Good day, and welcome to the Getinge Group conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Johan Malmquist. Please go ahead, sir.
Thank you very much, and welcome to all of you and to this early morning phone conference. So the subject of this call here this morning is the resolution of our very lengthy and ongoing dialogue with the U.S. FDA. On this call, I'm joined by Heinz Jacqui, who is the Executive Vice President of Medical Systems and also a member of my executive team. We have allocated about 30 minutes in total to this call. There is a short slide presentation that can be accessed following the instruction that was given in the press release that we issued last night.
And you can say in summary, I mean, yesterday, a federal judge signed a Consent Decree with us in the state of New Hampshire, which details the agreement that we have been discussing, together with the FDA for quite a long time. So with that as an introduction, I suggest that we move over to the short slide presentation and move to the first page. I think that most of you will recall that, in the middle and into the autumn of 2013, the U.S. Food and Drug Administration inspected a number of our manufacturing facilities within our business area, Medical Systems. And these inspections generated a relatively large number of observations. We had also, in our own audits, identified about the same time, a number of shortcomings of our Quality Management System.
As a result of that, and in dialogue with external support and in a dialogue with the FDA, we initiated, quite early on, a remediation program to restore the quality management systems to levels that are appropriate and acceptable to the FDA. And as you know, we have committed close to SEK 1 billion to this remediation work, a job that has already come well underway, and a job that we expect to complete sometime in the middle of 2016. Almost immediately after we realized that we had issues, we reached out to the FDA, as we have already said, and have since been in a dialogue to find some kind of a firm resolution of the way forward.
This is, in essence, what has been concluded now with the signature of a Consent Decree. If I move on to the next page, where you actually have the Consent Decree, you can say that this is a framework. It's a voluntary agreement that we have entered into, but it gives the framework of how we improve our Quality Management System. If you'd like, you could phrase it like a get-well plan, but that is quite formalized. The counterparty on the signatory side is the U.S. government, but the content of the decree as such is the discussion that we have had with the Food and Drug Administration.
If you relate it to the number of facilities that were originally concerned, you can say that the Consent Decree governs our behavior around a much more narrow set of legal entities. So in essence, there are three production facilities that are concerned by this decree. It is our Atrium facility in Hudson, New Hampshire. It is our manufacturing facility in Wayne, New Jersey, and it is also our production facility in Hechingen, Germany, and to a little lesser extent, Rastatt, that is connected on the cardiopulmonary side with Hechingen. Then there are two—one administrative unit, which is the holding in Rastatt, Germany.
The reason for that is that the two officers on our side, who are the signatories to the decree, which is Heinz Jacqui and our head of QARA within Medical Systems, Gail Christie, are employees of this holding. Then named is also the sales company that has the relationships with customers in the territory of the United States of America. So a more narrow set of facilities than anyone had anticipated. And as you can also see, what they have in common is that this is within the cardiovascular business, which typically provides products with higher risk to customers. If I move on then to the next slide, you can say that in this decree, and you will have the opportunity to, if you so wish, access the details of it, which we'll find on our website.
But you can say in this Consent Decree, there is one facility which is so-called a named facility, and that is Atrium. The two other manufacturing facilities and administrative units are called additional facilities. At Atrium, we will be subject to some delivery restrictions. We will have a temporary suspension of vascular grafts and surgical meshes, and then all other products out of Atrium will continue to be provided to customer under what is called Medical Necessity. And Medical Necessity is essentially allowing a company to provide products to customers because the products are deemed to be important to the medical community, either because we have high market shares or because the products have clinical qualities that are appreciated. So it's a little bit of balancing of the good and the bad, if you will.
The other facilities that are so-called additional facilities will be subjected to a much more frequent and much more in-depth ongoing audits and checks by the FDA and also by the named consultancies that we have, you could say. I think it's important also to underline here that there are no indication that any of the products that we're supplying to customers are unsafe. We haven't been asked to remove any product from the market, not to conduct any recalls of any unusual nature. So we will sort of obviously continue to work on our quality management system because not having that on the right journey, so to speak, could eventually obviously endanger patients, but that is certainly not the case as we speak.
Final slide in the deck presentation outlines what we have already communicated, but in a little bit more detail. So, in addition to the remediation costs that have already been communicated, we estimate that the aggregate amount that will impact us in a negative sense will come to around, sorry, SEK 500 million. And we believe with this early communication of the Consent Decree here in 2015, this amount will most likely in its entirety fall under the fiscal year 2015. Of the SEK 500 million, some SEK 45 million relates to a fee of some kind. And you can say these SEK 45 million, or sorry, SEK 48 million, relates to the right that we have to provide product as medically necessary in a facility that is named.
That amount could go up again if we haven't resolved our quality management system issues in Atrium within the next six months, which we certainly hope we will. We will incur an additional SEK 48 million for an additional six-month period, but we don't believe that we will get there. The remainder of the SEK 500 million is most of all loss of revenue from the temporarily suspended products, and to a lesser extent, also from some shortcomings that we estimate from the Medical Necessity products as well. In addition to that, there are amounts set aside for training and education of staff, which we are committing to do.
And this is, among other thing, training and education of what the Consent Decree means, and this needs to go out to all the employees of our organization. And then we also expect to invest additional money in retaining good relationships with customers throughout this time period. So, as I said, if you wish to gain further knowledge about the details of the Consent Decree, you can access the website of Atrium Medical, and you see here on the slide deck that you have the website address to access it. So I think with that, we can take questions from the audience now.
Thank you. If you would like to ask a question at this time, please press star one on your telephone. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Again, please press star one to ask a question. We'll take our first question from Michael Jungling from Morgan Stanley. Please go ahead, your line is open.
Great, thank you, and good morning. I have two questions. Firstly, on the SEK 500 million, can you provide some assumptions that you made on how you got to the SEK 500 million? Specifically, how long does the restriction hold? Does the restriction hold for the entire 2015? Is it only a portion of 2015? Secondly, do you know which products they are? Have they been defined very, very clearly in the Consent Decree?
And then on question number two is, as you mentioned that, it's, it's largely ring-fenced to 2015, but given that the majority of the remediation work, I guess, will not be finished until, let's say, mid of 2016, how would you assess the risk that the supply restrictions actually move all the way into 2016, and as a result, we also have a meaningful hit to earnings for the year 2016? That's all. Thank you.
Yeah, I mean, we will not provide. I think we provided clarity on in the documentation that you have received. So the product that will be suspended, in a sense, is the grafts, the vascular grafts manufactured at Atrium, and also the soft tissue repair product, the mesh that we've also gone under the name of biosurgery. So those are the two product groups where there are alternate suppliers or deemed to be alternate suppliers by the FDA, and we're removing them from the market temporarily. It will not impact the ability of physicians to perform their duties. I think on the vascular grafts, we manufacture vascular grafts essentially at three locations today. Atrium is one, Wayne is another, and we also manufacture grafts at our French facility.
The more comparable grafts to the Atrium are also manufactured in Wayne, so there will be a continuity of supply, but not that specific portfolio. The soft tissue product, the mesh are of course not made anywhere else in our group. They're sort of unique to the Atrium facility. When we have said the SEK 500 million coming the impact, then that of course indicates that the disruption of supply will not stretch beyond 2015. I don't think that we should confuse the remediation work with the sanctions, if I call it that. The remediation work is our long-term plan on bringing our quality management system from the position it had.
And that was established through a benchmark audit that we undertook together with an external company called Quintiles, that quite frequently do work and audits on behalf of the FDA. So they're actually, in the case of Atrium, they actually have the authority to do an inspection, on behalf of the FDA and submit the outcome of such an inspection to FDA for review. So that's part of the content of the agreement. So we're pretty confident that we can conclude the delivery restrictions within the year 2015.
Okay. And then on Atrium, can you provide some more details, please, on what it means for your sales force? Will there be some cost adjustments during this period to make sure that the pain is minimized, or do you pretty much keep everything intact because the supply restrictions are quite short-lived? And what percent of total sales will this Consent Decree impact for Atrium, please?
Yeah. We will, I can say that we will not, and this is why also, you could say, the impact on top and bottom line are actually not that materially different. We have said that under the circumstances, the expected length of any temporary suspension of products and so forth, that we will maintain intact our sales force. We believe we want to obviously be back in the market. We may redirect their use and the portfolio they work on so that they are productive and effective in the market. But essentially, we will keep our workforce intact throughout this change period.
That is also why I would say that the top line impact and the operating profit impact are quite similar in nature, because these are sort of very high-margin products. So and we, we're not gonna provide details. I think we've been quite specific. I think that we have provided historically, in conjunction with the acquisition of Atrium, the breakdown of revenues of the different segments. So you should be in a position to, to assess it. But we were not planning on, on sort of providing any, any details on revenues we have in, in different segments for, for competitive reasons.
Great. Very helpful. Thank you.
Thank you.
We will now take our next question from Kristofer Liljeberg from Carnegie. Please go ahead. Your line is open.
Yeah, hi, good morning. Just one more. If you could talk a little about the risk. If there's any risk, do you see that there could be sales restriction also at the site in Wayne and the German sites following the inspections from FDA? Doesn't sound so, but just if you could confirm that.
No, but I would put it this way: if we haven't understood the situation we're in, we have a problem. Now, obviously, we have understood that. We've put ourselves in a difficult situation where we now have clarity. You can say the route forward for us is very, very simple. We have an improvement plan with milestones attached to it. It is extremely important that we meet those milestones and report progress in line with our communication to the FDA, and that we learn from the past and sort of demonstrate that we are extremely committed. And I don't see any reason why we shouldn't meet those milestones. We've put a lot of effort and thought into the remediation program.
As we said, we've made a lot of progress. Atrium, in particular, has done a lot of progress, on their side. So the outcome you see here, financially and timing-wise and so forth, is, I would say, a very realistic, sort of path forward, with a very realistic, set of financial consequences that we have also communicated.
You might said so already, but will FDA require to do a new inspection to release the current suspension at the Atrium site?
Yes, but correct me here if I'm wrong, Heinz. I believe that we have the right to use Quintiles, which is the organization that supports us with the, you can say the consultancy at a higher level. Then we have a number of resource consultants in addition to Quintiles. But Quintiles has the right to undertake an audit on behalf of the FDA, and then submit the results to the FDA.
So, that's why you're confident this will only affect 15?
That is why we're confident that we have significantly more control over the timeline. I don't know if you want to add anything to that, Heinz?
No, it's correct, Johan. It's Quintiles and/ or FDA.
Thank you.
You're welcome.
We will now take our next question from Mattias Holmberg. Please go ahead. Your line is open.
Thanks so much, Mattias Holmberg, Danske Bank Markets. Two questions, please. What, if any, incremental cost increases will this bring beyond the numbers mentioned in the release? Meaning for, you know, you stepping up certain costs that you didn't have before 2016 and beyond. And secondly, you sound very confident around the SEK 500 million. I'd still like to understand what, if anything, would be the main risk when we summarize this 2016 or later, that the earnings loss was still larger than the SEK 500 million. Thank you.
Yes. Sorry, Mattias, your first question was around, may you repeat that again?
Yeah. What, if any, incremental cost increases will Getinge—will you need to have in place beyond this end of the remediation work process?
Yeah. I think what we said at the time, when we communicated the remediation program, or the first tranche, and I believe this was in the beginning of 2014, first quarter. We said that we anticipated that the quality management organization reinforcement, that is to say, the strengthening of the organization that would remain beyond completing the remediation program, would be somewhere around SEK 70 million. I still believe we're in that ballpark. There will probably be a little bit of fine-tuning, and we're also taking a bit of a corporate perspective over our quality or regulatory compliance organization. So I still believe that is the order of magnitude that we are speaking about here.
If you look at the main risks, I think this gets back to Kristofer's question. The risk for us is not completing the remediation program such as we have laid it out. So I would say that it's very much in our own hands. If we fail to sort of undertake the work we have committed to undertake, we would, of course, be subject ourselves to risks that these measures will remain in force longer, or that a facility that is not subjected to any restrictions now might be so. You could say the Consent Decree lays out a get well plan, and then you could say that you remain on probation for a period of time, where FDA will continue to keep a watchful eye on you, so you don't slip.
So, it's not only a matter of getting to a level, it's obviously maintaining that level, or even better, continuing a positive journey of a strengthening and a continuous improvement of quality and quality management systems.
Quick follow-up. Now, when you have the clarity from the agency, do you feel that there is any need to initiate any process for any of your other two remaining divisions?
Look, I think it's fair to say that, you know, this may serve as a reminder to us, and I hope many others as well, that this is an area where scrutiny for good reason, and there is a heightened awareness also from regulatory agencies, not only in North America, but elsewhere as well, with all good intentions of securing patient safety. So, yes, I think, I mean, this is a strong signal to all of our businesses to continue on a positive journey. That said, I would say that our track record in recent years of compliance and outcomes of audits are healthy in both Extended Care and Infection Control.
But, I mean, you're no better than the last sort of inspection you've had. And I think this is just something that you have to continue to work on and sort of implement a strong culture of continuous improvement.
Thank you so much.
Thank you, Mattias.
We'll now take our next question from David Adlington, from JP Morgan. Please go ahead. Your line is open.
Morning, guys. Thanks for taking the questions. Firstly, just is it fair to say that the lost sales you're going to suffer is around about SEK 500 million? And I just wondered if you could give us some sense of how you're expecting that to play out through the year. Is it just a Q1 impact, a first half impact, or is it spread throughout the whole year? Secondly, presumably competition will look to take the share that you're kind of leaving on the table. Just wondered how you will look to regain that share once the products are relaunched. And then finally, just wondered if there was any potential impacts on any goodwill on the acquisition, whether there would need to be any write-downs. Thanks.
Yeah. If I may, David, ask you to repeat some of those? I believe that was three, but-
But, I would say that the majority of the impact will come a little bit upfront. So I would think that we would most likely have a slightly bigger impact in the first half of this year, and then a slightly lower one, and that more relates to the products around Medical Necessity, because now we will need to enter into a pretty intense dialogue with customers where they will want to understand what this means, et cetera. So I think there will be some early disruption on the Medical Necessity products. And then I think it's probably gonna be a little bit less on the suspended because there is some degree of inventory, obviously, that we can access, and continue to provide products to customers.
I think there's a degree of sales force activity to reassure our customer base that the products are safe, but that we are under these limitations for this at this point in time. I'd say that it isn't the entire SEK 500 million, and we're not gonna comment in details around specific product line impacts and so forth. As I said, in some instances, we will be able to provide alternate products. I think we can maintain relationships. I think that our products are quite differentiated. If you look at the grafts, they are. They have unique properties, and there are unique devices that, to the best of my knowledge, do not exist with anybody else.
We have stent-reinforced ePTFE grafts that are bifurcated, that I don't believe exist with other companies, that we will put back on the market. For example, we have our mesh products that are also differentiated. So yes, I think we will be back. And we believe that, as we said, a portion of the SEK 500 million is obviously loss of revenue, and it is the bulk of it, but we will not provide details of those specific products or the specific numbers, as I said previously.
Just relating to the, any sort of goodwill impact?
None whatsoever on this magnitude, absolutely not.
Okay. Thank you.
You're welcome.
We will now take our next question from Johan Unnérus from Swedbank. Please go ahead. Your line is open.
Good morning, Johan Unnérus, Swedbank. First, could you just clarify on the last question? Did you say that the bulk of this SEK 500 million was related to temporary loss of sales, or did I-
Yeah.
Understand that? Yeah.
Absolutely.
Yeah, that seems to make sense, given the earlier presentations in the Atrium. And on the other points, first, on the milestone, you singled out one six months ahead. Are there others that should be especially mentioned or that you could provide any details upon, or should we regard that as sort of regular inspections, partly through Quintiles?
Hmm. I mean, Heinz, and Gail Christie, our head of QARA for the business area, has presented our plans to a large audience at the FDA and say, "This is, this is where we stand. We've been extremely candid around this. This is where we stand, this is where we need to get, and, and this is how we intend to do it." And I would say as long as we make the right progress around this, but with a strong sense of urgency, obviously, and the inspection sort of recognize that, then yes, that will be the name of the game, specifically as we talk about Hechingen and Wayne.
When it comes to Atrium, we have the intention of clearing an inspection here in the next six months to lift those restrictions that we're talking about.
That's helpful. And the other sites, the three sites, when can we expect to get a sort of message if they are clear, so to speak, in terms of risk of deliveries and so on?
Yeah, I mean, I would say that since the Consent Decree will be in force over a period of time, right? So we will obviously be more up to us, I think, to communicate to you if we end up in situations where we get delivery restrictions, or anything should happen that means that we will temporarily have to suspend other products, which we obviously don't think will happen. It's not part of this communication, then that would need to be communication coming from ourselves.
Is it correct to assume that the decree hasn't got sort of a certain timeline? It depends on how you execute on.
Yeah.
-the remedies.
Yeah, absolutely. I would say that it's probably going in place for a minimum of five years. Heinz, I think that's correct, right?
Four years, yes.
Four years, yeah. And I would say the crucial part is between now and the middle of 2016, when we are undertaking the remediation work. At the middle of 2016, the objective is clearly that we should be in full compliance across all of these entities to any and all requirements that the FDA might have. And then for the remainder of the CD in force, we would remain on this or a better level going forward.
Thanks. That's very helpful. And finally, on the Capital Markets Day, you were talking about in the first half of the year, possibly Q2, is that still valid assumption or?
Absolutely, absolutely. We, I think, Alex will need to get up to speed very quickly, but the job to support Alex in holding this Capital Markets Day is sort of already work going on. And then, I together with Alex, will review and validate the underlying assumptions and so forth. So the idea is to hold a Capital Markets Day, probably in the second half of the second quarter, but detailing the financial ambition of the group going forward.
Thank you very much. That's all I got.
Thank you, Johan. Thank you so much.
We will now take our next question from Lars Ekbrink from SEB. Please go ahead. Your line is open.
Yes, thank you. It's Lars Ekbrink, SEB. Can I just ask when, when would you expect the restocking of these products that's going to be temporarily suspended? When, when that restocking to your distributor is gonna start again? If you have any, any insights into the timing. Then second question, if, if I could ask, your, the sales guidance you provided last week, targeting an improved sales growth relative to 2014. I, I guess that's just to confirm that includes this impact from the sales loss that you are now specifying.
And then the third question is whether this, the November 2011 acquisition of Atrium and what's happened since, what's the impact gonna be in your due diligence procedures, when you are considering acquisitions of similar magnitude? Yeah.
Yeah, and again, Lars, I think we're not gonna detail around the revenues on individual product lines. But I think you can see from the... I think it's pretty clear in the presentation that says-
Yeah, yeah, sorry, I know, but I was about the timing of when you expect to restock, when you expect to start producing them again.
Yeah, and I think it's still back to if you imagine that we start with some kind of an inventory that will then be depleted, and then if we are not up and running before that inventory is depleted, then there will, of course, be a shortage of supply in the market. And then it's really down to between now and the six-month deadline, where we need to clear the inspection, when we actually sort of raise our hand and say, "We're ready." So we've factored that into this amount, and I think we wouldn't like to go into detailing that too much at this point in time. Sorry, your other question, could you repeat that, Lars?
Yeah, of course. It's, it's about the guidance, yeah, that you provided last year and what, improved sales growth relative.
Yes.
Yeah.
Again, I think we have, when we communicated the outlook for this year, we have said, in no very specific terms, and as you know, we had very weak organic revenue and order growth, in 2014, at less than 1%. So we have sort of just said that growth is expected to be better. We obviously have, as part of our internal planning, a bigger number that we're talking about. I would say that whereas I think that we will be able to absorb the revenue shortcoming and still grow the business, is actually not quite what, how the outlook is worded, but I think that's a realistic assumption.
Okay, and then final one on impact on the future ongoing due diligence procedures?
Yeah, I think, I mean, we acquired Pulsion here in during the year, which I think can serve as a pretty good reference. So in the process of that due diligence, we undertook a more detailed and more thorough review of their quality management system and QARA related issues. Also the restructuring program or the costs we're taking in the process of integrating Pulsion also contain a fairly generous investment into strengthening their quality management system to the standards we now know that we need to uphold.
Okay, thank you.
Thank you, Lars. I think we can take one more question, if there is one, and then I suggest we wrap up. As always, you can get back to us with more specific, if you so wish.
Thank you. So we take our next question from Erik Hultgård from Nordea. Please go ahead. Your line is open.
Yes. Hi, good morning, Erik Hultgård from Nordea Markets. Most of my questions have been answered, but I have a couple left. I think, the first one is whether the agreement with the FDA announced will, by any, means, impact timelines that you may have to reduce the manufacturing footprint within medical systems. And then secondly, what's the reason why only Atrium was impacted by supply restrictions, given that you also had the warning letter for, the Wayne site?
Thank you.
Yeah, I think that, I mean, as you know, we have sort of in a wider sense an ambition to concentrate production to fewer units. In fact, one footprint related project is sort of work in progress, the one of concentrating the textile grafts to our production facility in La Ciotat, and that transfer will obviously be concluded. I think to the extent that we would contemplate sort of looking over our footprint around the cardiovascular division, I think it is important that we stand firmly with solid quality management processes and so forth, and all our products fully validated before we contemplate any sort of more comprehensive change programs when it comes to footprint within cardiovascular.
So to that extent, there may be impacts if such changes were contemplated. I think on why Atrium was selected, Heinz, if I may hand that question over to you.
Sure. You know, we had close discussion with the FDA, and we looked into the details when it comes to Atrium and the vein facility. And during this discussion and introducing also our remediation plans, we finalized with the FDA that this restriction is only valid for Hudson, for Atrium.
All right. Thank you.
Okay. Well, I think with that, thanks for your participation. I, as I said before, please feel free to call myself. I can assure you also, Cornelia is extremely up to speed on this. She's, [audio distortion] I think I can say in summary, that we are glad that we have managed to finally provide some clarity and direction around the FDA situation that we've had for a long period of time. A lot of hard work obviously remains in the remediation program.
I think that we see this as an expensive investment in learning, and I think that we are very intent on making sure that we exit this process as a significantly stronger company, with significantly stronger processes, and that this will hopefully be an enabler for continued growth going forward. So with that, thank you for attending this conference on short notice. Again, give us a ring if there's any questions you feel have been left unanswered here. Thank you very much. Bye now.
This will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.