Ambu A/S

CSE:AMBU B

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, welcome to Ambu Q2 2019-2020 webcast. Today, I'm pleased to present Nicolai at the IR.

[Nicolai Thomsen, IR Manager]

Thank you.

[Operator]

[Operator Instructions] Speaker, please begin.

[Nicolai Thomsen, IR Manager]

Thank you. Good morning, everyone. And welcome to our Q2 2019-'20 conference call. My name is Nicolai, and I am from the Investor Relations team. With me today here at the Ambu head office in Copenhagen, I have our CEO, Juan-Jose Gonzalez; and our CFO, Michael Hojgaard. As you know, we announced our Q2 report yesterday evening. During this Q2 conference call, our CEO, Juan-Jose Gonzalez, will talk about the highlights for the quarter and the strategic rationale for the investments into our commercial infrastructure. And Michael Hojgaard, our CFO, will review the financials for the quarter and then we will take your questions. The duration of this call will be approximately 1 hour, and you can follow our presentation via our website. [Operator Instructions]Now I would like to give the word to our CEO, Juan-Jose Gonzalez.

[Juan-Jose Gonzalez]

Thank you very much, Nicolai. And first of all, let me say that we issued this announcement in what is an unprecedented time for the world as societies fight against the COVID-19 pandemic. So we are very grateful for all the work that doctors and nurses and respiratory therapists and emergency teams are doing in the treatment of COVID-19 patients. We have -- as a plan, we're going to spend some time going through the market, our strategy, the impact of COVID-19, our performance. Michael will share with you in more detail our financial results, and then we will have a Q&A. In terms of the key messages for the -- for this session, number one, we are posting a strong performance in Q2 and Ambu has been growing very rapidly over the last few quarters. But now with the positive impact of COVID-19, we are posting a significantly higher results. We are growing 24%, driven by a visualization business that is growing 69%. And as a result of that, as you all know, we are upgrading our guidance from 16% to 22% to 26% to 30%. But it's not only that. Over this period, we also achieved very important milestones in terms of our innovation. We were able to expand from pulmonology into ENT as planned, and now we are able to secure the FDA approval of our cystoscope and aView Advance as planned. And more importantly, we remain as planned with the launch of our duodenoscope as we file for FDA approval of [ aView ]. And as we move into GI and urology, now we are basically building our commercial infrastructure. And this is a very important investment both in terms of sales and making sure that we're able to create and penetrate these markets, but also in terms of our long-term profitability. This infrastructure is highly scalable, and this will allow us to make sure that once it is filled, we can bring all of our innovation, our colon and gastro and cholangioscope, and we can do it at a very high EBIT level.So before we start, it's always important to look at the market. And this is one of the key reasons why there is so much excitement around Ambu. The single-use market today is about $500 million, and we estimate that this market is going to grow to $2.5 billion by 2024. It's growing driven by the higher awareness around infection control by the benefits in convenience, but -- the strong appeal of the economics and workflow efficiencies. And all this is being powered by technology. All the advances we are seeing in sensors and computer processing power and in macro solution, which continue to accelerate, is allowing the development of single-use products that now has the ability to perform at a level that we could only imagine 5 years ago. And on top of this, the COVID-19 pandemic further highlights the importance of single-use products. It is during the COVID-19 pandemic where the focus on avoiding cross contamination is significantly heightened. If you are a patient who is healthy, the last thing you need is to get a reducible scope from someone that had COVID-19. And if you had a patient with COVID-19, the last thing you want is another infection from a reducible scope. And that's why when you look at COVID-19 pandemic, although we consider this to be a spike in demand and a one-off benefit, it's certainly going to have a positive impact in the development of the market. Now within that market, our strategy is very clear. We want to be the world's most innovative single-use player. And we have 4 key strategic priorities, to scale up our innovation and manufacturing engines, and then we'll talk about how important is that, why we have a first-mover advantage and what our plans regarding that. The second thing is, as we scale up our innovation and enter into new markets, we are focusing on the market where we consider we will have the highest appeal for single-use products. And in the geographies where we feel the conditions are right for the development. Within geographies, the United States, for example, is our #1 priority. As we are doing that, we are investing or building our best-in-class organization. This is marketing, health care economics, our sales force, our clinical teams, our innovation, our software development teams. This is critical as we move forward as a company. And in terms of our growth, we want a sustainable one. One that have a positive impact in the environment. So we also have an aggressive environmental agenda from recycling to a more environmentally friendly materials to make sure that we can build and fulfill this aspiration in a way that is in line with what we also believe is important for the world. Now let's talk a little bit more specifically regarding the impact of COVID-19 in our business. First of all, Ambu plays an important role in the fight against COVID-19. Our aScope Broncho, our Ambu Bag resuscitator actually are used in the treatment of COVID-19 patients. It's because of that, that we have taken aggressive measures to increase our manufacturing capacity and airfreight spending to make sure that we fulfill our role, that we bring our products there where they are needed the most. And again, as I mentioned before, although we consider COVID-19 to be a onetime effect, when we look at how we are penetrating customers further, how we have been able to expand our customer base, we have grown our customer base at around 10% since this pandemic started. We believe that this is going to be very positive for us. Now in terms of what can we expect with relationship to the COVID-19, we have seen the positive benefit in March. We are seeing the same positive benefit in April. We basically, at this point, are confident that the new guidance we have provided reflect what is going to be the performance this year. Now let's talk about our performance in more detail. So first of all, we posted 24% organic revenue growth. And when you look at the driver of this growth, on the left-hand side, you have the number of units that we are selling in single-use endoscopy. And first of all, in Q2, we are selling 313,000 units, out of which, around 80,000 are related to COVID-19. More importantly, our new estimate is that we are going to exceed the 1 million single-use endoscopes this year, which is a very important milestone for us. And then when you look at our core business, the impact of COVID-19 is more mixed. There are -- there is an increased demand in certain anesthesia products like resuscitation bags and face masks, but then our patient monitoring and some of the other anesthesia products like circuits and laryngoscopes are negatively affected. So it's very likely that our core portfolio will be negative affected in Q3, but then we expect it to recover as selective procedures go back in line and economies open and our health care systems resume their work. But overall, a strong Q2 performance and an increase in our annual guidance to 26% to 30%, which make us even more -- one of the fastest-growing medical devices companies globally. Now looking at our performance in ENT. It's very important because ENT is mostly an elective procedure. So first of all, we have 12 months of data already, and we continue to compare the performance of Ambu when we launched our aScope 3 versus the performance that has been -- that we have seen since the performance -- since the launch of our ENT in the U.S. And we continue to grow at 4x that rate. This is important because it's a larger market. We are launching with better technology. We have a stronger commercial infrastructure, but more importantly, because it shows that we can enter endoscopy segments where the concern around infection control is even lower. In terms of how we are achieving this 4x higher performance, we have seen that we are able to accelerate faster our legacy Tri-anim accounts, which was actually one of the main reasons why we decided to terminate our US distribution and going direct. Today, 40 of the largest top 100 U.S. hospitals have already adopted our single-use ENT. And more importantly, during this crisis, we also see organizations like the American Medical Association, indicating that single-use ENT scopes should be considered to make sure there are no risk of cross contamination. And I'm saying this because we expect in other areas within endoscopy, where we will be entering, the same level of receptivity. We expect to see that in urology, and we expect to see that in GI. So that's in terms of our performance. Why don't we talk about our innovation?And in terms of innovation, again, it's always important to step back and remember what are the key competitive advantage that we have in terms of innovation. Number one, we have the largest single-use R&D organization with over 300 engineers between internal and external, working to advance our pipeline. We have our R&D centers. We have exclusive technology partnerships that give us access to the most advanced technology. And we have a modular approach toward innovation, one that allow us to develop more rapidly, more efficiently and more new products. And we are able to combine that with a highest scale, low-cost manufacturing. I mean with a forecast of over 1 million scopes, we have a tremendous scale advantage. And that allow us to make sure that we introduce products at prices that ensure the creation of a single-use market and also very high levels of margin. Now it is a combination of this R&D and manufacturing, what have allowed us to build what is today the richest pipeline in single-use endoscopy. And data and key messages, number one, in spite of the challenges of COVID-19, all of our development projects are progressing as planned. More importantly, we got the approval of our aScope Cysto, our aView 2 Advance monitor, and we filed for our duodenoscopy FDA approval. Now one key thing that is important for us to realize is that, at this point, we launched our aScope 4 in time, we launched our ENT according to plan, we launched our system and aView Advance according to plan, and we also have our duodenoscopy in line to deliver at that time according to plan. This shows that we have an ability to execute and drive what is a large pipeline, very rapidly and very effectively. And I have to say, we have to all be very proud for that. But more importantly, when you look at this pipeline, we are talking that, in the next 3 years, we will significantly strengthen our portfolio. We will bring our next generation of aScope 5 into pulmonology that will allow us to enter into the Broncho suite to diversify our portfolio for other patients. We will bring our next generation of ENT. We will introduce ureteroscope in urology and then further innovate on our cystoscope with a high-definition scope. And in GI, it's going to be an incredible rollout of new products on top of a duodenoscopy launch that we will introduce this year. Next year, we will be introducing our Colon, our Gastro. And then the following year, our cholangioscope and then the next generation of our duodenoscope. This is important, and this reflects why we believe our aspiration of being the world's most innovative single-use company is within reach.Now let me talk a little bit regarding the launches we are going to see this year. And first of all, our aView 2 Advance monitor, this is a new technology platform that is going to be used across all of our existing and our new high-definition scope. This monitor platform is very important because it gives us excellent image solution with full HD capabilities. It allow us to then -- enable our narrowband imaging alternative, which is called our EVA technology. This monitor is a state-of-the-art, it gives you network connectivity, but more importantly, enable integration with EMR systems in hospitals, something that we are seeing is a key requirement not just in the U.S., but in the United Kingdom and other markets around the world. This monitor gives us high performance and more processing power. This is very important as we roll out future and advanced features that will help us to further enhance the image quality and diagnostic capabilities of this platform. And finally, the design, that feature, the functionality is very intuitive. It's flexible. It's portable, which is a key requirement to be able to fully satisfy the needs of health care systems. So this monitor platform, this modularity, is very important as part of our strategy and differentiation in the market, and the list price is going to be USD 5,000. Now our other important launch, and one we are very excited about, is the launch of our cystoscope. And we are very excited it's -- because it's our entrance for our direct commercialization in urology, and we are doing it in what is the largest market. There are 6 million cystoscope procedures. The feedback we have gotten is that there is a compelling value proposition for single-use cystoscopy. The same concerns around the infection control, the same need for convenience, that same benefit in terms of economics. All that indicates that we should see a similar level of penetration for our cystoscope as what we have seen for our ENT. The list price for this product is going to be USD 200, and we believe that, that is going to allow us to create the single-use cystoscopy market.And then finally, we embarked into a journey to enter into GI with the acquisition of Invendo a couple of years ago. That was a very important commitment. That was when we announced that we will make GI a core part of our strategy. And since then, there has been a lot of work with the R&D organization, manufacturing, quality, regulatory to make sure that we are in the position we are today in terms of filing for our FDA approval. Duodenoscopy represents one of the largest, if not the largest, single-use market opportunity. This is a market where the concerns and problems around contamination are very high. And where you have the FDA recommending U.S. hospitals to move to innovative technologies. So we believe this market is going to be large, and the penetration is going to be much faster than what we have seen before. Now in terms of our development, we thought we could give you a little bit more insight regarding our process. First of all, we engage with key global KOLs in duodenoscopy to help us in the development of this product. Actually, we visited 30 U.S. hospitals and had over 60 interviews with clinicians to get feedback, again, in terms of the size and performance and how the product need to be to make sure that it represents a meaningful improvement versus where they are. More importantly, we conducted a performance test where we compare our single-use duodenoscopy with the Olympus 180 system. And the results show very encouraging performance against Olympus. We are going to release all the results when we secure our FDA approval. But we basically left with a confidence that we have a product that is going to be competitive, and that is going to allow surgeons access to a solution that guarantees them high levels of infection control. And finally, as soon as we secure our FDA approval, we are going to launch a comprehensive clinical study. We are talking about 500 patients. After the FDA clearance, we are going to show some interim results after we have the first 60 patients to support our U.S. launch. The cost of this clinical study is not material. It's about DKK 5 million. However, it's very important and is in line with our strategy to introduce products with very high clinical credentials. Now we move forward with our cystoscope. We are moving forward with our duodenoscope. We expect to have these launches this year. And then next year, we expect to have further launches in GI. And then the following year, more launches in GI and urology. So now that we are in this situation, the key priority for us is our commercial infrastructure. And as you can see from the announcement, our commercial infrastructure investment reflects the scale of our commitment to make GI and urology successful. We are recruiting, in the U.S., 205 people. And by the way, these reflect our focus and the importance of the U.S. market as part of our growth agenda. Of those 205, 170 will be a dedicated stand-alone GI commercial organization. And they -- there will be 35 urology experts that are going to expand our existing pulmonology and ENT sales force, which will be leading the commercialization. We believe that at a health care system level, there is a lot of synergies in terms of pulmonology and ENT. It's typically the same value committee, the same procurement team. And of course, what is important is that we have clinical expertise when we engage with a surgeon. But overall, we believe there is an important synergy with our pulmonology and ENT sales force. And then outside of the U.S., we are also going to expand our commercial organization by 115 people. And they will be dedicated organizations and the urology resources supporting the pulmonology and ENT team, similar to the U.S. We expect this GI and commercial infrastructure to be ready by the end of the first quarter of next year. The total investment this year is DKK 115 million, and the full year impact for next year is DKK 375 million. Now let me just say this, this infrastructure is not only going to allow us to deliver a strong top line growth and make our launches this year and in the next year successful. But most importantly, it's going to give us the ability to drive significant profitability. All the sales restructure is highly scalable, and we will be able to leverage it. And as we drive more top line growth, that will drive a very significant increase in terms of our profitability.Now this is the update in terms of the strategy, the most important development of innovation and our commercial strategy. And with that, let me pass you to Michael to come talk to you about details of our financial performance.

[Michael Hojgaard]

Thank you, Juan-Jose. The COVID-19 pandemic caused a change in demand patterns and product mix for Ambu, which affected the visualization as well as the core business for the quarter. The net effect has been an increased demand, and we finished the quarter with organic revenue growth of 24%.Our Visualization business grew 69%, while Anaesthesia grew 3% and PMD declined by 6%, all leading to a combined negative growth in core by approximately 1%. The EBIT margin ends at 15.2%, while a number of endoscopes sold finishes at 313,000 units equal to a 72% growth in units. So on Slide 17, at -- on April 6, Ambu upgraded the revenue guidance to 26% to 30%. And at the average, incremental expected margin, this upgrade has a value of about DKK 160 million. In the quarter, we decided to provide DKK 38 million to cover for increased credit risks on accounts receivable. The provision is meant to cover for potential insolvencies among our customer base caused by the worsened economic environment. It's important to stress that we have no specific indications of any threatening losses. And in the past, Ambu has pretty much avoided any such losses. We tend to throw our outlook to continue on this path, but given the circumstances, it's prudent to build such a provision. The investments into further expansion of the sales force will impact this year's P&L by the mentioned DKK 115 million, and the net effect of the above 3 entries leads us to reinstate the 12% to 14% EBIT margin for the full year. These slides outline the effect we have seen from the COVID-19 in the quarter. We have estimated to achieve an additional 14% growth from the pandemic, driven by Visualization. Core has experienced a neutral effect with an increased demand from some Anaesthesia product, but also lower sales of product used by listed procedures in PMD as well as from in Anaesthesia. The COVID-19 contributed approximately DKK 110 million or 20% of the Visualization revenue achieved for the quarter. Out of the 313,000 endoscopes sold, approximately 80,000 units are considered related to the COVID-19. The main part of the increased number of endoscopes sold came from Europe, but also U.S. contributed to the increase. Let's go to the next slide and deeper into the sales highlights for the quarter. North America accounted for 46% of revenue and grew 17%. We saw some positive impact from COVID-19 on Visualization and Anaesthesia, while our PMD was negatively impacted, as mentioned. Visualization grew organically 43%, while Anaesthesia grew 7% and PMD was down 17%. The average selling price for Broncho -- for aScope Broncho remains the same as communicated in Q4, which includes the 15% price increase from changing the distribution channel in Visualization. Europe accounted for 44% of revenue in the quarter based on organic growth of 40%. Visualization more than doubled, while Anaesthesia grew 16% and PMD, 1%. In the rest of the world, accounted for 10% of revenue, and the organic growth was 2%. Visualization achieved organic growth of 79%, while Anaesthesia was negative at 28% and PMD at 15%. The search in Visualization sale is attributable to strong growth in especially Australia, in China and in Japan, while the negative growth in Anaesthesia and PMD is mainly caused by supply chain constraints relating to some minor markets.Now we'll move on to a more detailed financial update. Revenue for the quarter was DKK 989 million, up DKK 204 million from same period last year, corresponding to reported growth of 24%. The gross margin was 61.4%, an increase by 1.3 percentage points. The gross profit was positively affected by the reported growth in revenue and a more favorable sales mix from higher-margin products. Total capacity cost for the quarter was DKK 457 million, up 65% from last year. The increase is primarily related to the expansion of our commercial infrastructure as well as an increase in the workforce at Ambu headquarter. Furthermore, we have an increased cost for airfreight due to the high demand. EBIT before special items was DKK 150 million, and the EBIT margin before special items was %15.2, including noncash and nonrecurring items regarding the mentioned provision and impairment test of up to DKK 48 million in total. Moving on to the highlights of our cash flows and balance sheet. Free cash flow before acquisitions totaled a negative DKK 279 million, down DKK 223 million from last year. The milestone payment of EUR 40 million relating to FDA approval of the duodenoscope is expected to mature in the second half of the full year '19/'20. At the end of the half year, net working capital was DKK 700 million or 23% of 12 months revenue and is thereby reduced by 2 percentage points. At the end of March, equity totaled DKK 2.3 billion, corresponding to an equity ratio of 48% of total assets. Lastly, total net interest-bearing debt was DKK 1.5 billion, corresponding to 2.6x of EBITDA before specialized items. And finally, let me move on to the guidance for the full year. The outlook for the full year was operated on April 6, 2020, due to the higher-than-expected growth in Q2. The outlook for organic revenue growth was then increased from 16% to 22% to now 26% to 30%, as we saw increased sale of Visualization products and the number of endoscopes was consequently increased from approximately 900,000 to now more than 1 million. We reinstated that guidance here today. With respect to the EBIT margin before special items, this is now resumed at the 12% to 14% as we have accelerated investments into our GI and urology sales force. With this brief update, I would like to give the word back to you, Juan-Jose.

[Juan-Jose Gonzalez]

Thank you very much, Michael. There is still much to do in the fight against the COVID-19 pandemic, and let me just say that we remain aggressively focused on meeting our responsibility and making sure that we bring our products there where we have needed the most. Now in parallel, we are also very focused on making sure that we finish the year as a much stronger company. We keep investing on our innovation; on our high-scale, low-cost manufacturing; building our commercial organization; making sure that our competitive advantage that, which makes unique Ambu, are clearly in a better position to fulfill our aspiration of becoming the most innovative single-use player, one that is well-known for very rapid growth and a top-tier shareholder return with ongoing margin expansion. And with that, and in spite of the last interruption, let's move to Q&A.

[Operator]

[Operator Instructions] We have a question from Thomas Bowers from Danske Bank.

[Thomas Schultz Bowers, Analyst]

Yes. Just a couple of questions here for me. Just going to the SG&A investments, the sales force and the investments that you accelerated for cysto and then also, well, mainly DI. I'm just wondering just -- this include also the upcoming launch of -- in gastric and colon? Or is this primarily related to duodenoscope? So basically, I'm wondering how much you believe you covered in the GI areas with all the upcoming launches? And then second question, you briefly just mentioned that you've also seen a positive effect here in April, maybe not overly surprising, of course. But can you maybe add a little bit flavor on how you see the 2 main markets develop? So do you also see continued high demand in Europe? Or maybe is inventory levels potentially starting to normalize a little bit? So is this mainly U.S. demand that you're now seeing here in April for the aScope, of course?And then finally, just on the aScope inventory levels. Can you give us any flavor on the current unit inventory level and what actually you have right now for the current production run rate?

[Juan-Jose Gonzalez]

Okay, Thomas. Thank you very much for the questions. And let me start with the first 2 regarding the sales force investment in April, and then Michael will comment on inventory. First of all, our commercial strategy is very simple. We will commercialize our products directly. And as we enter into new markets, we will build the resource required to commercialize them successfully. Today, we are announcing the start of the buildup of our GI and urology resources, and the #1 priority for our sales force in GI is the successful commercialization of our duodenoscopy. Now next year, as we enter into gastro and colon, we believe that part of the result that we are building this year will be leveraged for those launches, and then there might be some incremental resources that we're going to build to be able to commercialize this product successfully. But you can -- the way you should see the investment in GI today is that this is the basis upon which we are going to start building all of our GI launches. Now in terms of April, first of all, as I mentioned before, we are seeing a strong April following what we saw in March. In terms of the regions, Europe is the one where we are seeing the highest level of demand. This is driven by the fact that surgeons in Europe, they are using single-use bronchoscopy to be able to determine what is the condition of a potential COVID-19 patient, and thus driving significant demand across all the key markets. In the U.S., we also see single-use bronchoscopy being used, but they are being used mainly when the patient is in a more critical state. So though you see some level of improvement, it's not to the same level that we are seeing in Europe. Now having said that, across the board, we have seen that we are penetrating our existing customers at a better rate and also expanding our customer base. And that's why, although this level of demand is unprecedent, and we consider it as a one-off that you should exclude from next year projections, the environment for single-use products and for Ambu specifically is more positive in the long term.

[Michael Hojgaard]

And then, hey, Thomas, let me give you an answer to your question on capacity and inventory. I think it's clear that we came into the quarter with high inventories compared to how we are exiting the quarter. It's also clear that, as Juan-Jose was alluding to, we have a very, very scalable model. And we've seen some strong demand in a range of our product lines like the aScope, but also the resuscitator. And due to the scalability, we have been able to increase our supply as we move through the quarter and into Q3 and Q4. But it's also clear that we are spending quite significant costs on air freight, as we talked about. So if you go out now, I don't know the numbers of the inventories, but we are more or less air freighting all products in -- that we are selling. And at the same time, we are expanding our capacity on these product lines quite significantly. So overall, I would say that we are able to take more or less all orders that we see.

[Operator]

Next, we have question from Benjamin Silverstone from ABG.

[Benjamin Silverstone, Research Analyst]

This is Benjamin. I'm very impressed by your decision to seize these new opportunities given the momentum on the back of COVID-19. But I was wondering if you could please elaborate on how you're seeing the scope and especially the duodenoscope sales uptick to go next year, given the ramp-up in the sales force and the introduction of the 500-person trial. Additionally, I think you mentioned this on the call, but do you have any estimates of the cost associated with this 500-people trial? And lastly, are you able to share any inputs on how the Duodeno will be competitive in relation to the Boston Scientific model?

[Juan-Jose Gonzalez]

Yes. Thank you very much, Benjamin. So first of all, let me talk about the development of the single-use duodenoscopy segment. And what we know is that duodenoscopy have all the characteristics for a very rapid penetration of a single-use solution. You see the same issues in terms of convenience, the same opportunity in terms of economics. But more importantly, even before COVID-19, there were significant concerns regarding contamination. And that's why you have the regulator like the FDA recommending all U.S. hospitals to move. And we believe that, that we'll also be seeing in some of our key markets outside of the U.S. So if I go to 2024, where we see this $2.5-billion single-use market, we expect that duodenoscopy is going to be one of the largest markets within that $2.5 billion. Now in terms of our development, we believe it's going to be a rapid development. But of course, we need to hire, train and deploy our sales force. We expect to finish the recruitment by the end of Q1 next year. And then there is some time for us to get it effective. We need to conduct our 500-patient trial. That can take about a year. So we should be able to start to see some level of adoption next year, but it will be the following year where we will probably see a much faster acceleration. In terms of the cost of the 500-patient trial, again, it's not material. It's about DKK 5 million. The most important thing is that it will be able to bring more clinical evidence regarding the safety and effectiveness of our product. And then in terms of the comparison of our single-use duodenoscopy versus Boston product, let me just say this, number one, with the performance test that we did, we were able to compare our single-use duodenoscopy with the Olympus 180 platform. And we were very satisfied with the results. Now we also have some information regarding EXALT D, of course, not at a high level of detail, but we are very familiar with the product. And we are also confident in terms of how our single-use Duo compare with Boston Exalt D. And the scale of our investment in terms of building our commercial organization reflects that, the confidence that we have a competitive product in what is going to be a very attractive segment and in an environment where the focus is -- on infection control is very high, which makes moving with our commercial organization the right decision.

[Operator]

Next question, we have Carsten William from Nordea Market.

[Christian Sørup Ryom, Senior Analyst]

This is Christian Ryom here from Nordea. I have 3, please. So my first is whether you can help us with the gross margin dynamics for the second half, whether you expect your -- the mix shift that you're seeing to have a meaningful impact on the gross margin versus what we saw here in Q2. My second question is to the list price on the duodenoscope and how we should understand that, vis-à-vis, the expected average selling price. I believe when you announced the ENT portfolio a couple of years ago, you were talking about a list price in the range of $270 to $300. And I believe our current understanding is that the average selling price is about half of that. And then my third question is a question to -- clarification on the comments you made around the April sales of the aScope. Is it fair to interpret that you have seen sales of the aScope in April being on the same level as in March from the comments that you made earlier?

[Juan-Jose Gonzalez]

Yes. Thank you very much, Christian. Michael, do you want to start with the gross margin?

[Michael Hojgaard]

Yes. Hey, Christian, yes, I think it's a very detailed question. But I think overall, when you look at the information that we've given you, you should not expect too much changes in the margin in the first compared to the second half. There could be a couple of decimals. But overall, expect, by and large, the same.

[Juan-Jose Gonzalez]

Perfect. In terms of the list price, of course, with time, we have become much better at understanding the health care economics and what is the optimal price points to launch. So most of the changes in pricing is not really driven by price pressure, but basically just refining our understanding in terms of what it takes to drive the conversion from reusable to single-use. We have communicated before that our global pricing is going to be between $1,400, $1,600. I have to say, we're still refining our pricing strategy, and we will communicate more details when we announce the launch.

[Christian Sørup Ryom, Senior Analyst]

Sorry, I was referring to the cystoscope where you were talking about a list price of $200. What is your expectation around the relationship between list price and average selling price that -- would that be similar to what we've seen for the ENT portfolio?

[Juan-Jose Gonzalez]

Not to the level that you described. But I think typically, you can assume it vary significantly by geography, but it could be all the way from 20% to 30%. This comes from list price to average selling price. And then in terms of April, again, we have had a strong performance in April, similar to what we have seen in March. I mean just to clarify, we grew in April, 46%. Now this is in line with what we need to be able to hit our full year guidance. So I have to say, it's on track, and we are confident we will be able to meet our guidance.

[Christian Sørup Ryom, Senior Analyst]

And the 46%, is that for the group? Just to clarify.

[Juan-Jose Gonzalez]

This is total company.

[Operator]

Next we have [ Henriette Dooga ] from Handelsbanken.

[Unknown Analyst]

Just a follow-up question on Christian's question to you, Michael. When you say that we should expect similar margins in second half as in first half, is that before or after provisions and impairment loss? Just to clarify on that. Then could you say a little bit more about how many new accounts or how many of the new top 100 hospitals have entered single-use or are starting to buy single-use endoscopes in connection to the COVID-19 sort of to figure out how many new accounts you actually have added to during these hectic months?And then I'd like to ask you about the performance study you have done against the Olympus scope. Is that something you will share at some point of time? Or can you maybe say a little bit how those performance study is compared to the performance study we saw from EXALT D, where it scored, I think, an average 4.7 compared to a high score of 5? If you could share a little bit on that.

[Michael Hojgaard]

Yes, [ Henriette ], so just let me continue with that question on profitability. So the way I interpreted Christian's question was that it was on the gross margin. So that is the ASP minus standard -- minus direct cost and overhead. And impairment losses and the provision comes further south of the P&L. So I'm talking about the other margin, not the bottom line margin. So of course, those onetime-offs are not to be repeated in the second half, but they are in no cases included in the gross margin.

[Juan-Jose Gonzalez]

Okay. So in terms of COVID-19, again, this varies by geography, but there are 2 benefits from COVID-19. Number one, that we have been able to increase our share of existing customers. And that's important because when you look at pulmonology, we had about 25% market share globally. So the one clear benefit is to be able to increase our market share. And the second one is that we also have been able to increase the number of new customers trying single-use products. And that's where our global customer base have grown by about 10%. Now we need to see what happens after COVID-19. That's why we keep reinforcing that you should consider COVID-19 as a one-off event. But clearly, we are going to finish this process in a much stronger position. And then in terms of the performance test. This is similar to the test that Boston made and we will make it fully available at the time we secure our FDA approval. The test was designed with guidance from the FDA. We basically test the product with experienced, high-volume surgeons and less-experienced surgeons. And we did the comparison again with the Olympus 180 model. And we were very positive with the results. We believe that we have a product that deliver against the key needs of doctors and health care systems. We believe that we have an attractive value proposition in terms of economics, and that's why we are building our commercial infrastructure. It really reflects our level of confidence regarding our ability to commercialize this product successfully.

[Unknown Analyst]

Okay. And then just a follow-up on your comments, firstly on we should take out that you had like 80,000 additional scopes sold in March and probably the same size in April. And those, as you'd see as a one-off being taken out of our forecast models for next year. That must assume that you anticipate that there will be no COVID-19 lockdowns when we reach spring next year.

[Juan-Jose Gonzalez]

Yes. I think we all hope a day that the world will not be facing a COVID-19 pandemic. So the assumption is that one. The assumption is that we will be facing the impact of an economic recession, but that we think all that environment will be accompanied with very strong momentum and with a stronger innovation and commercial infrastructure and manufacturing to deliver against our agenda. But we are committing to consider this as an extraordinary event and a one-off in terms of your projections.

[Operator]

Next question from Yiwei Zhou from SEB.

[Yiwei Zhou, Analyst]

I have 2. Firstly, regarding the clinical study for Duodeno scope. Is it possible for you to give us an indication on when do you exactly expect to complete the 500-patient study? And given now you will have data from a 60-patient sample instead of resource from a completed study by the time of launch, has that changed your expectation on duodenoscope sales for this year? And my second question regarding the new monitor. And it looks like the list price, USD 5,000, is much higher than the old version. Should we expect significant direct financial impacts? Would you also please elaborate a bit on your commercialization plan and also the rebate level for the new product?

[Juan-Jose Gonzalez]

I lost your voice when you were talking about the monitor. Do you mind repeating your question?

[Yiwei Zhou, Analyst]

Yes. The -- my question is the rebate level for the $5,000 new monitor and also the commercialization plan. I mean actually, I would like to have, if any, would you give a big discount to the larger accounts? Or could you elaborate a bit here?

[Juan-Jose Gonzalez]

Sure. Thank you. So let's talk about the clinical study. First of all, the clinical study reflects our plan all along. We were planning to do this 500-patient study and we're planning to share a -- an intermediate result to support our U.S. launch. That's basically our plan and that's the plan of Boston Scientific as well to support their own launch. So no, it doesn't have any implication in terms of how much we estimate we are going to sell this year. But certainly, it shows, again, our level of confidence regarding the performance of this product and our desire to make sure that all of the products that we bring to market has a strong clinical credential. Now in terms of the monitor...

[Yiwei Zhou, Analyst]

Can I jump in here? Can I interrupt here? So when do you exactly expect to complete the 500-patient study?

[Juan-Jose Gonzalez]

Yes. So we expect that study to take a year to complete. So it will be by the end of next year, the end of September next year that it will be completed. Now in terms of monitor, I have to say, first of all, the most important thing is that image resolution is a key driver of penetration. The more we improve our image resolution, the better our ability to create a single-use market and take share. So the monitor platform will enable that in pulmonology, will enable that in ENT and will support our cystoscope launch. And that's why it is so important. Now in terms of our commercialization, different markets, different accounts have different commercial terms. This is not really about revenues. This is more about driving penetration. In some cases, we will sell it. In some cases, they will be sold at a discount. In some cases, it will be combined with a large agreement around our scopes. In some cases, it will be leased. In some cases, you will put it for free, again as part of a major commercial opportunity. So I think it's -- I think I wouldn't be focused that much in terms of the rebate level, but more in terms of what it will do to the overall scope penetration.

[Operator]

Next we have Niels Granholm-Leth from Carnegie.

[Niels Granholm-Leth]

Yes, my first question would be on the DKK 38 million write-down on receivables. And I'm sorry if this question has already been asked, I was off the line for 10 minutes. But could you explain if the revenue attached to this DKK 38 million write-down was taken in quarter 2? My second question would be on the level of backorders that you mentioned in the interim report. Could you talk about how many weeks of backorders that you have for the time being? And my third question would be on the monitor sales. Will you incur costs for monitor freebies in the second half of this year? So basically giving away the monitor?

[Michael Hojgaard]

Yes, Niels. Thank you for your question on the provision for account receivable. I'm not completely sure I understand your question, but do you ask whether we have impacted our revenue by the provision in the second quarter?

[Niels Granholm-Leth]

My question was if the revenue attached to this DKK 38 million -- expected DKK 38 million write-down -- is the revenue -- was that incurred in quarter 2?

[Michael Hojgaard]

Okay. Noted. No, Niels. We are talking about a provision. We are not talking about our revenue. So that was what I was trying to say that we have no specific indications of any accounts that are going to incur these losses. This is from a situation where we have, in the past, really never incurred any significant losses. So we keep a very, very slim balance sheet with respect to provisions. So given the change in the economic environment, we find it prudent to build a provision like this, but I'm unable to pinpoint this to any specific account because we don't have any accounts that yet have shown any signs. So this is just to cater for something that might happen sometime in the future.

[Juan-Jose Gonzalez]

Okay. Okay. In terms of backorders, first of all, I think we are all very proud for the work that our global operations and supply chains team did to make sure that we could ramp up our manufacturing and air freight all our products where they are needed the most. Now I have to say, by the end of April, our backorders are very low, and this is not an issue anymore. But at some point in March, as we're going through the sudden peak in demand, it was certainly a problem. And then in the case of monitor, I don't think you should assume that there will be many units being placed for free as part of a cystoscope launch. That is, again, not a plan. It's very selective in terms of the type of commercial agreement that we do. So it varies by market. But it's not something that you could assume for the second half of the year.

[Operator]

Next question, we have David Adlington from JPMorgan.

[David James Adlington]

Yes, 3, please. So firstly, you mentioned that the legacy Tri-anim accounts have started to accelerate, but I think that was in ENT. I just wondered if you could give some further color around how much acceleration and what you're seeing on the broncho side. Second question, the $200 on the cystoscope. Just wondering if you're giving any price expectations on the ureteroscope as well. Should we be expecting a premium or a similar price point there? And then finally, I just wanted to sort of try and clarify in terms of whether '19/'20 this year will be trough margins? Or could we expect to see margins down again next year, given the level of investment you're putting in it?

[Juan-Jose Gonzalez]

Sure. Do you mind repeating your second question around -- I think we lost your voice after you said $200 cystoscope.

[David James Adlington]

Yes. On the ureteroscope, the other GI scope, I just wondered what those price expectations were there relative -- if you're not going to your actual price, should we be expecting a premium to the cystoscope?

[Juan-Jose Gonzalez]

Sure. So first of all, let me -- let's talk about Tri-anim. And Tri-anim was a very important strategic decision we made, which was around looking at the performance of our direct force versus the distributor and seeing that our direct force was able to outperform in terms of sales growth, account penetration and introduction of new products. And that was the basis under which we terminated the U.S. distributor and moved to a 100% direct organization. I have to say, that was a very important decision to make ahead of a COVID-19 pandemic. Because then we have a sales force organization that could aggressively engage with existing and new health care system, understand what is the level of support they need and allocate resources accordingly. Now we have seen benefits in terms of going direct in Tri-anim accounts, both in terms of driving a faster penetration of ENT and also driving a rapid growth in terms of our broncho business. And actually, if you exclude the upside from COVID-19, you could see that our Visualization business, which is mainly broncho, would have grown at around 30%. And that just gives you a sense in terms of the positive momentum that we are facing. In terms of the cystoscope, we expect the ureteroscope to be priced at a premium over the cystoscope. This is a more expensive, more complicated procedure. And therefore, single-use product there are going to command a higher price. And then in terms of guidance on margins for next year, I mean, we are not providing any guidance at this point. What is important for everybody to know is that our strategy is very simple. We enter into new markets. We build our commercial organization. And then as the growth continues and the new products continue, we leverage that commercial infrastructure and drive a significant increase in profitability. And basically, what we have -- the period we are going right now is the period where we are building the commercial infrastructure. But once that is built with such a top line growth, we'll be able to see a rapid increase in EBIT.

[Operator]

Next question, we have Catherine Tennyson from Bank of America Merrill Lynch.

[Catherine Tennyson, Analyst]

I have just 3 quick ones left. My first one is on the duodenoscope launch. As we approach that time frame, have you seen any change in the competitive landscape there? For example, have Boston become a little more aggressive on pricing? Or have Olympus already approached customers relating to their [ T90 ] model? My second question would be, on the 30 hospitals that you had in your duodenoscope trial, what portion of those institutions have and already had previous relationships whether through selling bronchoscopes or other Visualization products? And what portion are completely new customers? And then finally, apologies if I've missed it, but you flagged the supply chain constraints in the PMD business. Can you give us a little bit more color on that? And have they been rectified now in Q3?

[Juan-Jose Gonzalez]

Sure. So I mean I would say, in terms of the Duo launch, we are not seeing any changes relative to what we were expecting. Boston Scientific secured the regulatory approval first and therefore, we have seen them engaging with some selective health care systems, especially in the U.S. We know that on the back of COVID-19, the clinical study and commercialization effort has been slowed down as it has been more difficult to secure access. But basically, what we are seeing is what we are expecting. And of course, this -- the duodenoscopy -- the single-use duodenoscopy market is going to be very large. And we believe there is place for more than 1 player. And our strategy, our focus on innovation and our commercial organization is just to make sure that we have a meaningful share of that market. Now in terms of existing versus new relations for our duodenoscopy, I mean we have relations with nearly all hospitals around the world, just because our anesthesia and patient-monitoring products are widely available. But in terms of specific surgeons, this is a whole new customer group. And that's why we engage global key opinion leaders and top experts in GI to help us with the development and the feedback on our product. It has been a core element in our development program to make sure that we can bring a product that we know is going to be competitive, affordable with top technology and that will allow us to create this market. And then in terms of supply chain constraints. In our manufacturing plant in Malaysia, we produce our Visualization products and our patient-monitoring products. And when the Malaysian government instituted a movement control, they put a restriction in terms of how many employees could work in the manufacturing plant. And of course, we prioritized those resources on our single-use Visualization products, as they were the most needed in the treatment of COVID-19 patients. And that impacted our ability to produce our PMD products that drove supply chain constraints. Now all that has been resolved as the government increased the allowance in terms of how many workers can go into the manufacturing plant, and today, that's not a problem anymore.

[Operator]

Our final question from Michael Healy from Berenberg.

[Michael Healy, Analyst]

Congratulations on quite a lot of achievements in a difficult quarter for the company and for a lot of people.

[Juan-Jose Gonzalez]

Thank you.

[Michael Healy, Analyst]

And just want to finish up really on questions asked. Just on the duodenoscope. Are you in a position at the moment to sort of build at risk ahead of the approval from the FDA? And when the approval does come in, do you anticipate, provided coronavirus is -- the risk is mitigated there, do you hope to launch sort of relatively quickly and have maybe a quicker entrance and penetration in the market than Boston Scientific do? And can you just let us know maybe when this was submitted and if you've had any feedback from the FDA up to now and just maybe what is their response? Are they still quite reactive even in the circumstances? And also just in bronchoscopy, you obviously had a phenomenal quarter, and this is continuing into April. We just noticed that one of your competitors in single-use bronchoscopy has cited similar tailwinds from coronavirus. So if you can just give us an update on how you see the competitive dynamics in bronchoscopy playing out at the moment, that would be helpful.

[Juan-Jose Gonzalez]

Sure. No, thank you very much, Michael, and very important questions. So first of all, in the case of our duodenoscopy launch, the most important guideline is that we are launching early Q4. And that basically means a U.S. launch with the 60-patient human-test interim results available. And of course, as soon as we get the FDA approval, we will release the results of the performance test. Now one of our key competitive advantages is that we have a high-scale, low-cost manufacturing. And similar to what you have seen in aScope 4 and in ENT and what you will see in cystoscope and what you will see also in our duodenoscopy launch, is that we can produce very large quantities from the beginning. So supply is not going to be a concern for us. Now I would say in terms of our bronchoscopy, the key question that you have, I just want to make sure that I'm very clear before I answer it. Michael?

[Michael Healy, Analyst]

Yes? Yes? Go ahead.

[Juan-Jose Gonzalez]

Yes. I just want to be clear in terms of the question you asked me in terms of bronchoscopy, just to make sure I provide a...

[Michael Healy, Analyst]

Oh, yes, of course. Yes, so we see Verathon have commented that they've seen unprecedented demand for their bronchoscope as well. And obviously, it looks to be positive for all the players in this industry. Just wondering on your specific sort of market dynamics. Are you seeing there's competition from others coming in? Or are you still comfortable with your position and still taking market share in the single-use segment?

[Juan-Jose Gonzalez]

Yes. I mean I would say just a couple of things. One is this is going to be a $2.5 billion market, and we expect existing and new competitors to come into the market, and we expect them to introduce new products and to expand their offerings. And by the way, we need that. We need them to help us to create the market. We cannot do that ourselves. So we -- I have to say, doing the duodenoscopy launch together with Boston is much better than doing it alone, especially when you look at this at a global level. Having Olympus saying that they are committed to develop a single-use portfolio, that's very positive for us that it will help us to further validate that role and importance and value of single-use products. So we expect competition to come in. Now in the short term, I have to say we haven't seen Verathon impacting our business. And during this crisis, I also have not heard around a -- having inroads in terms of any of our accounts. And actually, what we have seen is that we have increased our number of accounts and because we had a capacity and the ability to expand our manufacturing, we have been able to fulfill demand in a way that, I believe, no other single-use player have been able to do it. But that's as far as we know.

[Operator]

All right. There are no further questions at this moment. So please go ahead, speaker.

[Juan-Jose Gonzalez]

Well, listen, thank you very much, and I appreciate all the questions. Hopefully, you will get a sense regarding where is Ambu today, what makes Ambu unique, our competitive advantages and the decisions that we are making to make sure that when we finish the year, we finish as a stronger company, as we did last year, and that we move into 2020 and 2021 with strong momentum, with opportunities to penetrate new markets, with a larger commercial infrastructure and in line to fulfill our aspiration to become the most innovative single-use company globally. Thank you very much.

[Operator]

Ladies and gentlemen, I may conclude the call for today, you may disconnect. Thank you.