Welcome to the Devyser Diagnostics Q3 2022 presentation. Today, I'm pleased to present Fredrik Alpsten, CEO, Sabina Berlin, CFO, and Ulf Klangby, founder and deputy CEO. Please begin your meeting.
Thank you, and I hope you can see the presentation because I cannot. Let's go to slide two. It's a great pleasure to have you all here. This is actually our fourth earnings call as a listed company, and today you will listen to me, Fredrik Alpsten, the CEO, and Sabina Berlin, our CFO. I have also asked Ulf Klangby, the founder and deputy CEO, to join us during the Q&A session. Slide three, please. This is Devyser. Before we go into our Q3 figures, I would like to give you a short summary of Devyser. We are a pioneering leader in diagnostic solutions. The company was founded in 2004, and we develop, manufacture, and sell diagnostic kits and software for advanced DNA testing.
Our products are adapted to the leading DNA sequencing platforms, especially to the NGS platform, the next-generation sequencing platform, which is the latest and fastest-growing platform. We have also products for the other platforms. Slide four, please. Why do we do what we do? Of course, we want to build a successful company, but the foundation for everything we do is to ensure every patient has a correct diagnosis in the shortest possible time. With our fast diagnosis, we help to save lives. That is something I'm at least very, very proud of. Slide five, please. What do we do? We develop and market genetic test solutions to guide targeted cancer therapies, fast diagnosis of hereditary diseases, and post-transplant follow-up. All development and all manufacturing are taking place in-house in our facility in Stockholm.
We sell our products to clinical diagnostic labs, either via our own sales reps or via distributors. We're based here in Stockholm, but we have subsidiaries, sales offices in eight countries. We are today around 100 employees. Slide six, please. What do we do? I think the reason why we have been so successful, strong growth and profitable more or less since the company was founded, is because we put the customer, the routine diagnostic lab in focus. We provide solutions that are easy to implement, maintain, and use. This results in time and cost savings for the labs, which is important, of course, also fast treatments for the patients. Slide seven, please. The growth in the company is high, I would say very high.
From 2015 to 2022, the growth has been 36% per year in average, despite a big hiccup in 2020 due to COVID-19. Since the company was founded in 2004, we have sold products for around 3 million diagnostic tests. Our products are sold in some 50 countries, but we have up to now had a very European focus. We have a very nice business model, which gives us very nice gross margins, 81% for the last 12 months, almost pharmaceutical margins. The nice thing is that they are improving as volumes are increasing and the proportion of direct sales is increasing. The company started as an R&D company, and we have until today developed and launched 28 CE-approved products. The company has been very successful in developing products efficiently.
It takes us on average six-eight months from a product idea to a registered, finalized, and launched product. Slide eight, please. We are active in diagnostic tests in three areas, hereditary diseases, oncology, and post-transplant monitoring. The biggest area is hereditary diseases, and products for diagnosing hereditary diseases currently make up about 70% of our total sales. Although our fetal diagnostic products, which are included in this area, are still important to us, the area now includes several inherited diseases with high growth, such as tests for thalassemia, cystic fibrosis, and fetal RHD screening. A few years ago, we started diagnosing in oncology, and sales currently make up about 20% of our total sales. We have products for diagnosing hereditary cancer, such as BRCA. In the autumn of 2020, we launched our first product for post-transplant monitoring in stem cell transplantation.
It currently accounts for a minor part of our sales, but it's growing very rapidly, and it's by far our fastest-growing area. With the NGS technology, you can measure very low levels of the donor's and recipient's bone marrow and very accurately follow the development, and thus, at an early stage, see if the deceased's bone marrow is about to grow back, and then you can start treatment at a very early stage. We are, since beginning of 2021, developing a product for post-transplant monitoring for solid organs. The first product we have started with is kidney. In terms of volume, the post-transplant monitoring area is very interesting as testing is done frequently on each person during the remaining life of such a person. Slide nine, please. This is our geographical expansion. We currently sell in about 50 countries.
Until today, we have primarily focused on the European market, which accounts for more than 90% of our total sales. We are now selling our products via our own sales guys in Europe in countries like Sweden, Denmark, Norway, Italy, Germany, Switzerland, Austria, U.K., Spain, Benelux, and France. That's the blue European countries on the map. Since 2021, we have also set up our own sales organization in North America for U.S. and Canada. In the yellow countries on the map, we are selling via distributors. Next slide, please. The U.S. is the biggest IVD market in the world. To further increase sales in U.S., we have decided to establish an own CLIA lab in the U.S. in a parallel to our present business model. This was announced yesterday by a press release.
By creating a CLIA lab, Devyser obtains complete control of the selling process, including reimbursement management, ensuring a value-based pricing and improved margins. It also allows for closer interaction with physicians and patients. The customer will send test samples to the lab, which will run the test and provide the customers with the final test results. The lab will initially offer test services for Devyser's biggest products and most interesting products. Devyser has signed a lease for the premises as it's around 450 square meters, and we have started to recruit lab personnel. We aim to have the lab CLIA certified and fully operational in the second quarter of 2023. Maybe a CLIA lab is not a big step for humanity, but it's definitely a big step for us at Devyser.
With that, I hand over to Sabina to go through the Q3 numbers.
Thank you, Fredrik. Then starting on slide number 11, please. During the quarter, we were proud to announce that our quality management system and prenatal diagnostics product RHD, they were approved under IVDR. The transition to the new regulations has been a challenge for the industry, and this approval we see as a mark of quality for our organization, as it shows the strength of our development and our quality organization. We will now continue to register new and existing products in accordance with IVDR. In September, Camilla Wiberg joined Devyser full-time as Chief HR Officer after having worked with us on a consultancy basis since 2020. Camilla has extensive experience that is very relevant for us as we continue to grow. Of course, we have the CLIA lab decision that Fredrik has just talked about. Next slide, please, then, number 12.
We reported net sales of SEK 31.2 million in the third quarter of the year, showing continued growth and a strong quarter. Compared to last year's SEK 24.3 million in sales, we see a growth of 28.1%. Year to date, we have a growth of 34% compared to last year. Gross profit for the quarter came in at SEK 26.3 million or 84.4%, showing a very strong margin for the individual quarter. Year to date, we are at 82.5%. Our loss at both EBIT level and after taxes has increased compared to last year as we continue to invest according to plan. We closed the quarter with a liquidity of SEK 382 million and report a continued strong cash position. Next slide, please, number 13.
We are seeing a strong growth in all regions during the quarter with the U.S. keeping to its triple-digit growth throughout the year. Our direct market channel is showing the highest growth number, and the increase compared to last year is made up of both the transfer from the distributor model in some countries and new customers that have come in during the year in those regions. Our distributor sales area continues to grow and is showing great traction. The year-on-year growth is a little lower due to the change of sales channel for four countries since 2021. Let's move over to slide number 14, please. Gross margin has remained above 80% during 2022.
Since fixed cost has become a smaller portion of our total revenue, the past three quarters also show a new level clearly above previous years. On slide number 15, you can see here that we have listed our financial targets where we have a growth target to achieve an annual organic growth in excess of 30% and in three to five years achieve a gross margin in excess of 80% and operating margin above 20%. Currently, we are fulfilling two out of three of those targets. Thank you from me. I'm handing back to Fredrik.
Thank you, Sabina. By that, we will open up for question. The session will be led by Peter Johansson.
Hello. To ask a question, please notify us. We have a question from Klas Palin . Klas, please unmute yourself and go ahead with the question.
Yes, thank you, and hi, to ask my questions, if you can hear me.
Yes.
I just wanted to start off, if you could perhaps further elaborate about the development in Q3. Sabina, I think you said something about a slower growth due to changes in sales channels, and it was also mentioned in the report that you had a weaker development in July and a very strong September. If you could elaborate a little bit further about that.
Of course. I can take that. My intention was never to make it sound like we had a slower growth due to sales channels. It's just that if we look at the individual sales channel of our distributor network, we have a lower growth than our direct market, and that is due to the transition of four of our countries, our major markets moving over to the distributor or the direct market channel.
Mm-hmm. Okay.
Was that a little bit more clear?
Yeah.
Maybe I can add, Klas, that Q3 is always a challenge because it's a rather short quarter because it's actually two sales months, and if you're a bit weak in a part of one of the months, it can affect the whole quarter. That's. It's always a challenge with Q3 because people take holidays, and then they are selling during two months. That's more that. We try to
Mm-hmm
Say that in the report as well.
Also, I just want to follow up with about this, that July was weak and September strong. Is that in absolute numbers or is that in growth terms?
It's both actually.
Okay. Yeah, of course.
Um-
It's always difficult to compare individual quarters and even more individual months because.
Yeah. Sure.
you get an order or you don't get an order, so.
Yeah. Okay.
We don't have a strong seasonality, but the months of July and August are always just a little bit unpredictable. One year we can have a strong inflow after the summer because it was a little bit slower before the summer, or it can be the other way around, but we always see a takeoff again towards the end of August and during September.
Yeah. Okay. Perfect. Just to follow up on the gross margin that was impressively strong, and I guess, is that driven by product mix?
It's a combination of product mix and fixed costs versus our moving pieces in the gross margin.
Okay. Yeah. I could step back for the moment and let the other guys in and return with more questions later. If that's how we should do this?
Yeah. Perfect.
Yes. Next question come from Ulrik Trattner, Carnegie. Ulrik, please unmute yourself. Go ahead, ask your question.
Thank you, and good morning.
Good morning.
Great to see that the gross margin is expanding. I'm guessing that is related to, as you mentioned, volume and direct sales. But could you just help? I have a few questions. If we can start off with, we see this sort of direct market expanding, and you're talking about new markets. Could you give us an update on a rolling 12 months, what's the exposure to Italy is currently?
Yeah. The exposure to Italy is still quite high. Of course, we have been very successful in Italy over many years. The proportion of the Italy sales is going down. We don't have that high sales growth in Italy that we have in the rest of the world, I would say. I expect by the beginning of 2023, Italy will be less than 50% of our total sales, but this will still be a very important part of our business.
Of course. Expecting that to gradually come down.
Yeah.
What direct markets are new in the quarter and what markets are sort of ready to be converted here over the next six months?
At the moment, we have no plans, and we have not communicated any more conversions. We did quite many countries here during end of 2021 and during first part of 2022. We talk about U.K., Spain, Benelux, France, and we have increased the awareness in the DACH region, and we have started up sales, direct sales in U.S. For the time being, we are focusing on these countries. Of course, there can be other countries within a year or so that we potentially can convert. We have some good distributor sales there, and they could be a target, but we are a rather small company, so we are focusing on these started countries right now.
If I'm not mistaken, U.K., that was in May. Spain, March. It looks March, France. Is there anyone representing France at the moment? Just to clarify, we are still to expect that these regions will lag 12 months before we see any sort of meaningful volumes from converting to direct sales, right?
Yeah, and I guess to add about France, we have hired a guy there now. It took some time, but he's now on board. I think he starts actually next week, so he will be here for training next week. We normally say it takes us up to 12 months from a first customer contact until the customer is a buying customer, and that's applicable in all countries. Of course, we will see a more attraction in these new countries after six-12 months after we have hired and placed the sales guys in these countries.
Great. Two more questions on my end, and that would be related to the CLIA lab that you now plans to open in the U.S. If you can just sort of clarify, has this been on a request from customers? If perhaps I could just expand on this would be, we have seen some intriguing data on the Chimerism product and that is in a collaboration with Mayo Clinic, right?
Yeah.
Have this been a request from Mayo Clinic that you should establish your own CLIA lab, or why are you sort of going in that direction? Is it something that you believe in yourself, or is it something that you have received feedback from customers on?
We have not got any direct feedback from customers, but what we see, we strongly believe in this, and we can also see that most of our competitors, they're offering this for their products because some customers, they would like to do it themselves, running the test themselves, and some customers, they would like to do it like this because it's much easier. They don't need so much validation of the processes, et cetera, and we can then offer them this solution very fast, and it sometimes it's a easier purchase decision if they can outsource this part.
We are looking for you to establish more than one CLIA lab in the U.S. over the next few years?
No. I think it will be sufficient with one lab for the time being, and that's the reason why we have located it in Atlanta, very close to the biggest airport in the U.S., because then you can ship the ship back and forth to the labs very easy.
Could you just give us some information? You're mentioning it will include yours or best-selling products, but could you shed some more light on what that implies, given that the Chimerism products are small in absolute numbers but big in relative growth terms?
Yeah.
What products are you planning to?
What we said in the press release are our top-selling products, and the reason why we didn't want to mention them is for competitive reasons. You know our products. It will be our big-selling products that we see. It's more or less the same as we have in Europe. I don't want to give the names now.
Okay, great. Last question on my end, that would be on tenders for RHD screening in Canada. Saw the first tender being awarded to you guys, small tender, small region. What is to be expected for the remaining part of Canada here within the next 12-18 months? I know tenders, they're hard to predict when they are to come out, but what's your impression? What's the current status on that?
We think there will be more tenders, and we understand that there will be more tenders. It's as always, very difficult to have the timing for such tenders. I cannot say more because I don't know more. I know that there will be more tenders, because it's a very centralized market in Canada, so you can expect one, two more big tenders coming out in the next 12-18 months. It's very difficult to predict the timing for that.
Of course. Last, sorry for squeezing another one in. Thailand, any update on the tender process there or?
No, it's no new information. They're still struggling with COVID in more or less the whole Asia, and that can be seen from our normal sales figures, but also when it comes to tenders. We have not got any more information about the tender in Thailand. You should not expect it. I think we need to wait another 12 months at least for that taking place.
Okay. Well, thank you very much.
Okay
both Fredrik and Sabina. I'll just unmute myself.
Thank you, Ulrik.
We have a question from Erik Pilbackes from Aktiespararna. Erik, please unmute yourself. Go ahead, ask your question.
Hi, good morning. Thanks for taking my questions. I have three.
Morning.
Regarding the great news of the IVDR approval of the Devyser diagnostic product, will this make approval of further products, both old and newcomer products, easier? Are laboratories already encouraged to switch from old IVD products, which might then act as a competitive advantage for you?
Well, it is like this. It will definitely make it easier for our next products because now we have agreed with the notified body how to do this, how should the file look like. That's a very big step to get the first approval, both for the QMS system, the quality management system, and for the first product. Now we can add all our present products and our and we actually have to add our new products. So it's a big step for us. We can see that quite many of our competitors they are struggling with this, both internally because they don't have the resources, but also with their notified bodies, for they are overwhelmed with work trying to get out approvals.
I heard the other day from a competitor that they will re-review their files not earlier than 2024, and that's a big problem because in tenders, they now start to request IVDR-approved products. We see this as a very big opportunity for us, having this in place. Did that answer your question?
Yes, very good. Thank you. Yesterday you released an update in the U.S. market that you will establish your own CLIA lab. You mentioned in the report that this will be accompanied by high margins, for example, better control of the sales process. Can you elaborate some more on this?
Yeah, I can. Yeah. What's happened now is there are reimbursements for this kind of tests. Now we can get the full benefit of the compensation to our lab. Of course, we will have higher expenses because we run the lab as such, but the margins for the products will be much higher because we have a higher income from each individual test. It will help to increase our margins.
Okay. Thank you. The last one, you presented the goal is to get the lab up and running during the second quarter of next year. In combination with the existing sales force processing the U.S. market, approximately when do you expect to notice more significant sales? Is that possible to answer?
No. We do not provide forecasts. What we say is that the US market is very important for us and we are putting quite much resources in that market now. I will not give any guidance when it comes to sales in the U.S.
Okay. Thank you very much. That's my questions.
Thank you, Erik.
We have a follow-up from Klas Palin . Klas, please unmute yourself. Go ahead, ask your question.
Yes. Thank you very much. Yeah, I would like to follow up on this CLIA laboratory in the U.S., and if it's possible to get an indication of the size of the initial investment, roughly at least, and what kind of capacity that you are looking for?
If Sabina answers the cost, and I can say something about the capacity, but please go ahead, Sabina.
Of course. We're looking at an initial investment to get the lab up and running of about SEK 4 million. Once it has been fully built out and up and running at our medium-term forecast, it'll be about a running cost of SEK 7 million.
Okay.
It's actually quite. It's not too expensive to get up and running.
Perfect.
When it comes to the volumes, it's a very flexible plan we have. We will start in a smaller scale, and then we can upscale quite much in this facility. It's quite easy to scale up. You don't
Mm-hmm
... you may add one or two persons, only.
Perfect. Also an additional question about this, IVD or notifying bodies. As you mentioned, to some companies this could be a difficult dip. You don't see this as a problem for your other products that you are to convert to IVDR?
No. Not at all, especially as now we have a very solid notified body.
Okay
TÜV SÜD that continues approving products, which is not. It's the case for all notified bodies. The big step is to have the quality management system approved and the first product approved. Now we have that in place, then it's very easy to add future products.
Perfect. Thank you so much.
Thank you, Klas.
We have a follow-up question from Ulrik Trattner. Ulrik, please unmute yourself. Go ahead, ask your question.
Thank you. That would just be a quick follow-up questions on the CLIA labs. Thank you. You answered most of it with the initial investment and the running cost. Do you believe this will affect your profitability outlook over the next few years, as well as how does this sort of affect your cash flow projections on to achieve cash flow positive results?
Well, the implementation of the CLIA lab will not affect our financial targets at all. It will initially add some extra expenses, but of course, it will also add extra sales. It will not affect our financial targets.
One would assume that this sort of already in 2023 will be a break-even investment, or is this more on 2024?
I would say as a more or less a zero result for 2023, yes. That's correct.
Great. Thank you.
We have no more question from our end. Please go ahead, speakers.
Okay. Thank you all for participating in this earnings call. Thank you for very good questions, and see you in three months from now. Thank you.