Good morning, everyone, and welcome to this web conference with Magle Chemoswed in connection to the company's report for Q2 2022. The company is today represented by CEO Justin Pierce, CFO Petra Jönsson Sjölin, and CSO Simon Jegou. My name is Jens Jacob Aabel Nordkvist, and I work at Västra Hamnen Corporate Finance, and I will be your moderator for today. We will start, as usual, with a presentation by the company. After which there will be a QA session where all listeners have the opportunity to write questions using the questions panel on the right side of your screen or on the bottom of the screen, depending on the unit that you are using. After you have written your questions, I will read them aloud, and the company will then proceed to answer them.
Before I hand over to Justin and company, I'd just like to say that this session is being recorded and that the recording will be available on Magle Chemoswed's webpage and on Västra Hamnen Corporate Finance YouTube channel. With that said, I give the word over to you, Justin.
Super. Thanks, Jens. Again, thanks very much for hosting us. It's a great report to be presenting today, so we look forward to it. I think the Q2 report is a strong report. I'll ask Petra to move through. Looking at the key financial highlights for what we've seen in the business, we've seen a steady increase on net sales. I should say on the net sales, these are net sales excluding our internal invoicing between the companies. As we start to increase the manufacturing of our technology products, of course, that revenue is falling outside of this in internal eliminations. Even with the increase on the DSM manufacturing, we're still seeing good growth on the net sales side.
EBITDA, SEK 7.7 million as opposed to SEK 4 million the same period last year. Fantastic. This is one of our economic goals that we're driving at, by 2025, to have the margins at up and over 20%. Currently we're coming in around the 22% mark for the year, and for the period. It's a great achievement by the team. Operating profit, here we can see a marked difference, in comparison to the same period last year. Strong drive both on the manufacturing side, part of our strategy focusing on, high profit margins on the CDMO, and then of course a really generous sales mix as the DSM products start to sell. Operating cash flow down in comparison, to the same period.
This is also largely due to the fact that we've had a very aggressive investment project and plan over the first half of the year as we scale up and start to move forward for the DSM product launches. General business report, what I can tell you, Magle Chemoswed, we see very high demand currently in the development services, the contract services that we're offering. We've had a busy first half of the year, and we look forward to continuing that growth. The CDMO side on the manufacturing, again, as I've already alluded to, we had a lot of manufacturing work on the DSM products. Likewise, we've had a lot of manufacturing work for customers as well as our generic APIs that we've been pushing out.
All in all, we see the contract manufacturing segment being fairly strong for us this year. We've moved more recently into the aseptic drug handling fill and finish, and here is a real growth driver for us. Part of our strategy in looking at the CDMO and the high growth areas and margin areas we can get from the business, this is one area that we're seeing potential for us in the future. On the Magle PharmaCept side, the DSM side, EmboCept S continues to be pushed. It's part of our expansion plans. We're seeing good uptake with that, especially in the European market. We've invested quite considerably in personnel, mainly geographically focused on Germany.
We're now starting to see that those new investments in human capital and the increased size of the team are starting to pay dividends for us in terms of sales. Overall, we continue with our strategy of strengthening the European market, our foothold in direct sales in that. We're supporting our partners outside of Europe. AXXO Woundgel, we started the manufacture of that. This is for registrations and supply into the Middle East. More recently, AXXO received regulatory approval in Latin America for the product as well. We started that up in earnest, as well. Likewise, SmartPAN, manufacturing SmartPAN, we've done to support the clinical studies.
We're also holding stock now to start supporting the slower market, pre-market launch that we have planned for the product. All in all, both segments performing well. We see good development in both of them. We're satisfied that for the first half year we've exceeded our expectations in terms of where we are. On the general business side, as a group, we have entered into a binding agreement with Malmö Stad. This is to acquire a piece of land that runs alongside our manufacturing facilities.
This will support our expansion in the future. Like I've already alluded to, the meeting of the financial goals on the EBIT, EBITDA side, this week we're a little bit ahead of schedule on this, so we are quietly positive that we will be able to maintain this moving forward. Overall, very satisfied with the quarter. Our growth strategy is performing well. Our investments are starting to come home to roost. Now it's a matter of us trying to develop the fruit a little bit further on the tree. The pipeline, there's nothing major to report on the pipeline. The three key products that we continue to focus on, being in the embolization space and the uterine fibroid and the prostatic artery.
These are on target and going forward, as is the chronic wound products that we currently have. We have nothing to report in terms of major delays or major steps in relation to the pipeline. With that said, you know, just to touch back onto our growth strategy, it remains current for us. This remains what we're currently focusing the business on. Establishing the direct sales and the increased CDMO returns, obviously being two of our primary growth areas where we are driving investment in order to accelerate future growth into the business.
Across all of those, including the last one on operational efficiency, we're driving very hard on the cost side to make sure that we're getting best benefit and best bang for the buck, in terms of what we're spending. Currently all of these programs are starting to kick and fire as we'd like them to. These are borne out, I think, in the figures that Petra will go through shortly, for the period Q2, but as well as for year to date. Overall we're on target, moving in the right direction, and fairly satisfied with the performance both in the quarter and the year to date. With that said, I'll let Petra take you through the remainder of the financials.
Thank you, Justin. Let's start looking at the second quarter and also the half year. As we mentioned before about the sales, the DSM technology has kicked off and we can see due to sales and the strategic growth on that, including the license royalties as well, which have increased a lot more than expected. The DSM technology, but also the customer service is performing as we have expected. We have also seen due to acquisition for the DSM or for PharmaCept, we are now in, let's say we take the full gross profit instead of before where we're not taking the full cake. In terms now we're getting the full benefit, the full gross profit on the DSM products, but also the full risk of it.
We're kind of taking over the whole, and this is the part of the decision of the acquisition. We can see that the performance is going well, but also the gross profit is then adjusted to this as well. Looking at the second quarter for the performance, some key performance indicators to give you a highlight on the total report, which is available on Magle Chemoswed Group as well, for you to download to look into the details. Looking at the net sales as we discussed and what Justin presented previously is the SEK 35.5 million for the quarter. Year to date we're at SEK 65.5 million versus SEK 64 million last year.
As I said, the DSM technology has increased and the sales mix has of course an impact on the total net sales, the EBITDA. For that, looking at the EBITDA, we have the first time, as Justin said, we have reached the goal. The primary reason for that is the sales mix, which has the DSM increased sales, but also contract services, which has less cost of goods sold. Therefore, we can see an increase for this area for the period and the full year. Looking at the operating profit, of course it has an impact from the previous, meaning from the net sales and the operating expenses.
Being able to control the cost, I will talk about that next slide, but these have also seen a benefit for that. The operating profits for the Q2 numbers are SEK 4.2 versus SEK 1.2 previous year. Year to date we're at SEK 7.6 compared to SEK 2 million last year. That gives us a net profit of year to date SEK 6.7 compared to SEK 1.8 last year. The performance, as I said, is primarily due to the sales mix, which lowers the cost of goods sold.
Looking at the operating expenses, as you might have seen in the report, we have started capitalization of R&D expenses, R&D work that we have done, which is mandatory accordingly to IFRS, of SEK half a million. These are other things that have been activated, and are new due to previous year. Our total operating expenses are in line with expectations. Despite that we have raw material costs and freight charges. The cost of course has the impact on the sales mix, it's lower than previous years, as you can see. As I mentioned before, this is highly due to the DSM and the customer service margin for this. HR, we have the personnel.
It's almost in line with previous year, but we also have new personnel, investments in the DSM focus area, which is in PharmaCept for that case. Otherwise, looking at the other operating expenditures, the quarter was SEK 3 million versus SEK 2.9 million, so we are almost at the same level. Year to date, we have SEK 5.2 million versus SEK 3.9 million. Overall, the expenditures is in control. There are some deviations between the seasonal sales and depending on raw material purchases. Looking at the cash flows, for the operating activities, doesn't include the royalties which is included in the income statement of SEK 6.4 million, which was received in July. Other investment activities from the cash flow is that we have invested for the DSM manufacturing but also clinical studies.
This is also reflected on the balance sheet for investment assets. Financing activities, we have a change of overdraft, and these are due to the seasonal sales of raw material and purchases. In all, as I mentioned, we have had a strong quarter and a strong half year. We are investing and the growth we can see coming a lot from our DSM portfolio and the technology that we are developing. Thank you for mine, and I will hand it over to Simon Jegou.
Thank you, Petra. Yes, I would like to say a few words on the alignment of the financial performance with the group's strategic objectives. On the DSM side, as Justin mentioned before, we're seeing a positive development of the sales of the EmboCept S, which is a good indication that our efforts in strengthening the sales organization are paying off. That's a very good development there. On the product launch side, we are finalizing the recruitment of patients in a post-market clinical follow-up of SmartPAN. The study work is conducted at the Heidelberg University Hospital, which is a leading institution in pancreatic surgery. We're seeing great promise so far on the 21 patients of the 36 that were included.
The product is working as expected, and we are receiving very positive feedback from the surgeons who are very excited about the product. They are very impressed also by the ease of use and the effectiveness in detecting the pancreatic fluid leakage. This is very promising. We expect a launch at the end of the year or beginning of next year. We can't wait to see the clinical outcomes that this first-in-class product can deliver, both for patients, of course, but also for the surgeons. On the CDMO side, we're seeing also positive development on the contract services in line with our growth strategy.
We are seeing increasing number of projects coming in within the small volume niche markets, which means that for us, it's a great opportunity to offer our integrated services to the customers advancing towards commercialization. This is a clear sign we're seeing here. That's about it for me.
Super. Thanks, Simon. Just to summarize and to wrap up from our perspective, I mean, strategically, we can see that our strategy, our growth strategy is starting to take traction. Over the remainder of the year, we of course hope to and look forward to trying to propel that even further. The year to date, it's been very strong. We've seen very good indications out of the SmartPAN post-market clinical follow-up study at Heidelberg, as well as good sales increases and good market reactions to EmboCept, as well as the partnership between Magle and PharmaCept to generate the Magle PharmaCept sales brand in and across Europe and internationally.
This of course is reflecting back into the sales figures and the overall performance of the company financially. It's been a great effort by the team so far for the first half of the year, and we look forward to seeing what we can do in the remainder of the year and the future moving forward. Jens, with that, I pass the floor back to you.
Brilliant. Thank you, Justin, Simon, and Petra for that presentation. I'd like to remind everybody who's listening that you have the opportunity to ask questions to the company. You can use the question field on the right side of your screen or on the bottom of the screen, depending on the unit you are using. While you all type away your questions, I thought I'd like to kick off this Q&A with a question of my own.
It's a very strong report, like you mentioned, Q2 report, and especially the margin side was very strong and stronger than we expected. One reason you mentioned is very high margins on the CDMO side, and that's to do with an increased demand for more advanced, and therefore less price-sensitive services. Is this demand sustainable? Will you be able to keep it this way, or will there be a natural fluctuation, where sometimes there will be more advanced demand, sometimes demand for more, I don't know, generic or basic services?
Yeah. It is of course project specific, when it comes to these projects. We expect to have the natural fluctuation that you would see in these type of development projects, come up and down. Overall we, you know, the better and stronger the projects that we get in, the easier it is for us to sustain at least near and around those levels. Yes, there is an impact based on customers, based on their financial stability and also their performance and their clinical trials and the work that they're doing.
The gross margin of 97.5% is very impressive. Two questions. We start with the first one. You mentioned some of the factors, Petra, I think, but you mentioned that high amount of services and those are more lower cost of goods sold, royalties as well. If we compare royalties this quarter was slightly lower than in Q1. In Q1 you posted a gross margin of 90%, and this time it was 97.5%. If you could just shed some more light on what kind of different factors contributed to that.
Yes. If you look at the balance sheet, we also have built some inventories, meaning that we have been in production both on these material, but also on generic material. You have an impact of when we actually are selling the goods and when we're actually taking the cost. Depending on when we are producing and when we are delivering to our customer, it has an impact on the gross margin as well then. The cost of goods sold is dependent on when we take the cost and when we actually produce material.
Right. Okay. Good. You actually answered my second question, which was just about that other line. Okay. Moving on then. Personnel costs were slightly higher than in Q1. You mentioned that you've added to, I think, the PharmaCept sales force in Germany. What's the headcount at Magle Chemoswed as of today? I think last time we spoke it was around 73 employees.
Yeah. We're getting up to around the 80. We have a couple of folks joining us in the next couple of months, so we will probably be just over the 80 mark in terms of headcount. You know, we're always trying to maintain our personnel cost expense. We grow the business in terms of personnel as we see that the demand is coming for that. Yeah. I think we'll end at just around 80, just over 80, by the end of the next quarter.
In the report you alluded to, in the near future focuses on France, I believe. Are you staffed up for that, so to say?
We have a Frenchman in our CSO. Simon will lead the charge into France. We have some folks to recruit into France directly, so we have some candidates there. Those will be additional folks to come into the business.
Brilliant. Going back to the last quarter, you mentioned that Läkemedelsverket was to do an inspection of your Grade A clean room facility. Out of curiosity, I was just wondering how that inspection went, and if everything's good to go with the facilities.
Yeah. It went very well. We were happy with the outcome. Great support from the authorities. There's, as always with these things, there are a couple of things for us to do, but we expect to get the license in the near future. There was a slight delay due to vacation times, so some people not being available at the authorities. Yes, we don't see any major hurdles in us pursuing that side of the business, so.
Good. Another addition to your capacity, so to speak, is the CDMO capacity where you purchased the land from Malmö Stad. Do you have any more insights on the timeframe perhaps and how that's progressing?
Yeah. I think this is a midterm project for us. You know, there's a lot of work for us to do behind the scenes in terms of environmental impacts, risk assessments, land soil sampling, environmental sampling, and what have you. We're in the throes of all of that at the moment. I don't think we would expect to break ground before the beginning of 2026, probably more realistically, somewhere towards the end of 2026, beginning of 2027. I would say that's probably a good timeframe for us to have had all the planning permissions and things completed.
Early stages. Moving on to the DSM portfolio. The SmartGel or AXXO Woundgel, as you also market it, manufacturing start up during this quarter. Could we expect sales maybe Q3 or in the coming quarters? What's the outlook for that?
Yeah, I think probably the coming quarters, there's quite a big manufacturing for us to do, to start up to get the safety stock produced, and then to set up the supply chain and what have you. It'll take a little while for that to kick in.
Brilliant. And the SmartPAN post-market clinical study at the Heidelberg University, when is that expected to be finalized? In what ways will you be using the results for the coming launch of the product?
We expect to have the final readouts towards the end of the year. Late Q4, perhaps early Q1 next year. How do we expect to use the material? We expect to use the material as a pre-marketing. We have a number of case studies there. It also supports the health economic evaluations we have behind the product, as well as some of the reimbursement discussions that we're having in different jurisdictions around Europe.
You also mentioned that there's the filing procedures and everything is going according to plan. My question was if there are any updates on the other, so to speak, CDMO portfolio products such as the EmboCept L, SmartGel II, but I guess all the filing is going accordingly.
Yeah, we're just working this, so there's nothing major to report one way or the other. Currently we're on target for where we wanna be.
You mentioned it slightly in the presentation, but there are some geopolitical factors that have affected you. I think last time we spoke, there was some COVID lockdowns in China, so the demand in China was impacted negatively for you. Also the war in Ukraine and Russia, that situation. It seems that you've been able to handle it quite well. Is that because you have you been able to put those resources to use elsewhere or what's been the kind of active strategy for kinda combating that?
Yeah. We have a fantastic team. We've done quite a lot of pivoting, especially out of the Russian market to secure other customers on the generic side, to pick up that slack. The business development folks have worked quite a lot. We've managed to claw back the impact of us not supplying into the Russian market.
Brilliant. Good. I had another question. You made quite a few investments this quarter in both acquisition of the subsidiary you mentioned in the cash flow statement analysis as well as in assets. Petra, you mentioned that they were more R&D or investments in the DSM portfolio. I was wondering if you could shed some light on those investments and more what they will bring. I'll leave it to you, Justin.
Sure. Yeah. This is increasing capacities. We have a new building that we have put together that's currently being invested in. These are dedicated manufacturing units for the different DSM products. This is as Simon drives the strategy through the sales force and through Europe, we are starting to predict an increased demand on those DSM products. The investments we are taking now are preemptive investments to make sure that we have manufacturing capacity to support these markets as Simon and his teams open up the markets to us.
Right. Sounds promising. Going back to the royalties and so the royalty income, do you see? Do you think they're back at a more normal level? I think the last time we spoke they were SEK 9.5 million, this time SEK 6.5 million. And it seems as if the pandemic is starting to wane, at least. Is it correctly kind of prognosed to forecast to say that it's slowly starting to get back to the levels that we saw pre-pandemic-wise?
I think we put it like this. I think we are quietly confident that we are coming back to an equilibrium. At least that is the indication we're having not just in the royalty, but certainly from customers across the business that there is a return to some sort of pre-COVID market condition for us. We've been quite satisfied with where the royalties are falling so far this year. We certainly had no indication to have a different type of expectation for the remainder.
Are they evenly distributed during the year, or is there a seasonal pattern that comes and goes with them or is that difficult to know beforehand, so to speak?
There's always a seasonal pattern. You know, manufacturers slow down over certain periods where their maintenance periods are. Sales forces have reductions in vacation times, and same as hospitals have slowdowns in surgery. Of course the summer tends to pre-summer and during summer you have a slight slowdown. Then it's also about supply chain management in terms of managing your stock when you top up again. We expect to see these slight fluctuations across the year.
Okay. Good. I think that was all of the questions that we had prepared beforehand. As I think the audience has gotten their questions answered, I think it's time to round off. Thank you very much for your time, Justin, Petra, and Simon, and I hope to see you again soon.
Great. Thanks, Jens.
Thank you.
Thank you. Bye-bye.