Good afternoon, everyone, and welcome to this web conference in connection with Magle Chemoswed Q3 report for 2022. The company is today represented by CEO Justin Pierce and CFO Petra Jönsson Sjölin. My name is Tobias Karlsson, and I will be the moderator for today, and I work at Västra Hamnen Corporate Finance. We will start with a presentation by the company, and after that, it will be a Q&A session where all listeners can write their questions in the question field. I will read them out, and the company will answer. Before I hand over to you, Justin, I just want to say that this recording will be available on the Magle Chemoswed homepage and on Västra Hamnen Corporate Finance YouTube channel. With that said, I give the word over to you, Justin.
Super. Thanks, Tobias, and thanks again for hosting us. This was nice. Yes, the Q3 for 2022, we feel that the quarter has performed as we expected. It's in line with our expectations. The third quarter of the year is always a trickier quarter for us to perform in. We have summer vacations. We have a natural seasonal slowdown in a number of the parts of the business, as well as shutting down for a period of maintenance during the quarter. Q3 is always a tough quarter for us.
As you can see from the key indicators that we have on the presentation, from a net sales and EBITDA and operating profit, we've remained largely within the scope of our expectations, close on year-on-year. We've also managed to pull back on the operating cash flow, almost doubling that up, from the same period last year. All in all, I think we are quite satisfied with the performance. I should also say that during the quarter, a lot of our focus was on the DSM products. It was moving away a little bit from contract manufacturing and the active pharmaceutical ingredient manufacturing that we traditionally do.
We also made space into the organization in order for us to do the DSM manufacturing as both the AXXO product, the wound care product that we have, is coming closer to launch into Kuwait, and as we near the end of our clinical study with SmartPAN. We concentrated quite a lot of our manufacturing resources back onto the DSM products during the quarter. Despite those investments that we made into the new products, we still managed to bring the quarter in within expectation without damaging the overall revenue or operating profit for the company for the year to date. The key areas for us to talk to you about, Magle Chemoswed, our contract development and manufacturing organization.
Like I said, very seasonal, very difficult in Q3, but good stable revenues that we managed to get out of the organization altogether. I think it also speaks to our business model, where we have different revenues coming in from different angles into the CDMO. This allows us to move revenue around from contract manufacturing into contract services to make space in the contract manufacturing, both for the seasonal shutdown and also for the increased work that we've done on the DSM. We see that demand levels in the contract service segment of the business remain high. They remain within expectation. Currently we are operating slightly over capacity, so we don't see that we have much difficulty for the Q3 and possibly moving forward in line with expectations.
We have some concerns around the supply chain. This is largely around shipping and being able to gather the suitable raw materials and things that we need to keep the contract manufacturing going. We're having some effect on the overall shipping costs around the world and just some of the sort of supply chain difficulties that a lot of other European companies are facing at the moment. We find a way through these for the moment. Magle PharmaCept, we saw a slowdown in sales of the EmboCept products over the summer. This, of course, was expected. Germany has a shutdown period. It's one of our largest markets, as does Italy, Spain, as well as Greece.
We had a slight slowdown, but the slowdown was in line with expectations. Our Latin American registrations for the EmboCept products are ongoing, coming to an end now, so we're starting to prepare for the audits from the regulatory authorities. Of course, once we've had those audits, we will open those markets up to those products. The AXXO Woundgel that is launching currently now in November into Kuwait, so the material is arrived. It's there, and we're very proud and very pleased to say that the Wound gel, the microsphere Wound gel is now launching. We have ongoing registrations in Uruguay, Paraguay, and other parts of the Middle East, as well as Latin America.
Turning now to SmartPAN, we have the post-market clinical follow-up study going on at Heidelberg University Hospital. Everything on track there. The preliminary results that we're receiving from the surgical team and from the CRO is that the results are well within expectations. The usability of the product exceeded our expectations, so we're seeing some very positive energy and positive news coming out of that study. We'll of course use that information as part of our pre-launch and launch package when the time comes for that. Magle Group as a whole, our financial targets are being maintained. We're getting closer to those. These are part of our Value Creation 2024 goals.
We see that we are now closing in at around 16%-17% of DSM products making up our total revenue, and of course, our target is 25% by the end of next year. We believe that the launch of AXXO, the increased territorial registrations of EmboCept, and the launch of some of the other products will keep us well on track to be in line with our financial goals. Royalties. The royalties we receive from Becton Dickinson, these are higher than our expectation. We had a slightly lower expectation for the first three quarters of this year, as there was some uncertainty how the product may or may not bounce back from the COVID situation.
We're seeing a solid performance from the royalty so far over the first three quarters of the year. This is giving us a little bit of a bump and a little bit more freedom to invest. We've also been able to increase our investment program, both in our facilities as well as our products, as a result of this. Overall, if we move down one slide, having a look at our strategic goals, our direct sales organization is continuing. We're continuing to expand that team and to look into new markets and how we can increase our overall reach, especially in Europe. CDMO returns again remain on target.
We continue to see some good stability, as well as growth in the contract service side of the business that we're quite happy with. Our pipeline development is going as expected. The other two are things that we're just working with globally. We seem to be pulling back a little bit on the operational efficiency. This is also helping to contribute a little bit to our bottom line and the increased profitable performance of the year so far. Overall, from a strategic perspective, from a growth perspective and from an expectation perspective, I think we're quite satisfied where Q3 comes in. Certainly looking at the year to date, we're in line with our expectations and targets.
To talk more to you about the finance, I'll hand it over to Petra, so she can take it further.
Thank you, Justin, and thank you all. It's nice to finally be back again and talk about our reports. If you haven't downloaded it, you can go on to Magle Group and download the report to view it in full. To give you some highlights and to explain a bit further about the third quarter, I have presented and prepared some slides for you as well. Looking at sales year to date, and this is also where Justin was presenting you before, our manufacturing has been a bit slowed down from January to September. This is also due to the focus of DSM product and our own technology, which has been manufactured and not included in this report due to elimination for this part.
Looking at contract development services, we can see an increase on the customer services support. Therefore, we can see a high demand from our customers. We can see a development moving forward and is in line with our expectations as well. Looking at the DSM technology, as Justin previously said, our expectation is to have 25% of our total revenue, and we can see that it is within our expectation and are following the trend that we have set for it. As the royalties, as you can see, the royalties have increased during the last quarter. This is also due to the changes and the expectations that we didn't have in the beginning of the year.
The U.S. market has picked up, and this is something that we are looking forward to as well. Going to the next slide, looking at more into the cost side and the performance side of it. The net sales is adjusted for revenue recognition. Also looking at the EBITDA between the years. Looking for the quarter on the net sales is SEK 34.1 million versus SEK 32.2 million. We have a 4% increase year-on-year. Looking at year to date, we're at SEK 99.8 million versus SEK 96.2 million. The DSM technology sales was also for that part the increases. The increases was for the PharmaCept acquisition for that.
The milestones, as we have talked about is of course the EBITDA. It continues within our expectation, which was the goal for 20%. We're just below that, but that is within our expectations, so that. The sales mix of course, is predominant for the EBITDA, for the milestones due to that, the royalties, and that would have an impact on the bottom line. For the operating profit, the quarterly result is SEK 1.4 million versus SEK 2 million. And year to date is SEK 8.9 million versus SEK 4 million. The Q3 period has been an intense manufacturing period within our own technology, such as the SmartPAN and SmartGel and AXXO Woundgel, but also our DSM starting materials.
The net profit for the quarter is SEK 1.2 million versus SEK 1.5 million previous year. The year-to-date is SEK 7.9 million versus SEK 3.3 million for previous year. Within that, we have a good performance despite the third quarter, as Justin said before, of the seasonal changes, vacations in Sweden, and in general, slow down due to maintenance and vacation period, as I said. The performance is good, we are within our expectations, and the sales mix has brought the lower cost of goods sold as well. Therefore, we have a good EBITDA. Looking at the operating expenses year-to-date, as you can see, the years last year and this year are similar to each other, small deviations here.
We have been able to do some active and efficiency planning for cutting down costs and being more productive in terms of planning our purchases and so on. We have included some of the capitalization, which I didn't mention in the previous. We have some R&D work that we need to do capitalization on due to IFRS regulations. That's almost SEK 1 million that we have capitalized. In terms of total operating expenses, these are in line with the expectation despite the high cost of raw material and freight charges and energy costs that we are currently all impacted on, especially the energy cost. As Justin said before, the freight charges we can feel and we can see as well.
These are things that we are trying to cope and discuss with customers and be able to finalize and try to leverage the higher cost. Despite that, we are still in line with expectation. We have the cost of goods sold. This is the cost mix impacted on the sales mix. If we have a higher sales of DSM products, which has a lower cost of goods, of course, that will be lowered. We also have our customer services that includes our solid-state chemistry. These also have a low cost in cost of services. Of course, we have our royalty, which has hardly any cost of services or cost of goods. Therefore, we have a better and a good cost of goods sold.
Looking at that, we have a good performance for the period. Looking at the personnel cost is in line with the expectation and also, it's almost same as previous year, for that. Looking at the cash flow for the third quarter, looking at the operating activities, we have a change in working capital. As you can see on the screen and also in our Q3 report, there is a change in the operating net cash flow compared to previous year in the same period. SEK 16 million versus SEK 3.2 million. This is predominantly due to inventory, almost SEK 11 million, which has an impact on it. This is own manufacturing and one high-value generic product that gives us the high value for that.
We have investment activities going on. Looking at the cash flow, it's SEK 14.6 million versus SEK 13 million previous year. These are our DSM manufacturing investments, but also clinical studies. We are increasing capacity in line with company strategy, which is also reflected on our balance sheet when you look into our detailed Q3 report. The financial activities, we have a change in overdraft, and these are primarily due to seasonal sales, but also the raw material purchase that we need to buy in for future campaigns that we do in our generic manufacturing. The royalty for Q3 is received early November. This is how we are looking at.
In all, we have a policy which is more earn before spend, and this is what the company is doing. We are putting all effort into earning and then putting it back for investment to the company, so we can continue to grow. Yeah, that's about it. Justin, back to you if you want to have any summary.
Thanks, Petra. I think the overall performance is where we expect. We're quite excited at the moment. We see a lot of DSM products starting to bubble up to the surface as part of our planning. We can see over the next period of time that a lot of our focus will move on to the DSM. Of course, these products represent an exciting future for us. At the same time, we see a good solidification in the CDMO work that we're doing. We're moving more into the sterile drug manufacturing, the small batch manufacturing, and we're seeing quite a lot of demand and uptake for that. We feel as though the business is on the right track.
We've invested fairly heavily this year in both the CDMO as well as the DSM products. For the moment, it's a good performance for us year on year, but still a lot of work for us to do, but we're confident that we're strategically on the right track for the moment. Tobias, I think that's all from us, and I guess I hand the floor back over to you.
Thank you very much for that presentation, Justin, Petra. I will remind everybody who's listening that you can ask questions using the question field. We got two questions during the presentation. The first one is, "The company has an impressive growth strategy, but looking at the cash flow, how are you funding all the current projects?" If you can elaborate on that, Justin.
I get that question. Okay. Yeah, I mean, we have part of our investment program is driven by the reinvestment of the profits from the CDMO back into the business. Of course, it is very much about generating enough profit to drive the other projects that we have. Yes, we as a company have to prioritize which projects we can drive and at what timeframe that they can be driven in. Right now, this is pretty much the way we're approaching things. It is about keeping the CDMO profitable so that we can drive the remaining projects forward in a timely manner.
I think the next question is in relation to that. "Do you have any plans to raise further capital to support the growth?
I think that would be probably a forward-looking statement if I were to go any further into that. I would say that, you know, just looking back at my previous answers where we are, of course, we're always considering the availability of cash what makes sense at the right time. I think for us, it has to be the right thing at the right time. From a capital market perspective, it's fairly volatile at the moment with the ongoing Russian-Ukraine crisis and the high rate of inflation too much inflation and what have you. We never rule out new capital into the business.
I think for the moment, we'll stay with our business model, and see what cash we generate in the business to drive forward performance.
Yes. Perfect. "We see a slight increase in revenues for the CDMO offering during this quarter. Is this level that we should expect in the coming quarters?" I mean, we see that contract manufacturing was zero this quarter, and why is that?
Yeah, two reasons. One, some of our APIs have a very long manufacturing process. That is one. We need to manufacture the material till we get out. Part of this is inventory management. We don't like to carry too much inventory. It's manufacturing to order. The other part, as we've already alluded to, was primarily moving manufacturing into the DSM category. Due to the financial eliminations that we do because we're selling between companies, the revenue is not reflected back onto the sales sheet. It's eliminated out. To go back to the first part of your question, are these the levels that we can expect? No. I mean, contract manufacturing of course won't be at the low level that we had in the quarter.
It'll revert back to, let's call it, a normal quarter. Do we see the uptake in our CDMO Services persisting? At least what I can see currently in the market and in the business, we have no reason to fear that we would see a large decline.
I see. On the other hand, we see a strong revenue from Arista royalties. Should we expect that will be continuing and sustainable, or can you tell us something more about just Arista?
Lots of questions about the future. Unfortunately, my crystal ball doesn't extend that far. What we are seeing is a restocking of the supply line by Becton Dickinson on the DSM. The royalty levels are a little bit higher this year than we've had in pre-COVID years. I think from a company perspective, just from a risk perspective, we probably wouldn't be looking at a repeat of what we're seeing this year. We're probably looking at something coming closer to the pre-COVID levels.
Perfect. We got a question. "Can you elaborate on the progress of your DSM pipeline? Should we expect the filings for EmboCept M and EmboCept L to take place in the upcoming quarters? And how is the progress going with SmartGel and SmartPAN?
EmboCept M and EmboCept L, we would probably not file this year. Part of this is financial prioritizing, and then we've prioritized SmartPAN and the launch of AXXO over that. In relation to SmartGel, SmartGel is linked to AXXO, so the first market launch here is Kuwait. We've already started working on the product in Germany, so we're seeing good indications, good pre-marketing indications. We will start to roll out samples to selected strategic clinics in Germany before the end of this year. Those projects are still working.
Again, coming back to, I guess, the original questions about capital, this is a little bit about prioritizing what we do and when we do it, and making sure we do the right things at the right time, which are gonna give us the best return for the moment.
Yes. Perfect. Your DSM platform accounted for, if I'm right, 16% of total revenue during this quarter, which is an increase since last quarter. You have a financial target of 25%, and your aim is to increase revenues from existing DSM products through intensified direct sales activities.
Yeah.
I was wondering if you could explain more specifically what this strategy looks like and how much growth do you think, like, you can expect from this strategy within the DSM products offering?
I mean, the products have a lot of legs. We're predominant in Germany as our main market, and of course, we are looking at expanding. We've already started that expansion process. We can see increased sales in Italy and Greece. To some extent the U.K. has started to pick up, so we're seeing some increased sales already in territories. That's just on the existing products. We see the real growth factor coming now with the launch of AXXO. This will be another DSM product coming into the market that'll increase that 16%. We have the launch of SmartPAN coming up in Europe. We're looking at the expansion as we previously communicated into other areas and other geographies.
Obviously the U.S. is one of our focal markets at the moment in what the best way to enter that market is and having the regulatory discussions with the FDA on how to launch those products. I think that's where we will see the growth alongside adding some headcount into the sales organization.
According to SmartPAN's portfolio, you say that you have received a first data readout. Is that progressing as planned? In connection to that, you have initiated an investment program to expand. I was just wondering, how much are you expecting to invest in that project then for that accounting?
Yeah. Most of the investment has been taken this year, at least on the clinical side. A lot of that investment has already been absorbed in the numbers that we've already represented or presented. There is money that we have earmarked. I'm not gonna give you the amount, but we put aside a budget there for the marketing and of course the introduction of Helena as the Chief Marketing and Innovation Officer. Her main focus is currently on the expansion of SmartPAN and the launch of SmartPAN and how we can do that through a direct sales force. Yes, there is a budget, there is a plan in relation to that, but we want to do it right rather than fast.
I see. Sounds promising. You have lower personnel costs than our estimates. What should we expect in the headcount? You mentioned increased headcount due to the sales force in Germany and France last time we talked. How is that going?
Yeah, it's going according to plan. I don't think we have any major issues at the moment. As a company, you know, we work in a very flat organization, a very lean, agile organization. Sometimes it's not always about personnel growth. It's more about how we can get people involved in more areas of the business, or how we can get less people to do more. This has also been part of our strategy. The growth has been, you know. You can see the growth, you can see the growth in the numbers, you can see the growth in the launch of the new products. Where it's strategic, we're not adverse to employing people into the business.
In some of the older parts of the business, we will have a reduction in staff, and some of the newer parts of the business, we have an increase in staff. But overall, keeping the wage cost in line with our budget and expectation, I think this is one of our main, major costs in the business, and controlling that cost and making sure we get the efficiency and the return from the investment on the labor side, is a key driver for us.
Yes. I also have some questions about the investments. You have about SEK 4.5 million during the quarter. What investment has been made?
We have three types of investments there. The major part of that investment is into our facilities, and this is also, we have converted some of our manufacturing sites for the DSM, so exclusively to manufacture the DSM. As we see the market potential and as the product get closer and closer into the market, we can see that we need to start scaling up and start expanding our capacities, and also start having dedicated manufacturing areas that we can support those products as they roll out. A large percentage of that has been into facilities, into the property.
The other part of that has been into the scaleup, into the purchasing of the materials in that we need to support, for example, the launch of AXXO and these sorts of things. Very much on the DSM side, I would say, to give you a direct answer to your question.
Yeah. Perfect. We got a question from the audience. When should we expect to get the license for your clean room facility?
Again, forward-looking statement. We're not in the habit of making forecasts about the future. We're in the process, we're in the discussions. We've had the audit from the Swedish MPA. As with all things, there's a backwards and forwards between us and the authorities, but we don't see any major obstacles for us not to get that license, once we fulfill the requirements that are there.
Perfect. You, as you said, you have welcomed Helena as the Chief Marketing and Innovation Officer during the quarter. Can you just tell something more about what she will bring to the table?
Yeah, of course. She brings, obviously, marketing and knowledge and experience with us. She's hugely experienced in this, worked a lot with TePe Oral Hygiene , and has had good experience of global marketing, global branding, global rollout, distributor relationship handling. Helena really comes in to support us and to bring that knowledge of direct product marketing, direct branding, brand strategy, as we look to now start expanding DSM itself as a brand, and then underneath that, the different DSM products that we have. This is what Helena will bring into the pool.
Yeah. Sounds great. The gross margin was 88% during this quarter. I was wondering, is that sustainable? How much are you affected by the high raw materials prices and the inflation in the world right now?
Yeah, it depends a little bit on the sales mix. We're able to hold that as long as we can increase DSM into the sales mix. We have a very high margin on DSM, so that, of course, gives us good balance when you look at the overall mix of our sales. Some of the drug substances that we're manufacturing have a lower margin. It depends a little bit on the sales mix, but I think if you take it as an average and look at our strategy moving forward, we would expect DSM to dominate. If we hit our financial target of 25% of revenue coming from DSM sales, then we should be able to sustain that sort of margin.
Yeah. Lastly, if we are looking forward, Justin,
Sure
Is there anything you want to add about the future on your own expectations for the company, both short or long term?
I think the company is an exciting company. I think we are relatively unique in that we have existing turnover, we have existing revenue. We have a solid business model that allows us to generate profit and to maximize the return on that profit by investing it into new and exciting projects. I think as long as we can sustain that model, we have a very innovative, highly motivated organization with great people in it who really believe in what we're doing and where we're going. As long as we can hold all of that together, I think the company has a very exciting future.
Sounds great. As I have no further questions, and all questions from the audience have been answered, I think we can round off here. Thank you, Justin and Petra.
Yep
Once again for your time today and the presentation, and your answers on the Q&A.
Great. Thanks Tobias . Good luck.
Yeah.
Bye.
See you. Bye.
Bye.