Ladies and gentlemen, thank you for standing by, and welcome to the Vitrolife Interim Report January to September 2019 conference call. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. I must advise you that this conference is being recorded today, Wednesday, 6th of November 2019. I would now like to hand the conference over to your first speaker today, Thomas Axelsson. Thank you. Please go ahead.
Good morning. Thank you for listening in on Vitrolife Interim Report, January to September 2019. The speakers today will be Mikael Engblom, he's the CFO of the company, and myself, Thomas Axelsson, the CEO. Let's start to go through the quarter then with page number two. In summary, the quarter was a good quarter with continued profitability. The sales of SEK 378 million. It was a growth of 33%. Sales increased by 27% in local currency. After that it was 15%, it was an organic growth. The EBITA margin was 41%. In numbers SEK 165 million. Please change to page number three. Mikael and I will start to go over the reasons behind this growth, profit growth. Okay. Let's then look on sales and growth per market region.
The growth, as I said before, was 27% in local currency, and 15% was the organic growth. If we start from the left of the page, from Americas, and then go through with the regions. It was a sales of SEK 71 million in Americas. It was good profitability. We are quite successful right now with the genomics and also with the media in that region. We are still, and I could say that for all regions, not for all regions, but for Americas and EMEA, we are distributing the Illumina products within the genomic side for this field then, for the IVF field. The growth was 35% in Americas. If you go to the region EMEA, it was a growth of 26%, in numbers it was SEK 147 million. It was growth in every business unit, and it was also growth in almost all geographical areas.
Part of the growth there is of course, due to the genomics, too. As I said, good growth in every business unit. Looking at quarter Asia, that is Asia without Japan. It is mainly China, India, and Thailand, more or less is the growth there was, and I would say only 4%, and I will explain a little bit more later when we're coming to the business units. The growth there was within Time-lapse, and it was a negative situation for the sales of Media. The sales was SEK 89 million. For the Japan Pacific, it was a fantastic quarter. The growth was 69%. The sales in that region is increasing due to more sales of all products. I would like to mention that during this quarter, we have had good sales of Time-lapse. One product that we introduced, for instance, was EmbryoScope Flex.
That's our largest product within the Time-lapse family. It takes 24 patients. Overall, it was a good growth of total 27%. Let's change to number four and look into the business units. Let's start from the top. The genomic business, sales of 37 million SEK, that is, as I mentioned before, only for the regions Americas and EMEA. Within that field, we are keeping up with the customer demand, we are also continuing with building more and support and this is the space. I will comment also that we are continuing with the product development in this field. Move to the ART equipment. ART equipment, as mentioned at earlier telephone conference, we have changed the product mix and are only more or less producing our own products with better profitability. The growth is 35%, the main product there is lasers.
Sales of 19 million SEK. I would like to say that we have not yet got the approvals for the last version, it's called NaviLase in U.S.A. and China, and those are the biggest market for lasers. Time-lapse, then, a growth of 45%. Sales of 108 million SEK. It is growth in all product lines, more or less. We have new products that is driving the growth. It is EmbryoScope+, as talked about before. We have introduced Flex 2. I must say that it is a great interest for Time-lapse. It's coming from the last two larger conferences. It was the one at ESHRE for Europe this summer, and then also during this season, it's in the ASRM in U.S.
We are in that range, continuing the product development both for hardware and for software and are continuing our work with artificial intelligence to make the products more accessible for the users. Means easier to use. Consumable devices, growth of 11%, SEK 46 million in sales. We are coming out of the situation where we have had some problem in delivering products. We are still increasing the production, and that is a trend, and we are increasing our capacity, so we can see that it is growing trend there at 11%. Media then, it is a growth of only 1%. It has been growing good in all regions except for China. It's good growth within the cryo products. By mentioning then China and cryo products and product development, I would like to change to page number five and look into the media.
During the quarter, a couple of things has happened that I would like to describe regarding media that is for Vitrolife good news. First is news regarding our development and what has happened there. During the quarter, customers were presenting data at the US ASRM conference. The data there was from a multicenter randomized control trial, and it was an sibling oocyte multicenter study. What we have done is that we have done some changes within our media for better performance. The biggest breakthrough and changes are the right combination, I would like to say the right combination of antioxidants. Antioxidants is something that is well-known within this field, but it is just a question about getting the right combination, and it is for three different antioxidants. That is acetyl-L-carnitine and N-acetyl-L-cysteine, and also alpha-lipoic acid. All of them are used in sequential culture media system.
What's good is that the Japanese study that we have done is showing very good results. It is an increase definitely for those over the age of 35. It is an increase in clinical results, in implantation rate, fetal heart rate, and also in ongoing pregnancy. We are waiting on more data on baby born then. The reason behind this success with product development is that it is all about the reduction of oxidative stress. Okay. During quarter also, we did a launch of the oocyte vitrification media in the U.S. We got it approved, the FDA approval during the quarter, and we did a launch at ASRM. Now we are able to go out on the U.S. market and have both media and also the handling consumables, the straws that you're using when you are handling the oocytes.
This is a good thing for Vitrolife because it is a situation and it is a field where we do believe it's going to continue the good growth. It is growing due to the growth of social freezing, but also that you can take action before medical treatments that can cause some kind of fertility-related problems. With the usage of vitrification and also pick up and you have a good survival rate, that's a very good way of reducing, let's say, the problem of some kind of medical treatment. Focus upon the upgrade of media range in China. We said before that it was growth in media of only 1%, China media market is very important for Vitrolife. We have had, as explained before, some problem with the sourcing of raw material.
We have overcome that problem during the quarter, and we are now building up the production and inventory for reintroducing them on the China market. All of the products are for the culturing field. We are also doing, we've been doing it for many years, but I would like to address that the registration process for our products so we can have a global harmonization of all media is going well, and we expect that some of the products that we are selling in other countries will also be regulatory approved within the near period. If that's going to be Q4 or it's going to be Q1 or Q2, you can never say because it's difficult to actually know when we are getting the registrations, the papers, but it goes quite well.
Overall, it has been a good quarter in all product groups, in all territories, and advancement within our product development and Time-lapse, and also within media. With that, I would like to hand over to Mikael and page number six.
Yes. Thank you. I will take you through the key financials during the quarter. We recorded sales of SEK 378 million, as Thomas mentioned. About SEK 20 million of that increase was due to currency effects, primarily the weakening of the Swedish krona. Gross margin was 64%, down 50 percentage points compared to the same quarter last year. That is primarily due to the genomics product mix. The genomics products have a lower margin than the average of the group, so it impacts the product mix negatively with about 50 percentage points. EBITDA was SEK 165 million compared to SEK 121 million same period last year. This increase, about SEK 9 million, is due to currency. The margin of the EBITDA was 41%, down two percentage points compared to last year.
It is the genomics products mix that is impacting this compared to last year, as well as that we have a positive effect of the new accounting standard, IFRS 16, which contributes with about one percentage point compared to last year. Net debt in relation to EBITDA is -1.1. We have a net cash position of close to SEK 600 million at the end of the quarter. As before, our ambitions are to use this for value-generating acquisitions. With that, please change to page number seven for the outlook. As before, we expect a long-term market growth of 5%-10% in monetary terms.
That's breaking down to a cycle growth rate in treatment of 3%-5%, and that you're using more and more treatment and technology for each treatment, which then adds the value for the industry to what we expect, 5%-10%. As before, we will continue to focus on sales expansion, and that is both that we are adding resources in sales and support, and also work more closely with the large and growing clinic chains of the world. We will also continue to broaden the product offering, this could be done both by product development, as Thomas mentioned before, with the media development, but also through acquisitions. With that, operator, we are ready to take questions.
Thank you, ladies and gentlemen. We will now begin the question-and-answer session. As a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be taken by an operator. Please stand by while we prepare the Q&A queue. This will all take a few moments. If you wish to cancel your request, please press the hash key. Once again, please press star one if you wish to ask a question. Your first question comes from the line of Björn Olander. Your line is open. You may ask your question.
Yes, thank you. Björn Olander, NORDIC Research. Three quick questions. First of all, very good quarter. As always, I try to focus on the uncertainties. Starting with the media business and the situation in China, has that been fully resolved now? Was it solved during the Q3, or has it also affected the fourth quarter? That's the first question.
Yes, I can respond to that, Björn. Yes, the sourcing production issues have been solved during the third quarter. It impacted the third quarter. During the fourth quarter now, we are introducing the products again that we have not been able to supply to the Chinese market. Then we are working with the clinics to change from the competitive products that they have had to use during the time that we have not been able to supply the market. We will work with the clinics now to try to convince them to change back to our products during the fourth quarter.
Okay. You mention in the report that it seems like many clinics have switched to competing products, and now you're trying to switch them back to your products, I should say. How easy is that, and is there a risk it could be a long-term effect that people could stay on the competing products?
Good question, Björn. You know that it is not all products that we have a problem with.
It is just part of the products, mainly the calcium products. Of course, there have been a lot of disappointed customers as well as disappointment within Vitrolife that we've not been able to support the customers within Q3 then. That has been a struggle for the customers. They have been working with it, and they've had some concerns. Since they are familiar with our products and they've had excellent results with them, it is not that we are introducing new products. It is that they are able then to get them back into their normal routine. I wouldn't say that it is a huge challenge, but of course it's going to be some disturbance during Q4 too, because they have some inventory currently, because they didn't know when we were going to be able to support them with the new products. It's not a long-term issue.
Okay. Moving over to genomics, obviously a very good start for that comparison as BTP. I'm just curious about the Asian market. You are developing a new generation of products. Could you give some more color on those new products and hopefully maybe when you think they will be launched?
Okay. I don't know if you know, comment exactly what we are doing. I can give you some hints, but it's not any secrets. When you mentioned the Asia and Pacific market, that is not included in our agreement with Illumina. We will get the rights to sell to those markets when we are ready with the new product. The product development within this field is considering the changes that we have seen, and those changes are that it is to have a product that is as stable and good as the current VeriSeq product, but also at the same time being a little bit more cost-effective, because it's in a cost situation within this market.
The second thing is also to be able to respond and see how we, since we are focusing on the IVF and fertility market, how we can make this genomics a little bit more easier and a lot more cheaper for the end user, the patient.
The situation there is that when you do, for instance, a PGT-A, then it is a process of monitoring the embryo. You are using lasers. You do the biopsy. There's a lot of moments there. What we can foresee is that one day it's going to be a market of easy-to-use products, ultimate software situation, and also from an ability to maybe skip a couple of those steps that is labor-intensive and add cost. That would, for instance, be that you can do genomics directly from taking a small sample of the medium. It's going to be a non-invasive situation. It is to improve the current traditional one, where you do biopsy and have good results, and then also try to see that you are getting a non-invasive product line that are as stable and have good performance as if you do it with the biopsy.
That's the trends that we are working on.
Okay. Those new products or concepts are not limited to Asia.
No
competitive also globally.
No. This market is, for sure, a global market. Of course, it is starting, always as it's been in this field, in U.S. I would like to say that it is a growth potential. A lot of the growth potential is regarding cost for the end user and the accuracy of the test.
Okay. Last short question, just coming up, had another impressive quarter. Are there any one-off effects in Q3 from major orders, or you had recently introducing products, if it could launch volumes or something like that, just to calibrate the expectations for the coming quarters?
I would like to say that I have answered before, is that when you go into a business like hardware and where the current penetration on the market maybe is around 15%, it is still 85% of the market that is not using Time-lapse. What we will see then is that it's going to be some variation between the quarter that, okay, one quarter you are selling a little bit more hardware, another quarter, you're selling a little bit less. What I would like to say that we believe in this, by just saying that, just because we are selling to one center, we shouldn't be able to sell to another center the next quarter, I don't think that is correct because it is a long trend. When we are getting customers, that is how we are working with the hardware.
It can be fluctuations between the quarter, but we believe it is a, for sure, growing segment.
Okay. Thank you very much. That's all from me. Thank you.
Your next question comes from the line of Dan Nicklin. Your line is open. You may ask your question.
Yes. Thank you very much. A few questions. First, if we start with media, you said that you are in discussions in China regarding introducing new products. Could you elaborate a little bit about, is it a full folio of products that you sell on other markets that you are trying to get approved in China, or is it just a part of it? Can you give us some color on how we should look in on this?
Okay. Let me explain. We are not introducing any new products. We are getting back with the products that we had some sourcing products with. That's the first thing regarding the market, and the sourcing problem that we have had in Q3. What I tried to explain, and I didn't do that successfully, is that what we have been working with for a long time is with the Chinese FDA, that's the National Medical Products Administration, to get the same kind of product that we had approved in other territories. The approval process in China, unfortunately, is quite tricky, and it can take more time than what is expected. What we are doing is that we are waiting on those registrations. That has nothing to do with the current market, the products that they are used to work with.
It's just that those products that we then will be able to sell also in China are the same products that we are delivering to the rest of the global market. That's the harmonization of our media range.
Yes, that was the way I had understood it. The products that you sell in China today are not exactly the same as you have approved in other markets. If you look at what you sell in other markets, are you trying to get all your products approved in China, or is it just part of it? At some point, just listening to you, it sounds a little bit like you're expecting the first approvals for the newer products in China or the products that you sell on other markets to come relatively soon. Then you will probably end up in, or you could potentially end up in a situation where you are both reintroducing products that you have sold and have had sourcing issues with, at the same time as you might want to introduce completely new products.
Is that an issue, or is that a potential issue?
I don't see it as a potential issue because the market in China is when you do a registration process, you are also doing clinical studies to get local data so you can prove the reason behind the registration and also get the user, let's say, feedback. They know about the products. It is a global world and it isn't so big. You go to different conferences, you know what's happening. We have had pre-discussions with the opinion leaders regarding the product range. I don't think that's going to be any major problem. You will not need to change your procedure. You will not need to change any step, any timings in how you're dealing with the media. It is just that media that is performed a little better.
Okay. My thinking was that is there a risk that a client that has not been able to buy products from you due to the supply issues and are therefore using competitor products, instead of buying the old product that you get back from solving the sourcing issues, is there a risk that they might wait to change back to things that change to when you get new products approved on the Chinese market? Or is that just not a risk at all?
It's a risk in all business of course. The risk that I see, if you would like to take it into consideration of short-term financial, let's say, situation, is that the risk is the time it will take for the customers, as we view it, to end their own inventory of other products. That's the major risk, how quickly will they then be able to transform back. Maybe if you take the risk assessment that there is a few customers that will not change back. There's always a risk.
Okay, great. Could I also ask about the genomics development? I mean, you're developing your own development or your own genomics products and could you give us some info on how you're proceeding there, and what's the timeline, and if anything has changed from what you've communicated before when it comes to when you can introduce your own proprietary products?
I don't think there's any more news than what I said. We are working on it. That's our ambition. We have a team, and we have partners in this field, and it is a development, and we try to have them as ready as possible. Not any timeline.
Okay. Last question, could you update me on pricing for the EmbryoScope Flex product compared to EmbryoScope+ and the ordinary EmbryoScope?
We don't disclose any specifics on pricing of specific products. Obviously the EmbryoScope Flex is our most expensive machine as it has the highest capacity. You also have some scale effects as a customer when you buy a large machine compared to a small machine. We don't disclose any specific prices for the different products.
Okay. You could run 26 embryos at the same time in that one.
Twenty-four.
Twenty-four.
Not 24 embryos. You can run 20-
Or-
24 dishes for a couple or for a culturing. What it is, it is based on a situation where you do more of mild stimulation, you're not having so many oocytes to do a fertilization on. It is the number of wells that you have within a dish. It is for markets where you do mild stimulation. For instance, they do that a lot more in Japan. Compare that with U.S. where they're doing heavy stimulation, let's put it that way, and where there are cases where they take out 25 eggs or even more, this product would not be suitable for the U.S. market. This is a product for clinics that have larger sizes that do mild stimulation in most cases. It is a product for mainly the Asian market and some larger clinics within India.
Okay, great. Okay. Thank you, guys.
Thank you.
Thank you.
Your next question comes from the line of Victor Forssell. Your line is open. You may ask your question.
Hi. Thank you very much. I think most of my questions were answered already, but I have one last one on the Time-lapse segment. Is it possible for you to dissect the growth a bit more in the quarter? I mean, last quarter we had the large order from EmbryoScope+ to China. If you could sort of break out the growth in different regions, but also in rough figures by the different systems, that would be great. Thank you.
We are not going to disclose that regarding our product. I can guide you like this. We made an announcement last quarter regarding the China order because it was a product that we have been doing product development on, that was specially also done for the Chinese market. It fits very well with the Chinese market, we got it approved. To give guidance to the market and saying that, okay, this is approved, we are starting to sell it in China, that's good guidance to you and the market. We are now starting also to sell EmbryoScope Flex. The information then to you is that it is, you can see that it is a product that fits well into the Japanese market. The same kind of answer as Patrik was asking about.
You can see that the product range, having everything from single product, just one culturing, like the Primo that is hardly being sold anymore, to the traditional EmbryoScope+, and EmbryoScope Flex, is taking into consideration the culturing therapy that what you do. The bigger clinics go for larger products, depending upon mild stimulation or not. That's then, let's say the guidance for in what kind of regions is it that they will use, what kind of product. Size of the clinic, depending upon if they will go for the EmbryoScope or EmbryoScope+. The expansion and product development that we are continuing doing is to try to fit a product into the right customer segment, depending upon if they are doing Time-lapse as it is, or if they do Time-lapse together with genomics.
If they do genomics with just some kind of selection due to Time-lapse to reduce the number of embryos that they will do biopsy on. That's the kind of segmentation for different kind of therapies that we are working on.
Right. Yeah. Thank you very much. Just a quick one on your current OpEx base. How lean would you say that it is currently, and what type of investments do you see for next year in terms of SG&A or R&D? I know you've been talking about R&D picking up a bit to your space. Thank you.
Yes. We have been expanding our OpEx compared to last year, as you see in the numbers. We've been adding resources in basically all functions. In sales and marketing, we've added resources, we've done acquisitions, we are strengthening administration such as quality assurance and IT, and we have also strengthened product development with media development and the acquisition of AI technology and some frequent product development related to that. We are strengthening in order to support future growth in all areas, and we expect that to continue. We are building the company to match the increased expected demand.
Right. You would expect some leverage to shine through in next year as well, some operating leverage from here.
Well, we haven't guided to have any improved EBITA margin due to scale effects in OpEx. We have actually said that we expect R&D costs to increase somewhat in relation to sales over the coming years due to the different opportunities we see in product development, especially in research and development. We're not expecting EBITA margins to improve due to scale effects.
Right
on the OpEx side. Yeah.
Okay. That's helpful. Thank you very much.
Your next question comes from the line of Arvid Makondan. Your line is open. You may ask your question.
Yes. Okay. Thank you for taking my question, congratulations on a great quarter. I was just wondering if you could dig down a little bit deeper into the launch of RapidVit, given that vitrification is perhaps one of the fastest-growing segments of the media market. Do you expect this to have more impact in upcoming quarters, is it not big enough of a product for you guys yet? Yeah, just if you can provide some more color on that.
Good morning, Arvid. The vitrification market, as you say, is, as we also believe, is a super growing market within the media range. The traditional vitrification products that we have for blastocysts, et cetera, and embryos, it is something that we have in most markets. In U.S., we have had some struggle to get the right clinical data through FDA, and we have been waiting on this. The situation regarding then oocyte vitrification and how the market looks like is, we have to take into consideration is that this market in oocyte vitrification, as we predict and the business predicts and the clinics predict, is that it's going to be a growing market. One aspect in U.S. is the social freezing, the social freezing is coming from U.S. as most of these trends.
Another thing is also an awareness from, for instance, the oncology side, that when they start treatment, if there is any kind of risk for some kind of fertility problem as a negative outcome of the treatment, then they first do, if it is a possibility due to timing, that they do an oocyte pickup so they can save the eggs for future, hopefully, fertility processes. There are two trends behind it. It is not going to be an explosion, but if we compare with the growth between different kind of segments, the vitrification market, and especially the oocyte vitrification market, are double-digit growth.
Okay. All right. Thanks for that. Just a last quick question. Do you feel, given the results you've seen so far in the genomics business unit and taking into account the growth you've seen in the other business units as well, do you still stand behind the guidance of genomics having an impact of about 10% on the whole year sales, or do you see reasons to update that guidance?
I believe that we are, on the first nine months, contributing with about 11% compared to the last year and for the same period. We are a little bit ahead of that guidance of 10% for the first nine months, but it's not a big variation, so we don't really see any need to change that guidance. For the first nine months, we are a little bit ahead of that guidance.
Right. Okay. Yep. That's it for me. Thanks.
There are no further questions at this time. Please continue.
Okay. If that's the case, thank you very much for listening to our Q3 report, and bye-bye. Thank you from Mikael and myself.
That just concludes our conference today. Thank you for participating. I'll disconnect the line. Be careful, you sir.