Hello, and welcome to the Getinge AB conference. Throughout the call, all participants will be in listen-only mode, and afterwards, there'll be a question-and-answer session. Just to remind you, the call is being recorded. I'm now pleased to present our hosts, Mattias Perjos, Chief Executive Officer, and Lars Sandström, Chief Financial Officer. Gentlemen, please begin your meeting.
Thank you very much. Good morning, everyone. Thank you for joining the call today. We will go through a couple of pages here, and I will give a little bit of background to today's topic, which is the provision that we've made related to surgical mesh litigation. So if we can move to page number two, please, we will start the presentation. So the background here is the Atrium Medical acquisition that Getinge did in 2011. A smaller part of the range for Atrium consists of the surgical mesh implants products, and this is what the topic of the phone conference today.
We want to point out that polypropylene mesh has been the established standard of care since the 1960s for hernia repair. It was actually developed in 1969. Atrium trades these products under ProLite and C-QUR brand names. And if we just talk briefly about the size of the business here, it's a rather small business for us. The revenue in 2017 was $15.1 million. By far, the biggest market is the U.S., so 70% of sales. The second was Australia, and the third largest was Spain with 5%. If we then move to page three, please. So, currently, we have about 900 pending lawsuits against Atrium Medical Corporation.
The pace of these lawsuits started to pick up late 2017, and it's 900 lawsuits in the U.S. and in Canada. The situation here is that patients are claiming damages for complications and injuries allegedly suffered after receiving surgical mesh implants. It is still an early phase. The trials are expected to start late next year, so in 2019, or possibly early 2020. The lawsuits, as such, consist of both individual lawsuits, consolidated state cases, and a consolidated multi-district federal litigation as well. It's also important to point out that there have been no adverse verdicts against Atrium Medical. We then move to page number four, please.
So what we're doing now is that we're making a provision of SEK 1.8 billion to cover expenses related to these claims. This provision will impact the operating results in the third quarter of 2018, and it will be reported as an item affecting comparability. Related to this, we will also make a write-down, mainly of intangible assets, which will bring a negative impact of SEK 90 million to the result of the third quarter. From a cash flow perspective, the payouts related to legal costs, they're expected to be impacting the cash flow from now, basically from the third quarter of 2018.
If we look at payouts related to trials, if any at all, these are expected to be impacting the cash flows from late 2019 to sometime during 2020. We also want to point out that we are going to fight these lawsuits vigorously, and the defense cost for this is very significant, and it's also covered by the provision that we're making. In parallel with this as well, Atrium Medical is evaluating the future of the surgical mesh business. We will not elaborate more in detail what that actually means. We're just looking at the possibilities, the different possible options for this business. If we then move to page number five, please.
We also want to address the topic of product liability insurance coverage here, and we can confirm that Getinge holds related product liability insurance. The insurance company has reserved the right to deny coverage, which is not uncommon in these instances. So we are in discussions with our insurance providers as we speak. If these discussions are not productive, though, the group may commence litigations against its carriers. That concludes the overview summary of the mesh litigation. So with that, we open up for questions.
Thank you. Ladies and gentlemen, if you wish to ask a question, please dial zero one on your telephone keypads now to enter the queue. Once your name is announced, you can ask your question. If you find your question is answered before it's your turn to speak, you can dial zero two to cancel. So once again, that's zero one to ask a question or zero two if you need to cancel. There'll be a brief pause now whilst we register your question. Our first question comes from Hans Mähler of Nordea. Please go ahead. Your line is open.
Yes, good morning. I have two questions, if I may. And first of all, starting off with the assumptions behind the provisions, what have you incorporated in terms of number of cases, cost per case, and also have you included anything from the insurance coverage in that provision? And my second question is regarding when it comes to the cost and the expense related to the claims, you say that future cash flows will be sufficient. What are then your assumptions for further costs related to the remediation within Acute Care Therapies, your assumptions for costs related to the alleged fraud in Brazil, and also what your assumptions is that the reason for only left it to fractional cost? Thank you.
All right. Well, thank you, Hans. The first question, we're, we've used different advisors and also looked at the similar types of cases in our industry, but we're not gonna go into detail exactly how these calculations have been made. We've arrived at this number because we believe it's the most realistic number that should cover the cost for this whole process. That's the only thing we will say. We'll not elaborate anymore on details of it. And when we say the second question, when we say that the cash generated will be sufficient, we are, of course, taking into account all other scenarios that we are aware of as well.
So, that includes FDA and Brazil and what have you. So we're confident that our the cash flow that we will generate will be enough to support this.
Okay. Can I jump back to the first question? When it comes to insurance coverage, what have you included in the provision from that? Is it a neutral impact, or have you assumed that you will get some coverage from the insurance?
We're not gonna comment on the insurance coverage, as this is a process and a discussion going on between us and our insurance provider now. So we've made the SEK 1.8 billion, and that's the provision, and that's the number that you should expect will hit us if. We're not making any more detailed comments about the insurance coverage.
Okay. Understand. Thank you.
Thank you. Our next question comes from the line of Peter Östling for Pareto Securities. Please go ahead. Your line is open.
Okay, thank you. Could you say anything about of the SEK 1.8 billion legal costs that you may have from now to, well, for the next one, next year, how much will that be? And secondly, the timing of this provision, given that the first trial is not until one year, what made you do the provision now and not maybe a little bit later? And thirdly, could you just elaborate a little bit, since this has been the standard procedure since the fifties, what has happened over the last couple of years? I know that there were large litigations regarding a similar mesh in the pelvic area a couple of years ago.
Can you elaborate maybe a little bit what’s happened in the market over the last couple of years that has made you end up in this situation? Thank you.
Okay. The, the, so the first part, we're not gonna break down the, the provision between the defense costs and, and potential, claims here. I just want to state that the defense cost is really significant since we expect, expect this to be going on for, for two to three years, and, and we will fight these, claims. It's a significant portion of the $1.8 billion, but we're not gonna break it down, down further. In regards to the timing, we are obliged to disclose when we reach a point where we have, when we can see that this is a significant risk going forward, and we have enough visibility to make the provision.
So we've just arrived at that point in time now, and the exact details behind that, we're not gonna go into the details or elaborate more on. And your third question, when it comes to what's changed in the industry, there's really nothing that's changed in the industry or day-to-day part of this business. It has just received more attention now from litigation lawyers in the U.S. There's nothing else underlying in the business.
Okay. Just a quick follow-up. What kind of claims have you made for the products that may be in the crossfire here?
We have an indication for hernia repair, and that's it, and we've not made any other claims than that.
Okay. Okay, thank you. I jump back into the queue.
Thank you. Our next question comes from the line of Kristofer Liljeberg of Carnegie. Please go ahead. Your line is open.
Thank you. I have three questions. First one, if you could comment on the balance sheet and the maximum gearing you think you could operate with. The second question is if you could provide a number for the number of procedures that has been done with the C-QUR mesh products. And my third and final question relates to if you have had legal costs showing up in the profit and loss in recent quarters, or let's say year to date, if there have been legal costs, how much? As a comparison now, since they, I guess they will not show up in the adjusted figures any longer. Thank you.
All right. Well, thank you, Kristofer. When it comes to the balance sheet, that we're comfortable that we don't need to make a share issue or anything because of this. We're confident that our cash flow is supported. We're not gonna give any indication of the kind of maximum gearing that we're able or willing to operate with. We just wanna conclude that there's no need for any rights issue, and we believe our own the cash that we generate will be sufficient, yeah.
Can I just on that, because last time you did a share issue, I think, gearing was not far away from where we are today.
Yes, but that was also a different situation in conjunction with the, with the spin-off, a number of shorter-term opportunities, and then other things related to this. So the situation is not the same today. We have very different visibility today on our business going forward.
Okay, thanks.
And your question about the number of procedures is not something that we disclose. That's a detail that we will keep to ourselves. It's not a number we disclose. And when it comes to the legal costs, so far, there has been legal costs in the P&L. Exactly what the amount is, we're not gonna disclose either.
But it's not material, I would say.
It's not, it's not material, but a big part of the provision is legal and cost money.
Okay, so we won't see operating costs being sequentially lower because of this provision?
Not in material respect.
Okay. Thank you very much.
Thank you.
Thank you. Our next question comes from Annette Lykke of Handelsbanken. Please go ahead. Your line is open.
Thank you very much. I'm just curious to know where in sort of the state you are for this MDL? These have normally a tendency, if we look at other companies, to run for, I would say, four to six years. And right now you are saying that you have 900 pending cases. How large is the pool or the potential pool? Is there any situation that we could actually see this running for some time? And can you exclude at this time that the number of pending cases could be much higher?
All right. Well, thanks, Annette. Now, the provision has been made based on, of course, the cases we know today. We've done our own analysis internally on this, and we've also had the support of a number of external advisors, and we've arrived at this. This is the best estimate that we can make in terms of timing and the overall number. And that's as much as we can say today. We can, of course, never exclude that there will,it will cost more or less in the end, but this is now a provision that we believe is well balanced, given what we have today and what we know of the future.
But Mattias, can you say that this provision is based on the 900 known cases, or and then if there is a risk that more cases will appear, or how big is this pool of potential... I mean, maybe you can say that you haven't done more than 900 procedures. I'm just trying to figure out, because we just to have a parallel here, we had a sort of a similar situation that you're probably very well aware of in Coloplast. Where in the beginning, you know, it was a number of cases, but you know with MDL processes in the U.S., it normally expands over years, and Nordea has a great business here.
Therefore, they are sort of trying to acquire more clients into the MDLs. Are these 900 cases all the cases that has been there, or can you exclude that more cases will come?
Well, as we said in the press release, the provision is made to cover all future costs as well. So, we of course looked at what can happen post today as well. When it comes... And we've looked also at the Coloplast situation. Coloplast though is Pelvic Mesh, not hernia mesh, so it's not entirely comparable. So, I really can't give you any more details about how we've arrived at this number. All I want to say is that we made the provision to cover current and all future costs for this cost.
So you now exclude additional cost of SEK 1.8 billion?
Sorry, you broke up there. Can you repeat, please?
I'm sorry. So what you're saying is that you find it very unlikely to have additional costs beyond the SEK 1.8 billion?
Yes, that's why we've settled for SEK 1.8 billion as an adequate provision. So we don't expect more cost to this. But as I said, you can never exclude it. These are complex processes drawn out in time, so it's impossible to give any guarantees, but we've made the best possible estimate here.
Okay, thank you.
Thank you. Our next question comes from the line of Sten Gustafsson of ABG. Please go ahead. Your line is open.
Yes, thank you. Most of my questions, you have at least tried to answer, but a few more. Going back to the insurance situation there, if you could give us any view on why the—your insurance companies are claiming that they will not have to pay for this, that would be interesting. And also, with regards to the write-down in Atrium, is this... Are you writing down the entire Atrium business?... or only the mesh products? And, if you could share with us where those products are manufactured today, that would be very helpful.
When it comes to the insurance provider, they, they've not given us any reason. They just reserved their right to deny coverage, which is close to standard procedure in these cases, I think. So we don't have any more information, so I can't give you any additional details on this. When it comes to the write-down, I'll let Lars speak to this.
So the write-down is not the Atrium business; it is the mesh part that we have evaluated and come to the conclusion that it requires this write-down and is connected to mainly intangible assets connected to that.
Where is this, where do you manufacture these products?
These are made in our New Hampshire facility.
Okay, thank you.
Thank you. Our next question comes from the line of Scott Bardo of Berenberg. Please go ahead, your line is open.
Yes, thank you for taking my questions. So first question, please. Can you give us an indication of what you believe your market share of surgical hernia mesh products were in North America, please? Just some size of some indication of your relevance in the market. Also, I wonder if following on given that you have a relatively low number of cases, let's say 900 or so currently, and this is somewhat of an inconsequential business as you highlight, can you go into a little bit more details as to why you decide to fight legally against these cases, rather than have what sounds like a much smaller potential settlement provision? So if you could answer those two, and I have a follow-up. Thanks.
Okay. Yeah, thanks, Scott. In terms of market share, we just want to say that we have a very, very small market share. It's the sales of $50 million in total, so it's really tiny. And your second question, can you repeat that, please?
Yeah. I'm wondering, given that this is a very small business for you, I wonder what shaped your determination to take a large provision, including a high degree of legal costs, when presumably you could have settled for a much lower consideration? Why have you decided to go the legal rather than settlement route?
Well, we haven't said that we're not gonna discuss settlement. We don't want to go into the strategy in our process here. We just want to say that we will fight these claims, 'cause we do believe that, as we said, it's been the standard of care for a long time here. But it's too early to say exactly where we will end up strategy-wise here. So I really don't want to elaborate more on our strategy when it comes to the defense.
Okay, thank you. And last question. I guess given the relatively weak position of Getinge today from a margin and leverage perspective, a lot of people calling into question the balance sheet. So would you be kind enough to give us some sense of clarity as to what you see your cumulative free cashflow over the next three years or so? And maybe elaborate further as to, is it still your expectation that despite this provision and cash out related to this provision, you can still de-lever as an organization over the coming three years?
What we have said is that this, the cashflow we have from the operations will be sufficient to cover this possible provision that we see, and that is what we would like to stick to.
Do you still see the ability to de-lever your balance sheet despite this heightened cash-out expectation?
Well, as I said, we don't comment on more on our future cash flows than we expect it to be able to cover it.
Okay. Thank you.
Thank you. Our next question comes from the line of Rickard Kotz of SEB. Please go ahead, your line is open.
Hi. Another question on the insurance coverage. How big is the maximum amount that could cover?
Yeah, thanks, Rickard. We do not disclose the maximum amount of the insurance coverage here. This is an ongoing process. We will not comment further on it.
Does this issue change your ability to pay dividends?
We will stick to the dividend policy. It's a question for the board, obviously, but the board has said that we do not need a rights issue for this, and we intend to stick to the dividend policy of the group.
Okay. And last questions, last question on, on the legal costs. Can we expect, legal costs already now in, in Q3, then? Will you, will you report that as some special item, or what kind of updates can we expect going forward?
As I said, we have legal costs now in Q3, and we will have going forward, defense costs only. But they are part of the provision that we make, and we're not gonna break them down.
Okay, thank you.
Thank you. And our next question comes from the line of Sten Gustafsson of ABG. Please go ahead, your line is open.
Yes. Thank you. Just one more question. Will you, will you stop selling these products now, or, or what, what's, what's your plan? And, and, if you can share with us some profitability, on, on those products, that would be very helpful. Thank you.
Yes, no, as we said initially, we're only evaluating different options for the business now, but we can't elaborate more today on what those options are. I'm sorry.
Okay. And in terms of profitability, this is a high margin product, I assume?
Not after legal costs, it's not.
No, but in terms of gross margin.
Yeah, we don't, we don't comment on individual product groups' gross margin.
Okay. Thank you.
Thank you. Our next question comes from the line of Ed Ridley-Day of Redburn. Please go ahead, your line is open.
Good morning. Thank you. Just to follow up in terms of the market share, I mean, can you give us some better idea on that? I mean, if we say something like 10, 15%, would that be reasonable? 'Cause my understanding was that Secure was a reasonably well-known brand in the U.S. market. I mean, clearly, J&J are number one, but there's plenty of others to be shared around. Secondly, as of now, I assume the provision is for the U.S. and Canada only, and that you have no visibility on any litigation in Australia or Europe. Can you just confirm that as well, please?
Yeah, there are no litigations outside U.S., Canada. And market share, we don't wanna give you a number on this. It's -- we are one of the smallest players on this market.
Okay. Okay, just quick, just quick, and one quick follow-up, and this, when you, Mattias, when you talk about... Obviously, I don't understand how you don't want to break down your assumptions. But if you're talking about, you know, you mentioned similar cases in the industry, I mean, clearly we have plenty of information on the vaginal mesh lawsuits. I presume that the sort of the average payments in those lawsuits would be a reasonable starting point for assuming the potential cost per case in this litigation.
I can only repeat that we've looked at similar cases in our industry. We've done our own internal analysis, and we've had the support of external advisors as well, and we've arrived at this being a suitable provision for us to cover the current cost and the expected cost for the future. But we're not willing to share any details on how this calculation's been made.
Fair enough. Thank you.
Thank you. Our next question is a follow-up from Kristofer Liljeberg of Carnegie. Please go ahead, your line is open.
Yeah, two follow-ups, if that's okay. The first one, when you talk about market share, I guess that's your current market share. But if I remember correctly, the annual sales for these products were twice as high when Getinge did the acquisition. So if you look at the number of procedures having been done so far in the U.S., would you still say that the market share is very small?
Yes, it's still very small.
Okay. My second question, again, going back to the risk with the balance sheet and the other processes ongoing, do you still expect to have, you know, settled with all authorities in Brazil before year-end?
Yeah, that's still our hope. We don't have any new information to share on Brazil.
Okay. Thank you.
So now it's time for the last question, please.
There are no further questions in the queue at this point, so I'll hand back to you for the closing comments.
Great. All right. Well, thank you very much. So, nothing really to add from our side. I think we've gone through the situation as such, and it's good that we've been able to answer all the questions in the queue. So thank you very much for joining today.