Welcome to the Devyser Diagnostics Q1 report. 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 over to CEO Fredrik Alpsten. Please go ahead.
Thank you. Again, welcome to the Devyser Q1 2023 Earnings Call. It's a great pleasure to have you all here. Today, you will listen to me, Fredrik Alpsten, the Devyser CEO, and to Sabina Berlin, our CFO. Before we go into the Q1 figures and talk about the development we are seeing, I want to repeat for our new shareholders and potential shareholders what Devyser is.
We are well-known among laboratories, especially in Europe, but we are less known among investors and the public. We are a pioneering leader in diagnostic solutions for genetic testing. We are a very value-driven company. Of course, we want to build a successful company with high growth and good profitability. Still, 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.
During the first quarter this year, approximately 105,000 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, 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, library prep kits, and software to clinical diagnostic labs, either via our own sales reps or via distributors. We have developed some 30 IVD and IVDR-registered products since the company was founded in 2004. We are based in Stockholm, we have subsidiaries, sales offices in 8 countries. We are at the moment 102 employees. What's the reason to our success? Strong growth with good margins, more or less since the company was founded.
I think that's the reason, because we put the customer, the rooting 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 time savings give cost savings. Most important of all, of course, it provides faster treatments for the patients. The first quarter this year was another record quarter when it comes to sales. We reached 39 million SEK, highest quarter ever, an increase of 30% compared with the same quarter last year. In local currency, the growth was 22%. It is always dangerous to look at a single quarter. If you instead look at the last 12 months, sales increased by 34% SEK.
Gross margin for the quarter was 85%, compared with 83% same quarter last year. This is the highest margins we have had for a single quarter. EBIT came in at - SEK 90 million, compared with - SEK 5 million in Q1 2021. In Q4 2022, we had an EBIT of - SEK 26 million, including a retroactive payback levy of SEK 6 million. The EBIT in the quarter has been affected by increased startup costs for our CLIA lab in the U.S., cost for our intensive but also successful development of new products, and extensive work to register existing products in line with IVDR regulation. There were also highlights during the quarter, both during the quarter and after the quarter. In March, we launched Devyser Compact, the company's first IVD-certified product.
This is a rapid genetic test for diagnosis of fetal chromosomal abnormalities. It's the first in its field to be approved in accordance with the IVDR. In April, we signed an exclusive collaboration and distribution agreement with Thermo Fisher. The agreement gives Thermo Fisher exclusive rights to market our NGS products for post-transplant follow-up in North America and Europe. I will say a bit more about that later on in the presentation. In April, we also received the Swecare Export Award 2023. The prize is awarded to companies that, quote, "With creativity, commitment, and scope put Swedish innovation in health and healthcare on the world map." End quote. The award was presented by the Swedish Minister for Social Affairs, Jakob Forssmed. Yesterday, we announced that the company's clinical testing laboratory in Atlanta has received a CLIA certification.
This certification allows the lab to begin testing of patient samples. We are very happy about this, it's actually two months ahead of the early communicated plan. With innovative products, high market growth, and a very professional commercial organization, we are confident that we will see a very nice future sales development. At the moment, we do not see anything that can change this. Of course, we may have single quarters that will not perform that well, but the trend is crystal clear. Sales are increasing much, most quarters will be record quarters. We're currently selling in more than 50 countries, and we are today selling direct in 14 countries, the blue countries on the map. In the yellow countries, we are selling via distributors, and in the gray countries, we have not yet started to sell.
In Q1 this year, 83% of our revenue came from direct sales and 17% from distributor sales. The corresponding figures in 2022 were 17% and 29%. Europe is still our dominating market with more than 90% of total sales. North America is only some- percent, but we think that proportion will increase. APAC is also small, only 3% in Q1, 2023. With that, I leave over to Sabina.
Thank you, Fredrik. Looking at sales per channel, direct sales in Q1 2023 amounted to 32.9 million SEK, an increase of 52% compared with the same quarter in 2022. Direct sales now make up around 83% of total sales, as Fredrik mentioned earlier. The distributor sales were 7 million SEK, a decrease compared to last year, as one focus area in 2022 was the continued transfer of markets to direct sales. The growth within the direct sales geographies is a combination of very high growth in newly converted markets such as U.K., Spain, Netherlands, and Belgium, and the more mature but still strong growth in Italy. The first three months of 2023 saw a continued stable growth in the EMEA region with our new direct markets taking the lead.
Countries where we have distributors, and the more mature market in Italy were not that far behind. Italy today represents about half of global sales. The APAC region is finally seeing some recovery and sales more than doubled compared to Q1 in 2022. We continue to see traction in our North American sales, and we're growing quickly. We grew over 200% in the U.S. specifically, and we expect to see impact from our clinical laboratory towards the end of this year once reimbursement is in place. Fredrik spoke about our revenue and gross margin earlier during the call, let me here comment on our expenses. Most of the increase from early 2022 comes from the work on establishing both sales and R&D organizations with capabilities needed to leverage our great technology that we did during last year.
We monitor investments and expenses closely, but the U.S. expansion and IVDR certifications are important projects that will be cost drivers during this year, but it will also generate substantial revenue over the coming years. We leave the quarter with a cash position of SEK 337 million and no interest-bearing debt. Investment made during the quarter mainly concerns the expansion of our manufacturing facility and the U.S. lab. On average, we had 93 full-time employees during the quarter and will continue to recruit within high focus areas such as sales, manufacturing, and R&D during the rest of 2023, but at a slower pace than last year. By that, I would like to hand back to Fredrik.
Thank you, Sabina. After the end of the quarter, we announced that we have signed an exclusive collaboration and distribution agreement with Thermo Fisher Scientific. The agreement gives Thermo exclusive rights to market our NGS products for post-transplant follow-up in North America and Europe. Devyser will continue to manufacture the products, and the product will be marked and sold under a combined brand. You can see it on to the right. In U.S., we have retained the commercialization rights for the Accept cfDNA product and for the Chimerism product for our ClearLab. We will actually believe that the agreement with Thermo will help to drive leads towards our ClearLab. We think this agreement is a great opportunity for Devyser.
The collaboration with Thermo gives clinical laboratories, physicians, and patients in the U.S., Canada, and Europe wide and rapid access to Devyser's innovative products. It will also reduce our future need for investments in marketing sales, especially in North America. Revenue from the collaboration is expected to start coming in at the end of Q3, 2023. As you probably are aware, we have increased our R&D spending over the last years, it has now started to give results. Not since I started at Devyser 2022, we have seen so many progresses in the development area. In April, we launched Accept cfDNA, a test to detect DNA fragments in the blood samples of kidney transplant patients.
We believe this may be IVDR-approved by the 3rd quarter, this product. The company's other already launched transplant product, Devyser Chimerism NGS for screening and follow-up of the stem cell transplantations is also expected to be given IVDR approval during the year. Shortly, we are also planning to launch Devyser LynchFAP, a product for diagnosis of hereditary colon cancer, and Devyser BRCA PALB2, a test that can diagnosis more gene mutations than our current BRCA test, for breast cancer can do. We're also working a lot on registrations outside Europe. I would like to say a word about IVDR. IVDR, the new regulatory requirements in Europe, is expected to totally change the industry, I must say. We have already started to see that IVDR approvals being required in public tenders.
Devyser has major advantages since many companies, including large global players, have neither the expertise nor the resources to achieve IVDR certification. The queue for certifications companies is long. As we are investing a lot in this, and we have been investing a lot in this, we are very well ahead with the IVDR certification of our product portfolio. This is very important for our future development, and it also consolidates Devyser's role regard to customers as a stable and reliable forward-looking partner focusing on quality and high safety standards. We work on the IVDR certification of the remaining product range will continue 2023 and the years going forward. We have three financial targets for the company. The first one is revenue growth. Devyser's growth target is to achieve an annual organic growth in excess of 30%.
For the quarter, we reached 29.9%. If you look at the last 12 months, the growth was 34%. As you can see to the right, historically, we have been above the 30%. The second target is to achieve a gross margin above 80% not later than 2024-2026. We put this target in place in fall of 2021 when our gross margin was around 75%. I'm very glad that already in Q1 2022 we reached this target, and we have been reaching this since then. Last quarter, 85% in gross margin and 82% for the last 12 months. It is clear increased volumes and increased direct sales share lead to higher gross margins.
The third target is to achieve an operating margin above 20%, not later than 2024-2026. We are now investing a lot in marketing and sales buildup, production buildup, development of new products, et cetera, and therefore prioritize that before a decent EBIT margin. However, we are confident that we will also reach this financial target. Q1 2023 was another quarter when we continued to deliver on the strategic plan we presented in connection with our IPO end of 2021. I must say we have even managed to deliver better than the plan we communicated. We believe that also 2023 will be a good year for Devyser. We will continue our focus on direct markets in Europe.
We see very good sales development from countries where we are converting distributor sales to direct sales. The U.S. is very important for us, and the established CLIA lab together with the Thermo agreement will help us to increase sales in North America even further. We are strengthening our distributor sales focus. Since May 1st, we have now a dedicated distributor personnel that will work with this, and we have managed new signed distributor agreements that we can work with. We're also looking forward to some product launches. We have some very innovative and transformative products in the pipeline. Thus, we are very optimistic about the future. With that, I would like to thank you for listening, and I leave over and back to the operator.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Ulrik Trattner from Carnegie. Please go ahead.
Thank you very much. Good morning, Fredrik and Sabina. I have a few questions on my end, starting off with the cost development in the quarter. Obviously, you had costs related to the CLIA lab as well as you mentioned some regulatory increases due to product expansion. Could we start off, if you could please specify how big the cost for the CLIA lab was this quarter, and how much is remaining for the year? Follow-up question to that would be when are we to expect a break-even level from the CLIA lab? I know it was previously stated s ort of within a year of establishment. When would that be? That would be my first two questions.
Yes. Maybe I can start with the second one, and I may leave over the first one to Sabina. We foresee that we will have a break- even in the CLIA lab at year-end. It is like this, that we have now got our certificate for the CLIA lab, but we are still waiting for the reimbursement for the products, and we expect them to be received by the end of the year. We will see sales before we get the reimbursement, but I think the big volumes will come when we have the reimbursement for the different kind of products. Short answer, beginning at year-end, we'll see a break- even for the CLIA lab.
Great. Just how much have, sort of the costs been impacting the cost base or the CLIA lab costs during Q1? Are the majority of the costs already taken, or should we expect to see additional cost ramp up related to this in Q2?
Please go ahead, Sabina.
Okay. Thank you. We're not disclosing exact numbers for our different cost centers and business areas. In general, we can say that Q1 represented a quite stable level that will be kept during the remainder of the year. We had some initial startup costs in terms of consulting, and we'll be spending a little bit more in the rest of the year on market access. The majority of the investments have been made. Our lab facilities are in place, and we have the headcount needed to validate the lab now also in place. We will carry a cost without substantial revenue to match for about two quarters more before we start seeing the increase in revenue to as Fredrik said, reach the break-even expectation that we have. Sorry.
Just sort of squeezing in
Go for it, yes.
Just squeezing in a follow-up question there. Have the costs, the planned initial cost for the CLIA lab, have that increased since you initiated, sort of starting up this project? Or is it essentially the four and a half million that were projected when you announced the start of building a CLIA lab?
I can also answer that, Sabina. It has slightly increased, but we are not talking about big big increases. That forecast stays. We have a slightly increased system. Like we're talking about 20% maybe or something like that.
Okay. We're talking about the CLIA lab should generate roughly then SEK 6 million-SEK 7 million in sales per year in order for it to be break even or even higher due to sort of operational- costs running a CLIA lab.
Yeah.
Okay. Just, how much of the increase in OpEx in the quarter relates to IVDR and new product launches? Obviously, I note quite a few new product launches here in first quarter, which is always good to see. How much of the increased expenses here are related to that? If you can give us some guidance in terms of what we should expect in a normalized state, or is this the normalized state in terms of getting new products registered?
I think it's important that when you compare numbers that you do not look at Q1 2022, you look at the Q4 2022 because that's more better reflects expenses going forward. The IVDR expenses, as I said earlier, we will continue to invest in updating our, upgrading our product portfolio to IVDR. That's something that will be going on both in 2023, 2024, and then maybe even 2025. That, the IVDR expense are reported on the line R&D expenses.
That kind of bridges me into my next question, and that would be on your confidence in terms of your financial targets. Because you say that you reached your organic growth target, but in my mind, organic growth is in constant exchange rates, and by that means that you are slightly below your financial targets. You have new products being launched. Now you have Thermo Fisher in place. I'm guessing growth should accelerate. When should we see sort of the leveraging on the margins and 20% or above 20% for the period 2024-2026? Are you still confident in obtaining that? Bear in mind that you're talking about a financial target of at least 20% EBIT margin.
Yeah. Well, and I think I actually said that earlier in my presentation, we are very confident that we will reach that. We do not rank our financial target, but it is a very important financial target for us. We are hopeful that we will reach it. The increase in costs we have seen in 2022 and 2023, it will not continue. It will be moderate going forward. On the other hand, we still believe that we will have a good sales development with very good gross margins that will affect bottom line on the income statement.
I'm guessing here, and I know that you don't want to talk specifics regarding the One Lambda agreement, but I'm guessing just comparing to what we have seen with other companies approaching the sort of indirect or distributed or sort of driven revenue model, that you should be able to leverage your margins even faster if that agreement takes off.
Yeah, definitely. We of course, and I think we said that, early in that One Lambda/Thermo Fisher, they have something like 80%-90% of all HLA labs as customers. We are very confident that when this takes off, it will be a lot of big volumes for us, and it will help us to even grow sales even further.
Great. Last question on my end, and then I'll get back into the queue. A few quarters ago, you announced a new distribution agreement in Japan. Just wanting to hear what's happening there. When should we see sort of revenue coming through that agreement or distribution agreement? I also note that distributor you signed in Japan are also the distributors of One Lambda. Are you expecting or have you seen an increase in interest for the products? I'm guessing it's regarding your transplantation products in Japan as well. Have you seen any sort of increase in interest from that region? First part, what's happening, when should we see sort of revenues?
Second, related to given the connection with One Lambda, if we were to see some increased interest in the product range in Japan.
Yeah. If we start with the first question, Dan, we expect to have sales already by the end of Q3 2023 in Japan. They have been and got training. I know that they are working closely with the key opinion leaders in Japan. Of course, an agreement between Devyser and One Lambda, it helps to set a quality stamp on our products and on our company. It helps in Japan, but it also helps us in other areas, not only for the transplantation products, but also for all our other products. It's very positive, definitely.
Sure. just if I'm not mistaken, the distributor you have in Japan is also the distributor of One Lambda's products in Japan, right?
Yeah, that's correct.
Okay, great. Oh, yeah, last question on my end, Dan, and I will stop torching you. Do you have any update on additional tenders for RHD screening in Canada? I also note that there is a slight delay on delivery of the one you already been awarded in Quebec. Is that related on your end or on their end? Two-part question there.
Yeah. No, we do not have any more information about the coming tenders. We know that the preparation are ongoing. Let's come back when we have more information about that. It's slightly delayed, the Héma-Québec tender. It's not on our side. It's more on their administrative side from our partner. That will come in here, slightly delayed, compared what we communicated earlier.
Okay, great. Thanks, Fredrik and Sabina .
Thank you. Bye-bye.
Please state your name and company. Please go ahead.
Hi, guys. Can you hear me?
Yes.
Okay, perfect. Sorry if there's any background noise on my end. I have three small questions, two related to the Thermo Fisher agreement. First off, will this partnership potentially make you update your financial targets? Second, is there any optionality of perhaps including the different products from your other segments with the partnership with Thermo Fisher?
We are not planning to update our financial targets at the moment. Second, we are not planning to add any new products or areas to the agreement with Thermo Fisher. It's a big company, and you never know what will happen in the future. No such plans at the moment.
Okay. When you planned these financial targets, did you have in mind signing such a agreement or was it more of a positive surprise?
Sorry, I beg your pardon.
When you lined out the financial targets, did you have an agreement of this type in mind about financial targets?
No, we didn't. We set the financial targets end of 2021. The agreement with Thermo was not, we did not think about that at that time.
Okay. Just a final question from my end. The increase in OpEx is somewhat dependent on new recruitments. Is this something that you expect to do also in the coming quarters, or have we reached a level where you feel more comfortable?
We are much more comfortable now. We have had some small increases in the number of employees. I think we increased the number of employees by 40% Q1 2022- Q1 2023. That will not happen. We have some small recruitment, especially within manufacturing.
Okay. All right. Thank you very much.
The next question comes from Klas Palin from Erik Penser Bank. Please go ahead.
Hello, thanks for taking my question. I would like to start with your new, nice agreement with Thermo Fisher and One Lambda. I am aware that you're not probably want to share any specific numbers, but if you could give some sort of idea of how large commercial opportunity this could be for you, because the One Lambda business is rather large, looking at Thermo Fisher.
Yeah. I cannot disclose any details for confidentiality reasons actually. I can say something like this, that we have not communicated the length of agreement, but it's a 5-year agreement. And it is rather common, and this agreement is not an exception, that you include the distribution agreement have certain obligations for the partners. If they are not fulfilled, you may terminate agreement or may change it from an exclusive to a non-exclusive agreement for products or for regions. It's also important that you remember that as a manufacturer, you have an obligation to sell products keeping the regulatory and meet product specifications. We have requirements from both sides. They have requirements, and we have requirements to fulfill.
I cannot disclose any numbers.
No, I understand. Still, it's quite a large commercial opportunity, I guess. However, it seems to be a very good market demand out there for your products. Is it possible to be a little bit more specific how you're performing in your sort of direct sales markets in Europe? If you are satisfied with your performance in all these markets?
Yeah. We are doing very well in the direct market, the recently converted direct market. In Italy, which is our biggest market and where we have been present for such a long time, we are doing really good. We don't have that high sales growth in Italy as we have in some of the smaller countries, of course. Still, we are approaching 20% growth in Italy, which is very good, because it represents more around 50% of total. And we've been present there since 2014.
Okay. My last question then is about the employee base. It's expanding quite a lot in Q1. Do you need to hire more people or at the same pace that we saw in Q1 in the near term to meet, I mean, the growing business in the U.S. and your agreement with Thermo Fisher?
No, we do not expect to hire as many people that we've done up to now. We, I'm very satisfied with the organization we have. As I said earlier, we may need to hire a couple of more heads, but not that many.
Okay. Great. Thank you so much.
Thank you.
The next question comes from Erik Pilbäck from Analysguiden. Please go ahead.
Good morning, Erik here from Analysguiden. Thanks for taking my questions.
Hi.
Firstly, congratulations to yet another impressive quarter. Regarding the agreement with Fisher, if it's possible, could you give us not guidance, but some sort of ballpark or maybe a reference product where we could look into?
No. No, I cannot give you that upfront like this. Let me come back on that one then. I cannot give you a good reference product. I don't even know if there are any. I think it's more that you look at this is a big global company. They are present in 80%, 90% of the HLA labs. They have a very strong marketing organization, marketing sales organization. It's more like that.
Okay, thank you. Regarding the 80% goal for the gross margin and 85% in this quarter, do you believe that this agreement with Thermo Fisher will affect the gross margins going forward?
We are not afraid that this agreement will dilute our gross margins. We are confident about our gross margin goal of more than 80%.
Thank you. What kind of other costs than production should we expect to increase when the volumes ramps up from this agreement?
For example, in our direct markets in Europe, we have an internal rule saying that when sales in a specific country reaches EUR 600,000, then we may add one more sales guy in that country or region. We will increase when sales are increasing when it comes to marketing and sales activities. Except for that, we have a rather good organization. We don't need to add that many people from now.
Okay. Thank you. As I understand at least, your products will be a strong complement to One Lambda's existing products, which are mainly focused on pre-transplantation. Do you see any possible future combinations, like package solutions, with One Lambda? Does the agreement involve all new coming products coming from the Transplantation segment?
The agreement covers these two products. We are of course open to discuss with them if when we have new products coming out. For the time being, we are talking about these two products. Yeah, you are correct that they're very strong in pre-transplantation area, and we have two very good products for the post-transplantation area. It fits very well with us, and One- Lambda.
Okay. Also on the theme of the segment of transplantation growing really strong, you have high expectations going forward. The products within transplantation, in lines of terms of profitability, would you say that this is in line with the rest of the portfolio? Does it differ like largely?
It's like the other portfolio. It's important to remember, we do not need to invest that much in marketing sales when we go with a distributor like Thermo Fisher, which is a clear advantage for us. So that's the beauty going with a company like Thermo Fisher.
Yes. Lastly, you launched the first IVDR product on the market. I think it might be hard to some to grasp how important this is, this development. Can you please give some more information on what the IVDR approvals and coming approvals implies for you as a company and the other companies that you compete in within the market?
Yeah. We see that quite many companies, they have problems to get their products IVDR registered. We see a clear advantage here. We also see that intending they have started to request that the products are IVDR approved or will be IVDR approved soon. We are very optimistic about doing this, even if it's rather costly for us.
Yes. Okay. One last question. Sorry. You're growing fast and there's a need for higher production, of course, and also this agreement. You're moving to a new production facility in H1 2024. Do you have any like broad cost estimates for this expansion, or will it be like they're slight?
It will be slightly more expensive because the space is bigger. We have got a very good deal we, as we see it. We have something like 4,500 square meters, and we are today around 2,000.
Thank you very much. That's all from me.
Okay.
The next question comes from Ulrik Trattner from Carnegie. Please go ahead.
Great. Thank you very much. Just some additional questions. This being related to, circling back to the previous questions. The One Lambda agreement, and especially regarding the new product that you're launching, it looks like you're going head-to-head with CareDx or the collaboration between the two of you are competing head-to-head with CareDx. Just looking at CareDx, they've been scrutinized for inflated testing revenues towards the Medicare segment. Just how much do you believe that have impacted the sentiment of the industry? Is that in any way impacting, in your belief, the One Lambda and the sales of your transplantation products in the U.S.?
Yeah. We have discussed this quite much internally and of course, also with Thermo Fisher. I don't want to say too much, but we are very optimistic about our solution. I cannot give you details about that. We are.
Fair enough.
Yeah.
The same question relates to your CLIA lab as well. Are you seeing some more cautious in terms of utilizing CLIA labs or more scrutiny regarding how these are built, or your way of thinking when now establishing a CLIA lab in the U.S. regarding this current sort of debate and discussion regarding genetic testing and CLIA labs in the U.S.?
No, we have not seen that. We, this, we get a lot of requests. Are you, are you not ready yet? We do not see that. Of course, it's not that this is a system to look at the whole market, but we cannot see that.
Sure. Fair enough. That was all question on my end. Thanks again.
Okay.
The next question comes from Ulrik Trattner from Carnegie. Please go ahead. As a reminder, if you wish to ask a question, please dial star five on your telephone keypad. There are no more questions at this time. I hand the conference back to the speakers for any closing comments.
Thank you very much for participating in this conference call. I wish you a nice day. Bye-bye.