The Episurf product portfolio will address a larger group of patients suffering from cartilage lesions
We have to come back to and understand how much larger the addressable market becomes. Most importantly, at present, though, the US market suddenly appears nearer. Not only because could it be a potential launch by the next year, but it would also mean that Episealer could establish a network and presence for its operations in the US. Further, despite the pandemic currently mitigating patient recruitment in the Epic Knee study, there is upside potential if the Episealer would be entitled to a breakthrough designation by the FDA. It would expedite the regulatory process. We have seen this in other ‘Peer’ IDE- studies.
We also like this initiative by the management. They demonstrate their ability to refocus their operations towards product development under tough circumstances where top-line growth has been interrupted.
That the pandemic continues to hold back sales growth is disturbing, and we are eager to learn when the company is back on our outlined sales trajectory. We are encouraged by good cost control, a good cash position, and new strategic initiatives. There is nothing worse with a management team that sits still and blames Covid-19 for lack of sales growth. As apparent this morning, Episurf doesn’t do that. The directed issue and the strategic initiative to launch a new product by a 510(k) pathway highlights an agile management team. We finally want to stress that 2020 and the start of 2021 have been highly successful in terms of operational metrics. The clinical evidence all points to that Episealer is a great technology that provides a long-lasting effect.
The estimate changes above do not move our Base Case substantially, which is why we reiterate our Base Case of SEK 4.5 per share. We will look deeper into the patellar market segment. This deep-dive will be intensified by us as the FDA submission comes nearer.