Earnings Call: Q4 2019

Mar 11, 2020

Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the DiaSorin Full Year 2019 Results Conference Call. As a reminder, all participants are in listen only mode. After the presentation, there will be an opportunity to ask questions. At this time, I would like to turn the conference over to Mr. Carlo Oda, Chief Executive Officer of DSO N. Please go ahead, sir. Thank you, operator. Good morning, good afternoon and welcome to this conference call. I think we all recognize that these are exceptional times. So what I will do, I will go briefly through the quarter for results and year end. And then I will spend some time commenting on things. One is how we see the situation in Italy. We got lots of questions about business continuity. Then I will cover the corona status of the business, the numbers and the status of the business, if we look at quarter 4 and we look at the different regions, I think what we continue to have good results in the direct geography. So overall, if I extrapolate the direct countries from export, we continue to see growth, which is in line with the low end of the guidance, which is around 5%. And then we have a drag on export. As we did comment a few times, we saw lots of visibility in some of the geographies. And certainly, that the volatility in these regions now is becoming even more so because of the current situation. But again, going back to Europe, we saw Europe continuing as the growth at around 5%, 6%, again, driven by the contriferone. Clearly, in Europe, there is a slowdown compared to the 1st quarters because we are because of the success of the QuantiFERON program, we are coming to a situation where we are getting as much business as it possible is as a result of either conversion from ELISA QIAGEN product as well as the SendOut that hospital decided to bring his house. Clearly, and I will I'm going to focus on QuantiFERON a little later when it comes to the U. S. There is a fundamental difference between the U. S. And the European market. The U. S. Market is a lot of it has to do with sendouts in the 2, 3 major labs, whereas in Europe, the standout is very limited, is more inpatient testing and within hospital testing. So there's a lot of opportunity is not there. Overall, though Europe continues to do well, North America, clearly, North America fell slightly short in Q4 from expectation, but that has to do with the fact that we were delayed, as you know, with the QuantiFERON program. QuantiFERON was just approved. I remind you as in late November, early December. When it comes to the how we see the opportunity growing above expectations. And this is because, again, the strategy of the 2 companies, QIAGEN and DiaSorin, was to go to the hospital market and capture the send out opportunity. The send out opportunity is big in the U. S. And is a true opportunity because of, a, the send out cost, which allows both company to capture a premium versus what is the average price today of TV in the U. S. And the second thing is that the volumes that today are sent out at each institution are high enough that would allow financially speaking a placement of a system. Today, we're going with the XL. And clearly, when the excess is going to be available, second part of the year, it's going to be an excess opportunity. So far, we have in literally 8 weeks, we see 180 offers made and 30 customers already buying. So the ramp up is significant. And by the same token, we are working also with the major labs together with QIAGEN in order to provide to the core facilities of the big labs, the XS solution. So as far as I'm concerned as far as the U. S. Is concerned, the hospital strategy is working. The TB is a driver. Clearly, we follow suit with all the other specialty products, as we indicated in previous calls. Very important to notice that we were able in Q4 to hire all the people we were planning to hire. So we have a full staff now of sales people dedicated to the hospital market. So very positive about the U. S. China, China was fine. In Q4, it continues it discontinued the trend as before. We placed last year over 100 systems, excess systems in China. So strategy is working well. I'm going to make then comments about China today. But if I need to go back through Q4, it's China was fine. Last but not least, LatAm. You noticed that in the first couple of quarters we had of last year, we had an issue with Brazil. And that issue eventually resolved itself and Brazil came back to net positive growth. And LATAM actually in the last quarter actually grew by 7%. So again, the direction and geography are all fine. And then the net effect of that is that clearly, our gross margin is benefiting significantly from this. And you saw that the EBITDA of the quarter is in line with what we achieved previously. Clearly, net of an effect that I'm going to comment later, which has to do with certain accruals taken in light of the decision to continue consolidation of manufacturing and shutting down one of the plants of the company. Now if we move to, again, major, let me call it, business development activities before we get to the corona situation. I think that there has been a lot of attention drawn by the fact that QIAGEN and Thermo Fisher came to, I think, a conclusion of their relationship and it's been announced that Thermo's subject to anti trust is owned by Caijan. And I think there's been a lot of questions that came our way as part of what is going to happen. Well, without getting into confidential details, I'm drawing everybody's attention to what the CEO of Thermo Fisher said when he did comment the acquisition. He made a reference, a clear reference to 2 companies that they do business with. 1 is Illumina, the other one is DiaSorin. As far as DiaSorin is concerned, he said we've been doing business with Diasone for 10 years. We have a great relationship, and we want to continue the relationship with the company as is. So I am very positive about the fact that the Thermo acquisition is not going to destabilize the current program. There are 12 to 18 months depending on antitrust in front of us where we will continue anyway business as usual. And then clearly, when we get closer to that to the deadline, then we're going to transition the relationship from QIAGEN to Thermo Fisher. As far as Lyme is concerned, it's the same situation. We will continue we agreed to go ahead with clinical studies, which we'll open this summer to oral potency marking by year end. If I see a positive effect of all of these from Thermo Fisher besides the relationship, the financial relationship and the relation between the companies is the fact that Thermal Fisher is a great company when it comes to sales and marketing that is in market creation. So I am excited about the opportunity working with Thermo and developing the line disease opportunity together because of the strength that they have clearly in pushing the scientific value of products through the channel and to the customers. Now if I can go back to now the elephant in the room, which is the gorilla, which is clearly what is what makes the future, I think, of all of us difficult to predict and explains why we decided to qualify our guidance for 2020. I would like to touch base on 2 things. 1 has to do with business continuity. Clearly, if you're not Italian and you read the newspapers, you get very alarmed by what the government is doing. And the impression is that the country is caged. The truth of the matter is that today, the business all businesses continue. Logistics is in place and goods continue to be shipped through actually, with a priority. As far as what Diosaurin has done, we have our primary centers in Italy. We have segregated people. We have created 2 shifts so that in case of a possible a potential infection of 1 of the employees, then we can conduct by law. What we have to do is clearly go back and understand all the context that the person has, which probably means we have seen with other companies that for a week or so that if you've segregated, only one part of the company will be closed. So we have placed 30% the workforce in Smartwork, and this is to reduce as much as possible possible clearly the risk of spread of infection. And so far, so good. We have 2 months inventory. We took inventory directly to customers or to locations outside Italy and mainly in the U. S. To serve the U. S. Market, in the U. K. To serve the European market and in Germany also for the European market. So I think business continuity is not a problem at this point. Now let's talk about business effects of the coronavirus. We announced yesterday that we are very close to launching on the MDx platform a coronavirus molecular diagnostic test. And just to make sure that everybody understands, the MDx is a small footprint system and we have 800 systems placed worldwide. And the majority of these systems is actually placed in hospitals where they do influenza testing in the U. S. And or they do tests like HSV, so herpes virus, cerebrospinal fluid analysis, so for emergency. So it's a system that is typically has been designed because it was originally designed for military use for fast response, clearly low throughput. And it fits like a globe, the requirement of health care systems today. What we have seen in China, but we see it in our own countries, the typical effect is that hospitals are the government first elects a certain number of labs to perform the test and then the logistics goes crazy and meaning that you have swabs going all over creation, trying to get to the logistics to the hospitals, and it takes up to 2 days to get a response back. But even if the patient is at the hospital, it takes 6 to 7 hours to get the result back because they are all batched and then they are sent to the core lab. In core lab, they use high throughput system that typically takes that time to generate their response. So the excitement we got over here around the MDx is the fact that it would be ideal as a system to be placed in the emergency room for triaging patients. At least if you live in Italy, and you will see that in all the other countries, what happens immediately is that they need to set up external facilities to test patients not to allow infected patients within the hospital. And in these triage facilities, it would be ideal to place the MDx. So that's an opportunity for us. And today, we are 2 weeks away. By the end of March, we're going to have CE marking, and we're going to launch the system in Europe and submit for EUA. And very clear to understand very difficult to understand how long an EUA process typically takes. Typically, it used to take 4 to 8 weeks compared to 6 to 12 months, which is a traditional patient care tool in the U. S. But the signal we get from the government is that we are speeding that up even further under pressure of having products available. So if everything works well by April, we should also have the EUA certification and the potential positive effect of our corona asset? Look, I don't have a crystal ball, but we did some quick calculation here. And we believe that having Italy is a major market and the U. S. That have an installed base of MDx up and running. We think at this point, the potential would be between €5,000,000 to €10,000,000 per month of business. Clearly, that's an estimate today that depend on for how many months this would last, but to prevent the question that would come for sure, this would be the opportunity. Now let's look now about the negative effect. The negative effects are very clear because of the pressure of the hospitals to have access and beds for the infected patients by COVID, what happens is that they push people without acute problems away from the hospital. All regular routine test is performed. All the insurance testing, whatever that's applicable, is performed. And it's very interesting if you listen to what Quest and LabCorp are saying about how they start to see the business in the U. S. They see in the U. S. Exactly the same thing, but the only insurance checks are postponed and there is more emergency testing for the corona. So all in all, without having a crystal ball, we believe that there is temporary effect on volume because hospitals would have less How long it lasts? 50 4 percent. We saw in China that for the 1st month when the inflation was at peak, it's a heavy effect. And then it tends to go back to a regular cost of business. But again, you need a crystal ball to understand how long it is going to take. So from the corona effect, in summary, I see no problems today as far as supply is concerned. I see that there is an opportunity for Diosaurin to develop the business around the molecular business around the corona and mainly, again, focused around the domestic market in the U. S. And we see a temporary negative effect on volumes of regular testing, which will be decreased. Now last but not least, I would like to make a comment on another press release we had, which is has to do with CTP. And that is perfectly in line with what we said during our Investor Day meeting, we said we believe decentralization is the way to go. And be able to decentralize, you need a technology that allows the past results. And we have been searching for a while, and then we found this very promising technology in England. We signed it up. We got exclusivity. And as we speak, we're working in transferring the know how of the platform and the consumables to our facilities. It's interesting that we made that comment 9 months ago about the necessity to decentralize, especially for infectious disease. And unfortunately, coronavirus is one of the best examples where if these systems were available, portable, it would clearly allow management of these situations completely different from what from the mess we are seeing today. Okay. All said and done, I will leave now the CFO, Mr. Cetrone, to go through the numbers, and then we're going to Thank you, Carlo. Good afternoon, everybody. In the next few minutes, I'm going to walk you through the financial performance of Piazza in 2019. And I would also make some comments on the contribution of the Q4. As usual, I would like to start with what I believe are the main highlights of the period. We closed 2019 with an increase in revenues at constant exchange rate of 3.8%, a little shorter than the full year guidance. Quarter 4 confirms the good performance of all geographies where we have a direct presence, plus 4.8% in the last 3 months of 2019 and plus 6.3% for the full year, whereas the export business decreased by 13.7%, 12.7% for the full year. Carlos already covered the drivers behind this variance. Quarter four gross margin reaffirms the very good results achieved in the 1st 9 months of 2019, therefore closing the full year with a ratio of revenues of 69.2% and the profitability improvement versus 2018 of 110 basis points. 2019 full year EBITDA at €277,000,000 increased by 6.3% constant exchange rate compared to 2018. EBITDA margin, again, at comparable exchange rate is at 39.1 percent visavis38.2 percent of the previous year. Activity is important to underline that during Q4 'nineteen, we booked some one off restructuring costs, net of which 2019 EBITDA margin at comparable rate exchange rate would have been 39.6 percent, with a growth over 2018 of 7.6%, therefore doing better than the full year guidance. 2019 net results at 170 €6,000,000 or 24.9 percent of sales, record an increase of €80,000,000 or 11.1% compared to 2018. Lastly, we keep maintaining our ability to generate a very healthy free cash flow, €180,000,000 in the year, visavis €164,000,000 in 2018. The net financial position positive for €173,000,000 has been negatively affected by the introduction in 2019 of IFRS 16, which accounted for about €30,000,000 This means we closed the year with no debt and €202,000,000 positive cash position. Let's now go through the main items of the P and L. 2019 revenues of €706,000,000 grew by 5.5 percent or €37,000,000 compared to 2018. During the year, we enjoyed some FX tailwind, mainly driven by the strengthening of the U. S. Dollar against the euro. 2019 gross margin at €489,000,000 grew by 7.2% compared to the previous year, with a ratio of revenues of 69.2%, as I said, 110 basis points better than 2018. This increase is a result of 2 major drivers. On one side, a positive sales mix coming mainly from lower export markets and instruments revenues and a very good performance of both market and specialty sales. On the other side, lower manufacturing and distribution expenses coming from the several cost reduction initiatives started in the last couple of years. The divestiture of the manufacturing site in South Africa announced in this quarter, which follows the shutdown of the 1 in Ireland in 2017, goes exactly in the very same direction and is coherence with the journey to safeguard margins that we started a couple of years ago. 2019 operating expenses of €260,000,000 have increased by 6.1% compared to previous year. The growth at constant exchange rate is as such above 4%, therefore in line with the growth in the top line. 2019 full operating expenses ratio of revenues is basically in line with 2018, 36.9%. 2019 other operating expenses at €11,000,000 are higher than 2018 by €5,000,000 or almost 80%. This increase is driven by some one off restructuring costs booked in Q4. In particular, as I said, I'm referring to the divestiture of our manufacturing site in South Africa and to a restructuring program done in Italy, which has been made possible by the introduction in the 2019 budget law of a measure that allows employees to voluntarily anticipate their retirement with the support of some monetary contribution from the employer. It's the so called quota cento. Both these initiatives are consistent with our efforts, as I said, to safeguard margins and to streamline manufacturing footprint. And we will start seeing the positive effect from 2020 P and L. 2019 EBIT, because of what described, closed the year at EUR 280,000,000 with an increase compared to the previous year of EUR 30,000,000 or 6.5%. The EBITDA ratio of revenues at 30.8% is slightly better than 2018, which closed at 30.6%. Q4 2019 EBIT decreased compared to Q4 2018 by $3,000,000 just because of the restructuring costs we have discussed about. Full year net financial expenses are higher than 2018 by €1,000,000 This difference is mainly due to the positive revaluation at fair value of the participation in our Indian subsidiary booked in 2018 after the takeover of full control from the Indian partner. Besides, in 2019, we also have to account for the negative impact of the figurative interest driven by the first time introduction of IFRS 16. Net of this element, 2019 net financial expenses would have been close to 0. 2019 tax rate is 18.7% is better than 2018, which closed at 22.6% because of the booking in Q4 of the 3rd tax assets related to the intangibles, which we moved to Italy in connection with the shutdown of the Irish manufacturing site. Net of this positive one off, 2019 tax rate would have been and in line with 2018. 2019 net result at €176,000,000 or 24.9 percent of revenues is higher than previous year by €18,000,000 or 11.1%. Lastly, 2019 EBITDA at €277,000,000 is better than 2018 by €22,000,000 or 8.4 percent, with a ratio of revenues of 39.2 percent visavis38.2 percent of 2018. The variance at constant exchange rate and net fee one off costs we discussed about is positive or 7.6% with a ratio on revenues of 39.6%. Quarter four EBITDA decreased compared to Q4 'eighteen, and this is entirely due to the mentioned restructuring cost. Full year 2019 improvement, EBITDA improvement compared to last year is the event, as we have discussed, by higher gross margin and by the first time adoption starting from 2019 of IFRS 16, which accounted for about €7,000,000 Since many moving parts and for the sake of clarity, let me underline that 2019 EBITDA margin is better than full year guidance, which was calling for 30.2% at constant exchange rate, even without considering the positive impact of IFRS 16, which accounted for a bump of a touch less than 1 percentage point. Let me now move to the net financial position and the free cash flow. We closed 2019 with a very positive net financial position of €173,000,000 after the introduction of IFRS 16, which implies the booking of financial liability for about €30,000,000 In 2019, the group generated €180,000,000 free cash flow visavis 164,000,000 of 20.18, therefore recording an increase of €17,000,000 10%. This variance is the result of a good economic performance of 20 19 and the positive working capital variance, mainly driven by an improvement in DSO, which is a direct consequence of the different geographical mix we discussed about and of a very disciplined collection policy. These two positive elements have been partially offset by a higher tax cash out, mainly coming from the one off exit tax arising from the shutdown of our operation in Iran on one side and on the other side from the depletion of the Patent Box tax credit granted by the Italian authorities in 2017. For the sake of clarity, let me underline that the Italian patent box tax regime has been renewed till 2014. What has changed is simply that during 2019, we have exhausted the tax period accrued for in 2017 and related to the years between 2015 2017. Lastly, let's move to 2020 guidance at 2019 constant exchange rate. We expect revenues to increase at around 5 and an EBITDA margin between 38% 39%. As Karl already said, please consider that this guidance does not incorporate the effect coming from COVID-nineteen outbreak. We will review our projection as soon as we will have a better picture of the impact on the different geographies in which we operate. Before concluding, let me remind please that the Australian financials are fairly sensitive to FX fluctuations and in fact, equal to U. S. Dollar and that for every €0.01 movement of the dollar against the euro, diasporin revenues move by about €2,500,000 on a yearly basis. Now let me please turn the line to the operator to open the Q and A session. Thank you. Thank you, sir. Excuse me, this is the Chorus Call conference operator. We will now begin the question and answer session. The first question is from Maja Pataki of Kepler. Please go ahead. Ms. Pataki, your line is open, madam. Yes. Hi, good afternoon. Sorry. Carla, I have a couple of follow-up questions to your comments around the coronavirus. Apologies, my line isn't too good. I missed some things. Could you just confirm that you said that in Italy, you had full access to hospitals and therefore there was not an interruption of revenue generation due to a lack of access? Do you want me to take this question now? Or you want to give me both? I can give you I would actually have 3, if I may. Second of all, the potential that you've given us for the COVID test, is that correct? It's €5,000,000 to €10,000,000 per month. If that is correct, could you just tell us what kind of volumes you're assuming underlying? And then the last question, it hasn't been really a topic at the conference call, obviously, because there are more pressing topics. But could you please give us an update on what is happening with regard to negotiation with Quest and what has happened subsequently with the other larger customers? Thank you very much. Okay. The corona questions, yes, so far, there has not been any disruption in supply in Italy. Because of the corona, what we have seen clearly in some institutions, especially in the north, is that the testing volume of regular stuff clearly is going down because you have less people, as said, accessing hospitals. There is a recommendation not to go to the hospital except for urgent cases. But to supply, access and supply, no problem. The second question has to be potential, yes, we say when we see that look, we see as follows. There are millions of tests today that are done and is or prospectively will be done. And I've seen what happens here in Italy. Let me just give you a couple of numbers. So the official every night on TV, the Minister of Health goes on TV and gives numbers. And they say that until today, officially, they perform 60,000 swaps. We know from a different source because of the volume of swaps supplied that so far suppliers have sent to hospitals over 800,000 swaps, okay? So it is very clear that this the suppliers as a storm. And everybody is on the call. Everybody I know is on the call from people that are actually synthesizing primers to companies that launch products, nobody was able to cope with this surge. So it's very clear that the way I see this business opportunity is that there is going to be a pie that would be carved out among different suppliers depending and it's going to be a mix of NDT tests. So you're going to have tests performed with labs just buying the stuff. And that's today, the reality in the U. S, as you follow the lab core quest, they're gearing up, and they are able to do to perform ADT testing. And then you're going to have a dissemination of testing in the periphery, in the core labs. And here, you're going to have bigger system. And then in the emergency room, where you're going to have a smaller system, and we would be the 1st one with more system to go out. I don't think, by the way, that this is going to be a lot to do, especially in Europe with final testing because it's successful, okay? So the real solution here would be a coronavirus test. This is either your corona or non corona. This is what you need to know today. So to make a long story short, I'm saying that if I do all this and I look at what would be the reasonable number of systems we can place, customers we can serve without really going back order because you cannot start with the opportunities and then go on back order. We did a quick calculation, and that is at full speed. So assume that you have a month where Italy is buying and U. S. Is buying because we will try to serve other markets, but eventually, the surge is so big that we will try to focus on initially on these 2 markets. We believe that potentially EUR 5,000,000 to EUR 10,000,000, okay? I cannot give you the volume because I would need to disclose the price, and I don't want to do that, okay? But this is how I am carving out this. And this is simply saying a piece of this volume that DiaSorin can commit to supply and support, okay? Other companies are going to then take other pieces of this business. And what is very interesting is that you are seeing, by the way, and you saw that there's been lots of discussions about the fact that governments are actually pushing local suppliers, local company to start to give priority to their own country, okay? So I would not be surprised if what you will see coming is that all the diagnostic companies will have somehow to supply their own domestic market first and then export, okay? But it's very interesting, you already heard in Germany what happened and the situation there. 3rd question has to do with Quest and BigLabs. Look, the negotiation with Quest is not a negotiation. The negotiation has been done, meaning that we announced that 2 things happened. 1 is that the contract has been renewed for 18 months and that is the time it is estimated by Quest originally to actually bring up to speed all their systems because the tender has been won by Siemens. So these are 2 official informations. Today, I have a feeling that the implementation of all these changes are going to go through some hiccups because everybody has been hit by storm. So how this is going to pan out? I have no idea. The effects are that as far as Quest is concerned, signals won't depend there. We kept all the infectious disease. Vitamin D was a sign to Siemens what we understood. And there is a soft landing period of 18 months where our vitamin D will continue to be used at the current line, okay? And then God knows what happens. LabCorp, there has been we are working, as said before, when I was talking about TB, we strategically want to develop and schedule the business going after send out, but also exploring the opportunity of the centralized labs. And what we have a great relationship over the years and we are clearly working with them to explain, understand and have them buy into our technology with our friend from QIAGEN. So every time we do have negotiations of this type with customers of this size, we always have a trade off, meaning that we provide discounts on certain things in order to have opportunities on other products. And I think this is let me just leave the comment there. So stay tuned. To us, it's very strategic to have access to this with the big volumes and the big labs we are getting today. So in the next call, we're going to update the market about where we are at. Thank you. The next question is from Mr. Peter Welford of Jefferies. Please go ahead, sir. Sorry, I was on mute. Apologies, I was on mute. Just a follow-up, please, on the coronavirus situation. You mentioned, I think, I'm right in saying there were 800 systems that have been placed at the moment worldwide. I wonder if you could give us some sort of geographical breakdown of those systems that have been placed so far. And also whether or not the capacity to actually supply the systems is potentially a limiting factor at all for the coronavirus test as you roll them out? And equally then, I wonder if you looked into, are there any supplies of any reagents or third parties that you rely on where you see risk there? And if you, I guess, done conducted due diligence of your suppliers to determine whether or not there's any risk from a raw material input point of view to your business longer term? And then just on the QuantiFERON business you mentioned there. You talked about, I think, the opportunity there in the U. S. And the ramp up that you've seen so far there based on, I think, 180 offs, as you said. I guess, could you just give us some insight into those customers that didn't choose to buy? What the sort of dynamic is there? And what the sort of negotiation and discussion centers around for QuantiFERON TV in the U. S? Thank you. Okay. Let me start from the last one, easy to remember. On the QuantiFERON for the U. S, I said, today, we have a position with our partner, Cajun, and the position is look guys. We bring tremendous benefit when we upgrade either if we upgrade you to from a license to a fully automated system and or if we allow you not to send out but to do all testing in house. And we believe that it's fair for the customer and first for DiaSorin and CAGEN to split the gains. So today, we are positioning our pricing into an area which is very interesting for the send out because today, the send out cost is between $50 to $70 And therefore, there is lots of space for the customers to gain efficiency and for us to gain the right value for the product. And when it comes to customers that we convert from Eliza to Aliazza, we ask for premium. And we make we talk with Cajun a very hard sense saying if customers don't want or don't understand the value of the technology, we are not going to make concessions. I have to say today that, again, 180 offers and with few exceptions, we see pricing as an issue. But if safe to say, where we are not going to bend is about value for this product, okay? Now going to supply chain, I see honestly today as we speak, I don't see issues. In mind, we are fortunately for us, we are a manufacturer, so we don't buy raw material. I've always been very proud of saying that we make all our staff ourselves in terms of biology. Otherwise, we will not be a diagnostic company. The only area where I think there is there could be an uncertainty, but again, this is a presumption, it's not what we see today, it seems like what we hear, is that when it comes to some of our instruments, it's very clear that some of the some which have actually bought in Europe, as you know, some of the some sub assemblies may be coming from other parts of the world, maybe China. What is very interesting about this corona effect is that everybody is now discovering that the supply chain is global and never local. So even if you think you're buying something in Europe, at the end of the story, a subcomponent is coming from somewhere else. So if I have to look forward, it would be interesting to understand whether and how long it is going to take for the Chinese supply chain of parts to be activated and made available to you. For the time being, we see no issue with instruments' viability. And so we continue to be alert with traffic. But if I need to point my finger somewhere there's a potential risk of some back order in the future, not only for us, but for a lot of companies, really could be instrumentation. Now working back to the list, the first question was on Corona. Can you hand me one second? What was the first question? Yes, sorry, the 800 instruments, just whether or not you could potentially give us a breakdown of where they are, I guess, and whether or not you see you've got enough supply of the actual instruments to meet demand of the tests when obviously the CE mark and the EUA is approved? Look, needless to say that this business was a U. S. Business. We bought it from Focus from Quest. It was 90% U. S. Developed business. So as you can imagine, a good chunk of the installed base is in the U. S. Any seats in hospitals, and that's a perfect location to exploit the opportunity because hospitals are the one that will do testing in the U. S. In Italy, we do have an installed base, but the problem is that the way now in Italy system is positioned or now the room, asset solution is more on the triage in Erdem Serum. And so what we are doing is we are dedicating to this a certain number of systems that we have in inventory or we have taken away from certain customers where today the priority is not what they do, it will be more the corona and reposition these days into the emergency room. So to make a long story short, in U. S. Installed base in hospitals, so right installed base in Italy, systems we are in inventory or we're taking away and putting inventory to make sure that we deploy into the emergency room in the as soon as the product is available. That's great. Thank you. The next question is from Mr. Andrea Baloni of Mediobanca. Please go ahead, sir. Yes. Good afternoon, everybody. Thanks for taking my question. Obviously, a lot of questions about COVID positive and negative side. On the positive side, I understood that the impact of COVID new test should be in the range of €5,000,000 to €6,000,000 per month, or €5,000,000 to €10,000,000 per month, which is a pretty huge amount. And this should be at full speed coming from Italy and the U. S. And correct me if I'm wrong. I have understood that the impact in Italy should be very soon to current situation. About the US, when do you think to receive the approval? Usually, it's a pretty long period to receive an approval from FDA, but in this case, it could be pretty soon as well. So just to calculate the full speed that could be calculated starting from probably already in May, it's something doable. My second question is about the negative impact of COVID. You've mentioned that so far, you are normally supplying the hospital, but the level of volume of testing the hospital is lower, dramatically lower compared to apartment in Italy. I would like you to help me in modeling this. So in China, where we have, say, 1 month ahead of Italy, What has happened? I mean, which is the drop in terms of volume sold to the hospital you have experienced in Q1 in China? And I would like to know if this is something which could be repeated even in Italy. And my last question is about tax rate. You have mentioned the renewal of a Patent Box. Which is your guidance on 2020 tax rate, please? No question. And I think in your comment, you already have a lot of the answers. So let me just try to add some I think you said EUR 5,000,000 to EUR 6,000,000, but I think you didn't understand what the number was. So you said EUR 5,000,000 to EUR 10,000,000. That's my first comment as far as the opportunity is concerned. Then you asked about the negative impact on volumes. I said, I wish I had a crystal ball. I will play lotto. I think that what I caution the market is that what we have seen is that in certain hospital in Lumberdi, that clearly is the ratio that has been hit. 1st, we saw 30% drop in existing volumes. We've not seen this so far in the south. So Italy is a complex situation because it's a blend. Today, here the north, this has been hit by a storm. And the South, so far, it has been preserved, okay? So what I'm saying, what we saw right now is around 30% drop in volume. China is a different situation because China was everything was very much concentrated in 4 weeks for 4 to 6 weeks. And at the peak of negative effects, you could see certain hospital even down 70%. In but in China also, you need to understand that fortunately for all of us, we were able to impose certain restrictions right away, right? And so the effect was immediate. It didn't last long. And then you see a recovery, a slow recovery, but you see a recovery. I don't know if this can help you to model it. Believe me, I wish I had a crystal ball to model it myself. How this is going to be translated into Europe? I have no idea. Until yesterday, in France, they were still celebrating in the streets as if anything is happening. Germany has been hit hard, and I saw a picture of Franco Airport completely empty. This is why I'm saying the crystal ball, how long this is going to last. And what we've seen so far is what I told you. About the Patent Box? Yes. So as I told you, the pattern box has been renewed. So the what we are shooting at in terms of tax rate for 2020 is a similar number of 2018, which is between 22% 23% tax rate at group level. The next question is from Mr. Scott Bardo of Berenberg. Please go ahead, sir. Yes. Thanks very much. Yes, a few questions, please. So I'm a little bit confused. So I just want to be 100% clear on a few things. So firstly, encapsulated within your around 5% group revenue guidance, do you include this new coronavirus test that you have within the portfolio? That would be helpful to get some understanding on or whether this excluded. The second question, actually, it would be wonderful if you'd answer that one first for me, please, if possible. Scott, very simple, no. This excluded positive and negative effects. So the guidance we gave, we try to give is what we saw in the business trends with regular cost of business. Then on top of that, what we excluded, so we don't know and we'll be able to quantify better moving forward is a positive effect and we try to give you what we estimate will be the opportunity that we will be we will look at as our the side of the business we can get, which is in full month, EUR 5,000,000. And then the negative one, which would be the volume drop. But all of this is not included in the 5%. Understood. All right. And then and I appreciate it's an evolving situation, but you already have then a very established routine diagnostic business. And the test that you talk about here is a new test, which hasn't, if you like, established itself in the market yet. So what I'm trying to understand is, at this point, do you consider yourself a net beneficiary, if you like, of the coronavirus attempts to contain the outbreak? Or should we expect, even including this test, some negative impact to your business, in which case just help us understand, is this a couple of percent on the top line? Is this 100 basis points additional margin compression to your guidance? I think it'd be useful in this environment just to get a little bit more clarity as to what is a more realistic scenario for us to embed at this point. Obviously, Scott, we've been working together for a few years. So if I knew, I would give it to you. I don't know. And I'm trying to explain to you what the uncertainty is and why it is so difficult to evaluate. It is difficult to evaluate because you don't know how long is it going to last, okay? It's now shifting by different geographic regions. And so how long is it going to last? We now know what we can predict what is the effect in China, okay? But I don't think that the Chinese model is reproducible, unfortunately, because we see us reacting with the same speed as the Chinese did. So I'm telling you I'm giving you some guidelines on what I see in Italy. So far, in Germany and France, we have not seen decrease in testing volumes, business as usual, but we both know that it's getting there, it's hitting hard and you're going to see the same effect. And certainly, nobody knows what is going to be the effect in the U. S, no? I mean, that's, I think, is a first statement. So I'm telling you, I have no idea. But one thing is for sure, it is temporary. It is temporary because it's just decreasing volume, patients not being admitted, but they will be amended. Insurers testing being postponed, but it will be done. Okay. Understood. And maybe then just following on from this. I mean, you've commented about China routine testing falling quite considerably in the month of February. I mean, these are, if you like, again, established profitable product lines. Are we is it fair to assume that the new test that you launch is of a profitability profile that can compensate for some of these losses? Or in a sense, is this more of a revenue generator than a profit generator for the company? Again, complicated to tell you. Look, I think that we made a decision as a company with social responsibility. We decided that we're going to provide this test to organizations at a reasonable price. And so we are not going to try to exploit the opportunity and the emergency. And so and that's an ethical decision that was made by the Board this morning. So we're going to sell this product at the same price that is actually paid for Allegro into Enfocus, which is the only established reference you can use today. So this is as much as I can. All right. Maybe last question, corona aside. I think your guidance ex all of these impacts is at the low end of your midterm aspiration for mid- to high single digit. I think you also mentioned some comments about renegotiations with reference laboratories. I just wonder if you could share a little bit more about this dynamic because it was my understanding you had previously reached some agreement with some reference laboratories. So just some comments about how watersight these negotiations and previous contracts are and whether the end goal is still very much in sight to become a high single digit organic growth business? Okay. If we go back to the other cost of business and we forget corona, so we took it to effect in 2020. One, which is to do with the discontinuation of Sines Eliza. As you know, when we have discussed, we are proceeding and we have an acceleration of cannibalization of the last accounts from the senior adviser to the new zone. The contract allows Siemens to stop supplying products to us by mid- to the second part of 2020. This is when the last slot will be actually shipped to their service to customers. So when we had bought this business, we are at 2 segments of the market we bought of the customer list we bought that we knew we would have lost. 1, we're 3 very large blood banks that were still using ELISA. And we knew that when this would convert, it would convert to another technology, not by a sorry, because we are not a broadband company. So this happened, we are supplying still supplying a lighter to them, but in the next few months, these are going to disappear. They're going to be moved to different technology. And then the long tail of smaller customers where we don't have a solution for the small customers, too small given for the excess, and we're going to lose them. Net net, all this discontinuation effect is going to happen in 2020. So that's a one off drop that you see. The other one, look, is a qualitative comment that we made. For us, it is very clear that and we said it many, many times, we are vulnerable on certain larger contracts on vitamin D with this big, big, big account because it's high volume, it's need to and so forth. And it was very clear when Quest made a decision to automate all the immuno, I say, that we will be certainly not vulnerable on specialties. Actually, we would gain more specialties like calprotectin, but we will be we will lose vitamin D. When it comes to vitamin D then with this very large account, it is, for us, better, in my humble opinion, to trade some vitamin D value, which is always at threat of being reduced by any of the labs competitors putting in front of these labs an absurd price and or the concept of vitamin D being a need to and being this point automated on a practice. So to make a long story short, every time I have a chance to get more business at a better value with a good contract, And if I need to do that, take an existing assay and exchange some value to get more value, we always do it, okay? So what I'm saying is, if I need to use our vitamin D existing business in order to speed up or make more comfort of a large customer than to introduce another product that gives me more stability and more value, I think it is worth of what they are starting to do it. One is compensating the other. So if you give a financial incentive with vitamin D, That is going to be compensated way than more than compensated by what you get in return from the line. And I would like to leave it here because it's a confidential information, but it's a principle that we've used in the past and we want to use in the future to secure strategic opportunities with the large flaps. Okay. Thank you. The next question is from Ms. Katherine Tennyson of Bank of America Merrill Lynch. Please go ahead, madam. Hi. Thank you for taking my questions. I have 3, if I may. My first one is on China. Of your 2019 revenue number, what proportion of that came specifically from China? And if you have your Chinese business, if you could just remind us what portion of that is lead to test versus special tests? That was my first one. And then if we look at Q1 for China, as we've seen a number of new coronavirus cases start to decline a bit in March, have you seen an increase in activity there? Secondly, if I could look at the increase in operating expenses in 2019, could you give us a little bit more color as to what those were and if that step up level is what we should expect for 2020? And then my third one is on your Siemens, ELISA customers that you're looking to convert to CLIA. What proportion of those have been done as of late? Thank you. Okay. Let me say we never disclosed where China is, but I think we say that APAC is around 15% of total business. And China is a good chunk of the business. So you can, I think, have enough to make the wrong assumption? So on quarter 1 in China, what we saw is January is which now since 10 years ago, but in January, we didn't see much simply because there was the New Year. Then we saw in February, we saw deep dive in testing volume when the country fundamentally frozen, not only in one region, but as you follow everywhere the country is closed. And now we see in March a recovery, which I'm measuring which today I see the recover coming from the fact that we are back into business of installing new systems because hospitals have opened up now access to engineers to for installations and they're very positive. And then we but again, it's still very difficult to get data from hospitals. But we, from the data point we have, we see a recovery in testing volume still well below last year, but certainly not to the dramatic levels that we have seen in February. OpEx, the vast majority of OpEx has to do with the investments we have discussed on commercial and the prep up of the U. S. Organization. We have hired over 20 people. So this is to be dedicated to the hospital segment and to push the QuantiFERON. And that's a major effect that we have seen plus some value based care initiatives online because we are hiring people also to support that program. Last, in Siemens, I think to this stage, we have converted roughly 75% of the installed base of the convertible customers, and we're going to have it all up by June. Was that all right? Super helpful. Thank you. Thank you. The next question is from Mr. Luigi De Velez of Equidacin. Please go ahead, sir. Yes, good afternoon. Two quick questions for me. The first one on the QuantiFERON TB. How much of the Italian and European revenues growth in 2019 19 has been related to the TB test? The second question on the molecular test, could you elaborate on the decentralization process affecting large hospitals surveyed by DEA and the impact expected for 2020? Thank you. In fact, look, I'll talk about the differentiation. The impact of this substance is embedded in a corona number. Concept is very simple. You are Italian, so unfortunately, you do see what we see every night on TV. The net effect today is that the hospital are trying to fence out inside of patients. Every day, you read in the newspapers that if they cannot filter patients, even acute care people that come in for other diseases. There was a case a couple of days ago about a hospital in Torino, acute case, a guy with a heart stroke come in and then is not tested because it's rushed in and then it's positive, and then they need to pretty much run cardiology. So they're building fences today to avoid these people getting sight And but they cannot do it because the only way to do it is to stop them outside. They build these tents, open tents. They put people inside. They take the swab. And then if they don't have a way to test the swab right there, now the journey starts. So the swab is sent, if lucky, to the reference lab to the core lab in the hospital, and that takes, it takes 6 hours to come back. If they are not lucky, meaning that they have not been allowed to do testing, so it goes to another hospital, it takes 12 hours. And the patient is stuck outside. And this is why today, when yesterday, we announced and we got caught by complete surprise by the to be honest with you, by the reaction of the system, of the political system, of the hospital system. Everybody immediately understood the value of the test because they want to triage people right there and right away. And this is the value I see of the decentralization. And by the way, I hate to say this, but 6 months ago, when we were discussing about why decentralization is strategic and why tons of care small system are strategic, we referenced this. We said, in case of epidemics, this is what you need. And again, it opens. So this is the only thing. I start again. Just watch TV at 8 and you see what I see. And, Karel, I don't believe we give a breakdown of the contribution of related tobacco sales and the growth of Europe, right? This is a confidential information. So it is a contributor, but it's alongside with all the other clear extra vitamin DTA that we have. We have a follow-up question from Maja Pataki of Kepler. Thank you for taking my follow-up questions. Carla, you mentioned the all the tests that are related to insurance, life insurance and there is a certain proportion of your test volumes that are not necessarily linked to acute conditions of patients. Do you have could you provide us a bit of a number or guidance how much of your tests in general are more used for checkups that could be that should be actually recuperated in the second half of the year? And then my second question, it's very helpful to get the understanding of what the potential could be from COVID-nineteen test per month. So shall we just think that if new countries start to see really dramatically increasing numbers, we should add anything between €2,500,000 €5,000,000 per country to that potential? Maja, very difficult to answer to your question. Look, let me just give an example. So we have market leaders of prenatal testing some infectious disease, CMB, telcoflus vosalsis, Urbala testing and so forth. There are guidelines that Italy and France are a good example where speed testing is done every cycle. Okay? Then again, meaning that if today a physician is to a commander to a pregnant woman to go to the lab and get tested versus considering what was happening, they say, let's say, the risk they own, okay? So this is why I'm saying rutin versus non rutin today has become a very loose definition. Vitamin D testing, everybody knows in the U. S. That the vast majority of vitamin D testing is actually related to the EUR 40,000,000 screening insurance programs that are done every year in the U. S. Again, read what the trend was a large corporate investor saying. They are seeing all of this postponed, okay? So I think if you look at our portfolio of vitamin D, vast majority of it is also related to clearly a non acute case situation and a lot of it in the U. S. Is related to insurance programs. And I see that to be postponed after the tsunami hits and since we revert to all other costs of business. On the infectious disease prenatal, again, I see some of it for this period of time, not to be done. Other infectious disease or hospital admission, for example, for hepatitis, they do it every time patients are admitted. So in this case, more patients are admitted, more infectious disease is done, more hepatitis patients than now versus the future. But the truth of the matter I'm saying is that we are everybody is looking carefully to what is happening in China because it's the 1st country where it happened and now they recover. Again, as we discussed before, China was relatively short. In Europe, we don't know how long it's going to start how long it's going to take before it starts, it peaks and it reverts. I think you're going to have an effect in Italy in the next few weeks because now they're going through draconian measures. They're pretty much shutting down all the north. You cannot leave your house and then let's see how long is it going to take before the relatively small number of cases. We are talking about 10,000 cases up to yesterday, but still increasing by about 2,000, 3000 per day. Let's see how long it's going to take to pick and go back. Italy will, in my opinion, provide a good example to everybody on what a democracy can do under certain democratic rules. Thank you very much for that. The last question is from Mr. Scott Bardo, a follow-up from Berenberg. Thanks very much for being very generous for your time. Just a very quick follow-up. Yes, so balling this all together and some of the puts and takes and moving parts, you have highlighted that you're looking to file for approval for your coronavirus test and you have some renegotiations with reference laboratories and some Chinese impact. If I were to build this together or distill this, is it fair to say that we are likely to have a pretty weak soft start for DiaSorin from a revenue perspective? Or do you expect it to be broadly in line with your full year guidance? And also maybe some Pietro, maybe some comments on margin. Would margin, in your opinion, be down in the first quarters of half of the year as compared to the prior year? Or are you expecting a stable development? If you could just comment there, that would be helpful. Scott, clearly, I think Q1 is going to be difficult because Q1 is pretty much is a tsunami. So U. S, China, Italy now looks like you're having Germany. So I think Q1 first half for everybody forget I am sorry, for everybody is going to be complicated. Unless you are in the business of supplying reagents from labs to corona. So if you adjust to that, you are doing very well because you enjoy the peak of the demand. If you also have with your regular business, diagnostic business, you will suffer from the decline in volumes. So the answer is yes, I believe Q1 and Q2 will be soft. By the same token, I believe that as far as margins are concerned, we see clearly you're going to have less I mean, since we are investing, since we believe all of this is temporary stuff, we are in we continue to invest to few programs. And so our OpEx rate will go up because we evaluate this care, because we have aligned with these clinicals, because in the U. S, we have all the good people to push forward on. So at the level of the gross margin, I think, as you're going to see continue to see very good margins. At the level of EBITDA, you make a dilution simply because the weight of your OpEx seems we don't want to stop it because it's the future of the company, you're going to have in the first three quarters a margin compression with 11 because of the OpEx certainly. Mr. Rosa, back to you for any closing remarks, sir. Thank you, operator. Bye bye. Ladies and gentlemen, thank you for joining. The conference is now open and you may disconnect your telephones.