Good morning, ladies and gentlemen. Thank you for standing by, welcome to the Vitrolife Interim Report, January to March 2019. At this time, participants are in a listen-only mode. There will be a presentation followed by a question and answer session, at which time, if you wish to ask a question, you will need to press star and one on your telephone and wait for your name to be announced. I must advise you, sorry, the conference is being recorded today, Tuesday, the 23rd of April, 2019. I would now like to hand the conference over to your first speaker today, Thomas Axelsson. Please go ahead.
Thank you very much. Welcome to Vitrolife Interim Report, January, March 2019. The speakers today will be Mikael Englund, CFO of Vitrolife, and myself, Thomas Axelsson, the CEO of Vitrolife. Please go to page number two, and we'll go through the summary of Q1. The Q1 for us was supported with a continuous high profitability, and I would also like to comment that we had a new business unit for this quarter. Sales was SEK 312 million, and it is a growth of 18%. The sales increase was 12% in local currency, where 4% was organic growth. EBITDA, 40% margin and total SEK 126 million. During the quarter, we also got a market approval for EmbryoScope+ in China.
Together with that, regarding the EmbryoScope and also development, we did an acquisition and have done a collaboration agreement regarding technology for embryo assessment using artificial intelligence, and that was done after the period. Please go to page three, I will look into the sales of the different regions then. If I start on page three from the left side, then it is the region of Americas. The sales in Americas is mainly US, and we had a very good growth in that territory of 48%. The growth is coming from the time-lapse that we got approved last year, and we can see a continuous interest within time-lapse in the region, and that combined with our sales of the genomics business.
If we then go to the, our largest region, that was unfortunately declined with 1% in organic growth then. We had very good sales in media, and the total sales within the media region was SEK 135 million. It goes a little bit up and down regarding the hardware, where sales on time-lapse. The region was good for media, and it wasn't so good for time-lapse in this period. If we're then moving to the region that is Asia, China, but without Japan, it was a very good growth even there. It was a growth of 31%. I would like to say that nothing of that growth is coming from the approval of EmbryoScope+.
The growth is coming from time-lapse sales in other territories in just China. It was also a good growth within the region for media. In all fairness, last year was not the best period for China, a growth of 31% is quite good. It was SEK 76 million. It was time-lapse equipment placed in Thailand, Vietnam, and in India, together with the growth of the cryo products there. If we are looking into Japan Pacific, there was decline of 5%. It was opposite towards China last year, where the territory last year had very good growth. If we compare with last year, it was the slightly decrease of the hardware products from time-lapse. The media was doing well in the region.
You are then combining and looking down to the sales figures, you know, it was 12% in organic growth, and 8% of those was acquired from the genomics, and 4% was real organic growth from the base business. 6% was currency effects if we are looking on the total sales increase of 18%. We will then go to page four, and then go through the business units, and let's start from the top. It is the new business unit that we are calling genomics, and that is for genetic testing, for aneuploidy and monogenic disorders, for pre-implantation use.
It was the Q1, we are very pleased to say that the transaction activities together with Illumina in taking over the customers and doing support for that within the region during the quarter has gone very, very smooth. We have in place a new organization that are dealing with sales and support, technical support, and the things the customers are asking for, together with the development people for the next generations of products that we are doing. Total sales for this quarter was SEK 20 million. ART equipment was a sales of SEK 12 million, this compared to SEK 18 million last year. I would like to say that it is negatively impacted as a result of a disruption of some IT systems of around SEK 3 million. Those will instead be in Q2 then.
time-lapse, positive one, and it is a good momentum, and we can see the customers that bought the hardware before are using the equipment more and more, and that's why we are having a stable growth. Let's say, to have the peak between the quarters depend upon if we are selling more or less of hardware. It's a growth of 1%. Disposable devices then, it was a decline of 4%. Unfortunately, I do have to say that partly of that is that we have had some delivery problem to some larger customers within the pipette sector. Then the media, very good growth, 14% of our core business. All businesses within media was growing. It, culture, and transfer and trial.
We can see that Mikael is probably going to come back to it later on, that we scalability on the media products that is growing so well with 14%. If we are then going to page number five, I would like to make a few comments regarding the acquisition that we have done, and it goes together with the line of time and also genetics going forward. Let's concentrate on why we are doing our own development, and why we are doing collaborations, agreements, and why we are buying technology for a time that's using artificial intelligence. That is all in line with our overall business goal, and that is provide tools, products, support systems to reduce time to pregnancy.
We have already different algorithms built on kids or guided mutation, and where they are also changed, where we use artificial intelligence. Those are based upon how embryologist works, more or less. There is a lot of information that we are getting out of, you say, the time-lapse equipment, all the morphology, all the steps, all the cell culturing. We can see that if we and the customers will have a better opportunity to go through all that kind of complex information, and we can do it to a more easy-to-use product, then we do believe that we can see a better outcome.
You can save time, for instance, and with saving time, it's going to go faster, and by that also, we can, we can predict a little bit better clinical outcome. The collaboration with Virtus Health, and Harrison.ai is for the technology, it is for continuous development of the algorithms. It is also for doing an RCT together with Virtus. The current product, and how we will work with it, is that it is a research use-only product, and that's the reason why we will need more RCTs, and hopefully, we can be the first one that will, that have some kind of approved, regulatory approved, image recognition tool for, the fertility business. That one, going forward, also with genetics, all of that is regarding the embryo selection.
Because there is, in most cases, there is one or more embryos during cycle. That is good. The question is just which one to choose. By having the opportunity to choose the right one from morphology time-lapse, and also the opportunity of choosing the right one from genetics, we believe, and we are working on, the road towards successful results then. By that, I would like to go to page number six and hand over to Mikael.
Yes, I will take you through the key financials during the quarter. If we start off with gross margin, we reported 63%, which was down compared to 65% in the same quarter last year. The main component for this variation is the product mix of genomics. The genomics business that entered into Vitrolife from the beginning of this year, has a lower margin than the average of the group, and that impacted the reported margin for the group. We had a positive currency effect, and we had a positive effect of the transition into the new IFRS 16 accounting standard of about one percentage points.
The EBITDA margin was 40%, and then that margin was also impacted by the currency and the genomics product mix, as well as the IFRS accounting standard. The net debt in relation to EBITDA was minus one. We continue to have a financial position to support our growth ambitions. With that, move to page number seven for the outlook. The long-term market growth, we expect to continue to be in the range of 5%-7% in monetary terms, and as before, driven by the growing middle class and the trend that people wait until they have children till later in life. We will focus on expansion of sales. We continue to see opportunities in all markets and business units.
For example, in Asia, we are focusing now on the marketing of the EmbryoScope+ in China, following the market approval, as Thomas mentioned. We will also continue to focus on broadening the product offering, both by in-house product development, but also through acquisitions, such as, such as the example of the AI technology acquisition that, Thomas mentioned before. With that, operator, we are ready to take questions.
Thank you. We will now begin the question and answer session. If you wish to ask a question, please press star and one on your telephone, and wait for your name to be announced.
If you wish to cancel the request, please press the hash key, so star and one on your telephone to ask a question. We just have the one question at the moment from Björn Olander of Murgata Equity Research. Please go ahead.
Oh, sorry, I think I was on mute. Good morning.
Good morning.
I have a couple of questions. First one on genomics. It would be interesting to hear where you are in this stage. I mean, did this collaboration start from 1st of January, and you sort of got up to speed directly, or is it has it built up gradually during the quarter? I mean, what I would like to know is how normal is the level of sales? Has there been any pent-up demand, are there many regions that you haven't sold in and so on? A bit of a feeling for the state of that business right now.
Okay, good morning, Björn. If I should start, regarding the regions, I take it from the end of your questions. We are only right now selling those products that we have, let's say, got a conversation right from Illumina in the territory of EMEA and the Americas. It's only those two regions. When a transaction is being taking place, it's kind of normal that customers are a little bit worried regarding if the new identity can do the support and also fulfill them, let's say, their demands from the first day.
Yes, of course, there has been some customers that was filling up their inventory or, and at the beginning of the year or actually at the end of last year, so they could have products for January and then a little bit in into February. I do think that we have done that very well together with Illumina, and has transferred customers and transfers customers to us, and we have supported them well. As we have guided before, the Q1 is a start-up quarter, with, and has had, you know, and we believe there should be some challenges initially, but it's gone extremely well. The projection is that, yes, we will have full quarters of sales from Q2 and moving forward.
Okay. This is not a sort of a normal quarter and expect a bit higher in the coming quarters. Is this something that will sort of, maybe will you add countries and so on, during the course of the year? Is this more of a shift that you just take over and there is more of a underlying growth of the market, so to speak?
Try to answer it. The market that we currently, I repeat, it has the rights for is EMEA and the Americas. The Asia-Pacific market is a market that Illumina will continue to support and supply products to. The agreement is that later on, when we have done development, is coming out with the next generation, that we are in a situation that we could also supply products to those markets, but that is not something that will happen in 2019. The underlying growth in EMEA and Americas for this business is, I wouldn't say that it is still growing a lot. It is growing like the normal business within this side.
There are, however, clinics that are starting to use more and more, and it's also a transaction that we can't control. It's more regarding when territories or, let's say, countries are opening up for genetic testing. There are markets like, for instance, the one that we are sitting in right now, Scandinavia, Sweden, where you are not doing this kind of testing due to the regulatory situation and the law. It's mainly today, US, Spanish, Russian, UK market, and it's coming in those, in other territories, too.
Okay, very good. What are you doing in terms of organization and so on? I mean, you have development organization and so on. Could you mention a bit more about the that business area?
What we've done there is that we have recruited specialists, you know, building up know-how regarding the genomics, also know-how regarding how to work with the counseling side in this. It is an separate organization for support, sales, and also for development. The development of this kind of chemistry, yes, there is some of that development that we have competence within the current Vitrolife, or let's say current old Vitrolife, so we have been able to recruit some staff in that side.
What we are using a strategic, let's say advantages that we can, that we can share between each other, and that's a synergy that is in customer contact, clinics that are using our products, clinics that are interested in as well, time-lapse as genetics, and of course, also all the overhead and warehouse support on that side, the logistics. It is an organization only focusing on genetic know-how and development of products that are for genomics. The rest is shared.
Okay. Second area of interest is, of course, EmbroScope+ in China. You announced it, 15th of March, if I remember correctly. Has there been any sales in China yet from that?
No, not yet. As Mikael said, that we are putting a lot of resources right now in utilizing our opportunity to have EmbroScope+, that partly was made for larger markets like China, like Japan, bigger clinics in Europe. From the 15th of March up until the end of March, there is not any sales of EmbroScope+.
No. How fast will it go, you think, with, I mean, have clinics waited for this approval, and they are sort of ready to hit the ground running? Is this more of a gradual thing that will sort of play out in the coming quarters and years?
I would like to say yes on both of them. Yes, we will see customers that have been waiting on it because it fits quite well into the larger structures. Yes, we will see, and I expect a good growth of EmbroScope+ in China. I also believe that the Chinese markets and the openness and how they view upon, let's say, the different kind of tools that they are investing in that, time-lapse is something that Chinese customers are viewing as a very, very good tool. The competition will increase, but I do expect that more and more clinics will go for time-lapse, and that will be from us or from the competitor.
I'm not going to do any long-term, let's say, guess on that side, but time-lapse will for sure grow in China.
Okay. Could you also remind me how the genomics side is in China? I mean, you're not part of that yet, at least, but how time-lapse versus genomics parts in China?
That's a big question regarding genomics, and I will not go into that because you probably are reading articles about what they do in China. What I can answer is that I don't see any conflict. I mean, there could be a conflict, that it was five years ago in the US, for instance. Should they invest in genomics, or should they invest in time-lapse? I don't see the same kind of discussion going on in China, and I don't really believe that genomics will take the kind of part in China that it is done in the US.
Okay, very interesting. Thank you very much.
Thank you.
Thank you. Oh, we just had another question, and it's from Victor Forssell of ABG. Please go ahead.
Thank you. Good morning. I have a follow-up question. I'm not sure if you mentioned it earlier, but do you have or provide any geographical for genomics? I assume that a majority of sales contribution is derived from the Americas. Is that a correct assumption?
Yes, that's a correct assumption, we don't provide any detailed list of the genomics per region. At the moment, we are only having distribution rights in North, South America and the EMEA region. All sales are in those two regions, but the majority of sales are in the North and South America.
All right, perfect. Thank you. Also, if it's possible to quantify somehow the negative margin impact from genomics as well, if you could sort it out somehow?
What we have guided is that we believe that genomics will contribute to about 10% revenue growth in 2019 compared to 2018, and that EBITDA growth will be 3%-5% compared to 2018. That will be margin dilutive then, all else equal. The biggest impact of the reduction of gross margin from 65%-63% is due to the genomics product mix.
Sure, yeah.
That is the answer I can provide you with that.
Do you see that dilution somehow vanishing during the year or improving towards the end of this year? A negative effect in the beginning.
Well, it will, of course, be a function of the product mix. The margin that we will have on these products that we are distributing for Illumina will be pretty stable if you look on the margin on the products.
Yeah.
The opportunity for margin improvement for the genomics business will probably be when we launch a new generation products and how that gross margin for that product will look like when it's a product that we ourselves.
Sure. Yeah. How should we look at the cost base, moving into Q2 and forward with perhaps a ramp-up in marketing in China, for example? How should we look at this?
Yes.
We don't do any forecast when it comes to the cost base, but over time, it has been relatively stable if you look on the operating expenses in relation to sales. I would foresee that going forward. We have guided as we expect R&D costs in relation to sales to increase somewhat over the coming years. Gross margin, this effect that we see in the Q1, I would expect us to continue to see the effect of the genomics gross margin impact during the rest of the year.
All right. Okay, thank you very much.
Thank you.
Thank you. There are no further questions on the line, sir. Oh, we do have one. He just seems to be coming in last minute. Daniel Albin of Danske Bank. Please go ahead. Daniel Albin of Danske Bank, please go ahead.
Thank you for taking my question. I wonder if you can update us on the commercial timeline regarding the rights of CrossBay Medical. Have you received any greater clarity, or how should we view this going forward? You did some writedowns in the Q4 report.
Yeah, we did. Hi, Daniel, it's Thomas. Yes, we were predicting, and it's not any change in that business, that a delay in the product, let's say, a product setting into the production and some of the changes within the product. It's not any change from before, and what we said that we are delaying it with about 1 year before the compensation of it.
Okay, got it. I wonder if you can just update us on your total market share as of today?
Yes. It depends on how you view the market. We believe that the sales of disposables on equipment to IVF clinics constitute about SEK 10 billion. Given that our sales are about SEK 1 billion, that would imply that we have a 10% market share, if you view the market as the total disposables and capital equipment market. If we look on the products that we currently target, which since we don't target all the products that these clinics purchase, we believe that our market share is in the region of 20%.
Okay, got it. On the competitive field, are you seeing, you know, new competitors or increased competition? For example, within the time-lapse segment and also the media business.
Yes, competition will always increase, and it will always change. The question is just what kind of product development and what are we doing to compete with those things? On the time-lapse side, yes, competition is coming in. We have, as people are aware of, you know, different kind of products. We have for single use, for, let's say, just one use, the innovation, we have the version where you can look on six embryos and the current one on 15 embryos then. That's something I do think is important going forward, that is going to be first in differentiation on hardware. But personally, also, I do believe that the biggest differentiation will be within the software. It's the software support that is going to open up the market.
There are maybe around 15% currently of all the cycles being done by time-lapse. There is a couple of reasons behind it, but I would like to say that one of the major reasons is that it is complicated, even if we don't think it is, even if it isn't that for some of the customers, it is still a new tool. By providing easier software, I do think that market will grow, and that's the reason why I personally believe that artificial intelligence by image recognition is definitely a good way moving forward. If we are now looking into the media side, yes, the competition will increase domestically in China and also in some of the emerging markets.
To some extent, I also think it's going to decrease in other markets due to the regulatory situation. You need a certain size to be able to afford the regulatory approvals with all the kind of processes. With the growth of this business and more regulated business, the consolidation and the growth of, from us, from instance, CooperSurgical and from some other players, is going to be a new competitive situation then. That's about it.
All right. Yeah. Thank you. That was all.
Thank you. There are no further questions on the line now, sir.
Okay, if that's the case, thank you very much for listening in, and have a very good day. Thank you.
Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.