Earnings Call: Q3 2021

Oct 21, 2021

Ladies and gentlemen, welcome to the ex vivo group interim report Q3 2021. I will now hand over to Dag Anderson, CEO. Sir, please go ahead. So hello, everybody. Good morning, Good afternoon, good evening, depending on where you are in the world. Today, Christoper Nordstrom, CFO and myself, Doug Anderson, CEO. We are happy to present the Q3 numbers and report To you and you will be able to ask questions. And also on the web, there will be possibility to post questions. So if we look at some of the highlights during the Q3, we had An increase of 31% net sales, acquired growth. As you probably remember, we made an acquisition in the Netherlands End of September last year, when we acquired the Dutch company Organisys. We have had a good increase Also in terms of machine perfusion, percentage of net sales at 53%. Gross margins Continued to be strong. We have the gross margin of 78% for thoracic. For abdominal, 53%, which is actually higher than previous quarters this year. As I have mentioned to you in previous calls, we continuously increase Prices. And we are now in the process of increasing prices, 1st November for Thoracic U. S. And then Europe we follow in January. Yes. We have adjusted EBITDA margin of 10%, which we are also very happy with. Some of the events we have launched, New Stratikitel, I will come back to that, Covering the time period 2022 through 2026. We had our 1st Capital Markets Day here in Gothenburg In September, which I from what I've heard was very appreciated. And we had a high number of attendees as well, around 100 persons in total. We participated In a strong way, ESOP conference in Milan, ESOP stands for the European Society of Transplantation. We have also delivered a 4th XPS, the lung machine, to lung bioengineering in the U. S. And for those of you who were participating in the Capital Markets Day, the Managing Director of Land Bioengineering Was participating in our Capital Markets Day, and we had 2 sites in the U. S, 1 in Maryland, 1 Jacksonville. So we now have 2 machines for lung perfusion in both of these two sites, which is very, very positive. As regards to strategy, we have a strategic objective, which is very clear. We want to become the global leader for organ company. That is our objective. And we have also clearly defined our economic engine, which is to measure revenue per installed machine. We have not done this in the past, but this is going to be a very important key metric moving forward because for every machine As we install, we want to maximize the utilization of this machine and hence these key metrics that we mentioned and follow-up. When it comes to our strategy, we defined 5 to 3 focus areas, which will lead to a global or leading all organ company position. The number one focus area here It's to become global leader at Domino, meaning global leader liver and kidney with initial focus on the U. S. We are also we have also had a second strategic focus area, the market to become market leader With our heart preservation system, we'll talk a little bit more about that later. We will focus on increasing penetration of Machine perfusion. We know that the way to increase utilization of organs It's through increased penetration of machine per future. So that is something we will focus strongly on. We are working closely with government and different geographies to Secure all inclusive reimbursements. Reimbursements for our products or yes, machines and solutions Exists in a number of countries, of course, U. S, Netherlands, France. But there is also strong movement in this direction now in, For example, in U. K. And also in Germany because when there is reimbursement in case, It is not then pricing becomes less of an issue when it comes to machine Perfusion, Machine Plan and Solutions for order preservation and evaluation. Then last but not least, We know that China in the future at some point in time will become the largest transplant market in the world. It's not there yet. United States is far bigger than China, but China doesn't have reimbursement today, but will have In the future, so these are our 5 strategic focus areas. I will now let my CFO, Christophe, talk about This is what's going on in the TransCon world with activity level. Yes. Thank you, Doug. And I will follow-up that with financial information as Welcome quarter. I think it would be good to shed some light on the transplant activity, especially in this quarter where we saw From the effects of the delta virus on health care in general. So Thank you. This picture summarizes it very well. During the Q3, the transplant activity, especially in the U. S, Was impacted by the effects that the delta virus had on the intensive care at hospitals. So as you can see on this slide, the number of COVID patients in hospitals in the U. S. Increased dramatically in the beginning of Q3. 1st July, for example, the number of patients 13 cells, it peaked September 1 with 100,000 patients. And then luckily, The decrease in September has been equally dramatic. And as we speak, the number of COVID patients are down to 55,000 in U. S. So this has, of course, had an impact on health care activities in general. In Europe, the trend has been more or less the same, but not far as dramatic as you can see. If you look at the lung transplants in the U. S, the number of lung transplants Year to date, it's in line in 2020. There actually has been 24 line count, not more, but it's 6% down against a more normal year like 2019. In 2021, the first two quarters showed growth, The 3rd quarter was down 18% compared to the 2nd quarter. And in comparison to 2020, the 3rd quarter was down 9%. However, the trend in October so far has been positive, so we are carefully optimistic. In the first 3 weeks of Q4, the weekly average of lung transplants was 49, and this means an increase of 5 transplants a week compared to Q2 this year. In Europe, As I explained earlier, the COVID impact varies from country to country, and there is no quarterly transplant data available actually. But year to date, We can see that the number of lung transplants are the same as 20 20, and they're actually identical. So to the financial of the quarter, Starting with the P and L overview and key ratios. So as I just mentioned, this was a quarter affected by the delta virus effects of In terms of care, net sales amounted to SEK 65,000,000, a growth of 31% compared to last year. Growth was entirely acquired growth coming from the abdominal business area. The organic sales growth was Overall, 0. And I guess you could say that what we lost in the U. S. Due to Delta was compensated by stronger sales in Europe and the rest of the world. Regarding gross margin, we are pleased with the margins also for this quarter, as Dag mentioned. Total gross margin is 6% to 9%. It's a little bit dependent on product mix there. And I will dig into the details on the upcoming slides. Adjusted EBITDA was SEK 5,000,000 corresponding to a margin of 10%, decent in my opinion, given the lower sales than expected. And year to date, Net sales SEK 173,000,000, a total gross margin of 73% and an adjusted EBITDA margin of 12%. If we look into the thoracic business area, net sales amounted to €42,000,000 And as I said, means of 0% growth against 2020. Non durable goods Was 94% of sales. We had one expense sale in the quarter, as Doug mentioned, to Lung Bioengineering. Fantastic that they have bought their Ford machine from us, and we will play 2 machines in England and Germany very soon, which is very promising. In terms of regions, the split was basically what we are used to see. North America constitutes about twothree of total sales. Machine perfusion represented 38% of sales. That's quite low. In example, if you compare with 2019, the split is more like used to be more like fifty-fifty. And static preservation portion in Q3 was 60%. Strong gross margin, 7% to 8% and in line with previous year. Moving over to abdominal. They showed net sales of SEK 13,000,000, which is a Strong growth compared with €9,000,000 in the 2nd quarter. This €13,000,000 was in line with the organic sales in Q3 last year. However, they were not a part of ex vivo then. The organic growth year to date for organist for January to September It's plus 28% compared to 2020, which is good. As you know, abdominal more or less only operates in Europe. So therefore, 97% of the sales are in Europe. And gross margin, 62%. It's the strongest quarter so far. Just some short comments on the EBITDA. Adjusted for onetime costs, it amounted to €5,000,000 corresponding to a margin 10%. The items affecting comparability was SEK 1,000,000 in the quarter and consisted primarily of integration costs with Organisys. We are now Finalizing the central station of the warehouse to Netherlands. And the rolling 12 adjusted EBITDA is EUR 27,000,000 plus and that means 11%. My final slide for today, financial position and cash flow. Cash flow from operating activities was negative SEK 9,000,000, and that was mainly due to a negative change of working capital. For example, we are now strategically building bulk. We did it last quarter, and we did it this quarter again. Both we are both authorized. We are manufacturing excess sales to meet future demand, Which is good. And we are also, for abdominal, securing products for our upcoming launch since we are moving from From one supplier to another. Cash flow from investing activities was minus what was SEK 20,000,000, mainly attributable to investment in our hard projects as usual. Cash position, SEK 285,000,000 By end of Q3, we should be in line with our internal expectations. And I feel confident that we have a Good cash position that is sufficient and that forms a good basis for us to reaching our strategic objectives for the upcoming That is correct. So I will now give the word back to Dag Andersson here. Thank you, Christoper. I will talk a little bit about The R and D pipeline, let's say, the most important projects where Interesting progress has been made also since last quarter. I will talk first about the Eugene Heart preservation A trial project where we are running a clinical trial in Europe. We have 6 centers, including patients. We just added another German center not long ago. And we also added a number of new Sentences as well during November December. And the plan that has been communicated from the very beginning We still have the last patient in by Q4 next year and commercial launch Q1 2024. And so far, we have included close to 60 patients in the European study. We also have the Preservation trial in Australia, New Zealand. And 2 days ago, we actually released The press release, I'm sure that some of you have seen it, and the title of that press release is that ex vivo set record for a donor heart outside the body using our groundbreaking technology. And what is unique here is that the donor part was preserved in Australia using noniscaming heart preservation For 7 hours and 80 minutes before successful transplantation in 2 55 year old NAV And by pushing the ideal time limit from less than 4 hours to traditional storage using ICE to more than 7 hours Using ex vivo technology, more lives will be saved. So this was a fantastic accomplishment. We are working or making progress when it comes to the U. S. Heart preservation trial, and we have the ongoing discussions with FDA. The trials will start in U. S. Next year. We also have Primek, Which has been running us for some time. We have so far only had one site Included and that is Sovereign Gas Batory in Gothenburg, but we expect now also Oslo and Copenhagen to include patients and hopefully also Very soon to German high volume samples. And the target here is to have the senior study report Finalized by Q2 next year. So that is 4 core primary. Liber Assist, Which is a machine, a transfusion machine, Which came with the acquisition of organics in the Netherlands end of September last year. We are selling this device or this machine in Europe. We are Discussing and working with FDA to define the route forward for us to be able to commercialize the machine in U. S. And the FDA routes will be concluded during this quarter. And you might Remember that there was a publication in the North England Journal of Medicine New England Journal of Medicine, which demonstrates that 2 hours of due and hypothermic oxygenated perfusion has Great. So clinical medical departments for the recipients of the liver organ. So this is the Liberty 6th project, the machine. When it comes to the outlook for the rest of this year, We are now in the final stage of preparing for the launch of the kidney systems transport in the U. S. We are expecting a type 10 ks approval in the coming weeks, and we are ready to launch. We have already customers waiting for the device. And we will know exactly in the next I think even by next week, probably the date when we will have the FDA acting approval. As Christoph mentioned before, We are now actually installing the Langx machine in the U. K. And Germany. And what's very exciting is that U. K. Will, let's say, not copy, but they will follow the lung bioengineering model. There will be 1 hospital, HepTid, Which will be producing loans not only for the healthy hospital but also for a few other hospitals. So we expect So you had quite good volumes in being there from this. And we are also installing the machine in Berlin, in Germany, and we start a value evaluation program there as well. As I mentioned before, we are Going to have a conclusion on the U. S. Regulatory pathway for liver assist, and we are speeding up the heart preservation And PRIMATE clinical trials. At the end of the day, we will know that Our vision is, you know, nobody should die waiting for the new organ. So this And this concludes the presentation by Pioneer and by Taxi Software Nordstrom. And I would then I'd like to open up the floor for questions, and we will try to answer as well as we can. So just Q3 to ask any questions that you might have. Thank you. Just to remind you, for those on the web, you can also submit questions via the Q and A box on the screen. Our first question is from Ulrich Ratner of Carnegie. Please go ahead. Your line is open. Thank you very much and good afternoon both Doug and Christoffer. And I have a few questions. Start off, some interesting graphs you showed on the development of COVID and the transplantation numbers along in the U. S. And it looks like we're not back to the level of where we're in Q1, Q2. How is this trend progressing? We should we interpret this that Q4 should look fairly similar to that of Q1 and Q2. And sort of follow-up on that one. These are obviously elected procedures, But to what extent can you actually defer these procedures? And could this even sort of relate to a pent up demand? Or Will these organs that have not been transplanted during this period be discarded? I mean, I think if I answer the second one, then Chris, if you can Talk about When it comes to deferring transplantation, it is quite Difficult to do so. I mean, you have 2 people on the waiting list. And we know that a high percentage of the people on the waiting list, they die Because it takes too long to get the new organ. So I think it's not like we've elected care that you can just move forward The surgery and everything sort of would work out. She could actually die on the waiting list. I think that is Probably the way to answer it. So if you can push I mean, there are, of course, different Categories of patients on the waiting list as well. And I'm sure the most acute cases are getting Getting a new order, but and if you can defer it sometimes, then you would do it. But I think it's less You will not see an enormous pent up demand. Suddenly, there will be 60% more transportation after 3 weeks. It doesn't really We'll reflect that. But we can see the activity level picking up again in Q4. And Christoph, if you can elaborate On that number, which you showed before, yes. I mean, it is I mean, it's hard for us To predict as well, but the trend so far, as I said in October has showed an increase of the weekly average of land trust last 3 weeks, which is good, 44 in average in Q3 to 49 in the 1st 2 weeks. And I also think that If you look at the first graph, I show the number of COVID-nineteen patients in hospital. It doesn't correlate to 100%. But The peak that we saw in Q3 of 100,000,000, I think could be compared to the peak that we saw In the beginning of the year of almost 130,000 patients, so that is less. So hopefully, that means also that the recovery can Yes. It can come come back again. And have we seen any effects on the waiting list expanding over this time period? I mean, once again, the problem with the waiting list is that you don't Typically adds patients to the waiting list unless you know that there is a realistic chance. So there is no reason waiting list Explosion, I mean, it all depends on who is added and how you attribute to the waiting list. There are always Waiting list. And we know that the potential waiting list is always much, much higher than the real waiting list. So yes, I mean, if you look at waiting list data in there has been 2 weeks of decline in So there is a correlation between waiting list numbers and, let's say, the The ability and access to intensive care, and we are I'm sure that you will see the waiting list increase As there is more access again to transplant progress with COVID cases falling down or coming down again. Okay, great. Second question relates to gross margin development. And should we not be able to see the price increases sort of affecting gross margin positively? I don't believe we have really seen that. Or is it too early to call out? No, no, it's a good question. And if If you take abdominal, for example, we cannot compare it with last year because we did not own organ cyst Or the Domino product range last year. So that's new. So we can only compare Domino with quarter 1 and with quarter 2. And we have seen an improvement in gross margin comparing quarter 3 this year with quarter 2 and quarter 1. When it comes to thoracic, the 78%, there is a little bit different product mix this year compared to the same quarter last year. So pricing has taken place, but there are also differences In gross margin, if you compare, for example, our perfect plastic preservation solution compared with The EVFT offering. So product mix do actually play in here as well. That's the reason why you don't see an increase of 7% to 8% versus last year. It's also if you compare to The same quarter last year where we had the same gross margin of 7% to 8% for thoracic non durable goods. I mean, we have also invested in the organization with people also working in operations with manufacturing. And Since so the cost basis is a little bit higher when and at the same time, we see the same revenue level. So that's temporarily And I think that's right. Okay. That's great. Two more questions, if I may. Starting off with OrganAssist and its potential earnouts, does it look like they will reach these earnouts in 2021? And I do believe one was related to sales, right? And one was related to clinical achievements and registrations. And given the progress of Clinical activity, it looks like they most likely would have hit that earn out. But how sort of will this play out? And what type of earnouts are we talking about? I mean, there is an earnout of 2,000,000 plus €2,000,000 €2,000,000 is paid out if we do achieve the 510 approval for the key message transport before December 31. And that we feel confident that we will get. So that means An earn out of SEK 2,000,000. When it comes to sales, we had quite an aggressive target for this year. The year is not Over yet. But it's probably going to be challenging to reach the earn out for Thanks as we see it right now because we also know that earlier in the year, there was still impact also from From COVID in Europe, even if that is less than now. So I would say with certainty, Certainly, you can never leave us with high certainty that they will get the earn out on the 510 approval, yes, Less likely that they will get the earn out on the sales revenue targets. Does that answer your question? Absolutely. Thank you, Doug. And will that be booked over the P and L? Yes, it will be. We are having discussions with We raised the question to the auditors actually, but it will most likely be a financial item asset over the P and L according to IFRS. Perfect. And last question on my end before I get back into the queue. It relates to your quite positive comments, on Long Bioengineering's business model on perfusion services. And obviously, you have long bioengineering in the U. S. Should we interpret your positive comments as that is something that you're looking into, into Europe, Something that we should see as a potential over the next 12 months that you establish? Or is there any limitation in terms of Reimbursement for each geography in Europe as well as organ allocation program that limits your opportunity to do a similar type of perfusion service model? I think it's difficult, as I see it now at least, to We're sort of cross border in Europe. It's not that easy because of the difference in a model. Sometimes we have reimbursement numbers still. But As I mentioned, heritage in the U. K. Is going to adopt, Let's say, a mini model of lung bioengineering where they will be producing lungs also for other transplant hospitals. And I know that also in France, I mean, I've talked to Porsche in Paris, which is the big lung transplant center. They have also expressed an interest in producing lines toward other French hospitals. The problem is that The surgeons are not that willing to give up on this. And there has to be financial incentive as well Connected to this, I mean, if you look at Danbio Engineering, they have a fantastic model in place where they only charge the transport center If they are successfully delivering, if there is a successful transplantation of lung that they are actually delivering to the hospitals. So That is fantastic. That works in the U. S. I think you will see national examples of Centralized sort of perfusion models, not only for lines, but also rather organs over time. And that, I think, will grow. And I see and view that very positively. Does that answer your question? It does. Thank you very much, Doug. And I'll get back into the queue. Congratulations on the heart transplantation patients, by the way. Thank you. Thank you. I just see here that there is a question from Johan Rios on the U. K. Where he says that, Yes. This is an important dynamic mark for ex vivo. Is Delta a concern for ex vivo over the next few months? I mean, we have regular contact with Healthine, and we are installing the machine now as planned. There is a budget allocated for a certain number of ex vivo lung confusion sessions in that hospital. So we have not heard anything yet that there will be any impact from Delta On that our business potential with healthy for the time being. And I think In the case of the U. K, if you centralize the perfusion to one big transplant hospital, it might actually Make it even easier, considering the delta variant as well that you're doing in one sort of site. So the answer is that we are There is no concern or there is no information saying that there will be any delay in this activity or launch program. I hope that answered You asked questions. Thank you. Our next question on the audio line is from Caroline Banna of Danske Bank. Please go ahead. Your line is open. Hello, gentlemen. Thank you very much for taking my question. So On the abdominal segment, you have a very ambitious goal for 2026 of sales from abdominal being kind of at the traffic level. So could you give some color on how you plan to get there? Thanks. Do you want to start, Christophe, a little bit? Have we sort of thought about the modeling? Yes. But I mean so this is one of our strategic objectives for the strategy period, To be the global leader actually of abdominal and to initially put our strongest focus on the U. S. Market. The key here will be the launches of our products, starting with the Kidney Assist. We will so we need to Ensure that we have a strong organization in U. S. That can handle the products, and we have taken that there. We also I mean, we also have Product that are supported by very strong clinical data that we believe very much in. And then it's also will also be important for us to continue to think of how we can make life The Tier 4, the transplant teams look how we can We are broad on our business as well. So we will have Very, very good machines. We will have a very, very strong sales force, but we'll also look into if There are other things that we can provide the transplant teams with in the abdominal field. So I think that is yes, that is important for us. Yes. Absolutely. I think at the end of the day, I mean, to have This technology on the market, which in the Lancet application and also the new immunogen of medicine As shown when it comes to kidney and liver, we have a Commercial team with sales people in the U. S. Dedicated to Domino. I think the rest of the world, we will actually share sales the same sales team we said For the time being, both for Rafiq and Adele, but we will make a big push in the U. S, which today is the biggest Abdominal marketing in the world, and we have a launch plan ready. We have customers lined up. We have done everything on pricing and everything is ready to go. So as soon as we get the type 10 ks approval From FDA, we just push the button, and then we start spending. Thanks. That sounds like a well thought that plan. So a follow-up question on that in terms of the planned Pricing, Chris, are you getting any pushback from clients that being in Europe, of course? And What do you expect from U. S. Clients and also potential competition over there? I can tell you, we can stop the U. S. U. S, we have never we have not had any pushback at all when we did last year. We have not had any pushback now. We are actually implementing it On 1st November, because you have to give 30 days notice. And for some reason, we ordered contracts. We postponed those pricing fees in 1st October to 1st November. So we are doing it now, and there is no pushback. In the U. S, we know that there is one competitor called TransMedics. They don't have an E and P solution like we have, but they have Preservation solution for that. And they are charging nearly twice our price in both of us. So I don't see any Issue in the U. S. To continue to increase prices. In Europe, it varies from country to country depending again on the reimbursement model in the company. So for example, in the Netherlands, they are now introducing a more generous reimbursement model from first of January. And they are also actually going to make it compulsory to use machine perfusion for marginal organs. So We see that we can increase prices in certain European countries in a good way and also, of course, get higher volumes, Whereas in countries where there is no reimbursement, then of course, depending on who is the baggage holder and how The budget for machines versus consumable consumable solutions is managed. I mean, there needs to be a little bit of a different discussion, but we are also Preparing a lot of support materials showing that raw materials are actually going up a little bit in price and that we are giving a story around the Price increases in an even better way they see our secret offer than they've done in the past. So so far, so good. All right. That's all from me. Thanks guys. Thank you. Thank you. Our next question is from Dylan van Hasting of Brian Garnier and Co. Please go ahead. Your line is open. Excellent. Thank you very much. Hi, Christopher. So just two questions from my side. First one is on EVLP trends. If I understand correctly, there is sort of a negative mix towards warm perfusion. And I was also wondering if you could perhaps Characterize a bit sort of the OPTN weekly trends where I can't really sort of see the COVID impact in terms of volumes, Maybe there's a difference in how that data is reported. So that's my first question. And the second one would be, if you've actually encountered TransMedics, their device in tenders in the 3rd quarter and perhaps so far this month? Okay. Christian, do you want to start with the first part then? Which is a little bit the Relative warm versus cold, that was really your question, Dylan, if I could Yes, basically. Yes. In terms of ERC, it varies from clients to Clients I think so for smaller clients that they in general have had much harder to focus on Having their EBT programs running rather than the big ones, we do know, For example, however, that one of our biggest companies, the UHN in Canada, There has been a quite significant decrease in their DVP program of about 50% compared to last year. So I guess it's yes, it varies a lot between the clinics. We are far from the 2019 levels still, which was more of a normal year. What was the second question again? I just We have not seen Transcendent. You mean in Langue? Yes. No, we have not seen them because they have different they are not evaluating lungs, Dylan, in our way, I mean, they have a lung transportation device, but they don't have any sort of unique solution. They don't have any sort of No, I have not seen them in any tenders. And you know that since we have sort of 90% market Sure. When it comes to growth preservation of banks with the perfect tax solutions, we can very easily also monitor Plantation volumes in different geographies based on our sales of Perplex stuff. And we see no there is nothing that We have seen from TransMedics in any sort of tenders and discussions we have had With customers, it's more. Excellent. That's very clear. I was just wondering if you saw them around because they're guiding progressively. Yes. So that's good. We don't see them. Excellent. Thank you very much, guys. Thank you. Thank you. Thank you. There are no further questions at this time, so I'll hand back to our speakers. So no more. Okay. Were there no more questions? No more questions. Okay. And I don't see any questions From the web feeders, I think we have answered all the questions there are. And I would like to thank you all for listening in. It's much appreciated that you take your time to listen to our reports, and We'll talk again in a couple of weeks or a couple of months' time. So thank you all, and thank you for organizing this.