Earnings Call: Q2 2021

Jul 15, 2021

Good day and thank you for standing by and welcome to the interim report January, June 2021. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer For your information, the conference is being recorded. Now I would like to hand the conference over to your speaker, Thomas Axelson. Please go ahead. Thank you very much, And welcome to the interim report January, June 2021. The speakers today will be Mikael Englum. He's the CEO of the company and myself, Thomas Exoson, that is the CEO of the company. Please change page to them and go into the summary of The Q2. Q2, it was a quarter of good growth. SAIDS was SEK382,000,000, And that was a growth in 83% in Swedish currency. FEGS increased by 94% in local currency, and the EBITDA What I'm arguing of 39%, excluding onetime cost. I will also within Together with Mikael in this interim report go through and happening after the closing date, And that is the announcement of an agreement to acquire 100 percent of Agenomics. Please change page and go into the presentation then and Look on Page number 3. Running through the sales right now, I said that it was a good quarter. The total growth was 94%. However, I think that we should take into consideration that last year, June this quarter, the IVF business was heavily impacted by the pandemic situation. There are very, very good signs within almost all markets. The 3 largest markets that are Japan, U. S, China, They seems to be going quite well. In Japan and in U. S, we are currently within 42, this year, seeing that they are doing more cycles than before the pandemic. In China then, they are Around the same kind of number of cycles. And the reason why they are not, let's say, increasing the number of cycles is that There have been some restrictions in the few provinces that is then making the difference of having growth and no growth. Going into the different regions, our market regions then, since Japan and Pacific are having good growth and they are doing more cycles than before the pandemic. We can see that the growth there is 26%. 26% is less in growth in local currency than what we are seeing in the other market regions. The reason is That last year, in comparison, those territories was those that were initially, at least, And during the year then, having an opportunity to do cycles in a restricted way, but Still performing cycles. You know that our territories were completely closed down. So sales of SEK 55,000,000 in Japan Pacific. Going into then the region Asia, that for our side is China, India and Southeast Asia, there is a mixed Picture, as I said, then China is almost back to normal numbers, while Southeast Asia and India still is under restriction and is having a And is having a problem. When I'm mentioning Southeast Asia and some of the territories there that are dependent upon IVF tourists, Globally, I can say that in every clinic, more or less, where they have a customer base from IVF tourists, those clinics are Note back to normal cycle numbers. The growth was 32% in Asia, And the sales was SEK 74,000,000. Then the EMEA region was SEK 170 €8,000,000 and the growth was €155,000,000 We have had significant growth. And in comparison, you know that some of the Countries was more or less completely closed down. But even taking that restrictions into Concentration, Q2 this year was a very good number. And we can see higher cycle numbers within The clinics where we have customers in U. K, Italy, France and in many of those regions. We also see within that region a good, good growth Of the time lapse situation then. Public clinics in Europe are, to A large extent, not back to normal numbers. Then the Americas, a growth of 176%. Last year, U. S. Q2 was more or less closed for the IVF cycle. But still, it is a good growth within the market. And We can see later on that we are turning into the divisions that in U. S, the good growth is coming from the Products that are directly related to number of cycles, and that is the genomics in our consumable business. So overall, organic growth of 94%, same as our local growth then. Please then go into Page number 4. I have mentioned that we see a good SAIC growth, we see that it's easy to compare the SAIC growth in the region and for our customers in the consumable sites. The consumer sites this quarter was EUR 233,000,000 and it was an increase with 91%. Growth in all regions, And it is a good mix between the products. And it is also a product offering that we have slowly changed Over the years, that are being shown quite well in these numbers. It is more labware. It is more media. It is more needles. It is more pipettes. So overall, it is a good comparison, the growth with Saiki growth in our market position. Within the technology, 72% growth and the sales of SEK 102,000,000. There, we are Still having a little challenge with the situation that restrictions in travel. But order intake and the situation looks good. And Outcome of our introduction of AIDA score are looking promising, and that is also reflecting in New orders on the embryo scopes. Genomics then, It is as you know, we are only selling the genomics currently in EMEA and U. S. A. And those were the markets that has the most restrictions last year and the growth of 239% is really, really good. And it shows that The customers are back and doing more general business case TGA than ever. The growth within our divisions, I would like to say that those are coming from also the a couple of, let's say, product development. And within this quarter, we can see that the launch of EnviroMab, the PGTA product from our results, has been good viewed from the customers. And also a positive thing That our media with antioxidants that has been sold successful in Japan, in a few other markets are now approved by FDA. Quickly going into the numbers regarding and financial regarding this quarter. I'm handing over to Mikael, and please then go to Page number 5. Thank you. The gross margin during the 2nd quarter was 62%, an increase compared to 53% for the same quarter last year. And the most important contributor to the increase is the economies of scale as a result of increased sales. This quarter, the gross margin was also charged with a onetime transport related cost of about SEK 3,000,000. So if we For this onetime effect, the margin was 63%. The EBITDA result for the quarter was SEK 134,000,000 corresponding to an EBITDA margin of 35%. The EBITDA was charged, besides the Transport related item that I mentioned, the about acquisition related onetime cost of SEK 11,000,000. So if we exclude these two items of onetime character, the EBITDA margin was about 39% during this quarter. The net debt in relation to EBITDA was minus SEK 1,900,000,000. So we continue to have a large net cash position. And the intention then is to use this net cash to finance or partly finance the Genomics acquisition. And with that, I leave over to Thomas to talk more about this acquisition. Thank you, Mikael. And then we are on Page number 6 then. As we informed last week, we have come to an agreement with Agenomics that we will acquire Agenomics. And together, We will build a new strong identity within the IDF field. The Ideanomics, they are in leadership within the reproductive unit Testing service. And their contacts and within the business that they are together with virtualized that our Products overall has been focusing on product development and what we're doing on clinical outcome by good culture condition and also stress free environment. Those two together, the Agenomics services developed in the Vestel and the VitroLite device Together, the joint base is something that we see can benefit our customers and the market then. So let's go into number 7 and be more specific about the clear strategic rationale regarding why Ideanomics and VitroLife can be a good identity going forward. And I would like to just address Five things that is quite obvious, at least for VitroLife and also for Agenomics. And that is that within a Growth feels like IVF. It is important to have a size and an ability to service the customer on a global base in this niche market. Together, Agenomics and DTI Life, we can with our portfolio and how we are then structured to the customer Deliver long term profitable growth. It has continued to be utilized and it will be key for this combined identity. Number 2, we talked about that there are some cycle growth, and we have talked about the monetary growth, and we have also said that there are add ons. There are different fields within the IVF sector that is growing more than the cycles itself. And for VproLife to expand into the high growth IVF diagnostic testing sector is key. We have done it initially by going into genomics And PDTA. And currently, by this acquisition, we go into the testing sector, And that is a good add on for continuous growth. Thirdly, it is also about How we can work together in a commercial network in our customer base. I Vdrive has currently been working mostly Yes. Clinics and also the IVF clinics, our key customer base and our interaction has been with the embryologists. Agenomics, they've been working with embryologists, of course, but also more with the gynecologists and some other professional staff. Combined, all of that will help both of us to be able to serve and to interact with the IVF Customer base from the clinics to the staff inside the clinics to the owners and also to the patients. And patients are the key For further decisions regarding what kind of treatment that they are asking for. Fourthly, The synergy, of course, then. I mean, what we can see is that we will have cross sales synergies, both geographically and also from solutions to customer. That's one thing. But also the strong innovation side that Elite Agenomics has. I'm quite impressive regarding the Development within Agenomics and the ability to turn research into products that are Helping the clinics, helping the patients. So further innovation between Ideanomics and VitroLife is a clear strategic rationale. Another case, it is that we it's quite interesting that ViteLife and Agronomics Yes. The same kind of mission, the same kind of goal, and that is to help The IVF clinics, the ones that are performing the IVF treatment to achieve successful treatment outcomes. And if I will then just explain that more in detail, we can go to Page number 8. And on Page number 8, we can see VitroLife has been working with we talked about selection tools, we talked about ranking, we talked about Evaluation of different kind of embryos. And it's been key then to have a stress free environment, so you can have been able to judge the embryos From either morphology side, which is time lapse side, which is key still, and most clinics are using it. Most embryologists are using Morpholog as the key to do an evaluation of the embryo to transfer. Also, the growth Side, the individualized has been the chromosome testing, the PDTA. But that is not enough. Agenomics Has so much more, the leadership within the reproductive genetic testing and especially within the pre implantation In the lysis side. So they have their own products, done development within The plantation side, preconception, also prenatal and rare diseases. But I'm going to focus right now on the pre implantation analysis. And The combination then of finding the best embryo, which Vitrolyte has been doing and also Agenomics is doing. Agenomics also had a Definitely to clear market leadership and are doing the development and are doing studies within the right Timing question. When is the MDMEDIUM ready to receive the embryo? So the combination of these two companies Is to get a competent embryo and also have information regarding when the embryo medium is ready to receive it. Together, that will increase the pregnancy rate and help the customers to get what they're asking for, a healthy baby, As soon as possible. By that, go into Page number 9 and look into some rationale from the financial side then, Michael. Yes. So Agenomics has a proven track record of delivering profitable growth, as you can see on the Slide number 9. In 2020, the company was impacted negatively by the pandemic. But in 2020 2021, there was also revenue coming from COVID-nineteen testing, which would then cause either nonrecurring Current revenue. So if we exclude the COVID-nineteen testing revenue, we can see that The compound annual growth rate since 2000 from 2017 to 2021 has amounted to about 29%. So it has been a Profit Total Growth Company. Moving to Page 10, some more about the structure in terms of the transaction. So the total consideration on a net debt and cash free basis is EUR 1,250,000,000, that's equal to about SEK 12,700,000,000. And we will finance this through a mix of issuing kind directed to the sellers and a directed share issue To institutional investors and the cash that we have in the company and some new committed debt facilities. The directed share issue was completed after closing of the stock market on July 8. And the amount of that was SEK 3,600,000,000. The issuing Kind will be approved on an extra general meeting that will be held during the autumn, and we will send out notice in due course for that. The transaction is subject to customary closing conditions and regulatory approvals, and we expect The closing to happen during the Q4 this year. Move to Page number 11 For the financial impact on the transaction. So we expect Combined pro form a sales for the last 12 months ending now in June this year of SEK 2,000,000,000 SEK 460,000,000 and adjusted EBITDA of SEK 864,000,000. And this excludes the effect of the COVID-nineteen In testing revenue and EBITDA. So we are expecting an immediate top line growth And the long time upside potential, as Thomas mentioned, from this growing business. On a pro form a basis, We expect revenue to increase with 68% as a consequence of this transaction. And we are Also seeing synergies, as Thomas mentioned, regarding the co selling and innovation field. On the EBITDA level, of course, besides the top line, we are seeing the pro form a EBITDA increase with about 45% due to this transaction. And we see positive cash flow generation being added as a consequence of this transaction. The net debt in relation to EBITDA will be below 3x net, which is our financial goal. And we are expecting the net debt to EBITDA to be around 2x on a pro form a basis. And as Thomas mentioned, we see continued opportunities for growth using this space. With that, operator, we are ready to take questions. Thank you. We'll now begin the question and And we are taking our first question from the line of Konrad Kaffner, please go ahead. Thanks. I'm Justin Yumen, Ingoliv Kaffner from Carnegie. Good morning, Thomas and Michael. And I'll just start off with a question regarding the quarter. Looking at the good development in your consumables and you're talking about good progress across the board with both including your Fitbit's labware and media And strong developments in the clinics in Europe where you're currently present. Are we still talking about you taking market share Within the consumables? Yes. Yes. That's what we can see. Within Our business are fluctuating up and down, as you're well aware of, depending upon how much hardware we are selling a quarter. And this quarter has been a good growth quarter for the technology, but it's not been any outstanding larger orders. It's been a good, good flow of Many time lapse endoscopes to individual clinics. So when you're looking into the consumer sites then, as you're mentioning, And see the growth. It is quite easy for us to predict the number of cycles Within the country, within the clinic chain and compare how much we are selling. It has been a challenge since the Pandemic came, and we were considering Q3, Q4, Q1 this year. How much are they building up in inventory? Are they afraid of being out of product due to the supply situation? We were bouncing those kind of questions back and forth. But currently, when I see a more stable business, and we can predict the flow of cycle compared to our sales. Those Things together is that, yes, we believe that we are taking on our consumers in just the market that you mentioned. Perfect. And I know that last quarter, you highlighted a risk of potential Delays and the supply change related to, I believe, on the media side, is there any change to that scenario that you're currently seeing? Yes. We worked hard. During the quarter, we have had some extra cost for The supply, we needed to fly products from the production In U. S. Or in Asia, there has been extra cost and the flight cost has also gone up. But we've been able to manage that Very well. In reality, we have changed a few bottle size. The customer has only experienced that they are getting a different Size and we have all those sites with regulatory approved. There's been not any changes within the cost for the clinic. We are taking it Inside the company. Going forward, it looks a lot better. I am a lot more clear, let's say, certain regarding the supply right now and how we are managing than where it was in late March, early August. So I feel that we are More or less outlook of the challenge, but you never know. You never know. I'm trying to be careful here. That's great. And if I'll just go on to the Ideanomics, just a few questions. So given that this It's run sort of diagnostics within the iGenomics labs rather than in the IVF clinics. Do you have any idea on how much of current genomics testing is performed in house in IVF clinics versus in decentralized labs? And what are your expectations on the future? And is it fair to call it out that the knowledge and know how of running genomic Testing in house and IVF clinics are quite core and majority of these tests will be performed in more specialized labs in the future. A best guess is that around a little bit more than 80% currently of all The pre implantation analyzes, if you talk about PDTA then, is done in Site Laboratories. So I mean, the clinics are asking for that service. Going forward and why we believe that having a decentralized Structure and not only focusing on U. S. U. S. Is a key market for us. It will be a key market, but it's already partly the mature market On the pre incantation analyzes market. The growth within the in all these kind of testing will happen outside the U. S. For instance, what's going to happen in Asia? What's going to happen in Japan? Is it going to be a more standard product Not made a standard, but it's going to be more used than being allowed in more countries within the No, more in Europe. So there are growth. And then your question was, is it going to be done in house or outhouse? I do think that it's going to be a mix. Some testing, if you're within a clinic chain, You will have the size that you will do some of those testing in house, for instance, PDTA. However, There are also other tests that needs to be done. And then will they have the scale? Will they do it so frequently so they will keep up With the algorithm and being able to perform all the different testing, I don't believe so. I do think that even if you are setting up a mid Size on genetic laboratory within your cleaning chain, you will get support and you will be in connection with Specialized genetic laboratory. So it's going to be a mixed trend going forward Definitely. And the growth is going to happen initially in markets that will have An ability and the legal regulatory side to do more PGTA. Great. And on a client especially intriguing, iGenomics Era testing, PGT is obviously where majority of the testing has been. But on Era, especially given Igenomic strong positioning, You're having a good understanding on in terms of number of cycles performed, if we were to look at the more mature markets, the U. S, How much of the cycles include ERA testing currently? Very little, very little. Regarding ERA testing, There are a couple of, let's say, situations that are being judged by the customer, by the clinic. And that is If it is going to be used primarily for implantation failures after more than 2 cycles with no success, that's Well, it is usually today, I mean, that's the criteria that is mostly used. And then the question is, should they You said already for the 1st cycle, that's the question regarding cost and also how much you focus on having on Pregnancy, healthy baby as soon as possible. Given your numbers, if you're using the Situation then on Iera testing today, There are different numbers. A very conservative number is that 10%, 15% of the cycles could be Done. Under the current clinical judgments regarding when to use it. So it is and it is far away from that number. So that's why we believe that the Iara testing And let's say the question regarding the ENDRA MEETRA is Key for us going forward. We have talked about the situation that the tools are getting better and better from the morphology side, the getting better from the pre implantation analysis side regarding the judgment of the embryo. But the question has been When to transfer it? And here are the IRAP testing, a good solution and a very good Beginning on understanding the window of implantation. That's great. Thanks, Thomas. And last question on my end, one relating to Eira and other one, Talking about the synergies, on Era, it looks like to be a good strategic fit with your time lapse. Is it fair to assume that The penetration of time lapse and error should convert over time and look quite similar in the long run. And the second one is Looking at your current product offering from aluminum and from PGT, do you believe that having now iGenomics that you can take Market share from Thermo Fisher Ion Torrent Systems and switching those customers from those kits onto alumina products. I've only 2 questions. The initial one, as I if I understood your question, is that Time lapse and Ira will not be in any kind of competitive situation because it is 2 different things That you are judging. Yes. Sorry, it was I found out complimentary. Just one thing to see if your understanding is that Aero will come up The same type of penetration as time lapse over time, given that they are highly complementary? I do think that the growth of time lapse will go a lot, lot quicker than the era. And we Probably today, around 20% of the site has been done by time lapse, by morphology. And I expect good, good growth in that side. The growth within Iara will come with more and more publications, and there are currently And I really like the way that we are trying to do and Ideanomics are trying to do IVF More of a clinical Where we base our assumptions on products and therapy on clinical sites like an RCT. A lot of things in IEA are not based on real clinical studies like an RCT randomized controlled study. And that's why we are doing that within time. It's currently On the artificial intelligence side, so we can see how we can improve the outcome or the usefulness of use. And the same thing is that Agenomics are working on an RCT. And You never know the outcome of those. I mean, it is but just looking into that side, if We can get clear numbers that it is a positive outcome on reducing time to pregnancy and, of course, Also pregnancy rate, and not only pregnancy rate, baby born, then it's going to be a quick transaction of the market. So it is a little bit of a Lottery, let's put it that way. Is the RCT going to look good when it's coming in a couple of years? Then I think this is going to take off quite good. If it is not so positive, then we are probably going to look like it was at the STAR study. The STAR study was Study regarding the PDK and if PDK was having better clinical outcome, then they're not doing any genetic Testing. And the outcome of that was that the first, let's say, the outcome was that it didn't have any Positive outcome over a wider population. So my question is that time lapse growth will come and is going to continue. Year of growth will come, and the really big factor for the quickest change will be the clinical outcomes. Great. And the last question was then regarding if you can take market share from Thermo Fisher switching to UR PDP Under the agreement with Illumina, if that could be sort of enhanced or taking market share through this. I see those as 2 different things. For us, you're starting to ask about The situation about the clinic, if they want to do testing inside or if they want to send it to an outside center. Our ambition with Illumina and our ambition with having the development of the embryo map is To support the clinics that are setting up their own laboratory. So I mean, It's one offer. And then the offer what we are doing within the service side within our laboratories is, Of course, regarding how we can have profitable growth and what is the best test. So currently, it is Not any direct synergies between those 2. Long term, yes, of course, that we will try to have the best offer internally as well as Externally. But that will be something that the future will have. Great. Thank you very much. And I'll go back into Congratulations on the quarter and acquisition. Thank you very much. Thank you. Thank you. We are now taking our next question from the line of Patrick Kling. Please go ahead. Good morning, everyone. Thomas and Michael, maybe you can talk a little bit about your gross margin that came in a little bit softer than I had expected for the quarter. And Even if you adjust for the EUR 3,000,000 in extra transportation costs, it's a little bit on the low side according to what I have Hoped for. So maybe you can talk a little bit about what we should expect going forward. I mean, if you just compare top line, I mean, you have, in this quarter, the same top line basically as you had in Q4. But even adjusting for the transportation costs, I mean, gross margin is down 300 basis points. So if you can talk a little bit about mix changes and geographical changes and if there are any Price pressure or anything else that we should be aware of so we know a little bit more about how to think about the future? Sure. Yes. I mean besides the onetime effect then, we ended up at 63%. And of course, historically, the margin has varied a little bit between quarters. What we can see this quarter is that we have had some extra Transport cost, Thomas mentioned it before. It related to I mean, transport in general has become more expensive in the world after the pandemic. And of course, we have a lot of internal transport in the company that impacts the gross margin. We also add some extra due to that we had other types of sources of supply during this quarter. So that's Impacting us short term, what will happen with transport costs long term when they go back after the pandemic to a more normalized level? We don't know that, but that's some extra that we've had. We also had some negative currency effects hitting the gross margin in the second quarter That if you compare to the same quarter last year. And of course, on the mix side, we had relatively high sales of genomics This quarter, and genomics has considerably lower gross margin than, for example, the consumables and the technology business. So the mix effect was also negative. So there were a couple of items that When the gains are in the average gross margin this quarter. Okay. Great. Then my last question was really about this patent litigation that you talk About in the report, I mean, could maybe you can elaborate a little bit on how important those patents are for your time lapse operations? Yes. So I mean the patents are related to method patents that are used In the software. And those patents Are then I mean these patents, based on our assessment, we are not infringing these patents. We have developed the Technology, considering that these patents exist. So of course, software solutions are part of our Offering. And of course, that is that has an importance in terms of our products. But I mean our position is still that these patents we're not infringing these patents regarding these method patents. Thank you. There are no other questions on the line. Please go ahead. Okay. If there is no other questions, Thank you very much for listening in. This is very, very warm day in July before the vacation. Thank you and goodbye. That concludes the call for today. Thank you for participating. You may all disconnect.