Arcticzymes Technologies ASA

OSE:AZT

Earnings Call Transcript 2019-Q1

[Christian Jørgensen, Chief Executive Officer]

Yes, good morning and welcome to the Q1 presentation for Biotec Pharmacon. I'd like to welcome the people here in Oslo who are present. I'd also like to welcome people on the web, and I'm sure that there's a lot of colleagues from Tromsø who's also watching this as I've said many times, one of the biggest shareholder groups in the company are the employees of the company. So shareholders for us is a very real thing. It's something we discuss every day at the lunch table, how the share price is developing because a large number of the employees of the company are shareholders. So a warm welcome to, as I said, everybody in Oslo and people on the web. The agenda is what we usually go through, nothing has changed there. This is just a thing that -- just to remind people of what we are, what I think is important that we come from Tromsø University and we are based in Tromsø, and we have a very good relationship with the University that we benefit from today. So not even -- not only did actually the company originate from University of Tromsø, but that relationship that we have with the University is still beneficial for us today in a number of areas. So we are happy to be located up in Tromsø, and we're happy with the relationship that we have with the University still up there. So these are the highlights of Q1. As we wrote in the Q1 report, we are not a quarter-by-quarter company. We are, in most of our business areas, are business-to-business and they can fluctuate. And especially, we have a number of large customers and whether they order in one quarter or the other quarter can influence our numbers but does not actually influence all our business we have with them. But that said, it's always nice to have a good quarter and it's always nice to have a good comparison when we compare to Q1 2018 that -- how the numbers are developing. And it's always nice to have a good start of the year. So we are happy with this. We had growth in all high-margin areas that is our Woulgan business, our ArcticZymes business and our consumer health business. The one area where we did not have growth was in the animal health business. There are fluctuations as to when our customer sells their products to their customers and that is not a concern for us. They will fluctuate from quarter-to-quarter, but we are happy and we are confident that the business we have there is in good shape. So growth in all high-margin areas, and that can also be seen by the EBITDA. EBITDA has been reduced. The deficit has been reduced over last year. We have launched a new product in ArcticZymes, we have a growing Woulgan business, recurring sales from the same customers in Germany especially. And then we got a grant from Norsk Forskningsråd, as we announced in the beginning of February, where they will help us develop the new Woulgan products over the next 4 years. So overall, we think, as usual, a very busy quarter for us but also a quarter where actually a number of the things that we have put in motion are getting the results that we would like to see. So for ArcticZymes. We are seeing a broader customer base in ArcticZymes, and that is I think very good news for us. We have, as many of you know, been very dependent on one customer, a relationship that we cherish and a relationship that we really work on because that one customer also put high demands on us. Those high demands makes us then better equipped to go out and sell to other companies. But we have seen not only a growing business this quarter, but we're also seeing a double-digit percentage growth of the sales outside this one big customer. And that indicates to us that we now have a broader customer base and we're not so dependent on this one customer, whether that customer buys in the quarter or not. So our products are getting a broader acceptance with a wider customer group, which is our strategy and which is nice to see. Secondly, we launched a while back our SAN product mainly for use in -- within gene therapy. We can actually see now some of our customers in that area are also buying some of our other enzymes. So the fact that we used the SAN product as a door opener to these companies, now we can actually also sell some other products to these customers. Again, an important strategic point for us to broaden our customer base so we're not so dependent on this one customer but we have more customers in the portfolio. So that was good to see. And as you saw, 25% growth over first quarter last year. We here -- again, I would caution that it is not a quarter-by-quarter thing. We sometimes get an order in end of March, sometimes we get it in the beginning of April and that can influence our quarterly numbers. But the business is in good shape. And of course, as I said before, having a good start to the year is always nice. We also launched the first ligase. Ligase is an enzyme that binds together DNA, and we are in the process of identifying more ligases there. In principle, 6 subgroups of ligases and then there's a number of variations of that. The way we do this is we go out and we talk to our customers. What do you like to see? What kind of functionality would you like to see in such a ligase? So this is not us sitting in Tromsø and trying to figure out. This is a fantastic ligase, so let's out and see if we can sell it. We actually develop it, we get the ideas from the customers and then we develop it. Secondly, I think also important that we have received a grant of EUR 254,000 to develop more enzymes in -- together with the University of Tromsø and with a Danish/American company. Those enzymes developed in that corporation, we are free to commercialize at our will once they are there. So I think again, a testament to the research environment and development environment we have in Tromsø. Not only do we manage to get fund from Norsk Forskningsråd, but we also manage to get funds from European Union to develop new products. So I think a big plus for the people of and colleagues up in Tromsø. We also -- as we have said many times before, we're looking for inorganic growth opportunities in ArcticZymes. We can develop and launch new products. Last year, we launched 4 products. Launch of new products and having a wider customer base is key for us to the growth. And we would like to jump-start this growth and not only go step-by-step but actually can we jump-start it. And therefore, we are spending quite some time on identifying corporation partners, that being mergers, that being acquisitions, whatever in Europe for companies that are interesting for ArcticZymes where we can actually benefit in becoming bigger and have the scale that we would like to have quicker than doing it ourselves. So that work is ongoing and we are very active. We have hired a company to help us with those endeavors. And of course, when we have something to announce, you will hear about it.For BetaGlucan side of the business. Woulgan, as you saw, NOK 1.2 million in sales up from Q4. We now see a steady increase in the business. We see a lot of repeat buys from Germany especially, and that is for us a good sign that we see the same customers actually ordering more and more. We also get orders from England, we get orders from the Nordics, but the big bulk of the growth and what we see here is from Germany. We also signed -- as you saw on Friday, we signed a new distribution deal with Publilog in Austria. Publilog is part of a company called Publicare, which is a homecare company based in Switzerland. They have operations in Switzerland, in Austria and in Germany, and we now signed a deal with them in Austria. They will then need to go to the authorities to get the product reimbursed, which is a bit of a process, as you're all aware. And we will not see any sales until end of this year, beginning next year once they have the reimbursement. But again, a good sign that a company is willing to go into these -- doing these efforts in terms of getting -- doing the work of getting reimbursement, and I think that also is a testament not only to the clinical documentation we have on the product that it actually works, but also the rumors coming out of the German market that actually there's something here that is worthwhile pursuing. We also signed a deal with a Portuguese company. We didn't think this was big enough for a stock exchange announcement, but we have a distribution deal with a small Portuguese company, who are very well connected within the Portuguese health care system. So we've been down there, we've been training their nurses, we've been -- had meetings with the KOLs and they will now start selling. We had the first small order from them here in April. But this will not turn the company around, but it was a good sign again that Woulgan is -- can be accepted. And it is part of our strategy, and I'll go -- on the next slide, I'll show the same slide as we actually showed in Q4. But a number of shareholders have asked us, what is actually the new strategy for Woulgan? And there it is in Europe, find partners who can help us sell this product, who are willing to put some resources behind it because we do not have the resources. They will mainly be in areas where we can get a decent price because there has to be some room for the companies to earn some money. So that's what we're doing. And Publilog in Austria, Excelderma in Portugal, a testament to that strategy that this is what we're doing. We also as you probably saw in the -- I'm not sure you saw it in the quarterly report. We got the first conclusions from the PMCF study that was done. As you know, we have to -- as part of the registration of a product to get the CE mark, the regulation is you have to follow up, that everything you claim in the registration, does it actually work, is it safe, the product and so forth and so on. That study, as we announced, finished in December. The last patients were exited in December, and we now have the kind of the first result of the report of -- from the investigators saying that the product is safe, the product is useful. And therefore, they will report back to the MHRA in England, which is our notified authority, to say that yes the product does perform in line with the CE mark, and therefore, it's safe to use and we can continue with that. So that was good kind of a tick mark to get that done, and we will of course, on -- constantly monitor the performance of Woulgan. This is what you have to do when you have a medical device, that you have to monitor performance, adverse events, anything that goes on there and report to the authorities if you see anything that is not right. So the PMCF is just one part of it. It's an ongoing thing, but at least now we have confirmed that the things we put into the CE mark is okay, and we'll report that back to the authorities. The Woulgan strategy is 2 things: One is we would like to promote SBG as an actual ingredient, which it is. It is an actual pharmaceutical ingredient, and therefore, this is the thing that makes Woulgan so different from anything else that we have SBG inside. So we would like to promote that. The sales focus will be on Woulgan, of course, because that's what we have today as a product. And we have also -- as announced in January, we will also launch more products as we go on. We now got the funding from Norsk Forskningsråd to launch a wider portfolio of SBG wound care products. We're also looking for partners, especially outside Europe. Inside Europe, we wanted to kind of take the -- our destiny in our own hands and therefore, going country-by-country, identifying partners who are willing to put resources behind it because we can -- we don't have the resources. But outside Europe looking for partners. And if somebody outside would like to not have Woulgan but use SBG saying, "Well, we have a dressing, we have something where we actually think that SBG would be a good fit to put in," we have no problems having an agreement with such a partner so that they can use SBG for their use. Whether we then do a license deal, royalty, whatever, that remains to be seen. But this is what we do. So not only Woulgan. We sell it in Europe through distributors, we're looking for partners outside Europe. We are developing more products within the Woulgan range, and we are also looking for partners who would like to use SBG as an actual ingredient in whatever shape and form they would like to do. The assortment will not be something we produce ourselves. We don't produce Woulgan ourselves today. We produce SBG ourselves, but the detail, the packaging, everything else is done from the outside, and the same goes for the products that we're going to develop. We will develop the products in cooperation with a contract manufacturing organizations, that's the CMO, who knows how to build or produce these various products. And we will identify those partners and then the build new products. We cannot have manufacturing for that in Tromsø or wherever. This is not our core. We need to identify partners who can help us produce it and develop this with us. So that's the adjusted Woulgan strategy. This is what we're doing. This is what Finn Ketler is working actually on, identifying partners in Europe that are willing to put resources behind it so we can see the sales of Woulgan expand. Develop more products so we are more relevant. And then outside Europe, find a global partner. And if somebody wants to use SBG, we have no problem selling SBG as an active ingredients in somebody else's product. It's a bit like GORE-TEX, a company called like GORE-TEX. They sell their technology to a number of different clothing companies but it's the same technology. We have an SBG inside. Instead of GORE-TEX inside, it's SBG inside, it's like Intel Inside in a computer. We would like to use SBG inside to other companies who can then use it in their applications. In the other beta-glucan segments, we are still recruiting patients in New York. As you know, this is a -- the neuroblastoma cancer is an awful cancer that affects children. Sloan Kettering is a very renowned institute in New York. They are getting patients actually from a number of countries outside the U.S., who are then trying to get into New York and to be treated at Sloan-Kettering because neuroblastoma is not a very big indication but is a very deadly indication for children. And Sloan Kettering is one of the best institutes in the world, has a lot of experience in the world with this. So we are still recruiting patients in this double study, a double -- where we have 2 legs, and it remains to be seen just what the result is. What they're trying to do here is to give the vaccine upfront, and then one part of the study to give the SBG 6 weeks later and the other part to give it at once to see if there is a -- if they can isolate the effect the SBG in the study as an adjuvant. So no results as of yet. But of course, fairly exciting for us. I've also been in pharma long enough to know that these studies can suddenly turn upside down, and therefore, it's -- we are cautiously optimistic, but we'll have to see the final results before we can make any conclusions. Within consumer health, we have had a good quarter mainly driven by sales in Asia and in the U.S. This is an area which is very competitive. If you go into amazon.de or amazon.com, you will find at least 150 to 200 beta-glucan products in all sorts of shapes. We don't have any IP in this area. This is gone. We have a very -- a lot of IP in the other area within SBG. But within consumer health, this is more a -- is something that somebody else can do. We think our products are better and we sell it as being better, but there's a lot of competition there. And within animal health, we had, as I said in the beginning, we had lower sales this quarter than we had in Q1 '18. We did sign a big deal with a Norwegian marine feed company here in beginning of April. And we're confident that this business is in good shape. So what we see here, we see some quarterly fluctuations, but we have heard nothing from neither the marine farmers out in Norway nor from our partner here that there's any noise in terms of the beta-glucan acceptance or anything else. So we're confident we'll get this -- the business back, and we actually got a fairly big order in the beginning of April here. So this is more a quarterly swing, nothing that worries us. So this is a -- yes, this is how the business went in Q1, very busy. We grew the business in all high-margin areas. We lowered the deficit. We had good cost control, and we launched new products. And I think the most important thing is not only do we have some very demanding customers out there and we can attract these demanding customers, but their end consumers, they need our products, and I think that's the most important thing. That the products we are selling are really relevant to the end consumers, and that's important for the business going forward. So with this, I will hand over to Børge for the financials, and I will come back to talk about the outlook.

[Børge Sørvoll, Chief Financial Officer]

Thank you, Christian. And as you all see, we are basically seeing improvements in all areas of the business now in the last quarter. And going straight into one of the most important aspects, looking at the cash flow. We see that our first quarter changes has -- we had a cash outflow of NOK 3.5 million for the quarter. Last year in the same quarter, we had NOK 10.6 million in cash burn, and this gives us an improvement of more than NOK 7 million on a quarterly basis. We also see that our receivables, they are unchanged from the same quarter last year. We see that our payables are actually reduced, so this gives us a better position as well. We also see at the end of the quarter, we had a cash balance of NOK 28.2 million. And if you look at the tables here, so you see that our cash position has flattened out. In the past, the curve has been much steeper here. So we actually see now a positive trend here on the cash side -- on the cash balance side. We hope that this will continue in the coming quarters. On the sales side. And as Christian touched upon, our business has grown in all of the high-margin areas. We see that -- we are really happy to see that Woulgan has actually grown up. Comparing it to the same quarter last year, we have actually grown the sales now 140% and we have grown them 30% compared to the Q4 2018 results. ArcticZymes is also growing their sales. We have NOK 6.3 million in the same quarter last year and now we're seeing NOK 7.9 million and so we have -- there's a good traction here. We see the growth and we are happy with that one. And as Christian said, animal health, we had a small decline in this quarter, but still we see a good growth in the consumer health side. We had some good orders in the first quarter and we're really happy with that. And we hope that this will continue in the coming quarters as well. On the group level, our sales figures were NOK 14.8 million, up from NOK 14.3 million in the same quarter last year. Even though that the growth is not that high, but we have seen the growth in all of the right places now. We see the growth in all of the high-margin areas, and that's where we focus our efforts and that's really good to see here. And we continue to improve our EBITDA. We had -- for this quarter, we had minus NOK 3.9 million in EBITDA, improvement from NOK 5.1 million in the same quarter last year, and the improvement is primarily related to sales. On the cost side, we have kept the cost level at a steady state, but we have increased the activity levels substantially in the business area. You can also say that we have IFRS 16. Maybe some of you are -- know a little bit about. It was implemented on January 1, 2019. It has an effect from our -- for our figures. It basically means that everything related to property, plant and equipment now is put on the balance sheet and is now put -- is now just an asset and a liability. In practice, it means that the expenses that we had on property, plant and equipment is now -- it will now be depreciated. So what happens is that our EBITDA is improved on a quarterly level. If you look at the actual figures we presented last year, they were NOK 700,000 worse than the NOK 5.1 million we have now. So it was more NOK 5.7 million last year. But we've done all of our 2018 figures to make -- to be able to compare the figures now. On an ideal basis, this will actually -- this will mean that we are moving around NOK 3 million from property, plant equipment to depreciation. It's a technical exercise, but it needs to be done as well. But the important thing here, we are improving our business, we are reducing our deficits as well. Going into the ArcticZymes side of the business. As you see it, we have grown the sales figures from NOK 6.3 million to NOK 7.9 million. And we also see that ArcticZymes has increased their expense base from NOK 7.6 million to NOK 8.8 million in the same quarter last year, and this has -- the expenses are primarily related to personnel and some external expenses. We are now switching some of the personnel that we have in -- on the production side of BetaGlucans over to ArcticZymes because we have such a high activity level there. That means that some of the expenses will increase in ArcticZymes, but they will decrease in BetaGlucans business as well. And as you can see here, even though we have increased our expenses, we still managed to improve our EBITDA on a bottom here. So even though it's just a marginal improvement from minus NOK 0.4 million to minus 0.3 million, it is an improvement that we are happy to see. On the BetaGlucans side, sales are a little bit lower than last year. It's NOK 1 million lower than we had in the same quarter last year. But -- and as we had in the fourth quarter as well, we see that even though the sales number are lower, it's lower in the right places. It's in the animal health side where the margins are lower. We still managed to increase our gross profit here. We see that we have NOK 0.5 million in improved gross profits here. The cost we do, we have it in the high-margin area. It is -- and again, it is on the consumer health side. So it is a good thing to see. And we also see that assets as I talked about with ArcticZymes, we have managed to reduce our expenses here, close to NOK 1.4 million here. And it's also because we have moved some of the personnel expenses from BTG to ArcticZymes and it's also because we have reduced some of the external consultants that we have used. EBITDA improved by NOK 1.6 million and we're really happy to that, that we are seeing a good improvement in profitability now. And with that, in conclusion, I will say on the financial side, a lot of things are looking really good now. We are on the right track. We have made some -- we have done some efficiency steps in the organization. We try to utilize more the organization in a better and more economic way. And we need to continue now, we have a constant focus on our cash burn, and we need to see that -- get it closer to breakeven now on a longer level, lowest one. And I think that we are saving cash, we are saving -- maybe not saving cash, we want to generate more cash and we want to have control of our costs in the future now. That's what we do. And I think with that, I think I will leave it to Christian to take us through the last few -- the outlook for 2019.

[Christian Jørgensen, Chief Executive Officer]

Yes. As Børge said, cash is important for us and something that we talk about every day, and managing our cash is a key requirement for us. And so we do this switching of personnel, we do whatever we can to get synergies out between the 2 business areas and thereby, saving resources. As Børge also said, the activity level has gone up quite a bit. You might not see so much in terms of sales, but if you see that animal health sales is maybe one customer, which doesn't actually require a lot of transactions. And we saw that going down maybe, but that doesn't really help us on the resource side. We have then a number of new ArcticZymes customers. We have a number of new Woulgan customers. That is actually something that is taking resources out. And with that still we maintained a very -- almost flat cost development, including also the salary increases that we had last year that is in those numbers and including also that we have spent some money on external resources for identifying partners for ArcticZymes. So all that is managed within the same cost figure. So cost management is key for us. Cash management is key for us. We have reduced the space we have in Tromsø to save some resources there. So we had 2 floors before. Now we only have one floor. And we put people together and see how much we can save and having flying offices we don't need, have -- all of us having offices up there. So savings wherever we can and put the resources where they actually make a difference, namely in the sales or development of new products. That's where we put them and we try to save on anything else. The outlook for '19 is the same as we presented end of January. We expect revenue growth in the 2 focus areas, ArcticZymes and Woulgan. This is where we put the resources, this is where we see the benefit from the shareholders' point of view, that those 2 business areas need to be growing. We would like to grow the business in ArcticZymes organically and we have plans and we're doing that. But we're also looking at inorganic growth opportunities in order to jump-start to be a bigger company, faster than we are today. It takes some time with the resources we have available to build it. And if we can find a partner, we can merge where we can buy, then suddenly we are in a different league to put forward there, again. But it's about increasing sales in existing and new territories and finding partners who are willing to put resources behind it. We cannot put resources behind it. We have limited resources. We need to find partners who will say, "We think this is a great product. We're think there's something in it for us." We would like to do -- as we saw in Austria, we would like to put it through the reimbursement process, and those are the kind of partners we're looking for. And then, we'd like to expand the portfolio for Woulgan. I think as I've said a few times, we do see a kind of a picture for that if you come with maybe a Ford Focus, I do not know, but I think it's a fairly good car, it does everything it's supposed to do, it does the trick. But it is not as relevant if you go to the Volkswagen Group and we go say, "Well, we had a Ford Focus.' It's more interesting if we have a family of cars, saying we have a whole family here. How do you like that? We have this product today and we'll have those products in the future. When you can picture that, when you can describe that picture to partners, it's a completely different picture than having only one product. And that's what we try to do. Having Woulgan and then saying we have more products in pipeline, we received funding from Norsk Forskningsråd, and we are out there looking for partners who can help us produce and develop these products. So that's the outlook. Organic growth, focus on cash consumption and cost control and ArcticZymes looking for inorganic growth opportunities to see if we can jump-start the business. And with that presentation is finished, but I'm sure there are questions here or there are questions in -- on the web. I'm happy to take your questions.

[Unknown Analyst]

Can we expect any new products this year? Or will it be for next year for the Woulgan side?

[Christian Jørgensen, Chief Executive Officer]

We are working very hard on new products. I would not -- I don't think we can manage to do it in 2019. It's just -- it's too short for that. One thing is to develop the product, and that's -- but then you have to go through the registration, you have to go -- and make sure it actually works, and that process is pretty long. So technically, to have a product that works is -- it can be done within a year or something, but then you have to go through the whole process of actually getting it reimbursed, getting it CE marked, getting it...

[Unknown Analyst]

Two or is it 5? Or can just you tell a little bit about that?

[Christian Jørgensen, Chief Executive Officer]

We're looking for new distributors in Europe. Outside Europe, we're looking for partners who are maybe have a more regional scope or a global scope. There we do not go country-by-country. It is basically -- it's too far away from us. We don't have the resources to be able to support a distributor site. So outside Europe, we're looking for regional or global partners. Inside Europe, we're growing country-by-country. This is an area we know. This is close to home. And there we are mainly looking for countries where we see there is a fairly high price and there's a willingness to pay for new and innovative products. How many countries? We're working on a number of countries. I would like to -- love to announce it when we have them. But at this point, I'll just say we're working on several new countries in Europe as we speak.

[Børge Sørvoll, Chief Financial Officer]

I have one question from one of the listeners on the line. What do you think about the market potential for Woulgan in Germany based on your experience so far? Or is there -- or what can we expect from sales revenue on that side?

[Christian Jørgensen, Chief Executive Officer]

I would be very hesitant to come up with a number because I know that, that number is -- almost will be wrong for a lot of reasons either it's too little or too much. We think there's a bigger potential, which is why we're working so much on it and which is why we are having -- we're seeing more and more home care companies coming to us. We're educating more and more home care nurses. These are the nurses that actually go out and treat the wounds in the patients' on a daily or weekly basis. And what the team is tracking, they're tracking how many nurses have we trained in Germany and the other countries we're in because we see that as an indicator of that. At some point, if we have trained so many nurses, there will be sales coming in. So we're tracking on a monthly basis from all our distributors. We are asking them to come back, "How many nurses have you trained this month," and therefore, to have an indication of when can we see sales coming in. Germany is the largest medical device market in Europe. How big our sales can be there, I would not put a number on, but it is definitely bigger than it is today. But what the limit is, I would not come with a number.

[Børge Sørvoll, Chief Financial Officer]

Any other questions?

[Christian Jørgensen, Chief Executive Officer]

Then I would like to thank you, the people who showed up in Oslo. I'd like to thank you, people who are listening on the web for the questions. And of course, you're always willing to, as you do and we're very happy with that, write to us, call us in between the quarterly meetings here so we have an understanding of what you're interested in and what your worries are and we can address it and we can then have these discussions also as I said outside these meetings. So thank you very much.