Earnings Call: Q4 2020

Jan 28, 2021

Welcome to the XFO Professional Report on Operations 2020 Webcast. I will now hand over to CEO, Doug Anderson. Please go ahead with your meeting. Thank you very much. So Doug Anderson, CEO of Xevo and Christoph Nordstrom, CFO of Xevo. We are Here in Gothenburg today, we are going to talk about the Q4 performance And also summarize 2020 and then talk a little bit about 2021. I will start by talking a little bit about The highlights, quarter 4. All in all, I am happy with the quarter. I'm happy with the year despite The pandemic, we made a lot of progress. And I'm going to show you here a little bit of what Our main achievements were especially in quarter 4. We managed to get the first patients included in the EU Heart preservation study. 4 centers out of 9 are ready to include patients, and we have had patients In Belgium and also at Salverenska Hospital here in Gothenburg, Sweden. So that's a real highlight. Second one is The Lancet publication showing study results related to the kidney Transport device that has been developed by Organisys, the company that we acquired in Netherlands, end of Q3. And talking about Organizyst, the new business area, abdominal, which Comes from the acquisition of Organizyst, added actually 26% growth in net sales during the quarter. Net sales increased in total by 2% in local currency. We had a strong start 2020, then quarter 2, due to the pandemic, was a very weak quarter, and then we have seen improvements in quarter 3 and also in quarter 4. Gross margin of non durable sales of 72% compared to 77% quarter 4, the year before. And I just want to mention here that the reason for the lower gross margin is that we have now included The organ assist range of products, and they had lower margin than the old XFFO range of products for different reasons. One reason being that they have sold via distributors in all the markets rather than direct sales. So the distributor has It's, of course, making a profit on their products. We'll come back to this later on. We had a positive adjusted EBITDA of 11% compared to 13% in the quarter before. And I'm happy with this result Because we made already some of the investments that will generate a good result this year, which I will also talk about Later on. So Christophe Nordstrom will now talk about financials. We have 4 slides that he will Talk you through. So please go ahead, Christoper. Thank you, Doug. Yes, let's move on with the financial section of this presentation. Starting with net sales and gross margin. First of all, Q4 was the Q1 where we Xevo conducts business also within abdominal transplantation, as you all know. For that reason, we now Present 2 business areas in our financial reports, thoracic, which includes lung and heart transplantation and abdominal, which today includes liver and kidney transplantation. In both these business areas, we sell durable goods and we sell non durable goods. And for these business areas, we will present sales figures and gross margin. So Q4 then. Total net sales amounted to SEK 60,000,000 compared to SEK 62,000,000 last year. That corresponds to a decrease of 3% in sick, but an increase of 2% in local currencies. In thoracic, in other words lung transplantation, Sales of non ruble goods decreased 26% in local currencies. There was still an impact from the pandemic, as you all know, Especially within machine perfusion. But here we should also remember that the comparison quarter, Q4 2019, was a very strong quarter with record sales. Abidominal had a flying start and contributed with total net sales of SEK 17,000,000. This means an acquired growth for ex vivo of 26% for the quarter. And the abdominal sales were driven by an extended machine installed base in 2020, but there was also a shift in sales during 2020. They can see update in Q2 and a recovery in both Q3 and Q4. Total gross margin was 69%, as Doug mentioned compared to 73% last year. In order to understand this decrease, we need to look at the margins in each business area. In thoracic, the gross margin on non durable goods was high this quarter, 80%, and this was due to price increases And also a high portion of sales from static preservation. However, at the moment, as Dag mentioned, margins in abdominal were lower. In Q4, about 50% were their nondurable goods. The portion of sales through distributors are here higher, which impacts on the margin, and this is something we will work on during 2021. Worth mentioning also is that organ assist has historically focused on increasing their machine installed base rather than gross margin. They also, at present, More or less only have European sales. And if you compare it to U. S, for example, margins are normally higher there. So Price increases and the launch in U. S. In the future will increase the gross margin in the upcoming years for sure. For the full year, Total net sales amounted to SEK 180,000,000 compared to SEK 221,000,000. And the total margin was in line with last year's 74%. I will move over to next slide, profit and loss. So sales and gross margin has already been commented. Regarding OpEx, we implemented a cost reduction program in Q1 and we have followed that program during the year. However, as you know, From the second half of the year, we have been very, very active. We have invested in building a new organization. We are integrating organ assist and we have invested in our commercial organization. So given these efforts, in our commercial organization. So given these efforts and the fact that there is a pandemic, we are very satisfied With the 11% adjusted EBITDA that would present both for the Q4 and also for the full year. Moving over To the next slide, cash flow. For Q4, operating cash flow amounted to minus SEK 22,000,000. This was mainly due to payment of acquired debt in Organ Assist and integration costs. I would say Excluded these items, operating cash flow was more or less plusminus0 for the quarter. In Q4, SEK 19,000,000 was invested in R and D projects and the acquisition of Organisys shares had a net impact on cash flow with SEK 201,000,000. Finally, cash at year end amounted to SEK 354,000,000. So last Final slide of the financial section, balance sheet and PPA. One major thing, goodwill and capitalized R and D has increased with SEK286,000,000 compared to last year, big figure. Of this, around SEK250,000,000 comes from the acquisition. Ex vivo's equity assets ratio still very strong, 88%, no external funding exists. The long term liability that you can see in this quarter consists of a provision for organ assist milestone payments and deferred tax, so nothing else. And in the final PPA of the Organisys acquisition, net assets of SEK 77,000,000 were identified and goodwill amounted to SEK 166,000,000. So that was it. Dag and De Schorn, I will now move over to you again. Thank you. Thank you, Christoffer Nordstrom. So let's continue and talk a little bit about the full year 2020 And some of the highlights. I've already mentioned some of the highlights connected to quarter 4, but it's always worth Repeating, I mean, I'm extremely proud of the start of the European Heart preservation study that we actually Started the clinical studies and patients have been included. I am also very happy about the clinical transport device publication in The Lancet Showing the superiority of our cable transport device over any other device existing on the market. I mean the acquisition of Organisys end of September came at very right time, and I'm very pleased with the acquisition and the way The integration has evolved and also the sales of the product produced by Organisys. We have the PRIMEIX study, which is a PRIMEIX solution for thorax Surgery, which is also very important. It's not a transplant solution, but it's a heart surgery solution Where we also believe that we have something very exciting to bring to the market either ourselves or through licensing agreements, etcetera. We have also the Strategy 2025, which we worked on during August, and I changed The management structure and organization. After I joined the company, became CEO. I think these are the ones I want to highlight for the full year. And then I want to show you this slide that shows the all organ company picture. I mean, we have become the 1st global all organ company in the world since we are addressing all organs with machines and solutions. We are now leading in lung and liver transplantation with a great network in thoracic and abdominal surgery. And we are positioned as experts in advanced solutions for transplantation and working with We're leading key opinion leaders in the area of transportation. Moving to the next slide. This is very important to show you that we are actually now Addressing 98% of the markets with the combined ex vivo and organ assist offering. Ex vivo Initially was focusing on lungs, and that is only representing 4% of the global transplant markets. Adding heart Brings that number to 10%. Adding liver increases that number by another 24 percentage units. And kidney is the most Translanted organ, it's 64% of all organs transplanting the world are kidneys. And in total, There are approximately 150,000 transnodes in 2020. If we move to the next slide, not going Spend too much time on this, but it shows our extended product portfolio. So moving from lungs We have 1 perfusion and machines, code preservation of lungs and now then also the organ assist Front line with liver assist and kidney assist, kidney transport and they also have a lung machine called lung assist. I would talk a little bit about the pandemic and the impact it had on TransNord activity. And I would just summarize it this way by saying that impact varied throughout the year and depending on the region. If we take the U. S, which you can see on this graph, on this graph you can see the number of lung transplants by week in the U. S. There was a strong dip in March, April, and there was further dip when the second pandemic started mid sort of December. All in all, lung transplant activity in the U. S. Fell 6% in 2020 versus 2019. In Europe, it dropped more and also in the Pacific area. So depending on the country, Somewhere minus 10% to minus 30%. In some countries, most activities were actually postponed. And in other countries, they managed to still perform certain number of transplantations. So there was a great variation among the countries. So this shows the picture in 2020. And the way it impacted Xvigo was that 2nd quarter was poor, 3rd quarter a little bit better and 4th quarter even better. So moving in the right direction. 2. I want to show you as well a little bit more related to the kidney transport device I mentioned earlier, which with findings published in The Lancet Dance Magazine. And this device shows That the group that was used for the study and treated with 100% oxygen showed significantly better results Compared to the control group. And this is what was published in The Lancet. And this Kinne Trapper device will The launch later on in the year, we will first file F4 FDA regulatory approval and also CE Mark and then launch later on in 2021. When it comes to the Kidney trials update related to the heart preservation device. I have now mentioned to you that we have started the clinical study in Europe. We have included patients in Belgium and in Sweden. More clinics are now ready to start inclusion. And we are going to, in Total include 101 heart transplant patients in the study and 101 in the control group. And we are also now in the U. S. Preparing to start the study, which we expect will commence somewhere sort of midyear. I've already talked about Primek, which is a patented C Mark priming product, where we are also performing It's an extended study. In total, we will include 366 patients. More actually, more than 13 patients now have been included in this study. If we then move to this year, what is the outlook and what are we actually planning to do and focus on. I just want to move back to what I also presented in the last quarterly updates related to the strategic plan. I mean everything we do is based now on the strategy that was defined and approved August September, I mean, I have focused on building a high performing team with completely new management team and also a lot of our organizational changes. We have become an all organ company with the acquisition of Organ Assist. We are focusing on commercial excellence, New incentive models for the sales force, geographical expansion. We have been adding now sales detail in New geographies, including China, we are looking at the pricing, how do we move the price points up, especially for the abdominal range And also implementing new sales tools to, let's say, become even closer get even closer to our customers. Customer driven innovation, of course, we want to develop products and machines and solutions based on true customer demands and customer needs. And we have a new R and D director since October, who comes from Essity, a Swedish company. And many of the projects are being let's say, we have Pointed new project management and added sort of more resources to make sure that we optimize Last but not least, operations excellence, building best in class supply chain. We are going to Implement or create a new distribution center for Europe in Netherlands in organ assist facilities And working a lot with design for manufacturing and supplier evaluation. So this is the strategic plan. What that then translates to into when it comes to 2021 focus areas. These are the 5 areas that we are going to focus on. And One area is, of course, the integration of OrganAssist, selling the full range of products and making sure that the OrganAssist range of products Also gained regulatory approval in the United States. So a lot of focus on commercial, expanding the commercial team, Working with, let's say, sales tools and commercial excellence in every dimension. The heart preservation projects, Our most important R and D project, and we will continue with this. We focus on initiating the study in U. S. And in Australia. We will continuously work with the pricing model. We will Raise prices, but we will also cut out distributors in a number of markets. And we have just taken the decision to cut out distributors in France and Spain yesterday and today, and that will, of course, have a strong impact on the gross margin of the Organisys product range. Then we have the FDA approval and C Mark for the kidney transfer device, which is a unique product, and we are planning to launch it later in this year. And then last but not least, we are also extending the EVLP, the stem solution offering by We are combining 2 machine platforms. I mean, we have produced a machine called XPS and sold more than 50 machines worldwide Over the last couple of years, OrganAssist also has a lung machine called LungAssist, which is a smaller And less integrated machine, but definitely has its place in the product portfolio. So we will combine these two machine offerings and make sure that we sell even more machines to drive even more EVT usage across the world. So these were actually this is actually my last slide, and I think we can now open the floor for questions from the audience. Thank If you do wish to withdraw your question, you can do so by pressing 2 on the telephone keypad. Alternatively, you can also submit questions in the web Q and A box on your screen. Our first question comes from the line of Daniel Albin from Danske Bank. Please go ahead. Your line is open. Thank you and good afternoon. I have two questions To begin with, and the first one is really on the market outlook. If you could maybe give a bit more color on, say, the Transplant rates in U. S. Versus Europe and possibly a feel for how the start of Q1 has been, Meaning that is the situation getting worse or better? And maybe also this in light of your machine offering And how that is likely to be impacted going forward? The second question on the acquisition contribution, are there any Seasonality to account for or is the EUR 70,000,000 in revenues roughly sort of the run rate to use? And also on that, could you elaborate a bit on organic growth rates for this segment going forward? Thank you. Thank you, Daniel. A lot of questions. I would try to remember them all. If we start with the transplant Market and situation. If I look at Q1, so far, Numbers look good, Daniel. I cannot say much more right now. But the year has started Okay. I've seen the U. S. Transplant numbers, and so far, it looks good. How it will look coming quarters is, of course, or coming months, it's, of It's hard to say. It all depends on the speed of vaccination and how that will sort of be rolled out. But We have assumed for 2021 that every month will look better than the previous months, so to say. So We have a growth plan for the year, which I believe will hold. It looks like that Right now, Don, it's hard for me to make any more comments on 2021 right now. I think we all live in a certain with Certain amount of uncertainty and one can only do once best and work hard really hard and Successful, more successful than competitors. It's hard to promise you anything else right now. If we then move to Organ Assist Their product range, and you asked about seasonality. I mean, we can see that their product range, I mean, we they have had a Strong 2020. And 2020 quarter 4 was by far The best quarter ever that they have had. And they have installed a certain base of Machines and devices for kidney and liver, I think it's around $150,000,000 that they have installed. And of course, You know the more you install, the more sales you get. And as part of the acquisition of Organisys, part of the price we paid It's linked to an earn out model this year. So they need to sell quite a lot or we need to sell quite a lot, sorry, In order for them to have this earn out and we all want them to get this earn out and they will get this earn out. So there is a lot of focus on For that reason to make sure that our sales force now starts selling the full range of products including organizips. And we have also added certain sales resources in certain key markets. We have, For example, in Spain, we recruited salesperson from one of our competitors and the same in France, who know the abdominal market well. So we will be able, therefore, to terminate the distribution or distributor agreements and Send direct, which has an impact on price and therefore also net sales. So that's a little bit on organ Assist and seasonality. So I see a very strong 2021 for Organisys. Yes, I do. Okay. And then maybe to quantify it in terms of organic Growth or growth? I mean, are we talking ballpark 5% to 10% or 20% to 25%? Jonny, you know it's very difficult for me to guide you on future development. I think I've said enough for the time being on this topic. I shouldn't say more. Let's conclude Talk more when we have done quarter 1, Donnie, and then maybe I will have more clarity, if you don't mind. Okay. Great. Thank you. Thank you. Okay. Our next question comes from the line of Magnus Fani from Direct News. Please go ahead. Your line is open. Yes. I was wondering if you could shine some more light on the heart preservation study. Thinking of the primary and secondary endpoints, also I know it's hard probably, but if you could say something more about Time line. Secondly, I would like to know a little bit more about the price increases. Is this for the full assortment of products? I understand you have a special focus on the abdominal product. So then I guess the price increases will be higher there, Right. Okay. Let me start with the price increases, if you don't mind, and then we move into the hot preservation project. When it comes to hot price increases, we are aiming for Price increases for the full range of products. Last year, we increased prices for the warm evaluation solution and also Cold preservation product reflects us. We increased prices between 10% 15% depending on geography. We will do the same again this year. And especially in countries where you have good reimbursement model like the U. S, for example, and France, Then of course, it is easier to increase the price of our products. When it comes to the abdominal range, As I said earlier, we will have, let's say, a double effect here. One effect will come from direct price increases. The other effect will come from Taking out distributors from the value chain and selling the products directly ourselves. So we are assuming Good price increase this year and in line with what we did last year. And I'm sure that You will see a positive gross margin development as a consequence of that during 2021, yes. So that's on the price increase. Then when it comes to the heart preservation project, I mean, the purpose Of the heart preservation project is to prove that our heart preservation box and solution It's much better for transporting hearts than any other existing solution on the market. Today, when the heart is transported, it's basically transported in a beer cooler, let's call it that. And the heart can only be transported for approximately 4 hours. That's the time a heart can sort of, call it, survive Outside the body, from the time you remove it from the donor to the time you insert it in the recipient body. And Our heart preservation solution is able to transport a heart As we believe it, up to 24 hours. And this is what we are going to prove with our clinical study that our solution enables The heart to be transported and preserved for a longer time than any other existing solution on the market. And we have done previously A short study in Lund, which was published in Nature Magazine. But now we are doing the full clinical study in Europe, in the U. S. And in Australia. And in Europe, we are including 101 patients In the study and 101 in the control group and approximately the same number in the U. S. And the smaller number in Australia. The time it takes to execute the study depends on how many Patients are included in the study, and that is also a consequence of, let's say, the pandemic we have been living What are we are living with? I mean, some hospitals are open and are able to do studies. Other hospitals like U. K. Hospitals, for example, they have said that they cannot do any clinical studies until the situation has improved. So I can't really give any date today for when the study will be ready. I mean, this is a project that will continue For another few years before there is a commercial launch. I mean, that's for sure. I mean, this is a significant study involving all continents Basically, and a lot of patients. But we want to do this study and to do it really well and to get sort of statistical significance. That is our aim here. And therefore, we are spending a lot of money and time and resources on this study during 2021 and also 2022. I hope that answered your question. Very good. Thank you. Thank you. Thank you. Alternatively, you can also submit questions in the web Q and A box on your screen. There will be a brief pause while questions are being registered. Our next question comes from the line of Matt Haitians from Red Eye. Please go ahead. Your line is open. Hello, Doug and Nextiva. Can you hear me? Yes, we can hear you. Loud and clear. Good. Okay. Thank you. I'm a bit curious of the, of course, the organist The part, the abdominal now. You say that you have, of course, the distributors taking quite a big chunk of the gross margin. Can you give us some kind of flavor on how much that will mean in the long term? I mean, what's your Aim to have the gross margin for this area long term? I mean, this is a very good question. The fact is that If we take the distributors today that Organisys is using, they are charging somewhere between 15% to 30% of net sales for delivering the service in respective country. We are going to Terminate or have now terminated the distributor agreement in Spain and France, for example. I don't know By heart, I guess there is like a notice period and a few months where we still have to use them. I don't have that exact information. But the ambition is to bring their range of products up to the same Gross margin level as let's call it the old ex VIVO assortment. How quickly that will happen, I cannot tell you. But you will see the improvements quarter by quarter. I hope that is enough to answer your question. Yes, that's good because I was Expecting it to be maybe towards next year to 2022 when since you have probably the contract that run out. Exactly. I mean that it all depends on the contract and so on. Thank you. Okay. That was it. Thank you very much. Thank you. Thank you. We have no more questions from the audio line. Speakers, please go ahead with the web question. Yes, I can there is one question from Tobias Schildfat Address to Dogue, which important decision concerning regulatory approval are you waiting for? And when do you expect it? I I mean, the main one this year when it comes to regulatory approval is initially, it is the kidney transport device that I talked about and that has been developed by organist in the Netherlands. That transport device is Needs to get regulatory approval in Europe and in the U. S. Before we can sell it. And Normally, when you file an application to the regulatory authorities in the U. S. FDA, They have 90 days to respond if they want to use the full 90 days. And they might then come back and Ask for some further information and then you submit it and then they have in theory another 90 days. So it's very difficult to say exactly When we expect to get it. If everything is fine with the first application submission, then of course, it's 90 days and then we have the approval. And in Europe, it's sort of similar time line, maybe a little bit shorter. So but the aim for the Kinetranspir Device is to have the regulatory approvals This year and to start commercializing towards the end of this year. So I think that is the main one that we are Addressing right now. And then we will also get regulatory approval for the liver assist Device that organ assist has. But number one focus is the kilo transport device right now. I hope that answered the question to BS. I think we have no more questions from the web as well. Because please go ahead with your closing comments. So just to summarize, I am Pleased with quarter 4 and the full year 2020 given the pandemic. I think we covered a lot of ground during the year with the acquisition of Organisys, with the new organization in place, with the new strategy, With clear objectives to be reached by 2025, also starting to commercialize the organization more, the price increases. And so I can see that this year will be a good year for us. I mean, we are working with the organist range of products, Launching it into our sales force, we are working with the heart preservation projects, including more patients in the study. We will continue to work with pricing by increasing prices and removing distributors in certain markets. We have this The Kinet transport device, where FDA approval and CE Mark will come later this year. And we are also launching the new 9 Assist or not the new, but the organ assist magnet shift machine as a complement to our previous XPS machine, which will then Extend the EVMP machine offering. And that I also think will have a very interesting impact on the usage of EVMP later on in the year. So this is the outlook. I think 2021 will be a very exciting year. Let's just get out of this pandemic as quickly as possible And move forward. So thank you all for listening, and welcome back next quarter. Thank you. Thank you. Bye.