Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the DiaSorin Full Year 2017 Results Conference Call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mr. Carlo Rosa, CEO of DiaSorin. Please go ahead, sir.
Yes. Thank you, operator. Ladies and gentlemen, good afternoon, and welcome to our full year 2017 conference call. As usual, I will give you some comments about the business on the full year 2017 and some reference to quarter four results. Then I will allow Mr. Pedron, our CFO, to take you through the numbers. Well, let me first start saying that we are very satisfied of the 2017, which has been a very successful year in terms of certainly financials, but also the business progression of certain projects that we are carrying out in research and development and in conjunction with other partners as well. First of all, from a financial point of view, we achieved the 2017 guidance, both in terms of revenue and in terms of EBITDA number.
We are on track to deliver the growth that we have communicated to the market when we had the investor day, and we presented a three-years plan, which I remind you, covers 2017, 2018, and 2019. Now, if we talk about some of the business achievement, 2017, in my opinion, has been very rich of events. First one, as you know, has been the acquisition of an asset from Siemens, the ELISA business, which was concluded in October of last year. Let me remind you that that acquisition was strategic for DiaSorin, and not necessarily because of the technology. It's an ELISA technology, which we have, and we are very well aware of that is a technology that is aging and needs a replacement.
Where that acquisition gave access to DiaSorin to few hundred of customers located in primary geographies, mainly in Europe, and other geographies around the world, where we can now access these customers and convert the customers from the ELISA technology to the chemiluminescence technology that we have on the LIAISON and the LIAISON XL platform. Plans are in place and in execution to contact customers and propose the switch, and we expect this conversion to happen within the next 36 months. Let me remind you that this conversion is possible because we do have on our platform all the equivalent product that we have purchased from Siemens. The second event, which was strategically very relevant for us and was recently disclosed fully at the JP Morgan conference, has been the partnership with QIAGEN around latent tuberculosis. As you well know, it is a very interesting business.
The good majority of this business sits in the U.S. The second geography would be Europe, then the rest of the world. QIAGEN certainly has been spending a lot of time, and very successfully, in promoting the use of this technology, switching from manual Mantoux into ELISA. Through this alliance, is the intention of the two companies then to allow customers to move further into a different technology and platform, which is the LIAISON platform family, starting from the XL, and then certainly including the XS when the XS will be made available to the market late this year, early next year. Product development is on track, and we expect, as we announced in San Francisco, the launch of the CE version of the product in Q3 of this year.
Certainly, for us, this is an asset because it goes to an existing customer base we have that is using ELISA, and they are interested to convert. It gives us access to a customer base that we are not selling to today, which is a part of the QIAGEN customer base that is using this technology, but is not a DiaSorin customer. Conversely, it's giving QIAGEN access to thousands of systems that DiaSorin has installed where the assay is not in use. From now on those customers, we do have access to the assay through the LIAISON platform. As you can see, both companies are very excited because this is a win-win situation for both. The last project which we have announced is that I name group efficiencies.
It has to do with the fact that in an environment that certainly is becoming very competitive vis-a-vis pricing on the market, DiaSorin has initiated an effort to streamline its cost base to remain competitive and guarantee the same profitability that we are offering today. That, as you know, is premium. Again, in a market environment where price is certainly always under dispute. As a part of the program, we've initiated a redesign of our manufacturing processes. Some of this has already been implemented in our establishments, mainly in Europe. Part of this effort has been communicated as well to the market, has been the closure of our Irish plant. The project is on plan. If you have seen that we do have accrued close to EUR 10 million in 2017 to front all the expenses that we will incur for the closure of the plant.
We, as communicated, expect annual savings of roughly EUR 7 million from this closure, and therefore the payback is going to be a little bit over one year. Carry forward, this will again allow us to stay more focused and with a competitive cost base. Last but not least, before I get into the different geographies, has to do with technology. From a technology point of view, our vitamin D franchise has been relatively flattish in 2017. Actually, in Q4, it slightly grew. As said, this is something that it can happen from year to year. We've given an indication to the market that we expect vitamin D, usually year-on-year, to decline between 3%-5%. Which means that it can be good one year, it can be worse the following year.
Overall, what we see on the market is that certainly because of competition on price is decreasing in volume, but volume is still increasing. In view of the vitamin D2, 2017 has been a good year for vitamin D. CLIA ex vitamin D was extremely good. Revenues grew by 13% in 2017, 12.5% in Q4. We continue to see double-digit growth of this product family. Now we have 118 products available on the box, and we launched last year, actually three new products on the platform. Last word on the LIAISON XS. LIAISON XS, the plan proceeds as communicated to the market. We are in process of validating the validation units in-house, and we expect a launch end of this year, beginning of next year. It is fundamentally on track.
If we move from immunoassay to molecular, we continue an effort to expand the menu on the platform that we acquired through the Focus acquisition. We have launched two new kits, Bordetella and Clostridium in 2017, and three new ASR for the U.S. market. We completed our own hematology panel with the last assay, and again in 2017. The last assay on hematology is closing the panel that now is fully available on our LAMP technology. From a sales point of view, we have mid double-digit growth for our molecular franchise in the U.S. market. As you know, our revenues in the U.S. are skewed toward influenza. The flu season, well, last year was a good flu season, certainly, as you have seen, is phenomenal when it comes to 2017, 2018.
We continue to see the franchise of flu growing strongly, but certainly it's seasonal dependent. By the same token, we continue to expand access to market of the platform through our European subsidiaries. If you remember, Focus was a fundamental U.S. company. We've communicated that a value of this acquisition was the ability then to take these products into U.S. through our own network. This continues, and we have seen strong growth as a result of that in the European market. If we discuss now geography briefly. We continue to see in Europe a very strong growth, and this is to the contrary of what some other competitors really show about Europe. Notwithstanding the fact that all the main European markets per se is a net result of consolidation, and efficiencies are decreasing in value.
The reason why we continue to see strong growth in Europe is because this consolidation fits very well with our platform and the LIAISON XL, which typically sits in bigger establishment hospitals and labs. That benefit from the fact that the smaller hospitals are closed and the volume is funneled through larger institutions where we sit, and therefore we enjoy increase in volume and consequently increase in value. Last but not least, when it comes to Europe, Italy was a very nice surprise. As you know, Italy accounts for 12% of group revenues, and 2016 was very sluggish for the market, whereas there was a strong growth in 2017, which is almost 7% for the year and 7.3% in quarter four. Our own domestic market is finally getting stronger.
If we go to the U.S., in the U.S., we had a 19% growth in 2017, 6% growth in Q4. Certainly, there is an aspect related to this growth, which has to do with the change of perimeter, because in 2016, we accounted for seven months of sales of Focus, whereas in 2017 it was a full year. Certainly, if I can make a comment on this, we see double-digit growth in molecular, where we continue expanding the customer base. We see low single-digit growth in our immunoassay business, which again is good at a time where you have a concentration of business in the large reference labs, namely Quest, LabCorp, BioReference, and certainly we are position in these settings allows us to benefit from increasing volumes that comes through these labs. Latin America, very good.
Brazil had an outstanding growth in 2017, over 20%, mainly driven by, again, the chemiluminescence strategy that we enjoy, that we have in the country, where we are well-positioned both in central labs as well as in the primary hospital institutions. Brazil, it is on a positive cycle these days, and we are enjoying the fact that we're well-positioned in the market. Last but not least, I would like to comment Asia Pacific. Asia Pacific for us is primarily China and Australia. In China, notwithstanding the fact that the growth for the year has been strong, 15%, we have seen in quarter four a slowdown in growth. This is explained by the fact that primarily in China, we have our installed base in Class 3 hospitals, and we are developing the base into the Class 2.
You are well aware of the fact that the Class 3 hospitals are now saturated, and the government is making a conscientious effort to move patients away from Class 3 into Class 2. Therefore, we see that the volume growth in Class 3, which was strong in previous years, now is not there any longer. We see that the volume is flat in this institution, whereas we see 15%-20% growth in volume in Class 2. The net effect of this is that our install base in Class 3, which was generating double-digit growth per se, just for the fact of being there and enjoying this growth, the growth of the market, is not a net growth contributor any longer.
Whereas, as I think we have already discussed in the previous quarters, we are making a conscientious effort now to direct placement into the growing segment of Class 2. The net result is that we foresee in Q1 as well in Q2 of 2018, a slower growth than what we had historical, but then we expected, because of the fact that now the installed base in Class 2 will pick up and will contribute more to the overall revenues. We expect that in the second part of the year, we will go back to a double-digit growth in the Chinese market. Before I turn the microphone to Mr. Pedron to go through the numbers, I would like to comment on the dividend policy. As you have seen, the board of directors have decided to issue the ordinary dividend of EUR 0.85. Last year was EUR 0.80.
Historically, we have had a policy of increasing the ordinary dividend, maintaining it to around 38%-40% of the net earnings. By the same token, the board of directors has decided to, let me say, in the policy, to increase the value for shareholders to pay a special dividend of EUR 1.8 with a payment date of December 31st of 2019. I think what I would like to comment on this is two aspects. The first one is that you see for lots of public companies. One of the ways to create value for the shareholders is typically a share buyback, which is complicated for DiaSorin because, as you know, our free float is relatively limited, and the liquidity is limited. Therefore, a buyback would not be an option for the company.
The other option certainly is, when possible, to issue a special dividend, which was a decision made by the board this year. This, although it's very important to remark, that does not change at all our appetite for M&A and/or limit the ability of the company, certainly to conduct wise M&A as we have done in the last few years. Now, Mr. Pedron.
Thank you, Carlo. Good afternoon, everybody. In the next few minutes, I'm going to walk you through the financial performance of DiaSorin in 2017, and will also make some remarks on the contribution of the fourth quarter. Before we start, let me please remind you that we began reporting the Focus business since May 2016, and the Siemens ELISA business from this quarter. 2017 perimeter of consolidation is different from the one of last year. Said that, as usual, I would like to start with what I believe are the main highlights of the period. As we said, we closed the year with revenue increase over 2016 at constant exchange rates, in line with our guidance, 11.5% or about EUR 65 million, without considering the positive impact of the recently acquired Siemens ELISA business. Its contribution in the quarter was about EUR 9 million.
Coming back to our guidance, I believe it is worth underlining that both the so-called like-for-like business and the recently acquired molecular franchise of the Focus business delivered as per our expectations. The first scoring a full year growth of around 6%, and the latter with an H2 growth of about 15%. 2017 EBITDA growth at constant exchange rate and adjusted for both the positive effect of the Siemens ELISA acquisition and the negative one of the Irish divestiture, is in line with our full-year guidance, increasing by 13% or about EUR 28 million, with a ratio of revenues at Siemens ELISA of 38.7%. The combined effect of these two events affected Q4 for a total of about negative EUR 3.3 million. DiaSorin keeps confirming its ability to generate a strong free cash flow, EUR 132 million in the period.
This allowed us to close the year with a net financial position just short of EUR 150 million. After having paid in May dividends to our shareholders for about EUR 44 million, and in September about EUR 30 million for the acquisition of the Siemens ELISA business. As you may recall, the total consideration for this business was around EUR 45 million. The remaining balance would be paid in deferred installments during the next three years. Last, not least, in January 2018, we signed an agreement with the Italian Tax Authority, granting us a tax relief under the patent box regime, the so-called patent box regime. As you might remember from our previous quarter calls, this elective tax regime was introduced in Italy in 2016 and is characterized by a five-year renewable lock-in period.
The impact on 2017 will cover 2015, 2016, and 2017, and amount to about EUR 90 million, which is better than the original estimate I provided to you in the previous quarters. Let's now go through the main items of the P&L. In order to allow better understanding of the performance of the underlying business, I will also comment the impact of the two, let me call them outliers of Q4, which were not included in our guidance, as we said in Q3. Which are namely the Irish divestiture one-off cost on one side, and the Siemens ELISA contribution on the other. We also tried to add a few slides on our website, which try to bridge the difference between the business before Siemens ELISA acquisition and the Irish divestiture cost write-off. 2017 revenues at EUR 637.5 million grew by 12% or about EUR 68 million compared to last year.
The growth at constant exchange rate was 13.1% or EUR 74.4 million, including, as said, the contribution of the Siemens ELISA business. The growth at constant exchange rate and without considering Siemens ELISA is 11.5%, in line with the guidance. It is worth mentioning that Q4 has been hit by almost a EUR 7 million FX headwind, mainly driven by the U.S. dollar and the Chinese yuan. Gross profit at EUR 431.9 million grew by 11% or EUR 42.7 million compared to last year, closing 2017 with a ratio of revenues of 67.7%. The difference with 2016, which closed at 68.4% of revenues, is mainly driven by the Siemens ELISA business, which, as we discussed, is dilutive at gross margin level, but not, again, not at the EBITDA level one.
The different mix, some price pressure on clear me-too products, and mainly vitamin D, and the slightly dilutive effects of the Focus business, which is again dilutive, as we discussed, on the gross margin level, slightly dilutive. The Siemens ELISA business dilutive effect is more marked in Q4, which closed with a gross margin incidence of revenues at 66.5%, against 68.4% recorded in 2016. Besides, it's fair mentioning that Q4 was also hit by the FX headwinds we just talked about. Total operating expenses at EUR 231.5 million, or 36.3% of revenues, have increased by 11.7% compared to last year. Please remember that as we saw in the previous quarters, about the EUR 30 million of 2017 OpEx are driven by the depreciation of the intangible assets coming from the Focus and Siemens ELISA business acquisition.
Net of this element, full-year OpEx would have grown by about 9.5%, and the ratio to the revenues would have been 34% against 35% of 2016. 2017 other operating expenses at EUR 16 million are higher than 2016 by almost EUR 7 million. As anticipated during Q3 call, the main reason for such difference is driven by the one-off costs associated with the divestiture of our Irish site. On top of this, some expenses related to legal action in the U.S. concerning the future introduction of certain products into that market. Again, the same element we discussed in Q3 call. As we will see in a few minutes, the impact of the Irish divestiture at the EBITDA level is lower, since some of the costs we incurred are write-off of fixed assets, and so are not impacting the EBITDA.
As a result of what just described, the 2017 EBIT at EUR 184.4 million, or 28.9% of revenues, has increased compared to 2016 by 6.8%, or almost EUR 12 million. If we consider, however, the adjusted EBIT excluding the Irish divestiture cost and the Siemens ELISA positive contribution, which accounted for negative EUR 7.7 million in the year, we would have a result of about EUR 192 million, or 30.6% of revenues, with an increase over 2016 of slightly more than 11%. Q4 EBIT has been materially affected by the very same elements, thus recording EUR 39.6 million or 23.2% of revenues. Net of the Irish one-off costs and the Siemens ELISA contribution, the adjusted EBIT of the quarter would be in line with the profitability recorded in the previous periods. Now, let's move to the tax rate.
The tax rate at 21.7% is 11.3 percentage points better than 2016, which closed at 33%. This variance is mainly driven by the impact, as we just said, of the Italian patent box tax regime, which accounted in 2017 for about EUR 19 million. In order to avoid any confusion, let me please clarify that the patent box contribution in 2017 is the result of the cumulative effect of three years, 2015, 2016, and 2017, since we filed the request with the competent tax authorities back in 2015. Obviously, we cannot expect a similar impact in 2018, which would indeed benefit from the contribution of one year only. That contribution, I believe, would be in the range of EUR 7 million. I will comment later more on 2018 tax rate, expected tax rate.
To keep on talking about tax, I would also like to comment on the impact that we will have in 2018 from the recent approval of the U.S. tax reform. We are still finalizing the calculation, but I believe that we will have a benefit on our financials in 2018 of about $13 million. I remind you that U.S. and Italy are the two main geographies in which we pay taxes, and both of them are benefiting from recent reform, the U.S., the patent box, Italy. Going back to the P&L of the period, net results at about EUR 114 million, or 21.9% of revenues, is higher than the previous year by EUR 27.3 million or 24.2%. Lastly, 2017 EBITDA at EUR 237.9 million is better than last year by EUR 20.6 million or 9%.
The variance at constant exchange rate and without considering the impact of Irish divestiture, the Siemens license benefit is positive for 13% and is in line with our full year guidance. We have provided a slide to bridge this gap and to make it more clear to read. 2017 EBITDA ratio on revenues is 37.3%, which adjusted for Siemens and Ireland, becomes 38.4%, in line with what scored in 2017, in spite of some FX headwind. Q4 EBITDA at EUR 55.8 million or 33% of revenues, once adjusted for Ireland and Siemens, and some legal expenses related to the legal action we just discussed about, is in line with what are recorded in the previous quarters. Let me now move to the net financial position and the free cash flow. DiaSorin closed the period with a net financial position just short of EUR 150 million and EUR 173 million in cash.
This is confirming the ability of the group to generate predictable and strong free cash flow, EUR 132 million in 2017, which is broadly in line with 2016. It is worth mentioning that during 2017, DiaSorin cashed out about EUR 80 million more of taxes than in 2016, mainly driven by the tax payment phasing mechanism in Italy, and invested about EUR 5 million more in CapEx. Please note that the cash impact coming from the Italian patent box regime will start kicking in from 2018. The free cash flow in 2018, thanks to the patent box in Italy and to the U.S. tax reform, should be materially better than 2017. Lastly, let's move to 2018 guidance. We expect revenues to grow by around 11% and EBITDA to grow by around 13% at 2017 exchange rate. The guidance is given on 2017 reported EBITDA, not the adjusted one.
We will not use any more of this adjusted concept in 2018, because now Siemens is embedded in our numbers, such as the tail of the Irish statistical cost. Let me please remind you that DiaSorin financials are fairly sensitive to FX fluctuations and in particular to USD. Dollar denominated sales represent indeed about 35% of our total sales. As we said a few times, for every $0.01 movement of the dollar against the euro, DiaSorin revenues move by about EUR 2 million on a yearly basis. To conclude, even if not part of our formal guidance, let me share with you that considering the combined effects of Italian patent box in 2018 and the U.S. tax reform, I am expecting the group tax rate in 2018 to be around 23%. Let me please turn the line to the operator to open the Q&A session. Thank you.
Excuse me. This is your Chorus Call conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press Star and One on their touchtone telephone. To remove yourself from the question queue, please press Star and Two. Please pick up the receiver when asking questions. Anyone who has a question may press Star and One at this time. The first question is from Maja Pataki of Kepler. Please go ahead.
Good afternoon. I would actually like to start my questions, and apologies for that, with clarifying some things that were said on the call, because my line is really bad. Please excuse me for making me repeat certain statements. Am I correct that you said that organic growth in 2017 was around 6%? That will be my first question. Second question would be that the Italian patent box impact in 2017 was EUR 19 million for the three years together. I was wondering if you could explain again why the impact of the extraordinary costs on the EBITDA level was lower than on EBIT. I think you said something, my line is just breaking up. I have to keep dialing in. I'm really sorry for that. Thank you.
Maja, I'm going to take your first question. Yes, you understood right. The growth of the like-for-like business, and when I say like-for-like, I mean without the impact of the Focus molecular business which we bought in May 2016, and the Siemens one, is around 6%, which is what we expect. It's coherent with our budget assumption and plan assumptions. You are also right on the second point. The impact of the patent box regime in 2017 is EUR 19.4 million. Again, please do understand that this is the sum of three years, 2015, 2016, and 2017. My expectation is that the impact of the patent box, the positive impact we will have from the patent box in 2018 is going to be around EUR 7 million-8 million.
Going to your third question, which was the one regarding EBITDA and why we have a difference between EBITDA and EBIT of the Irish divestiture cost, the answer is driven by the fact that some of those costs are actually write-off of assets, intangible assets for which you see no impact at the EBITDA level.
Thank you very much. I'll hop back into the queue.
Thank you.
As a reminder, if you wish to register for a question, please press star and one on your telephone. The next question is from Luigi De Bellis of Equita SIM. Please go ahead.
Yes, good afternoon. Three question from me. The first one, regarding the top line guidance, how do you expect technology divisional revenues trend to evolve in 2018 compared to 2017? In particular, if you can separate Siemens and molecular trend and the rest of the business. Second question on QIAGEN. How much is the expected contribution from the partnership in 2018 and 2019? The last question on your strategic plan, compared to your target on 2019, what is going better and what's worse compared to your original expectations? Thank you.
Hello, Luigi. This is again, Piergiorgio speaking. In first question, top line guidance. As you know, we don't provide a full breakdown in terms of technology of what's behind the guidance. What you should expect, like what we have seen in the past few years, is a fairly flattish vitamin D, so slightly negative, I would say, mainly driven by the price pressure that we have commented so far. As Carlo said a few minutes ago, we still saw also in 2017, a growth in terms of volume, even though eventually that growth in terms of volume didn't translate into a growth of sales. The driver, obviously, as it has been in the past few years of our growth, will be CLIA ex the vitamin D franchise.
We are not giving, we are not disclosing the impact, not in 2018, but not even in 2019, of QIAGEN contribution, but I believe Carlo might elaborate on that. Regarding the 3 years plan, we just updated the 3 years long-term guidance after the Siemens acquisition, which was not a while ago, was in September. I would say that we are going more or less according to our original expectations, but we are still fairly aligned with what we believe to develop in the 3 years plan.
I will add a couple of qualitative comments to what PG said. As far as QIAGEN is concerned, certainly the contribution in 2018 is very limited, simply because launch of the products happens in the second part of the year. We don't expect, honestly, a lot to happen. Although, I believe and also, sorry, consider that as said that the relevant market, most relevant market, if we follow what QIAGEN is saying, is the U.S. Therefore, we will have access to the U.S. market later in 2019. However, I think that what is happening today is that the two companies are collaborating very well in the sharing customer information and planning thoughtfully for the launch of the product. Therefore, I expect that there is going to be a relatively fast pickup and an effect, a positive effect, starting from 2019 when we will have full years.
Clearly, I'm not ready to disclose numbers also because these numbers are also confidential vis-à-vis our contract with QIAGEN. As far as target and the 3 years plan and what goes better and what goes wrong, look, I think that in a qualitative way, I think that today Europe is delivering better than expected. Our view in Europe has always been that is a mature market, consolidating market, and is a market where because of the efficiency programs driven by the various countries, it is difficult to grow. You see it from everybody else numbers. I think DiaSorin is exceeding the numbers, is exceeding the market growth of everybody else, significantly. Again, is a combination of two elements. The first one is that we do have our install base properly placed where the consolidation is happening.
Also consolidation does happen our specialty business because that carries specialties that today may be done with technologies or in a customer base that we cannot reach, typically ELISA, into central labs where ELISA is not certainly the technology of choice, and we are there. Therefore, we enjoy also for specialties, the transition between smaller hospital and larger institutions. The second element for Europe, which is the good side, is the strong growth in Italy. If you follow what we said in the previous quarters, we've been very cautious, even last year, to comment on Italy. It looks like that certainly there is a trend in the country that is a combination of more efficiency, so less testing side, but the volume is strong.
Certainly for us, that does carry a positive effect because, again, it is our home market, 12% of total revenue, so we do benefit from this trend that we see continuing also in 2018. What goes differently from expected, somehow I think China, because what we did not expect was the fact that the contribution given by 70% installed base on the Class 3 hospitals, we would expect that contribution to continue in terms of volume growth, and we do not see that happening. So we see certainly strong growth from all placements in Class 2, but still, that represents only 20%-30% of our business today. I think overall, the growth of the business is as expected, as you can see, but certainly there are these two elements. One is positive, the other one is negative.
By the same token, this proves a fundamental concept for DiaSorin in terms of revenues and markets. Since we play worldwide in all markets, sometimes bad news are counterbalanced by good news. So there is not a specific exposure to any specific market, but we are well-balanced among different geographies, and that helps us out when some geographies have problems, to balance it with news coming from other geographies.
Okay. Thank you very much. Just a follow-up. Could you give us more color on how do you think to increase your installed base in Class 2 in China?
Well, I can give you a tactical answer, and I can give you a strategic answer. From a tactical answer point of view, we are enrolling distributors today that are more oriented toward the Class 2 market. You need to understand that the Class 3 versus Class 2 is a fundamentally very different hospital, because the Class 3 is a hospital that does require automation, and so track systems, which are very popular in Europe and in the U.S., are now picking up as well on that market. And it does require distributors of a certain size, which have the ability also to take upon themselves all the costs associated with that kind of equipment. So there is a specialization of distributors in these two segments.
We were certainly working to add to our distribution network, more distributors on Class 2, now certainly we need to focus on that, because that is strategically where we want to go. In light of the fact that the LIAISON XS, which will be launched in Europe in 2020 because of registration, was certainly designed, as we have discussed many times, for that segment of the market. We see ourselves going to that segment today with the LIAISON XL and new distributors, also we see that segment, which is the winning segment, growing segment. We see ourselves strategically positioned long-term very well because of the LIAISON XS introduction to the market.
Thank you very much.
The next question is from Patrick Fuchs of AGI. Please go ahead.
Hello, good afternoon. I have a financial question regarding the foreign exchange impact on EBITDA. Are you naturally hedged there? Would you expect the lower US dollar to have a bigger impact on earnings? The second question is, we are now two months in reimbursement cuts in the U.S. Can you give some qualitative comments what to expect in 2018, maybe going forward into 2019? Thank you.
Patrick, can we take the question on PAMA first?
Thank you.
You're right. We are two months into the year. As I think we did comment in the past, we see that PAMA will strategically affect the U.S., but from a different angle. As you know, and I think has been disclosed, for the big labs, namely Quest Diagnostics and LabCorp, that do represent a significant chunk of our U.S. business. The effect is not going to be so dramatic because their top-line revenue is only dependent on Medicare and PAMA just for less than 10%. Therefore, yes, we see an attempt of these labs to get leniency from suppliers, and certainly because of the long-standing relationship we have with these labs, we made ourselves available to discuss with them business terms in exchange, certainly, of business as we have done in the past.
Let me say, I don't expect that we will have a significant impact on PAMA when it comes to that business.
As far as the rest of the business that we have, which is smaller private labs and hospitals, we tend to sell in that setting specialty assays. I don't expect, again, that these assays are going to be dramatically impacted by the PAMA reimbursement.
Conversely, as I stated before, I see that this PAMA reimbursement is dramatically changing the business scope of some of the hospital market. Today, hospital market does represent over 50%, I think 56% of the total lab testing business in the U.S. We see more and more, the hospital really wondering whether it makes sense to them now that now 30% of their revenue, 35% of their revenue will get significant cuts. Starting to wonder whether they will continue to run the lab or give it, one way or the other, to one of the commercial labs. In that sense, certainly, it means that that segment of the market does shrink. By the same token, if you're well-positioned in the large labs.
You do benefit from the fact that they gain volume and they gain market accessibility. By the same token, I see that polarization is happening also on the smaller labs, because certainly the business model is big and efficient versus smaller and closer to my patient base. This is why I see that the decision of DiaSorin to invest into physician office labs.
That segment of the market is strategic. As a result of this polarization, the segment in the middle is the one suffering and changing, and really will have to change business attitude, whereas the big and the small eventually will benefit from this.
Yep. Maybe just a follow-on to that. You basically mentioned that you are largely exposed to the Quest and the LabCorp in the U.S. Is the business that you have with hospitals generally higher margin for you, keeping it simple, as a smaller hospital cannot negotiate to the extent than the larger labs can? You mentioned you're not exposed, in general.
Look, certainly the business with hospitals is higher margin.
Okay.
Okay. By definition, is higher margin. Again, I said, is mainly specialty, so we do have a protection there. I also would like to go back one second to the concept that the commercial lab business is lower margin. It depends how you do your calculation.
because it does drive phenomenal volumes of products to your manufacturing facility.
Therefore, it does really have an impact on your cost base and your efficiency.
Okay.
I keep always challenging our management control team to really consider what is the impact of the business, the commercial business, which I consider extremely beneficial, not only strategically-
because they do gain market share, and they will get more market share going forward, but also financially because it drives all the synergies and efficiency in manufacturing.
Thank you. The foreign exchange on earnings?
Yes, Patrick. Yes.
Right.
Kind of natural hedge there.
Okay.
Our two biggest plants are in Italy and in U.S., we also have a significant cost base, which is U.S. dollar denominated. There you have, obviously, some kind of natural hedge between your cost and revenues.
Okay. Thank you very much for that.
Thank you.
The next question is from Romain Zana of Exane BNP Paribas. Please go ahead.
Yes, good afternoon. It's actually Romain Zana. Sorry, I missed the beginning of the call. I have two question. The first one is actually a follow-up of Patrick on PAMA. Just trying to quantify, I was wondering if your top-line guidance including any impact from PAMA at all. If yes, what is your underlying assumption for that? The second one, just a clarification on the EBITDA growth guidance for 2018. Is the Forex assume is the spot rate, or do you have basically assumption for evaluating assumption for 2018? Thank you.
I'd give you the one on the PAMA. No, we don't. For the 2018 numbers and guidance, we don't expect to have an effect on PAMA.
Okay.
Okay. Simply because of the nature of the contracts we have with customers and labs. However, I foresee that moving forward, especially with some of the large labs and because of the partnership, we will have with them certain discussions, which I expect to be associated with increasing bulk amount of business. Okay. In the 2018 guidance, we don't expect to have an impact of PAMA.
Okay. Just do you think that, I'm just curious, but beyond the potential pricing impact on DiaSorin, it could be a limited impact given the small proportion of Medicare reimbursement. Beyond that, do you think that the labs might, let's say, be more inclined to delay some replacement of their equipment, just in a wait-and-see impact, to have a clearer picture of the PAMA on their P&L? Do you think it could be a risk?
You mean the larger labs or?
Yeah.
Look, I see that the larger labs today are continuously engaged into efforts of streamlining their cost base. One way or the other, but this is true all across the board, they're making significant efforts to move to more efficient systems and platforms and automation and so forth. You would be surprised how little automation you find in some of these labs, but the reason being that they're so big that the industry per se has not designed solutions that fit their needs, to the point that some laboratory chains like Sonic, for example, has elected to build their own systems. I have a feeling that when it comes to Quest and LabCorp, they would have to go into the same direction. They are certainly committed to streamlining their manufacturing processes. I don't see an effect in delaying CapEx, because that CapEx goes against more efficiency.
Okay.
I will take the one on EBITDA, the guidance on the EBITDA. Every time we provide a guidance on EBITDA and revenue, the guidance is a constant exchange rate of the EUR. In this case, the guidance is a constant exchange rate for 2017. In 2017, the average exchange rate of the US dollar, which is the currency to which we are most exposed, was 1.13. As said, every time there is a movement of EUR 0.01, it means +EUR 2 million or -EUR 2 million revenues. The EBITDA level, give or take, that translates to one, 1.2, 1.3, it depends. Our guidance is provided constant exchange rate. We have our own assumption for the budget in terms of what will happen to the US dollar and the other currencies. I guess, my estimate is as good as yours.
Okay. Thank you.
The next question is from Scott Bardo of Berenberg. Please go ahead.
Thanks very much for taking my questions. First question, please, just with respect to the revenue growth of 11% constant currency. Would you be kind enough to call out please, what the expected acquisition contribution is within that? Is your implicit assumption something like 3% or 4%? Just to help us better understand what that implies for organic growth expectations. Also on financial guidance, please. A little bit surprised given that you call out an adjusted EBITDA for the first time, that you don't provide guidance based upon it, given there's lots of one-off costs here. I just wonder if you can clarify that it is still your expectation to track alongside your midterm guidance framework that you've outlined to the market, I think in September last year.
I think last conference call you highlighted that the Irish restructuring should provide an additional potentially 100 basis points EBITDA margin improvement on top of the 38.5 you isolated for 2019. I just wonder if that is still the expectation from the board today. Just a couple of questions there and then a couple of strategic ones then please for Carlo. Thank you.
Hey. Hello, Scott. I will start taking the one again in the financials. Let's start with the revenues. More or less, the impact of the difference in perimeter, considering the fact that we had EUR 9 million of Siemens sales in 2017. Considering what we are factoring in in 2018, the delta should be around EUR 30 million, slightly less. I would say revenues coming from the Siemens ELISA business. Remember that as we discussed in the last call, we are not selling Siemens instruments, but we are focusing on reagents, because our whole strategy is to convert Siemens customer base, which is ELISA customer base, to CLIA customer base. Regarding the EBITDA and the guidance. What is happening is that in 2017, the impact of the Irish divestiture shutdown was very material, and it was not included in our 2017 guidance.
That is why we thought it would have been better to help you out, guys, to understand what was happening, to crystallize the impact of the Irish site shutdown. In 2018, we will just have a small tail of the shutdown cost related to the Irish facility, and that tail is already embedded in our guidance. The tail is not as material as it was in 2017. We thought it would have been better just to give a simple guidance to make life easier for everybody, so that every time we comment our quarterly numbers, we just have one EBITDA to comment, which is the one we will report and the one you will see.
Okay. Thank you. Just on this question of midterm targets, and I think you are highlighting the benefits of these restructuring activities should mean even better margins than the 38.5 you isolated in your last plan. I just wondered if you could still confirm that statement by 2019. Is that still the expectation?
What we said is that the impact of the savings we think we're going to get out from this Irish site shutdown will be EUR 6 million-EUR 8 million, once the whole operation is completed, which will be done by the end of 2018, beginning of 2019. That's when you will see the real savings, full effort of the savings kicking in. What we said in our three years guidance is that nevertheless, we still stick to our 38.5% EBITDA contribution, even after these, taking into account the Irish closure shutdown. Here, you really have to allow me a little bit of flexibility. I don't have the possibility to tell you it will be 50 basis points better. We are talking about EUR 2 million, EUR 3 million more EBITDA, EUR 4 million more EBITDA in 2019.
Even though our business is fairly predictable, it's very bold to say that it will be 39%. I wouldn't be surprised, I stick to the guidance, which is 38.5%.
By the same token, if I may, just add a comment. As said, I think today, companies that do not see what's coming and what has been happening in the last few years, which is on one side, consolidation, concentration, on the other side, certainly more and more price tension. Companies that are blind to this and do nothing to improve their efficiency are actually companies that are doomed to fail in this market. From our point of view, if you think about it, you look at our EBITDA margin, that's probably in the top 5% of the industry, almost unbeatable. I believe that in order to preserve these very high margins, there are two things that need to happen, and they need to happen together at the same time. One, you need to be innovative and develop new products that provide advantages to your customers.
I believe that the market today is shifting and is more and more available to pay for innovation. The second thing that you have to do is that you need to fight for efficiency. These two things have to go together. This is why I'm saying closure of the Irish plant and streamlining an operation in Europe is for us a crucial investment in order to be able to sustain profitability to the levels which are top of the industry.
Understood. Thank you very much. Just a couple of very quick follow-ups then, if I may. If I understood your comments on top line growth guidance, it implies around a 5% FX contribution, then around a 6% organic growth. If that math is correct, I just wondered if you could sort of help us understand why that growth wouldn't accelerate on the prior year, given that you're placing the XL instruments very well, which are higher throughput. Vitamin D is diminishing as a percentage of contribution for the group, and you've got some other growth contributors coming in. I just wanted to understand, is this conservatism from your side, or are there a few sort of one-off effects or impacts that we should be mindful of? That's a quick follow-up question one.
Follow-up question two, 23% tax rate, does that make sense going forward, in your opinion, as an ongoing assumption? I understand the U.S. seems more structural, but what would your guidance be for the midterm? I'll leave it at those two. Thank you.
I'll start taking the tax one. Yes, 23% tax is sustainable in 2018 because the patent box will still be there, and the recent U.S. tax reform is there. It is the same for 2019 because the elective tax regime will last until 2019. But again, this is a five years tax regime, which means that after these five years, we will have to go back and renegotiate with the tax authorities. What will happen for the patent box after 2019? I really don't know. It's a big question mark. We have had recently new elections in Italy. I really don't know what is going to happen after 2019. Now it is a law. It's a law of the state, until 2019, we are set. For the U.S. tax reform, again, you tell me what's going to happen for the U.S. tax reform.
As long as this will last, we will enjoy this tax benefit, obviously. Until 2019, it's locked, let me say, to summarize. After 2019, at least for the patent box, we'll have to wait and see.
I would say the first one, look, it's difficult to say if there is a conservative forecast. I think it's a very pragmatic expectation. It's a combination of events, of a continuous change in the environment, and what we see are the strengths of DiaSorin in the different geographies. If we see the trends could improve, as we have done in 2017, we will let the market know and increase our guidance. For the time being, I think this is a sustainable number.
Very good. Perhaps very last one from me. Gross margin contracted 60 basis points for the year, which sort of broke the trend of improvement that you've seen in recent times. Anything to get concerned about there, or what is the expectation going forward?
I believe, Scott, what we said in the last Q4s, none of you believe me, we also said it during the 3 years plan in Milan, is that we were expecting to see some gross margin deterioration. To the point that we also disclosed the price pressure that we saw on the 3 different buckets of the products, how we cluster them, the need to, and the differentiating specialties, and so on and so forth. What we are seeing is what we are expecting, all the initiatives we are putting in place in terms of getting some operating leverage out of our operations, streamlining some of those activities, are specifically meant to offset the gross margin pressure and to keep on delivering an EBITDA margin. At the EBITDA level, around 38.5%.
Being more specific, what you saw in 2017, even more in Q4 2017, is the impact of the Siemens business, which is a very good business for us. As I said, it's dilutive at gross margin level, it's accretive at the EBITDA margin level because of a lower level of fixed ratio. Just to summarize, this is going exactly where we are expecting it to go.
Thanks, Piergiorgio.
Once again, if you wish to ask a question, please press star and one on your telephone. The next question is a follow-up from Scott Bardo of Berenberg. Please go ahead.
Thank you very much for taking my follow-up. Just very quickly on the LIAISON XS. I think if I look back to your Capital Markets Day in 2017, you had a picture or had some communication around commercial activities commencing towards the end of 2018 and contributing into 2019. If I'm correct, you said that you don't expect European approval now till 2020, I wonder if this is a delay. If so, could you talk a little bit as to why, or whether this is my misunderstanding? Thank you.
No, actually, Scott, this is due to the fact that the five hours call this morning. When I was referring to 2020, it's China.
Oh.
It's not Europe. Sorry for the mistake. You picked it as usual. Let me rephrase it. We will expect launch late 2018, early 2019. What I'm saying, the difference in quarters is simply to do with the fact that you do have a soft launch. The product, the system is made available, then you start placement with a selected number of customers, effective launch starting from next year. In Europe, CE marking launch is foreseen as explained at the Investor Day in Milan.
Very good. Very lastly then, please. Obviously, there's been a lot of heavy R&D listing to develop the infectious disease portfolio for the North American market, the HIV and hepatitis products. I think you referred to previously that some of this R&D will get reallocated, if you like, this year into other areas. I just wondered if you could give us a bit of a status update, how that program is developing, also how some of the other developmental programs that you have for new biomarkers and specialties are progressing within the organization. Thanks.
Okay. As far as the program, HIV hepatitis is progressing as expected. We are conducting clinicals. We initiated the clinical studies for some of the markers that the first wave is expected to be filed with the agency by the end of this year. You will have hepatitis C, finally you have HIV. The program is going as we have expected. As far as strategically where we are going to, I think that there are two areas where we will refocus our attention. The first one is to do with tick-borne diseases. This is because it's a very interesting market that today we're dominating with our Lyme disease assay. When we bought Focus, to be honest with you, we completely missed this, because we bought Focus for the molecular line.
Focus Lab and Focus Diagnostics, they were known for specialties in the infectious disease area. This, by the way, was one of the reasons why Focus Lab was actually bought by Quest. In this portfolio of products, we found a very interesting set of products for tick-borne diseases, where they're dominating the market in the U.S. These are older technologies that we plan to reconvert to the LIAISON because are true specialties. They follow the Lyme disease, they go exactly in the same setting where we are today. The other area where we continue to invest, but now it's more on the clinical side, is CKD. This today is product development, meaning that we have the FGF23 has been launched. We have a sclerostin that is going to be made available for clinical studies. We have vitamin K.
Today we are spending quite a lot of money in clinical studies in order to prove the validity of certain algorithms that include vitamin D, vitamin D 1,25, FGF23, and now we will add the sclerostin to this. Stay tuned. As we have discussed previously, this is basic fundamental clinical research, but it takes time in order to see the benefit of this.
Very good. Thank you very much, indeed.
Mr. Rosa, there are no more questions registered at this time.
Thank you, operator. Bye bye.
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