Welcome to Devyser Diagnostics Q4 report 2022. For the first part of the conference call, the participants will be in listen-only mode. During the questions and answer session, participants are able to ask questions by dialing star five on their telephone keypad. Now I will hand the conference over to the speakers CEO Fredrik Alpsten and CFO Sabina Berlin. Please go ahead.
Thank you. Welcome to the Devyser Q4 2022 earnings call. It's a great pleasure to have you all here. Today, you will listen, as said, to me, Fredrik Alpsten, the Devyser CEO, and to Sabina Berlin, our CFO. Before we go into our Q4 figures and talk about the nice development we have received, this quarter, I want to repeat for our new shareholders and potential shareholders what Devyser is. We are a pioneering leader in diagnostic solutions for genetic testing. We are well known among laboratories, especially in Europe, but we are less known among investors and the public. We are a very value-driven company. Of course, we want to build a successful company with high growth and a good profitability. Still, the foundation for everything we do is to ensure every patient has the correct diagnosis in the shortest possible time.
With our fast diagnostic test, we can help to save lives. Just during the last quarter, the fourth quarter, approximately 85,000 people were tested with our products. That is something I'm very proud of. What do we do? We develop and market genetic test solutions to guide targeted cancer therapies, rapid 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, library prep kits, and software to clinical diagnostic labs either via our own sales reps or via distributors. We have developed and launched some 30 IVD and IVDR registered products. We're based in Stockholm, but we have subsidiaries, sales offices in eight countries. Today, we are around 100 employees. What's the reason to our success?
I think the reason why we have been so successful, strong growth with a good margin more or less since the company was founded, that's because we put the customer, the routine diagnostic lab in focus. We develop and provide solutions that are easy to implement, maintain, and use. This results in time savings for the labs, and by time savings, they will receive cost savings. The most important of all, of course, we provide faster treatments for the patients. The fourth quarter was another record quarter when it comes to sales. We reached SEK 34 million, highest quarter ever, an increase of 40% compared with the same quarter last year, and in local currency was an increase of 30%. The gross margin was 80% compared with 75% same quarter last year.
Even though we have invested quite much in production built up during the quarter, the margin is high. EBIT came in at minus SEK 26 million, compared with minus SEK 40 million in Q4 2021. The operating expenses in Q4 2022 have been affected by a one-time reservation for a retroactive payback fee in Italy, cost for starting up the CLIA lab in the U.S., and also our international marketing and sales build-up. Many exciting things has happened during the quarter. Most important was the decision to establish a CLIA lab in the U.S. In parallel to our present business model, it enable us to offer services directly to our U.S. customers. The customers will send test samples to the lab, which will run the test and provide the customers with the final test results.
Already from start, the lab will offer test services for our top-selling products. We have signed a lease for the premises and started to recruit lab personnel. The initial workforce is expected to consist of five employees. The lab will also be used for training and education of U.S. and American customers. We aim to have the lab certified and fully operational in the second quarter of 2023. To strengthen the U.S. organization, we hired John Murray as general manager in the U.S. during the fourth quarter. He is responsible for all Devyser operations in North America. John has over 20 years of experience in senior management positions, mainly in healthcare, including national sales director at Veracyte and marketing director at Abbott Point of Care Lab division. 2022, the full year was another record year when it comes to sales.
We reached SEK 127 million, highest year ever, an increase of 35% compared with last year. The gross margin was 82% compared with 77% 2021. Higher margins are mainly driven by higher volumes, higher prices, and a high proportion of direct sales. EBIT came in at minus SEK 52 million compared with minus SEK 21 million in 2021. It follows our strategic plan, and we are confident that we will reach our financial goals. In addition to the highlights during the fourth quarter, many things have happened in the company during 2022. I would like to mention at least two of them. Devyser was awarded a tender from Héma-Québec in Canada for our non-invasive fetal RHD detection product.
The product is used to determine fetal RHD status, actually a test to determine if the fetus has a different blood group status than the mother, because this can cause a lot of risk for the child. The tender is initially over three years, starting in 2023. The order value amounts to SEK 16 million. There is also potential of additional two y ears. The tender is a big breakthrough in North America, and we are very proud, I'm very proud of the team in making this happen. National and regional screening programs represent an important part of our business, and this award is a true confirmation of our product's competitiveness in these large international tenders.
Another important milestone during the year was that, in August, we were certified under the new, more comprehensive IVDR regulation that came into effect in May 2022. The certification issued by our notified body, TÜV SÜD, covers our quality management system and our fetal diagnostic product. The approval strengthens our position in the market and confirms our long-term focus on quality and patient safety. With our innovative products, high market growth, and a very professional commercial organization, we are confident that we will see a very nice future sales development. Of course, we may have single quarters that will not perform that well, but the trend is crystal clear. Sales are increasing much, and most quarters will be record quarters. We currently sell in about 50 countries where we...
Whereof, 14 are countries where we sell direct, and that's the blue countries on the map. The yellow countries we're selling via distributors, and in the green countries, we have not yet started to sell. In 2022, 77% of our total revenue came from direct sales and 23 from distributed sales. The corresponding figures in the 2021, that's 71 and 23. Thus, the proportion of direct sales are increasing quite much. Europe is still our dominating market with more than 90% of our total sales. North America is only a few percent, but that proportion will increase. APAC is also small, only about 3%. With that, I leave over to Sabina.
We have some technical issues to hear you, Sabina. We will be right back.
Hello, operator.
Yes. We are waiting for Sabina sound to be clear out to the webcast. We'll be right back in a minute.
This call is being recorded.
There. Apologies for my sound not coming through properly, but I hope you can hear me now. I'll go through the sales per channel and then move into a little bit more information about our P&L and balance sheet. Direct sales in Q4 in 2022 amounted to SEK 28 million, an increase of 72% compared with the same quarter in 2021. The distributor sales were SEK 6 million, a decrease of 29%. Comparing sales between 2022 and 2021 may be difficult as some countries have gone over from distributor sales to direct sales during the year. U.K., Spain, Netherlands, and Belgium have converted from distributor sales during the year and will now only sell direct in these countries.
We see direct sales representing 83% of total sales during the quarter, compared with 77% for the full year. In 2022, we saw strong development in all our direct European markets. For rather new direct sales markets like Sweden, Denmark, U.K., Belgium, Netherlands, Spain, and France, we have seen sales increases between 40%-800%. Even for a well-established country like Italy, where we are the market leader for many products, we have good sales growth amounting to almost 20%. Italy still represents slightly less than 50% of our total sales. EMEA sales increased by 40% for the quarter and 37% for the year. The APAC region has developed poorly during both Q4 and the full year of 2022 as the pandemic still affects us.
China has been a rather big market for us historically. We had hardly any sales to China during 2022. We're optimistic and strongly believe in recovery soon. APAC is an important market for us. We have recently hired a dedicated distributor sales director. Another country that we still strongly believe in in APAC is Japan. It is one of the biggest market for our present products. We're very glad to have signed a distributor agreement with a well-known distributor as late as December 2022. Sales are expected to start already during 2023. We see sales in APAC decreasing by 36% during the quarter and 24% during the year. We strongly believe also in our North American sales. We're growing quickly.
The sales will continue to grow substantially in the future, not least because of our CLIA lab, our new sales channel in the US. We believe that in some years, the US will likely be our biggest market. Since the company was founded in 2004, we have developed, registered, and launched some 30 products. Almost all developed products are still sold, and even for products launched 15-18 years ago, we still see double-digit growth rates. However, in 2022, our biggest growth came from products testing for thalassemia, cystic fibrosis, RHD, breast cancer, and chimerism, the latter being our product for post-transplantation monitoring in stem cell transplants. We also foresee new product launches in 2023 that will add good growth. We discussed the revenue and gross margin earlier during the call, so let me just quickly comment on our expenses.
Most of the increase from 2021 comes from planned recruitment to support our new direct markets and gear up for growth in all areas of operations. We're building a strong global company, and our philosophy is that we build and invest now to ensure that we have stable and smooth running foundation to build our continued growth on. By making smart choices already now, we will save a lot of money over the years to come. Selling expenses also, of course, include the EUR 600,000 provision for payback levy in Italy. We continue to present a strong balance sheet with a cash position of SEK 364 million at year-end and no interest-bearing debt. In December, we were close to 90 full-time employees in the group, and we will continue to recruit within high focus areas such as sales, production, and R&D during 2023.
Devyser holds a strong employee brand and it has been relatively easy for us to find high-quality applicants for all open positions. With this, I hand back over to Fredrik. Thank you.
Thank you, Sabina. some words about U.S. The U.S. is the biggest IVD market in the world. It's the market with the highest prices.
We strongly believe in this market, and we have some very well-suited products for the U.S. market. The U.S. market will be our biggest market within a couple of years. We hired our first salespeople at the end of 2021. Today, we are 4 persons in the U.S. that are selling kits and software to laboratories. Since we took the decision to establish a CLIA lab, we have also hired 2 more persons and are planning to hire a couple of more to the lab during 2023. We are also planning to maybe increase our sales force in the U.S. As you may know, we have 3 financial targets. The first one is revenue growth. Yeah, our growth target is to achieve an annual organic growth above 30%.
As you can see to the right on the slide, we are above that. The second target is to achieve a gross margin above 80% in 2024-2026. We put this target in the fall 2021 when our gross margin was around 75%. I'm very glad that we already in Q1 2022 reached this target, and we have been reaching it since then. It is clear that increased volumes and increased direct sales share lead to higher gross margins. The third target is to achieve an operating margin and EBIT margin above 20% in 2024-2026. We are now investing a lot in market and sales buildup and production buildup, and therefore prioritize growth before a decent EBIT margin in the short term. However, we are very confident that we will also reach this financial goal.
Going forward, 2022 was a year when we continued to deliver on our strategic plan which we presented in connection with our IPO, end of 2021. We have even managed to deliver better than the plan we promised. 2023 will be a good year for Devyser. We'll continue to focus on the direct markets in Europe. We see very good sales development from countries where we converted from distributors to direct sales in 2022 and 2021. The U.S. is also very important for us, and the establishment of a CLIA lab will help us to increase sales in North America even further. We will strengthen our distributor sales force. As you heard, we have now dedicated personnel that will work and expand our distributor network.
We have a couple of new signed distributor agreements during 2022 and that will soon start to generate sales. We are also looking forward to some product launches. We have some very innovative and transformative products in the pipeline. We are at the bottom, very optimistic about our future. With that, I thank you for listening and leave over to the operator to start the Q&A session.
Thank you. If you wish to ask a question, please dial star 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star 5 again on your telephone keypad. The next question comes from Ulrik Trattner from Carnegie. Please go ahead.
Thank you very much. Good morning, and a couple of questions on my end. Perhaps we could even start where you ended off with the growth versus your financial targets. And can you clarify what the organic growth was for 2022? By my account, it was slightly below your financial target because what you report in your slide was the total growth, including FX, whereas the organic growth has been, for the full year, slightly below 30%, and your financial target states organic growth above 30%. Just to clarify where we're at versus your financial targets.
Yeah. You are correct. The growth 2022 was 35%, but adjusted for the currency effect, it was 29.0%.
It was below your financial target.
It's all organic.
Yeah. That is slightly below your financial target of above 30% organic growth. What is expected to drive the organic growth towards your financial targets? Since it's stated as above 30% organic growth, what are we expecting to see in 2023 for you guys to achieve this?
Yeah. I'm confident that we will continue to have a growth above 30%. We have the direct sales in Europe, of course. We have just started here with the direct sales. We are now seeing the... You know, it takes some time for us to work with our direct sales force, and they came on board during 2022, and now we'll see the outcome here in 2023. We also strongly believe in our U.S. presence, and that will continue to drive our growth. We may also see some good sales from distributor sales all around the world. We have some, as I said, very good planned product launches in 2022, 2023.
Just by looking in hindsight here for 2022, is there an area where you're not satisfied with the development given that the growth is below your financial target? Is it the direct sales in Europe that has not accelerated the way you have seen US launch not sort of generating the revenue that you were expecting or distributor sales that have declined more than you were expecting? Is this something that you would have expected going into 2022?
Well, as you saw on the slide when we split the sales in the different regions, we have a quite big drop in Asia, actually. That's, it's sad also, I think Sabina said that China, for example, has been a quite good market for us, but we have hardly seen any sales to China during 2022. We have been affected by the decline in Asia. However, we think that will recover during hopefully 2023. We are confident about that.
Okay, great. Could you also help with the sales split between tests since you're stating growth and essentially naming, well, quite a lot of tests in your portfolio. Could you provide us some split between how much is hereditary tests, oncology tests, and post-transplantation monitoring tests? Are there any specific tests that you actually want to highlight as the next growth driver, the chimerism test, the thalassemia test, or whatever you would like to highlight?
Yeah. If you divide the sales in hereditary diseases, it's approximately 70%. Oncology tests, approximately 20%, post-transplantation monitoring is approximately 10%. We see a big growth in the post-transplantation area, in some in the hereditary breast cancer tests within oncology. When it comes to the hereditary tests or area, we see high growth in thalassemia, cystic fibrosis, and RHD screening.
Great.
We do not disclose the growth for these different hereditary tests. But as we have only one product within the post-transplantation monitoring area, you can see that it grows by more than 100%.
Great. You also gave, a teaser that is you're expecting new product launches, within the field of transplantation. Could you give us some more information on that?
I just to correct you, I did not say which products we are launching in 2023, but you know also that we are working within that area, but we have not disclosed what kind of products will be launching in 2023.
Okay, great. Moving on.
That's for competitive reasons.
Yeah, absolutely. Fair enough. You can start off with the gross margin. You had a higher portion of direct sales in the quarter versus Q3. Nice to see that development. Any reason for the decline sequentially in the gross margin, given that you have a higher portion of higher margin direct sales, one would expect perhaps even the gross margin to increase even further. Is there any reason behind the gross margin development in the quarter? It's still high, but it could have been higher given the portion of direct sales.
Definitely. I, the reason is very simple. We are now investing quite much, having consultants helping us to scale up our production possibilities in. We have take some extra cost due to that. That's really, that's reported as cost of goods sold and affect the gross margin.
How long will these costs persist? Are these related to Q4, and we should not extrapolate that into-
We.
... forecast
... we may see some investment in the build-up, scale-up of production also during beginning of 2023.
Are we talking first half of 2023 or just the first quarter or-
Yeah. It's difficult to say. I think, yeah. Let's say first half, yeah.
Thank you. Moving on to the CLIA lab in the US, if you can provide us with a cost forecast for the first half of this year, that would be very helpful. It's still expected to be operational by midyear, right?
Yeah.
Second question on the CLIA lab would be, what tests will you offer? You mentioned your top-selling tests, but can you help us decipher what tests are actually the ones being offered in the US?
Yeah. Yeah. If I start with your last question, we have not disclosed what kind of tests we will run in the lab. I will not disclose that now. When it comes to the cost for the CLIA lab, I may ask for some help here from Sabina. We have communicated something before. I think we stay with that, don't we?
Yes, we're not changing any previously communicated estimates. We're making some investments but that will only affect the balance sheet. You'll see that as a depreciation over the coming 3-5 years. In the buildup phase right now, we're not accumulating that many running costs since we don't have the full production staff on site in the lab. Rather towards the second half of Q2, we'll see more running costs as they are more on the fixed side now with our location and similar. We'll be stabilizing a level more towards Q3 with the full staff in place, our logistics solution up and running, and tests starting to come through at a bigger level than the initial customers will expect to see towards the end early summer.
Great. Thank you. Just a follow-up question on tests offered there, Fredrik, in the CLIA lab. Is it worth reflecting over the poster presented by Mayo on the Chimerism and product portfolio and that would be perhaps the easiest test for you to sell in the US, and are there bigger hurdles for certain tests in the US market respectively the rest of your portfolio?
Well, yeah, of course, the post with the Mayo Clinic is of course very positive for us because it's a quality stamp for our products. How it affects if we are going to sell that or not via the CLIA lab, I cannot comment on that actually. Of course, we are now having a good relationship and good contacts with key opinion leaders in the U.S. to get the quality mark on our products, and that's an ongoing work that will continue for 2 years, I think. It does not affect which kind of products we use for the CLIA lab, if that was your question?
Yeah, great. Last question on my end. Seeing a big ramp-up in number of employees, I think we're talking about 32 people in... added in 2022 overall. If you can help us decipher what function these are and give us a split between sales rep, admin, production, and R&D, please. That would be very helpful because what I'm looking at here is 19 employees added in Sweden for 2022, and one trend that is perhaps a bit worrying is to see sales contribution per employee going down sequentially each quarter, more or less since Q1 2021. Is there any reasoning for that, and when that trend is to turn the other way around?
Yeah. We 2022 has been a year of building up the organization, especially the commercial organization. It's always like this, that you hire people first, then they start to generate sales. We have an internal rule when it comes to salespeople that when you're reaching EUR 600,000 or $600,000 in sales, then we can add another person. We are very careful adding new persons into our organization. Of the increase of number of employees during 2022, I would say that 60-70% are within the commercial organization. We have a support organization.
We need, for example, to have a bigger order department because now we are selling to so many more customers. Earlier we sold to one distributor in UK, for example, and now we're selling to 30, 40, 50 customers. That it leads to a higher number of employees just for the business model that we have. You will not see such big increases 2023 and 2024 that you have seen in 2022, for sure.
Great. just sort of going back to those numbers, 60%-70% in sales reps added, that would imply 20-22 employees added in the sales organization.
Yeah.
Could you give us some numbers on how many sales reps you currently have? The 19 employees added in the Swedish organization or denoted as employed in the Swedish organizations, are those sales reps as well, or are they more in other functions?
Yeah. It's in both sales reps and in other functions. I think it's important to remember that people in the commercial organization, we need to have sales reps out there selling. We need to have support persons, field application specialists that help customers to do demos and if they have a troubleshooting. We need to have marketing. We need to. And that's also a commercial, really important expense for us. We have product management helping set up different kind of webinars. A lot of things within the commercial organizations. It depending on how you define salespeople, for me, they are all salespeople working one way or the other. We have also invested in production to prepare for a scale-up later on.
We have also invested into our regulatory employees. As you know, we got the IVDR during 2022, we have spent some money on that. We have also Invest in some within R&D. They're all over the place. You will not see the increase, such an increase in 2023.
Okay, great. Thank you very much. That was all questions on my end.
The next question comes from Klas Palin from Erik Penser Bank. Please go ahead.
Hi there, and thanks for taking my questions. My first one is related to this Japanese distributor. I guess you don't want to name the distributor, but maybe you can provide some information about how many products that you are planning to introduce in the Japanese market and perhaps when that could happen?
Yeah. Thank you, Klas, for a good question. Yeah, we will not disclose here, even if I think you can find the name in our social media when it comes to the name of the distributor. We will start with one or two products with this distributor. We think that we can be up and running already in 2023. The nice thing with our products is you don't have a long re-registration period. We can sell our products to start with as a real product, research use only product, and it's much, much faster to get out the product to the customers. We can in parallel run the registration work to have it if needed.
I'm not sure if it's needed for Japan. We are for the time being quite confident in the rural sales in Japan. It's good, fast way to the market.
Okay, great. You mentioned that you have had a weak demand from China during 2022. Do you see a pickup now going into 2023 as COVID restriction has been eased?
We are optimistic, for sure. It's the proof is in the pudding, but we are optimistic.
Okay, great. Then a question, is mostly related to the European market. Have you been able to increase prices entering 2023?
Yeah. I can disclose that we did a price increase of 8% for all our products. Of course, some are. They are in a tender, it's not possible to increase the price now. We have increased prices.
Okay, great. My last question is about the Canadian tender that you won last year. You indicated that you would get perhaps your first order in mid-2023. Is this still your expectations?
Yeah.
Okay, great. Thanks so much.
Okay. Thank you.
There are no more questions at this time. I hand the conference back to the speakers for any closing comments.
Thank you all for participating in this, or in this earnings call. Thank you, Ulrik and Klas for good questions. See you, in three months from now. Thank you very much. Have a nice day.