DNB Markets - Episurf Medical: Moving into the US

Q4 earnings were below our forecast, but there were clear positives in the report including a growing customer base and the first distribution agreement in the US (for the recently cleared patellofemoral implant system). We have made only minor forecast changes and reiterate our fair value of SEK3.3–9.3.

Q4 earnings softer than expected. Q4 revenues were SEK2m (c35% below our estimate of cSEK3.1m) and EBIT was cSEK-23.6m (c19% below our forecast of cSEK-19.8m). Higher than expected operating costs related largely to the intense work related to the 510(k) process for the patellofemoral implant system. The end-Q4 cash position was cSEK155m, marginally below our cSEK157m forecast.

Customer base grew c72% YOY in Q4 and c52% in 2022. This is good as orthopaedic surgeons typically like to test a product before they decide whether to use it more routinely, so a higher number of surgeons who have tested one or more of its products is important.

First distribution agreement signed in US for patellofemoral system. The company received its 510(k) clearance late last year and has now signed its first distributor agreement in the US (local distributor in the Minnesota area). We believe more such agreements will be signed as the marketing strategy is to use freestanding distributor organisations rather than building a proprietary organisation. In our forecasts we have assumed the company will pay a c30% distribution margin to its US distributors.

We expect focus on commercialisation in 2023 onwards. With the company's portfolio of personalised implants approved in many markets, we expect increased focus on commercialisation in the coming years. It has already partly restructured its European organisation and should continue to build a US distribution network for the patellofemoral implant. Also, it reiterated that the 510(k) application for the MTP implant (for the big toe) should be filed this year and – if things go as planned – be launched in the US in 2024.

Recruitment for EPIC knee trial still a challenge. Recruitment to the PMA trial for US approval of Episealer knee implant system still faces recruitment challenges. The company is trying to speed up recruitment and now plans to file for PMA approval in 2026. Hence, we include first revenues from the Episealer system in the US in late 2027e.

SEK3.3–9.3 fair value reiterated. We believe the growing customer base is promising and the company should sign more distribution agreements for the patellofemoral system in the US and hence focus on commercialising its products.