Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the DiaSorin results as of September 30th, 2017 conference call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. To get any 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.
Thank you, operator. Ladies and gentlemen, good afternoon, and welcome to our Quarter Three 2017 conference call. As usual, I will comment in a qualitative way some of the events that characterize this quarter. I will turn the microphone to Mr. Pedron, who is going to go through the financials. Let me say that this quarter was in fact full of extraordinary events. I will take you through each of them. First one is that we acquired and we completed the acquisition of the Siemens ELISA business. As we have discussed before, the rationale for this acquisition is that it did provide us with access to several hundred customers that today are using ELISA, for which we do have equivalent chemiluminescent products.
This, we have calculated that there is a potential additional install base of between 200 to 300 systems that we'll be able to place with these customers in the next three years, cannibalizing the existing ELISA business of Siemens with our own platforms. The transfer of the business from Siemens to us already started. It's, I would say, flawless so far, and we started to serve from our logistic center all the existing Siemens accounts. I would say that so far, so good. This is something very similar to what happened with Quidel. Let me say we have already done this once before, and I do not foresee any hiccup with this acquisition.
The second item that I would like to cover is to do with the fact that, as we have discussed, when we presented the three-year plan, we intended to outsource certain services in order to extract value and synergies, and also eliminate from our perimeter of activities, certain activities inside that are non-core. If you remember, the first one had to do with centralizing logistic and order entry. That has been done, and it started in Quarter Two into Quarter Three. During the quarter, we had some initial elements of this transition. What we have seen is that because of the fact that at the same time, we are transferring out our inventory to the third party, as well as we had to initiate a shipment of the Siemens product as part of the Siemens acquisition.
We decided on purpose to move to October some of the large shipments to certain distribution areas. This is why you will see, and we will comment this later, that on the revenue level, especially on the distribution side in certain geographies, you see a delay in revenues. That is associated with the fact that with this congestion of activities, we decided to give priority to the direct customer versus distribution, where we know the distributors do have, in fact, local inventory. The transfer is completed. We also have transferred out employees. We have closed down our call centers, and we expect moving forward to exert the benefit of this project. Let me remind you that as we have described during the long-term plan, starting from next year, we expect 2 million-3 million savings on the cost line, again, from the outsourcing of these activities.
The third element that I would like to discuss and disclose is the fact that we have initiated a litigation with a third party in the U.S., and this is intended to get access to the U.S. market with one key assay for stool. Litigation started a couple of months ago, and we believe it's going to be concluded in September 2018. Again, this is not to protect existing sales, but it is to gain access with one product which we consider strategic to the U.S. market. The combination of costs associated with the outsourcing of logistics, plus a combination of the cost associated with this litigation amounts to roughly EUR 2 million. In the quarter, you see that there is an outstanding cost of EUR 2 million in this year. I think Mr. Pedron will add more color to this.
The last element that I would like to discuss has to do with the fact that we have announced the shutdown of our Irish facility based in Dublin. This has already been communicated to the authorities in Ireland and to the employees. The reason for this is very simple. After the acquisition of the Focus Diagnostics assets, it is very clear that the center of gravity for our molecular activities is, in fact, in California. If you remember, Ireland was under the DiaSorin perimeter, the center for molecular development. At this point, it's very clear that this would have created unnecessary duplication, and we decided to close the site. This will be done throughout the next three quarters, and we expect to have all done by the second half of next year. We expect that we will incur into certain costs.
One of cost in the range of EUR 6 million-EUR 8 million. Also, we've calculated that the annual benefit from the closeout are in the range of EUR 7 million. The return of this investment is going to be fairly rapid. As said, overall, this has been a quarter that certainly has had few extraordinary events in terms of activities which were already stated in the SBP. Now update. If we move to the revenues for the quarter, as I always do, I'm going to comment revenues at constant exchange rate. At constant exchange rate, revenue growth in the quarter was 4.3%. In this case, what we want to highlight is that there are two extraordinary events which have affected this quarter.
The first event has to do with the fact that the bad weather situation in the U.S. has created a delay in sales of vitamin D to the two largest accounts we have in the U.S. If you have a follow press release from both Labcorp and Quest, they do report a one-off effect of slowdown of revenues related to the bad weather. Clearly, vitamin D, that is a non-critical assay, but is more done in the physical check, has suffered the most. In fact, you will see, when I will comment my revenues by technology, that vitamin D, that has been in the last two quarters flattish, shows a negative result in the quarter, but is driven completely by this delay in orders in the U.S.
The second event that, as I said before, delayed revenues to the quarter 3, is the fact that when we started the implementation of logistic, we have delayed shipment to Q3 in certain geographical areas and namely certain distributors. This has been done, again, to alleviate some of the effort of the logistic team and give priority to the direct customers versus export. For the sake of reference, we believe that the effect of these two phenomenon together in the quarter is in the range of EUR 3 million. If we go now by revenues by geographies, we start from Europe. Europe, in the 3rd quarter, had a very strong performance, 7% growth versus last year. Again, this has to do primarily with two markets.
Let me say, one is Germany, where notwithstanding the fact that we have a very strong business there, we continue to see high single-digit growth in this market. The second one, which has been a surprise to us, very positive, is actually Italy. If you remember, until the end of last year, Italy was showing a very weak performance, and that had to do with an attempt of the government to curb volume testing. Truth of the matter is that starting from the 2nd quarter, Still today, Italy is rebounding actually, and in quarter 3, we have a growth of 15%. This takes the nine-month growth of Italy to 6.8%. That's certainly something that was not necessarily expected, but it is important for us since Italy still represents around 10% of our revenue.
As far as Europe is concerned, we continue the strong growth in this geography. Let's turn to North America. North America, without considering the one-off, let me say, the effect of the DiaSorin Molecular revenues, which do not make still the year-to-date result comparable. If we just look at our, let me say, traditional immunoassay franchise, the growth in North America has been 3.6%, notwithstanding the fact that vitamin D has been very weak in this quarter. The reason why it has been weak again, has to do with a significant drop in volume in certain states, namely Florida and Texas and Georgia, which were hit by the wet weather. Fundamentally, the big reference lab did not see orders for vitamin D for almost six weeks. We see that it bounced back to normality.
We see in the most recent months that we are back to the volumes that we have seen traditionally. We expect the next quarter to be in line of historical number. Certainly, we took a hit on this month. Notwithstanding this, again, we have seen growth of 3.6%, and this is mainly driven by the infectious disease franchise. We now are at full steam at Quest with all our products. It's the first quarter where now all the products have been implemented and in line and offered by Quest, and this clearly makes our revenues extremely strong in the U.S. with these products. If we move to Asia Pacific, you see that at constant exchange rate in Q3, there has been a significant slowdown of 1.2%. The growth has only been 1.2%, but this, again, go back to my initial comment.
Within Asia Pacific, there are two distributors, where we have elected not to ship in quarter three, again, to alleviate the work of the third-party logistic partners. This is why you see in this region that there is apparently a slowdown in revenues, but certainly you will see in the next quarter that things go to normality because this has been simply a move from one quarter to the other. Within Asia Pacific, China continues to perform in line with expectation. There's a 20% growth in Q3 and a 20% growth in the first nine months. The main geography is doing as okay and as planned. Last but not least, let's discuss about Latin America, where there has been a growth of, in the nine months, around 8%. In Latin America, the most strategic country is Brazil.
In Brazil, we continue to see high double-digit growth, 17% in Q3 and 17% in nine months. We continue to see a very healthy trend of the business due to the stabilization of the country and also stabilization of the currency. Overall, I'm saying that I think the quarter three results have to be interpreted correctly because with lots of moving parts. Now I will allow our CFO, Pietro to take you through the numbers with more quantitative comments to the quarter. Thank you, Pietro.
Thank you, Carlo. Good afternoon, everybody. In the next few minutes, I'm going to walk you through the financial performance of DiaSorin during the first nine months of 2017. I would also make some remarks on the contribution of the third quarter. Before we start, let me please remind you that we began reporting the Focus business since May 2016. The perimeter of consolidation up to September 2017 is different from the one of last year. Besides, as already said by Carlo, please note that the recent Siemens Healthineers acquisition, even though impacting our balance sheet number, does not have any effect on our P&L. We will start seeing the effect of the Siemens Healthineers acquisitions starting from Q4, the effect on the P&L. As usual, I would like to start with what we believe are the main highlights of the period.
We closed the first nine months of the year with the revenues in line with our full-year guidance and with a material increase over 2016, EUR 55 million or 13.3% constant exchange rate. This, in spite of the impact on Q3 of the two one-off events that Carlo just mentioned. We closed September year-to-date EBITDA in line with our full-year guidance, with a strong growth over the previous year, 15.5%, or about EUR 25 million at constant exchange rate, and with an EBITDA margin just a touch below 39%. Q3 EBITDA at EUR 56 million or 37.5% of revenues grew compared to last year by about 3.5% at constant exchange rate and scope of consolidation. Whereas it is flat-ish at current exchange rate. Again, I believe it is worth underlining that quarter three has been affected by those one-off we just discussed about, and I will cover again later more in details.
Net of these elements, therefore, profitability of the quarter is in line with what we have recorded so far. Lastly, DiaSorin keeps confirming its ability to generate a strong free cash flow, EUR 97.5 million in the period. This allowed us to close September with a positive net financial position of about EUR 113 million. After having paid in May dividend 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 about EUR 47 million. The remaining balance will be paid in decreasing installments during the next three years. Let's now go through the main items of the P&L. September year-to-date revenues at EUR 468.6 million, grew by 13.4% compared to last year.
The growth at constant exchange rate is almost the same, 13.3%, since in Q3, we had about EUR 4 million FX headwind, mainly driven by the depreciation of the U.S. dollar and the Chinese yuan, which offset the positive effects we experienced in the first half of the year. Let me remind you that the currency to which the group is most exposed is the U.S. dollar, and that for every $0.01 movement of the dollar against the euro, DiaSorin revenues move of about EUR 2 million on a yearly basis. This is the same number we shared with you a few quarters ago. Considering how the U.S. dollar closed Q4 2016 and where it is trending now, I think it is fair to say that we will likely experience some FX headwind also in the next quarter.
Gross profit at EUR 319.7 million, grew by 13.2%, or about EUR 37 million compared to last year, closing the first nine months of 2017 with a ratio over revenues of 68.2%, which is basically in line with 2016. This is a result on one side of higher sales of specialty products, like CA 125II and Gold Stool Panel, to mention a few, some positive effects from manufacturing efficiencies, and the lower depreciation rate over revenues, which almost completely offset, on the other side, price pressure on some CLIA C2 products and the slightly dilutive effects of the Focus business. Again, these elements have already been discussed in the previous quarters. Total operating expenses at EUR 170.1 million or 36.3% of revenues, have increased by 13.8% compared to last year.
Please remember that as we saw in the previous quarters, and we will see for the next few months, about EUR 3 million of the reported quarterly OpEx is driven by the depreciation of the intangible assets coming from the Focus business acquisition. Net of this depreciation, September year-to-date reported OpEx would have grown by about 11%, and the ratio on revenues would have been 34.3%, against 35% of September 2016 year-to-date. If we move now to the other operating expenses at EUR 4.8 million, we see that they are lower than 2016 by EUR 2.3 million. 2016 was affected by some material non-recurring expenses, mostly driven by the costs associated to the Focus business acquisition, which explain the majority of this difference.
2017 number includes some restructuring costs associated with the startup of the European logistic hub, the project described by Carlo a few minutes ago, some costs related to the Siemens ELISA business acquisition, on top of expenses related to the initiation of a legal action in the U.S. concerning the future introduction of certain diagnostic tests into that market. As a result of what we just described, September year-to-date EBIT at EUR 144.8 million or 30.9% of revenues, has increased compared to 2016 by 15% or almost EUR 19 million. The tax rate at 32% is 100 basis points better than 2016. This variance is in line with our expectation and is mainly driven by the reduction of the Italian corporate income tax rate from 27.5% to 24%. Net result at EUR 95.7 million or 20.4% of revenues, is higher than the previous year by EUR 13 million or almost 16%.
Lastly, September year-to-date EBITDA at EUR 182.2 million is better than last year by almost EUR 24 million or 15%. The variance at constant exchange rate is positive for 15.6%. The EBITDA ratio over revenues of 38.9% is 60 basis points better than last year. Moving to quarter three, we had an EBITDA of EUR 56 million or 37.5% of revenues, in line with last year. Again, as I said, in order to better understand the quarter, I believe it is worth underlining that Q3 has been impacted by some one-off costs for about EUR 2 million. And to be more specific, the costs associated with the startup of the European logistic platforms, and these costs are spread across several lines of our P&L. And as just described, the expenses related to the legal action in the U.S.
These two elements, together with some negative FX headwind in the quarter, contribute to explain the EBITDA of the period, which net of this one-off, would have been in line with the trend of the last few quarters. Going back for one moment to the European logistic platform, I would like to share with you that we will start seeing the benefit of this project from 2018. The total expected saving in the range of about EUR 2 million-EUR 3 million per year, once this initiative will be fully up and running. Let me please remind you that this plan was anticipated in our investor day back in June, and is one of the initiatives we are implementing to improve the overall efficiency of the group. Let me now move to the net financial position and the free cash flow.
DiaSorin closed the period with a positive net financial position of EUR 113.3 million and about EUR 152 million in cash. This is a result of what discussed so far and is confirming the ability of the group to generate a predictable and strong cash flow. During the first nine months of 2017, we generated almost EUR 98 million. It is worth mentioning that up to September, DiaSorin cashed out about EUR 10 million more taxes than last year, and this is mainly driven by the tax payment phasing mechanism in Italy, so it is just a timing effect, and invested about EUR 10 million more in CapEx as planned. With this difference being mainly driven by the investments to support the U.S. segment project, again, presented and discussed during investor day, and a few other projects aimed at increasing the efficiency and the productivity of our manufacturing processes.
Before moving to the guidance, I would like to share with you the expected financial impact of the divestiture from our manufacturing site in Ireland. As discussed, this initiative is the result of the acquisition of Focus Diagnostics, now DiaSorin Molecular, and is driven by the decision of the group to centralize all of our molecular business in one single place. This project is going to carry some one-off costs, mainly related to people, consultancy, and some rent costs. We are still working out all the details, but I believe that overall, the impact at the EBITDA level will be between EUR 6 million and EUR 8 million. This is the total impact of the overall projects. We think also that about EUR 4 million-EUR 6 million of these costs will be booked in Q4 2017. We believe we will be able to repay for these investments in about 12 to 18 months.
Said differently, we expect an yearly saving of about EUR 6 million per year, once the project will be completed. Lastly, in view of the group operating performance, the management confirms 2017 guidance for both revenues and EBITDA, with a growth at constant exchange rate of around 11% for revenues and 13% for EBITDA. Please note that this guidance does not take into account neither the positive impact of the Siemens ELISA deal, nor the one-offs coming from the Irish divestiture project we just discussed about. Let me please turn the line to the operator to open the Q&A session. Thank you.
Excuse me. This is the 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 a touchtone telephone. To remove yourself from a question queue, then you may press star and two. We kindly ask to use headsets when asking your questions. Anyone who has a question may press star and one at this time. The first question comes from the line of Pataki Maja with Kepler Cheuvreux. Please go ahead.
Yes, good afternoon, and thanks for taking my question. Carlo, I have a question. You were giving us an indication on the negative impact from the two effects, the hurricane effect, basically the vitamin D hurricane effect, and the move of some of the shipments due to the distribution agreements. Did I correctly understand you that you said both effects taken together have a €3 million negative impact in Q3? Just wanted to clarify that. The second question is related to your one-off costs. Basically, on your slide number 13, you say that you had €2 million one-off costs related to the new logistics model. We're going to have another €4 million-€6 million related to the closing of Ireland. In total, we should be expecting for the full year EUR 6 million-EUR 8 million one-off effect.
The last question, I'm sorry, I didn't quite understand. Can you elaborate a bit more in detail what the initiation of the legal action is concerning in the U.S.? Thank you.
Okay. I will take your first and last question, PG is going to cover the one-off. Yes, indeed, the negative impact, combination of the hurricane in the U.S. and the shipment delay is roughly EUR 3 million. Please note that these are two very different effects. The hurricane vitamin D testing is lost, because simply was not done in that quarter, and we don't expect it to be postponed to the following quarter. What we are seeing, in fact, today is that the volume are back to where they should be, but certainly you're not going to get back the testing, whereas the shipment has been simply a decision of the company to move from one quarter to the other. Certainly that effect, you will see in the Q4. When it comes to the legal action, is relatively straightforward.
We have one product that we distribute in the European environment, is a stool product, we intended to bring this product to the U.S. and go through FDA approval and start commercializing this product. We are in the phase of filing the approval with the FDA, the product has not been commercialized yet. We are actually wrapping up clinical studies, we are planning to commercialize the product sometimes next year. Meanwhile, a legal action has been brought against the company by a third party, claiming that there has been infringement of certain rights of this company. We have then initiated an action that is supposed to resolve this dispute, is supposed to be done and over by summer of 2019.
What you have today, you have the one-off legal cost, which are the money spent in preparation for the hearings, which will happen in the summer of next year.
Thank you.
Hi, Maja. This is Piergiorgio speaking. Going back to your questions about the one-off. Yes, you heard correctly, 2 million one-off are already embedded in our numbers. They happen in Q3, and they regard both the European logistical project and some one-off litigation costs. We expect to have in Q4, so not yet embedded in our actuals, EUR 4 million-EUR 6 million costs at EBITDA level, related to the project of the divestiture of our manufacturing site in Ireland. EUR 2 already embedded in our numbers, EUR 4-EUR 6 to happen in Q4. Overall, the total project is going to bring EUR 6 million-EUR 8 million. Because of IFRS regulation, we will have to start accrue for most of those costs starting from Q4.
Okay. Very clear. Thank you.
Thank you.
The next question comes from the line of Luigi De Bellis with Equita SIM. Please go ahead.
Yes. Good afternoon to everybody. Two question from me. The first one is related to the Siemens acquisition. Could you quantify the impact to sales and EBITDA level expected from Siemens in Q4? Second question, could you update us on the Italian patent box and the potential impact? The third question on China, could you give us an update on the market trend in China and on two-invoice policy? The last question on the free cash flow generation, could you provide some indication about the net financial position expected by year-end? Thank you.
Okay, PG, if you cover Siemens, patent box and free cash flow, I do China.
Let me start from the patent box. I believe we have some good news here. We have been recently contacted by the Italian tax authorities. Again, you know how it works in Italy. As long as you don't have a signed piece of paper, everything can change. Said that, I believe we have good news because we have been contacted by the Italian tax authorities. They told us they basically agree with the way in which we did our filing. We did our filing back in 2015, and we are hopeful we will be able to conclude our wording with the tax authorities by the end of the year. We will have a rollback mechanism. Again, hopefully, we will be able by 2017, this year, to have the cumulative effects of 2015, 2016, and 2017.
Then we will enjoy the benefit of this patent box also in the next two years, because this is a five-year selective tax regime. After that, we will have to refile again. The good news is that tax authorities told us they liked our proposal and I believe the original estimate, which I made, which was EUR 2 million-EUR 3 million, could be on the conservative side. If eventually the discussion will go as we hope, potentially the impact could be a little bit better than that per year, which means that in 2017, again, if we will be able to sign documents before the end of the year, we will have an impact, which is, let me say, around EUR 10 million at least.
Going back to Siemens, I believe we said when we bought the business that yearly sales of 2016, yearly sales of this business was around EUR 46 million. Part of those sales are made up of instruments and services, and a big chunk, obviously, in reagents, which is what we are interested in. In Q4, you should not expect that one quarter of full year sales, because when we bought the business from Siemens, they somehow asked their customers to build up a little bit of stock to manage with the transition period. I believe that, if you say that the run rate is EUR 10 million per quarter, normal run rate, considering that in Q4 we had this start-up kind of phase, you should imagine something like EUR 6 million-EUR 7 million.
In terms of the EBITDA, I'm not going to give you the exact number, but just to help you think about it. In this business, the manufacturer is Siemens for their products. The gross margin is going to be a little bit lower than the gross margin we are used to. In terms of OpEx, this business is carrying lower OpEx ratio compared to our OpEx ratio. That to say that all in all, I believe that at the EBITDA level, this business is not going to be dilutive at all. As the conversion will progress, the EBITDA margin will obviously be accretive, because we will get clear sales with a not proportional increase of OpEx. In terms of net financial position at year-end, I'm not able to provide a guidance there. We've never provided guidance in terms of net financial position.
What I can tell you is that if you take the Q4 last year, and you consider that we still have some additional CapEx investment we're doing to support our Beckman strategy in the U.S., to support all the operations we're putting in place, those investments we're putting in place to increase our manufacturing efficiency, you can find them in full board process.
The last point that you wanted us to cover has to do with China. In China, I think that the trend now is fairly clear, and there are two elements which are interesting to highlight. The first one is to do with the fact that if you look now at Class 3 hospitals and Class 2 hospitals in China, you see a different progression of volumes.
It's very clear that the Class 3, which was saturated before, is showing volume increase, which is low single digits, so 1%-3% volume increase. Whereas if you go to the Class 2 segment, you see an increase that goes high double digits, between 15%-20%. The reason is that on purpose, the government is pushing people, is pushing a migration between Class 3 to Class 2 to decongest the Class 3 in favor of the new Class 2 hospitals, which have been built in main cities. This is one interesting element. Depending on where your install base is, you benefit by this endogenous growth rate.
The second one, which is certainly happening, again, I believe has to do more with an exception on 2016 rather than the 2017, is that the birth rate, so number of newborns that happened last year, which was phenomenal, 17.5 million newborns versus an average, which is between 15.5 million and 16 million, certainly has been an outlier. What you see in 2017, the newborns go back to where it should be, so around 16 million. That does carry an effect for those companies, for example, like DiaSorin, that have been, as you know, a good chunk of our revenues in infectious disease in China
Related to products for pregnancy, mainly for prenatal disease, infectious disease testing. In fact, we see in the dynamics of volumes that in 2016, in certain clinics, maternal clinics, we see this decrease in volume. As far as everything else is concerned, we don't see yet an impact of two-invoice policy. We certainly see a new distribution model to become more popular. That has to do with these GPOs, let me call it that way, or logistic centers or Group Purchasing Organizations that are today formed as a result of consolidation of distributors that are becoming a reality companies have to deal with, especially in the main . DiaSorin today, we are actually selecting a couple of GPOs with which we would like to form strategic alliances in order to guarantee continuity of distribution in certain key strategic areas.
Okay. Thank you. Just a follow-up, if I may. Could you update us also on the U.S. tax reform and potentially impact for you?
Again, a lot of moving parts here, but on November 2nd, the U.S. House Committee on Ways and Means released its proposed law. We are still going through all the details of the proposed law, but from our first reading, if the bill would pass as is, we are expecting a tax saving in the range of $10 million per year. As you might have read, the federal tax rate has been reduced from 35% to 20%, or the proposal to reduce the federal tax rate from 35% to 20%. At the same time, some tax deduction will be taken away, and the most important to us is the state tax deduction. If we compound all of these effects, and if the law will be approved, we should be able to report, starting from next year, a lower tax bill in the U.S. again for $10 million.
Luigi, going back to your question before on the net financial position. Again, I'm not going to provide you guidance, as we never did. If you want to do your modeling, remember that we are going to pay back to Intesa Sanpaolo that financed the acquisition, helped us financing the acquisition of the Focus Diagnostics business. We're going to pay back in installments of €12 million in Q4, at the end of Q4, and this is reported in our statutory financials, so you can see it there.
Thank you very much. Very clear.
The next question comes from the line of Scott Bardo with Berenberg. Please go ahead.
Thanks very much. It's Scott Bardo from Berenberg. Yeah, a few questions, please. Firstly, just on the Irish manufacturing facility consolidation. I can't recollect you talking about this initiative during your three-year plan in the summertime. I just want to understand, is this plan incremental to your initial communication, and thus then the cost savings of EUR 6 million incremental to the already outlined EUR 10 million-EUR 15 million? If you could confirm that, please. Second question relates to Siemens. I know you've obviously had this business in the organization for a short period of time. Can you just be a little bit clearer, please, as to what the revenues on a full year basis we should expect from this asset? I think you just mentioned something like EUR 40 million. Is it that the revenue contribution differs from how you saw it when you acquired that business?
If you could just talk a little bit about the moving parts there so we can model that correctly, please. Last question is Molecular. Molecular seemed relatively poor growth this quarter. You say 7% or so constant currency is 1% reported. Can you provide a little bit of justification here? I understood that the expectation was for broadly double-digit growth from the Focus business. Can you talk a little bit more about why the trend was a little bit poor this quarter? Thank you.
Okay. Scott, I will cover your three questions. First one, it is fair to say that our LTP did not include the closure of the plant, because this decision has been taken after that. However, it is also fair to say that our LTP, in our Irish site, we actually host 2 type of businesses. We have an ELISA business manufacturing, which is part of the original business that we had purchased in Ireland from Biotrin, and it was actually moved to this facility. As well as we have all the molecular activities related to extraction business and LAMP business. What we had in the plan were synergies associated with consolidation of ELISA, but we did not have synergies associated with the closure of the business. Right.
I don't think that you can take what we've indicated in the LTP and then mathematically add the roughly EUR 7 million savings. I would say that a good scenario would be that you could have an incremental EUR 5 million of more savings once this is also implemented. Okay. The second one, Siemens, is roughly around EUR 40 million in revenues as a combination of reagents and instrumentation. This is what we inherited from Siemens. Keep in mind that again, here, the only reason why we bought this business certainly is not to promote ELISA, but is to provide to our people between 2 to 300 customers that are suitable for cannibalization and placement of LIAISONs. What we are not going to do moving forward is we are not going to sell instruments any longer as Siemens was doing.
These instruments, because these were systems intended to support the ELISA business. Just to give you a ballpark number, and believe me, I'm going by memory, we are probably talking about roughly EUR 5 million per year of instrument and service sales. Clearly much lower margins that are not going to be continued in our business model. The third question you have is molecular. Again, I understand it is unfortunately deceiving. When we report, let me say, the like for like, and then we discuss about what we call molecular, the truth of the matter is that molecular is not only molecular. Molecular is a combination of 2 technologies, truly molecular PCR products, the Simplexa line.
We have a bunch of ELISA IFA business that still sits there, is seasonal, has a lot to do with specialty picks, and is a profitable business, certainly profitable, but certainly not growing. When we report the growth of 7%, it's growth of pretty much a combination of the 2. Now, if you carve out the non-molecular business and you just speak to the molecular part, you have a low double-digit growth from this business. Again, also when you look at this molecular business, so the low double digit, it's a combination, again. I'm sorry for the confusion, unfortunately, this is what we bought. It's a combination of 2 type of businesses. One third of that business is pretty much a very large contract with Quest.
If you remember, this company belonged to Quest, and actually it was supplying to Quest, lots of molecular products, especially ASR for Quest to develop their own LDT. That business, part of the business is relatively flat because it only grows with growth of Quest volume. You may expect at best a growth of 2, 3%, which is what I believe Quest is reporting as volume growth overall. There are 2 third of the molecular business, which is truly end user business, and that is growing high double digits. Okay, if you ask me for a qualitative determination of business and expectation, yes, it is growing as we expected. We didn't buy EUR 80 million worth of molecular, but just a combination of molecular and specialty ELISA.
Within molecular, there is a Quest contract, which follows certain dynamics, and the non-Quest business, which is the business directed to roughly 300 hospitals in the U.S., which follows a complete different dynamic. We may decide moving forward next year to represent this business a little different because I understand it's generating confusion sometimes with analysts and investors.
Okay. Very good. Thank you for the answers. Just to follow up, please, and just to make sure I'm crystal clear here. Your new or your 2019 guidance framework called for flattish margins by 2019. With this incremental EUR 5 million as payback from this consolidation, pure math suggests EUR 5 million additional EBITDA, which is 100 basis points margin progression.
By 2019 as a sustainable improvement rather than flat. I just want to make sure I understand that correctly, that the consolidations you make will lead to 2019 margin improvement. That's basically what you're suggesting, if I understand correctly. Thank you.
Hey, Scott. Hi, this is Giorgio speaking. Yes, the three-years plan guidance did not include the EUR 5 million Carlo just talked about coming from the Irish manufacturing site shutdown. At the same time, we're talking about the 2019 guidance, and you really should allow us some flexibility there. From a pure mathematical viewpoint, what you're saying is fair. Our modeling did not include the EUR 5 million.
Very good. Just very last one, if I may, very quickly. Just on tax, and I appreciate your comments, and there's a lot of moving parts here, but just to assume the Italian patent box situation, and to put that in some sort of sustainable future perspective over the next few years. Something like a 30% tax rate makes sense for 2018, 2019. I appreciate it could be lower than that this year, depending on your collection.
What's going to happen is that in our group, we have mainly two big taxpayers, which are U.S. and Italy. They represent more or less 80% of our tax bill. In Italy, we are going to have, hopefully, the effect of the patent box, one-off in 2017, covered in three years. 2018 and 2019, we are going to have those EUR 3 million to EUR 4 million. We will see. The patent box is an ele-
Per year?
Yes, per year. Patent box is an elective tax regime which lasts for 5 years. We will have to apply for a new patent box coming 2019. Until 2019, we're covered. We'll have to apply for a new one. Will we be able to get it? Will the law still be there? Hopefully so, but I can't commit. This is definitely not included in our 3-year guidance. Neither this nor the so-called Trump tax reform. For the U.S., again, if the law will move on as it is now, or not changes, we are going to have a reduction of $10 million per year. If you pile it on, you have $10 million.
Let's call the $10 million current exchange rate, EUR 8 million, plus the EUR 4 million you get from Italy on the patent box, if it will be approved, we will have EUR 10 million-EUR 12 million less taxes on our group profit starting from 2018 on a recurring basis, if everything will go as we hope.
Excellent. All right. Thanks very much indeed.
Once again, if you wish to ask a question, please press star and 1 on your telephone. The next question comes from the line of Welford Peter of Jefferies. Please go ahead.
Hi. Yes, just a few quick follow-up questions. Firstly, just on the Dublin business, I'm wondering with regards to the extraction business and those, I appreciate it's a minor sales, but are those sales just going to be discontinued or can they be transferred to California? Secondly, just wanted to confirm that the European costs for the implementation of logistics and the initiation of the legal action, that EUR 2 million, they're not excluded from the EBITDA outlook. It's only the Dublin site closure costs that are excluded from the EBITDA growth rate outlook. Then just finally, on the U.S. litigation, am I right in saying that you've got a similar agreement in the U.K.? And I appreciate that the U.K. market may be quite small, but is there also an endeavor underway to potentially launch the product in the U.K. market as well? Thank you.
Look. Yes, U.K. is also a geography, which is covered by this discussion. Let me mention about extraction. PG is going to cover the other part of the question. Yes, in fact, you are right. There is a business in the range of EUR 3 million-EUR 4 million, which has to do with the ex NorDiag business. We are actually evaluating what to do with that piece of business, if it is worth transferring to the U.S., especially in light of the fact that some of these products may become part of our post-transplant strategy for the PCR assays. Another opportunity would be to sell this business, if possible, to someone that could guarantee continuity of supply to customers.
In this case, as Scott said, the problem for us is not necessarily to make a significant amount of money out of this sale, but more than just guaranteeing a continuity of supply to a long list of loyal customers. Notwithstanding that, if we cannot find a solution that guarantees continuity, we are going to shut it down and move on with the rest of the business.
In taking it further regarding the cost, you got it right. The setup cost linked to logistics platform, European logistic platform, and the legal claim are already included in Q3 actuals. You do not have to deduct them from the EBITDA guidance we gave.
Whereas for the shutdown cost of the Dublin site, you should, as we said in the press release, take them out from the guidance. At the same time, as I believe I said, please remember that we did not incorporate in our guidance the positive effect coming from the ELISA business, the Siemens ELISA business, which is going to partially offset the negativity you are going to have from the Dublin shutdown.
Very clear. Thank you.
Thank you.
We have a follow-up question from the line of Mr. Bardo with Berenberg. Please go ahead.
Thanks very much. Just a quick follow-up. Carlo, just wondered if you could share some thoughts on the Zika market. This was potentially a bit of a wild card for DiaSorin, and I understand we're in somewhat wait-and-see mode. I wonder if there's any dynamics you can talk about in that category. Also, just a general high-level discussion about the pipeline, how that's progressing. You've outlined some quite ambitious plans for progressing the specialty pipeline. I wonder if you could talk a little bit about that, please. Thank you.
Okay. Interesting that you mentioned this. When it comes to Zika, I think we've been always clear saying that it is a bit unknown what the state of Zika. Today, we have our product approved in the U.S. for emergency use, we are following suit with the FDA to get the formal FDA approval. Today, we do have a certain number of customers in the U.S. using the product, mainly Department of Health, because today, in most of the states in the U.S., it's mandatory to provide these samples to the Department of Health for testing because it's a reportable disease. However, the volumes are still relatively low. It did not become, yet, part of routine testing. I think that this can go two ways. If you talk to different operators and microbiologists in the U.S., you get both opinions.
One way would be that this becomes part of the prenatal testing. That would immediately create, in the U.S., a market of roughly 4 million tests. Pretty much in the U.S., on an annual basis, we have 4 million newborns. That would be certainly a very favorable scenario for DiaSorin because, as you know, with our specialty infectious disease assay, we do have very significant market share also in the U.S. The other scenario is that it becomes a regional disease, concentrated more in those areas where you have a risk of mosquitoes, so you go down more in the southern areas of the country, in Florida. That would leave this Zika as a relatively small opportunity.
On top of this, what is very interesting is that through the acquisition of Siemens, we do actually have access to an ELISA product that Siemens was carrying, specifically designed for Brazil. Siemens has been awarded by the Brazilian government a very large tender in the range of EUR 1.2 million, but they're talking about a couple of million tests of Zika, which is the kind of testing that today is done in Brazil, where depending again on the season, wet season, dry season, you see an incidence of Zika which varies dramatically. By the way, it is very counterintuitive. On a dry season, you have a very high Zika prevalence. On a wet season, you have no Zika prevalence, which is not simple to understand, but it is the way how it goes.
As far as the pipeline of specialty, today, I think we could distinguish between molecular and immunoassay. When it comes to the immunoassay, 70% of the DiaSorin research and development resources, as we speak in 2017, this will continue until Q1 next year, are dedicated to support the registration of the hepatitis HIV in the U.S. as part of the Beckman program. This is simply because we had a full catalog of products that you know we distribute ex-U.S. When we decided to move it to the U.S., we made a few modifications to these products to make them more U.S.-oriented. That certainly took away a lot of capacity from immunoassay product development. Notwithstanding that, we will launch this year three to four products as specialties in the immunoassay.
When it comes to the molecular pipeline, we have stated that it is our intention to have two assays FDA clear every year and four ASRs launching in the U.S. market. We got the C.diff launch Europe and U.S. We got the HSV mucocutaneous claim approved in Europe. We are submitting this in the U.S. We are releasing, we just released yesterday, our Bordetella pertussis assay CE mark. It is going to be filed with the FDA. To make a long story short, Scott, yes, we had 12 months where we put a humongous effort to support our U.S. chronic hepatitis. We are at peak right now, Q1 next year is when most of this effort will be completed. We will resume back to regular course of business for immunoassay products vis-à-vis the generation of five to six new products per year.
Very good answer. I hadn't appreciated there was so much internal resource going into the HIV and hepatitis framework. That's interesting. Thank you very much indeed for the comments.
Keep also in mind, Scott, that we did, as we have announced, we set up a manufacturing site in England for HIV, for hepatitis B and hepatitis C. In that site, we are actually making products that are fully dedicated for the U.S. market. Even if products are the same, it does require a hell of a lot of validation work that has been allocated to R&D to support operation. That's the reason.
Understood. Thank you very much.
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Thank you, operators. Bye.
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