Ladies and gentlemen, thank you for standing by. Welcome to the Coloplast Financial Statement Webcast. At this time, all audio participant lines are on a listen-only mode. During the presentation, we will have a question- and- answer session. At this time, if you do wish to ask a question, you can do so by pressing star one on your phone keypad. I must advise the webcast is being recorded today, Tuesday, the 5th of May 2016. I'd like to hand the webcast over to our presenter today, Lars Rasmussen. Please go ahead, sir.
Thank you very much. Good afternoon, and welcome to our Q2 2015-2016 Conference Call. My name is Lars Rasmussen, I am CEO of Coloplast, and I have with me today CFO, Anders Lønning-Skovgaard, and our investor relations team. We will start with the usual presentation by Anders and myself, and then we will open up for questions. Please turn to slide number 3. In Q2, we saw continued strong European growth, further backed by the very successful SenSura Mio Convex launch, which I'm very satisfied with, and which is reflected in our reported Ostomy Care numbers. We knew from the outset that the U.S. would experience its hardest quarter this year, and that was the situation in Chronic Care. We did, however, see a lot of tailwinds in the U.S. Urology and Skincare businesses, which meant that the U.S. actually ended in positive growth for Q2.
The growth in emerging markets in Q2 was below our expectations. Emerging markets performance currently paints a mixed picture, a declining growth momentum in China, Brazil, and Greece drives down overall momentum. Overall, we continue to deliver 7% organic growth, which is in line with expectations. On a positive note, we continue to have a firm grip on our costs. We delivered a 33% EBIT margin for the first half of our fiscal year. Today, the board of directors approved interim dividends of 4 and a half DKK per share, corresponding to a total interim dividend payout of almost DKK 1 billion. Our organic revenue guidance for 2015-2016 is unchanged, with a growth of 7%-8%. Our growth in DKK is now expected at 6%-7%.
In addition, our EBIT margin guidance in fixed currencies is unchanged at 33%-34% and 33% in DKK. Please turn to slide number 4. Year to date, our revenues grew 7% organically and 8% in DKK, and amounted to DKK 7.3 billion. In Ostomy Care, organic growth was 8%, and growth in DKK was 7%. For Q2, in isolation, growth was 9%. Growth continues to be driven by our SenSura and Brava portfolios, especially in the larger markets like U.S., U.K., France, and Germany. SenSura Mio Convex has now been launched in 15 markets, and we are experiencing such a satisfying response from nurses and users, that we are struggling to keep up with demands, and we have initiated further capacity expansion.
Finally, our Assura portfolio growth was also very satisfactory and was driven by Russia, Algeria, and China. In Continence Care, organic growth was 4%, and growth in Danish kroner was 5%. In Q2, the organic growth was 3%. The SpeediCath ready-to-use and Sweden catheters continue to drive growth, and especially the compact category performs well. In the compact segment, we continue to see strong performance in markets like France and the U.K. The big driver for lower performance was the U.S., followed by the tender win in Saudi Arabia in Q1 last year. As reflected at the beginning of the year, we expected to be hit hard by distributor buying patterns and inventory reductions in the U.S., and this materialized, especially in our Continence Care numbers in Q2.
We continue to see satisfying in-market sales growth in the U.S. We expect the inventory reductions to tail off in Q3. Performance in our collecting device portfolio remains challenged by high competitive pressure. We remain satisfied with sales growth for our Peristeen products. In Urology Care, organic growth was 8%. Growth in DKK was 12%. In Q2, the organic growth was 8%. Sales of the Titan penile implant devices continued to drive performance. We saw a very satisfying Q2 with female pelvic health. Our end urology business saw a challenging Q2 due to lower sales in emerging markets. In Wound & Skin Care, organic growth was 9%. Growth in DKK was 11%. Organic growth for wound care in isolation was 6%.
For Q2, in isolation, organic growth for the total business area was 9%, and for Wound Care, it was 3%. The growth was driven by Biatain sales, in particular, Biatain Silicone in the European markets like U.K. and Germany. In France, growth was challenged by the introduction of yet another price cut by the French healthcare authorities. We also experienced lower growth in several emerging markets, especially China, Greece, and Saudi Arabia. The Skin Care business saw a very high Q2 from high InterDry sales. Finally, satisfactory performance continued with our contract manufacturing of Comfeel. Turning to our geographical segments, we saw organic growth of 5% both year-to-date and in Q2 in our European markets. The growth was driven by U.K., France, and the Nordics. Organic revenue growth in other developed markets was 5% year-to-date, and 4% in Q2.
As explained earlier, order buying patterns from distributors impacted year-to-date and quality performance negatively in the U.S., whereas our growth rates in Canada and Japan remain highly satisfactory. Revenue in emerging markets grew organically by 15% year-to-date and 14% in Q2. Year-to-date, we saw strong growth in markets like Russia and Argentina, whereas declining growth momentum in China, Brazil, and Greece has influenced overall emerging markets performance. With this, I will now give the word to Anders. Please turn to slide number five.
Thank you, Lars, good afternoon, everybody. Gross profit was up by 7% to almost DKK 5 billion. This equals a gross margin of 68%. We continue to see improvements in production efficiency at our volume sites. These improvements offset the negative gross profit impact from product mix. The gross profit was also impacted by increasing costs in emerging markets and increasing depreciation, as well as costs associated with the expansion of our Nyírbátor site and relocation of manufacturing to Hungary. The distribution to sales ratio came in at 29%, on par with last year. The ratio was impacted by incremental sales investments in the U.S., China, Consumer Care activities, and the U.K. of around DKK 80 million year to date. The admin to sales ratio came in at 4% of sales on par with recent trend.
The R&D to sales ratio came in at 3% of sales, activity levels remain high. We are investing more into our pipeline and into strengthening the links between R&D and production. Overall, this resulted in an increase in operating profit of 7%, corresponding to an EBIT margin of 33% in both fixed and actual currencies. In Q2, in isolation, the EBIT margin came in at 32%. Operating cash flow amounted to almost DKK 1.1 billion and was up 27% compared with last year. We saw a positive impact from higher absolute earnings and higher paid taxes last year, which was offset by payments on escrow accounts to settle mesh claims. Cash flow from investing activities was impacted by investments in capacity expansion, both in machines for production of new products and the site expansion in Tatabánya in Hungary.
CapEx amounted to DKK 227 million year to date, compared to DKK 325 million in the same period last year. The lower absolute spend reflects the fact that the investments in the new factory in Tatabánya will be included in the second half of this year. Last year's CapEx spend included a large investment into the new MIU platform, as well as investments in new factory in Nyírbátor. The sale of bonds provided a DKK 319 million cash contribution versus DKK 403 million last year. Please turn to slide number 6. Our organic revenue guidance for 2015-2016 is unchanged, with a growth of 7%-8%, whereas our growth in Danish kroner is now expected at 6%-7%.
The change in guidance in Danish kroner from Q1 is mainly related to changes in the British pound, US dollar, Argentinian peso against the Danish kroner. Our guidance assumes stable growth rates in Europe. We also assume growth rates in North America and China will pick up in the second half of the fiscal year. We are easing our expectation on negative price pressure to around 50 basis points impact on our top line for 2015-2016. We are successfully mitigating the negative price pressure in Holland and the German home care market. This leaves with minor reimbursement impacts from Chronic Care in Norway and Wound Care in Greece and France. We don't have any news to share on the mesh litigation since Q1. Our legal strategy remains unchanged, and we continue to make good settlement progress.
For 2015-2016, we continue to expect an EBIT margin of 33%-34% in fixed currencies and around 33% in Danish kroner. Higher growth from our new product launches still means pressure on the gross margin. We are on track with the relocation of manufacturing from Denmark to Hungary, and more than 15 production lines are currently in the process of being transferred. In Q2, we saw stable trends for most of our cost base, which we expect to continue. We now expect incremental sales investments of around DKK 175 million, as new investment cases have been approved to pursue the potential behind better access to hydrophilic catheters in Japan and Australia, as well as surgical urology opportunity in the U.S.
We expect our net financials to end the financial year 2015-2016 around -DKK 50 million, impacted primarily by the net impact of cash flow hedges on the US dollar and British pound, as well as the devaluation of the Argentinian peso. The improved net financial estimate is primarily related to unrealized cash flow hedge gains on the British pound. CapEx guidance for 2015-2016 is expected to be DKK 600 million-DKK 700 million. Our CapEx is driven particularly by investments in more capacity and for new products, including SenSura Mio and Biatain Silicone, and for the Tatabánya factory expansion. The change to the CapEx guidance is mainly related to fine-tuning and timing of various projects in global operations. Finally, our effective tax rate is expected to stay around 23%. This concludes our presentation. Thank you very much. Operator, we are now ready to take questions.
Just as a reminder, if you do wish to ask a question or make a comment, please press the star followed by 1 on your telephone keypad and wait for your name to be announced. If you wish to cancel that request, please press the hash key. Once again, for a question or comment, that's star 1 on your phone keypad. Your first question today is from the line of Annette Lykke. Your line is open.
Thank you very much for taking time to my questions. I'd like to hear Lars, if you could sort of elaborate a little bit about your growth opportunities in the U.S. market, assuming it has to be outside GPO contract, assuming that the situation will remain status quo. I also, in respect to the GPO contract, ask in connecting with the Premier contract in September or later this year, it was mentioned that the ConvaTec call that it is a combined contract between Ostomy and Wound Care. If you had any comments in this respect, that would be great. Then I'd like to hear a little bit about reimbursement, or the consequences of the changed reimbursement environment in both Japan and Australia.
What is sort of the short-term effect, and what is the longer term prospects of these better conditions?
Was that all? On the GPO side, with our current size, I don't see that we are blocked from pursuing market share growth in the US. If you just take the last three years, we have increased our market share by 50%. We have been growing a lot, and even in the first half, where we have a weak growth in the US because the distributors are sharing stocks, we can see on the in-market sales growth numbers that we actually are taking big market shares.
But I'm not trying to sort of diminish the irritation of us not being on the GPOs, because, of course, that would just be another way of growing. Now we have to fight harder to get the growth that we get in the market. We can grow, and we have to do that. You also have to remember that we still have the advanced technology contract revision, and that means that we can't take our whole portfolio into the hospital, but we can take the newest products that we have. In Ostomy, the way it works is that you only push your new products in the hospitals anyways.
You would never dream of bringing in your old products to the hospitals because it is about getting access to the new patients. Of course we can also grow for the next period without it being on the GPO contracts, but eventually, we need to be there, no doubt about that.
Can I follow up here, Lars-?
Yeah.
Ask you, is there any sort of, I mean, if you're not getting into those contracts, for example, during this year, is there a certain cap on how much you can see to grow the share? Is there opportunities for you to sort of, maybe take market shares in the community part of the business, within patients experience complications with their products?
There are numbers, a number of ways that you can grow. First and foremost, in the current years or in this year and also in the years before, we have been doing or making a lot of independent contracts with hospital chains. We have made contracts and we can sell in several hospitals or in many hospitals. Of course, we'd like to be in all of the hospitals. It does not mean that with our current size, that we cannot take market shares, and we are growing very strongly, especially in Ostomy in the U.S.
Therefore, I don't, I don't see that the situation is on, is changed from how it was one year ago or 2 years ago, or 3 years ago. We can easily grow as we want to grow in the next period. As I'm saying, at one point in time, we need to get on those contracts, of course. Would we rather be there than not? You bet. That's the situation right now. Fortunately, we can sell our news products via the advanced technology agreements. On the on the Premier contract, I'm actually. Could you repeat you're saying that we would be-
No, it was just.
that would be a combined contract with-
Yeah
Ostomy and Wound Care?
Yeah, that was mentioned on the ConvaTec call.
Okay. I must say that that I did not know that, but so far, we have not had any issues on being on contract with our Wound & Skin Care products for most of the GPOs. That has been quite easy for us because the Ostomy contract is a dual source contract, whereas the Wound & Skin Care contracts are multi-source contracts, where you typically see 7 or 8 vendors, and there we have free access in most of the GPOs. I wouldn't see that as being a big problem.
Turning to the reimbursement in Japan and Australia, first and foremost, I'd like to say we are very happy with that development, and we are very proud of it because we feel that there has only been one situation before this current situation, where we have been in what we consider to be the driver's seat in changing the reimbursement setup, and that was when we got reimbursement on catheters in France. Then now we are in a situation where we have gotten reimbursement, not to the same scale and tune as in France, for example, in Japan and in Australia. It does mean that in those two countries, the, it is actually quite big value pools that are opening up.
Now there's a very big outstanding job in both markets, to educate the professional community and also the current users, of what does it mean with these new opportunities and this new funding? To create a more, you could say, a kind of standard of care, which is more in line with what you see in other developed markets. That would drive a very different volume in those markets. We're looking very much forward to that, and we feel that we are set up in a way in those markets where we are really able to also follow through on these new opportunities.
Okay, thank you very much.
Welcome.
Question is from the line of Michael Jüngling from Morgan Stanley. Your line is open.
Thank you, thank you very much. 3 questions, please. Firstly, when it comes to organic constant currency sales growth, would it be possible to give us the growth rate by decimal point? I know this sounds a little bit tedious, but is it below 7% or above 7% in the second quarter? Secondly, on China, what is the organic constant currency growth for the second quarter? Is the slowdown that you've mentioned broad-based, or is it more in certain regions in China where you're experiencing a slowdown? Thirdly, for the U.S., have you seen the expected acceleration in sales growth in the third quarter? What was it in the second quarter, please? Thank you.
Maybe I could open up with the last question about the US. What we see in the US, I'd just like to reiterate that we have changed the context last year, where we previously paid a bonus on what the distributors were buying from us, we are now paying a bonus on their in-market sales numbers. Which means that if they would have any excess stock, they would sell that out before they're buying anything new from us. We knew that, and that is we estimate, because we don't have exact numbers on our customer stock, we estimate that that is we are at that point now where they start to buy in a normal pattern again.
We are getting the in-market sales numbers or sales out data, and we do see that we have a continuous strong sales growth on both Ostomy Care and Continence Care. That have not changed. I don't know what you are referring to when you say that, the growth acceleration.
Well, I mean, I think as part of your guidance for the full year.
Oh, yeah. Okay.
in the second half, you would have started seeing acceleration.
Yes, yes. We expect to see an acceleration in this quarter, the quarter that we just started now, which is our third quarter, if that was the question.
Mm-hmm.
Regarding China, then the situation in China is that we have increased our staff in our sales or our commercial organization in China quite significantly over the last few years. We do see that there is a market, I don't know if I should call it a slowdown, but we see a reaction in the market to the pressure from the authorities on the way that the public sector is conducting business in China. That also means that it is a bit harder for us to register especially wound care products in new hospitals.
We take this as an opportunity for us to look at our current organization, because we have been expanding it so fast, that there are a few things that we'd like to work with and change over. Therefore, this year, we are not employing more new salespeople. We simply take a year where we are stabilizing what we have to prepare for further growth. That means that for this current year, we expect to have a growth rate to the tune of 20%-25%, where we have been above 30% in the last years that we have seen. That's where we are.
I'd also like to put it a little bit into context because this is primarily hitting wound care. It doesn't take a lot of nominal value to really move the percentages there. What we are missing by in this quarter in China is around DKK 15 million. That is up against a base of DKK 3.5 billion. It is, we think it's manageable, and we don't feel that we have anything which is broken in China.
Great. The question number one, please?
Yeah, Michael, the organic growth in the second quarter was 6.5.
Okay. What was it in the first quarter? If we look in, if you look at your whole numbers and we do a weighted average, it seems to me that probably in Q1 or so, you did, 7.4. Is that reasonable?
No, the first quarter, the growth was 7.2%, and then the 6.5%, so year to date, 6.9%.
Okay. Just a follow-up on the US business. Can you comment on what the US business grew in the second quarter? Because in the past, it sort of seemed it was the guidance sort of was flattish growth. Is that what actually happened in the US in the second quarter?
It's around 2%.
Great. Okay, very helpful. Thank you.
Question is from the line of Ian Douglas-Pennant from UBS. Your line is open.
Thanks very much. Just on your guidance again, is it reasonable to say that your full year margin is now likely to be below 33% rather than above, given, I'm just thinking in terms of currency, given you've lowered your revenue guidance, but not your EBIT for currency? The second question is on the U.K. You said your U.K. growth was strong this quarter. Could you comment on the growth excluding the prescription fulfillment fee or the shipping fee in the U.K., so, you know, maybe just the wholesale sales? You know, we've seen data from the U.K., and we've heard comments from one of your competitors that both would suggest this market is slowing down, so I just wanted to get your thoughts there. Thanks.
Let me start with the UK question, because I think that there are several data sources in the UK. If I start with the most reliable one I have, which is our current organic growth in the UK, it is very strong and very close to double digits, both in our business to business and also in our general healthcare area. You can use either PCA data, or you can use IMS data, when you look at it, and if you check out on those two data sources, you will see that they have very, very different takes on how much the market is growing.
We think that the PCA data is quite understated because first and foremost, it's England only, and secondly, they do not include prescription services. It's something I think that will take a little bit more time to discuss, and I think that you're going to meet a couple of my colleagues in the next days, so you can entertain yourself with them. That sounds fun. Thank you. Thank you, Lars. Ian, in terms of our guidance in the Danish kroner, on the EBIT, it is around 33% EBIT margin guidance in Danish kroner.
I have Martin Parkhøi from Danske Bank. Your line is open.
Martin Parkhøi, Danske Bank. 2, maybe 3 questions. firstly, just on your long-term targets, because I remember approximately 2 years ago, you said you were targeting 25% in emerging markets. Now we are around 15%, since emerging markets account for around 15% of your sales right now, then it's actually sliced off 1.5 percentage point of group growth. should we see the upper bar, upper level of this long-term target as quite unrealistic as the situation looks right now?
A little bit associated with this is that, you have previously said that the impact from a generic competition potentially on SpeediCath is included in your long-term targets, but have you, due to the slowdown in emerging markets, actually lost a buffer? It could mean that, you could go below the 7%, following this potential generic competition. My second or third question, you recall, that's just regarding this, Lars has touched a little bit upon it, saying that, you will not employ more salespeople in China for this year. Now you have invested a lot of money in emerging market for several years, and now we sort of see growth going down.
Are you satisfied with return that you're seeing right now on this significant investment that you do every year? Should we expect to see a slowdown in the years to come on the investments in additional sales initiatives? That was all.
Yeah, that was also quite enough, because it's pretty tough questions, Martin. Because it's inevitable that there is a slowdown in emerging markets right now, due to the funding is gone in many markets where the oil prices are very low and also raw material prices are very low right now. Of course, we feel the impact of that. So right now it's we're around 15% growth, that is also in a quarter where we are sort of taking an organizational break in China. It's definitely below the 25%.
We are looking into what this means also for our investment appetite, but we are not pulling out of any of these countries and I also feel that if I look at our local EBIT margins, I think that overall they are quite healthy in most of the markets that we're looking at. We knew, and I also think that we discussed that when we started to invest in emerging markets, we knew that you would have bigger uncertainties and also bigger difference between when things are really rolling and when they're really not rolling, than you see in the more stable markets. Right now, we have less uptick in emerging markets than what we invested for.
I would say, on the other hand, we actually have more uptick in Europe than what we thought when we start to invest here. We would be much more prepared to be, to have a dialogue about this when we meet at our Capital Market Day, but I think that you have a point, which is that we, that emerging markets is lower than what we thought when we talked about it two years ago. I would also like to underpin that the fact that we are working with our organization this year in China in order to figure out how to continue the expansion we do there, is not to be seen as a sign of that we don't want to invest further in China.
We see this as an up-and-coming markets, and we have far from worked with to get that market to where we want it to be. I'd like to say that there have been a couple of positive things, especially on the catheter side, compared to what we knew when we talked about about the new strategy, and that is Japan and Australia. The fact that those two markets have opened up I would make no secret out of it, that we see that the improved reimbursement schemes that we see there means that we can introduce our ready-to-use catheters in those markets and also the Compact versions of them.
That means that we are going to do that full force, and that is actually, something that weighs on the positive side on the on the SpeediCath portfolio. I actually think that we are in a better position than I would have thought than when we discussed this a couple of years back.
The next question is from the line of Veronika Dubajova from Goldman Sachs. Your line is open.
Good afternoon, gentlemen, thank you for taking my questions. I have three, please. The first one's just on ostomy, I know we've spent a lot of time talking about continence and stocking and all that, but I'm just curious, on ostomy, quite an impressive growth rate in the 2nd quarter. How should we be thinking about that trend as you move into the 2nd half of the year? I guess, you know, Lars, you called out the Convex launch as one of the drivers. What's your capacity currently with where you are to sustain that very high single-digit growth rate into the rest of 2016? My second question is, you did mention in your press release that you've seen a worsening of the competitive environment in some European markets for continence care.
I was hoping you might elaborate on that. My last question is just on gross margin, and any comments you might have on the full year outlook here. Thanks so much.
On the gross margin, on the gross margin?
Yeah.
Okay. Okay. All right. I would leave that one to Anders, if he would like to fill in on that one. On the Ostomy Care side, I think that we have the needed capacity to sustain the current growth, depending on what kind of products that the customers are going for. We could also do more, but when it comes to Convex, we are completely exhausted, and we are waiting to get new capacity. So that's, you could see that as a problem. I just see it as very positive that we are actually growing significantly over what we expected in this particular segment.
On the catheter side, actually, I think it's very important to say that if you take, if you take the underlying growth in or the in-market growth in the U.S., and you take into consideration the fact that we won this huge tender in Saudi Arabia last year, then the growth rate that we see in catheters right now is exactly the same as we saw at the same point in time last year. So there's basically no change to our growth rates. We are struggling, and I think that's not a secret, especially in Germany, where we do not have the same market shares as we have in other markets when it comes to catheters.
that's what we're investing to get every single day to get on top of that. on the gross margin.
In terms of the gross margin, we are expecting to see a gross margin that is improving in the second half. It's due to scale, it's also due to the fact that we are on track with the plans of moving the machines from Denmark to Hungary, we have already started the production of Bard's silicone, Comfeel, and also our SenSura Mio products in Hungary. We're also on track with the activities within Innovation Excellence to reduce the number of production employees in Denmark with 100. We believe that these activities will improve our gross margin in the second half of this year.
If I may follow up on that, Anders, I should be thinking of the gross margin as flat on a full year basis with, you know, down in the first half and up in the second half? Is that a fair assumption?
That's a fair assumption.
Okay.
Normally we don't give that much credit to the to this specific line. I think that if you look at our overall guidance, we expect a stronger second half on the AB line than we had in the first half. That comes from multiple sources, but gross margin is one of them.
One of them, yeah.
Okay, understood. Thank you very much.
Question is from the line of Chris Cooper from Jefferies. Your line is open.
Hi, good afternoon. Thanks for taking my questions. Firstly, on the charter business, please, can you just describe to me how the market share has developed over the last few quarters, particularly relative to the same quarters in the previous year? I'm just trying to get a sense really for how much of the growth in home care is the underlying market and how much is restoring the share that you'd lost.
Yeah.
Secondly, on the notification, please, I saw that the MDL order had been stayed until the first of June.
Yes.
Can you just explain to us what that means in practical terms? Should we be expecting a change in the pace of settlements, one way or the other from this date?
Mm-hmm.
Then lastly, please, just on the GPOs again, do you have any more insights yet on why you were unsuccessful on the Novation GPO contract back in, whenever that was, back in February or March?
On why we, why what?
Oh, sorry, why you were unsuccessful in securing the Novation GPO back in March? I just wondered whether that has led you to adapt your approach in any way for the GPOs that are coming up later this year.
Okay, when it comes to the, when it comes to the charter market shares, I think that the only visibility I can give you on that one is that with the current growth, we are taking market shares. Maybe contrary to what we said a year ago, where we were quite firm that we would probably pick up market shares from new customers and not from people who have left us, then we actually do see the customers that left us when we had the problems last year, that they are also coming back, and we are very, very happy to see that.
That market share gains of new customers and also people coming back means that we are actually growing quite strongly in also in charter in the U.K. That actually goes for all the segments that we are handling in charter. On the mesh litigation, it's correct that we have a stay until the first of June. That means, of course, that our burn rate is lower because if we didn't get the stay, then we would have to do discovery or perform discovery, and that is quite expensive.
That means that we are spending our time and efforts on settling cases, and I think that the progress in settling cases is good and very satisfactory. For my part, I think that we could say that we are on track with the situation on the mesh litigations. On the DPO side, it's very hard to say what we can do different on that one. Of course, we are doing our utmost to improve on our strategy. But I think that you can't see away from the fact that there's a share issue in this.
We do know from the intelligence that we can pick up in the market that price-wise, we are very competitive. It's not, it's not price, and we also have these products in the markets, or in those DPOs on a advanced technology agreement. It actually means that there is a demand for the products, therefore it must be the raw share that we talk about.
Okay, thank you. Just one follow-up, perhaps on the, on the mesh litigation, please. The stay has sort of, I guess, artificially lowered the burn rate, does that then imply that we can expect the burn rate to increase once the stay date has passed us, beyond the first of June?
We have had the stay prolonged multiple times. This, I guess that the stay, or the background for the stay is that the judge is seeing a satisfactory progress on the settlements. As long as we are able to produce that, I think there's a likelihood that we can also keep the stay.
Got it. Thank you. I'll get back in the queue.
Question is from the line of Oliver Metzger from Commerzbank. Your line is open.
Yeah, hi. Thanks a lot for taking my questions. First one is just on your Urology Care, in particular, the penile implant. One year ago, you reported some weakness, and for that point of time, you were not able really to identify the reason why the demand has decreased. Now in retrospective, have you identified any reasons for that weakness? Is also the current strong momentum, rather a catch up, or do you see really improved underlying conditions? My second question is more on the Wound Care outlook. On the pure Wound Care business, with 3%, it's definitely a lower performance in this quarter than to previous quarters. Does the whole environment appears more challenging, or was this more a one-time effect, mainly due to the situation in France?
My third question is, you mentioned that, or you explained higher R&D spendings due to initiatives between production and R&D. Potentially, you can just elaborate a little bit about these initiatives.
Yeah. It's not good when the outlook is soft on penile implants. That was what we had last year, and I think that we are not able to explain it. What we, what we initiated last year was a lot of activities on the marketing side. We have had a lot of training sessions. This, the way it works, when it's penile implants and also female pelvic health, is that you, that you actually educate doctors. The way you do it is that you have an expert educating a number of doctors, so that they try it out themselves, and get familiar with your specific device.
We are actually running a much higher number of these training sessions since an increasing number over the years, and a lot since last year on penile implants, but also on the female pelvic health side. I expect, or I would presume that that is also what is paying back in the numbers that we see now. Since Astora, just to continue on that, since Astora closed down their business. We are also doing a lot of training seminars with doctors who are in need to learn about new technologies and new products.
That is very, very important to us to continue to do that, because that is how we are securing future growth in also in that part of the business. When it comes to Wound Care, yeah, you're right, we are hit by the reimbursement change in France. There is an effect there. We are also hit by the fact that we are doing the activities that I talked about previously in China, we expect the growth to come back strongly in China.
Finally, Greece have also changed the way that they are reimbursing or paying for products, and that have also led to a reduction of the consumption in Greece. Those are the three things that are kicking in. For the rest of the markets, we actually see a very nice uptake. I'd like to add, actually, that we have launched just recently the silicone product, the Biatain silicone product in China.
We are looking very much forward to see how that will impact the market, because we have been impacted negatively in China by the fact that it is not possible for any companies in China to prolong their contract on the silver products. That also means that our silver products went out of service last year, and we feel that on the growth rate, and now we are able to fight back with Biatain Silicone. We have some positive things on that side also. On the higher R&D cost, we have a number of very interesting products in the pipeline, and they take a little bit more cost up, and that's basically it.
We have been discussing that many times over the years, that we can't give you a fixed percentage on R&D. We invest what we think is necessary, and right now we need a little bit more, so we invest that.
To add on that, we have also decided to invest more into our pilot in order to be better in ramping up the production of our new products.
Okay, that was helpful. Thank you very much.
You're welcome.
The next question today is from the line of Scott Bardo from Berenberg. Your line is open.
Yes, thanks very much for taking my questions. Firstly, sorry, just come back to the U.S. Ostomy GPO contract. I think there was, you know, quite a bit of confidence amongst the organization, early part of the year, to secure a GPO contract in the U.S. for Ostomy. I just wanted to understand, do you think there's any potential connection between the readout for Novation? You mentioned it was some market share related phenomenon, also to the Premier contract. Is your read that these things are more likely to go in the same direction? Also, would like a little bit of clarification around the advanced technology contract that you have.
It was my understanding from 3 years ago, you had this contract in place, a 3-year contract, and I think you announced today that that's been extended to the end of this year. Is it my understanding then, that this is not renewed into 2017? Or what is the mechanism for the extension here, which seems to be on a slightly different time horizon to what we've had historically for this component of the contract? That's a specific on the GPOs, please. On the U.S. also, I think you explained quite well some of the stocking patterns, so on and so forth, in both Ostomy and Continence. You do pull out within the release, quite a marked decrease in the standard catheter segment in the U.S.
I know this has been a trend for a little while, but would you say this decline is now accelerating? Really just like to get a feeling for, how your value upgrade exercise is going, what %, if you like, of the catheters in the U.S. now are now of the hydrophilic category? An update there would be very helpful. I'll pause there for a second and have one follow-up. Thank you.
Yes, on the GPO contracts, I think you're right that we actually had the competency in the organization to work up against the coming with an offer for the GPO efficient or the GPO contract for us to be on in vision. We also were part of the auction process all the way to the very last bit. I would also say that we're probably a bit surprised that we are not part of it. Because normally you'll be shut out much earlier. That tells us that we have the products, and we have the competencies to be in such a process.
I come back to my previous statement that I can't take anything else out of this, than that it must be a share issue, and we need to find a way to get a higher share, and thereby be in a better position to get in there. That's, of course, what we're investing for. I think with the financial strength of the company, we have the muscle to invest what it takes, and we are very committed to do that.
This doesn't mean that we, in any way, have given up on getting a market share in the U.S. against the same competitors as we have in Europe, where we get a market share, which is to the same tune as we have elsewhere in the world. The contract or the advanced technology contract that needs to be, or that is running out at the end of this calendar year, will have to be renegotiated before the end of the year. We will have to see how that goes and how that works. But I do feel that we also there are equipped to have the necessary discussions.
When it comes to catheters in the U.S., we are growing significantly above the market when we look at our end market sales data and that is on the back of our standard catheters, if you will. We are not pushing our standard catheters in our marketing communication and in our marketing activities. We are pushing solely the hydrophilic coated catheters and where we can, we are pushing the compact catheters. Therefore, you also see that the growth is made up from what we are winning in compacts and the hydrophilic catheters, and that is really how we go about it.
Okay, great. Thank you. Perhaps just quickly, a point of clarification. Just to understand that, at the moment for the organization in the U.S. or the organizational setup in the U.S., your entire U.S. hospital strategy, if you like, for ostomy at least, relates to this advanced technology agreement, which is due to expire this year. You're optimistic you can renew that at the end of this year. I think that's what I understood you say.
No, that-.
Please confirm.
No, that's. I'd like to maybe put a little bit more flavor on that. We have made a pretty large number of contracts, independent contracts, with hospitals that are working under different GPOs. We have picked out a number of, you could say, high-profile-
Yeah
... hospital chains. We have made contracts with them because they can make contracts outside of the GPO contracts with the companies that they would like to have in-house. That is the number one thing that we have been doing, and then we have been pursuing the GPO contracts. We will have to keep continuing to do independent contracts. It's just a more cumbersome way to get access to hospitals. That's of course, what we do until next time we send this up for negotiations.
Thank you. Just very lastly on this sort of contract idea, I think you've been making some excellent progress in wound in North America. I think you pulled out historically that, having negative pressure wound would be helpful for securing tenders, and obviously didn't quite work out, initially at least. Are you seeing, at the moment, any, tenders or, things that, opportunities that you're now losing for not having this complete portfolio in, in North America in wound?
No, it's not. It's, well, it might be, I don't know, because it's not what is being requested right now from the U.S. organization. It's, it's other things that they're pursuing and which we are quite right now developing. It's very much inside of the silicone segments that they are asking for a complete portfolio.
Understood. Thanks very much for taking my questions.
Welcome.
Your last question on the line with Alexander Döhler, Barclays.
Hi, thanks for fitting me in. Maybe I could ask just two. First one is, and I know you have to be cautious, but it's around Hollister and their settlement and market share dynamics in ostomy. Just given where you're growing relative to what ConvaTec have reported, clearly you're taking some share, or ConvaTec is losing some share. Is Hollister also losing share in order for you to have the kind of growth rate you're posting right now? Just if you can give any comment around that situation. The second one is maybe a longer-term one, just around the partnership with Ambu, and whether we can get your sense of a total addressable market for the disposable cystoscope product.
I mean, understanding it's not a forecast, but just getting kind of a TAM that could help us put that opportunity in perspective, for the longer term. Thanks.
I'm so sorry. I don't feel that I'm very well equipped for those 2 questions. We don't feel it's appropriate that we comment on Hollister and Bard's situation. I'm sure that you probably can get an easier access to them than we could to ask the same question. On the Isiris launch, we are just launching, right? It's been well received, but the sales numbers are negligible at this point in time, so time will show.
It is a market that we are building, but still, this is still a small part of the business.
No, I think that's fair enough. I just wondered if you could maybe give us a sense of total number of procedures, potentially times a rough idea of price, even if you don't want to give us either of the two components, but just to help us solve that equation. What's the total, you know, if you had 100%, and then we could think-
I think that we will, at some point in time, be able to give you a, you know, a trustworthy answer to that. We are learning about the market as we speak, because it's the product of course works. We also know what number of procedures are out there. The big question is, are the hospitals willing to pay for reducing the risk of infection that to the tune that they need to pay when they're using the single-use devices? There we have something to learn about this specific segment, because.
Yeah
we have to create our own data.
Yeah. No, that's fair enough. Then similarly, just a quick follow-up on that, have you looked yet at colonoscopy? I understood that was in the pipeline for this joint venture for disposable colonoscopy. Is that the case, and do we expect a launch at some point on that one?
We, you know, we don't comment specifically on what we have in the pipeline for any of our business lines. I'm so sorry.
Okay, no, fair enough. Worth a try. Thank you.
There are no further questions at this time.
All right.
Please continue.
Thank you very much. We would like to say thank you for participating, and looking forward to seeing you over the next period.
Thank you. That does conclude the conference call today. Thank you all for participating, and you may now disconnect. Speakers-