Arcticzymes Technologies ASA

OSE:AZT

Earnings Call Transcript 2021-Q1

[Jethro Holter, Chief Executive Officer]

So good morning. Welcome to the Q1 presentation. For the agenda, here we go in the usual fashion, where we go through the highlights for the quarter. Then we will move on to giving you a business update. Børge will orientate you through the financials. And then we will finish it off quite quickly.So for the highlights for the quarter. What we see is for ArcticZymes, it is actually our first quarter as pure enzymes company and for us it's been an outstanding quarter. We've actually achieved our best quarterly performance ever, achieving NOK 40.4 million in sales for the quarter. Profitability remains strong. We've achieved NOK 25.8 million in EBITDA. When it comes to the 3 segments -- the market segments we serve, each of those has grown. And what we've also seen there, in particular, the molecular research sales, we see now it's started to reestablish to pre pandemic levels. On top of that, we've -- we've successfully upscaled the manufacturing process of our SAN HQ enzyme by over 100-fold factor, and that's very important in driving future sales. So we're going to dig a little bit deeper into each of these as we move through the presentation. So for the business updates, we will start in the usual fashion by going through the commercial segment sales. And as mentioned earlier, we have achieved our best ever quarterly sales performance. For the quarter, collectively, the enzymes business grew 119% compared to Q1 last year. When we go into the segments, the therapeutics segment, this is therapeutics. This is where we serve other companies who are developing gene therapies and vaccines based on virus technology. So for the quarter, we grew the business by 36% compared to Q1 last year. Therapeutics made a 25% contribution to [indiscernible] Q1 sales. We talked about ReiThera in the past. ReiThera is an Italian company, who is developing a COVID-19 vaccine, and they are using our SAN in that manufacturing process.There's been a lot of information recently about them in the media, and they have now initiated a Phase II, Phase III clinical trials. And there is an expectation out there that they will market the vaccine before the end of this year. So that's an update on the ReiThera. We also had 2 large SAN customers, audit us during the quarter. They conducted GMP audit of the terms of operation up here. And this is very much a mandatory process for them because they need to qualify us as a long-term critical supplier. It's also a prerequisite before seeking regulatory approval. And we really welcome audits. I think customers here auditing us is an important thing for us. At the end of the day, we learn a lot with each audit. It allows us to strengthen what we do because we learn -- we implement some of the learning from that. And it just makes us much stronger and more relevant as a commercial supplier. When we look at the research and diagnostics segments, here, we grew at 176% for the quarter compared to Q1 last year. Overall, this segment contributed 75% to total sales. If you look at the split, 2/3 of the sales for this segment came from molecular diagnostics. So this was really the main driver for sales this quarter. And then the product -- as the main product there was Cod UNG. However, some of our other products, such as the proteinases, the polymerases, the DNAses also there in driving existing and new business opportunities. We also signed a new supply agreement with a relatively new customer of ours, who's a molecular diagnostics customer in the U.S. They're developing a multiplex diagnostic platform. And basically multiplex is just a word for doing simultaneous detection of several things at once. And so what they're doing is developing a platform to detect COVID-19 and other respiratory viruses. We've already seen a small contribution of sales from them during Q1. Molecular research accounted for 1/3 of the segment sales. And this is good news because this is the first indication for the molecular research sales have started to reestablish to what we've seen pre pandemic. We do anticipate large fluctuations to remain in a molecular research business despite being reestablished. This is no different than before, the business was choppy before the pandemic, and it is -- and this is part of doing normal business at the end of the day. So what contributed to this? Well, we've seen several large orders coming from all geographical regions. And we were -- and that was mainly related to the recombinant shrimp alkaline phosphatase enzyme we have. And that, again, that product has traditionally fluctuated from quarter-to-quarter because we have some large potential orders that will come in. Typically 1 quarter and not other quarters here. I'd like to give you an update on COVID-19-related sales. And what we're seeing now is the majority of sales we have today is a result of recurring business. These orders coming in from the same customers on more on a regular basis rather than those one-off orders that we've seen last year. So now we start to establish a base of numerous customers which will have long-term business in this area. And these customers are the ones that have developed robust COVID-19 relevant products onto the market. So effectively, what we're looking at, we actually have fewer customers than we had last year when it comes to COVID-related sales. However, we are supplying those companies that will drive long-term value here. Also, just a personal perspective on it, ArcticZymes is also serving 1 of the largest providers of COVID-19 tests as well. When you look at the contribution, COVID virus-related sales contributed 41% towards total Q1 sales. And off of that, the majority of those sales were towards the molecular diagnostic testing segment -- towards molecular diagnostic testing. We estimate that to be around about 90% of it. The reason why it's an estimate is we don't have 100% visibility into how our -- where the products are going, particularly with those customers that historically purchased our enzymes and [indiscernible] into different products. So sometimes if the customer purchases our enzyme, it's used in COVID and non COVID-19 applications, and we don't have visibility to that split. So it's always an estimate that we put here. So it's important to bear that in mind.Like all our business, since we do B2B business and deal with large orders, this means that here, we still expect to see quarterly fluctuations continue in the COVID-19 area. However, we expect these to be to a lesser extent because we will now start to get a good foundation of reoccurring business. I'd like to say something about innovation and operations. And the last few quarters, we've been telling you about -- we've been scaling up the Salt Active Nuclease manufacturing process. In particular, it is around the SAN HQ enzyme. We successfully upscaled the manufacturing process of that enzyme now. We've achieved over 100 fold increase in fermentation yields and product will be commercially available to our therapeutic customers during Q2. And this is significant because at the end of the day, it really serves customer requirements who require larger quantities of enzyme from a single batch. And this is important to those customers who are approaching commercialization and also those that are running multiple projects. What we're seeing is we -- in this space, we're seeing an increasing base of commercial manufacturing organizations who are running multiple projects for their clients. And they will certainly need material from larger batches moving forward. The bottom picture -- the bottom right picture, is -- shows 2 of our proud colleagues. And these 2 colleagues were very important because they co-managed the project from the planning of the scale-up process all the way through integration into production. And of course, we have many more colleagues that were involved, and it was a job really well done, very well planned, very well executed. What you can see what they have done, it's a bottle, and in that bottle, that's a fraction of the material that has been downstream process and represents the first validation batch. In terms of the innovation pipeline, that's progressing. We have several products that are anticipated for launch, be ready for launch during 2021. We're working on an M-SAN ELISA kit that will help support and grow our sales of the M-SAN enzyme, which we launched earlier. We're also working on Taq DNA polymerases, reverse transcriptases. Those enzymes will be optimized to work with a virus-based test applications. We're working on new SAN products and other enzymes. So you'll see these gradually come out as we report in future quarters. When it comes to strategic growth initiatives, our focus has pretty much been towards the infrastructure and expansion of R&D and operations. And I want to sort of show a picture of this to the top left here. This shows a part of the facilities we've taken over on the ground floor, below where ArcticZymes Technologies is located today in the SIVA Innovation Center. This will eventually become part of our new production facility. As you see in this photo today, everything is being moved out, what was there. And now it's really about renovation work, is underway to modify the infrastructure here, install new facilities. So what we're going to be doing is we're taking down some walls, where we'll be installing new water, having the right cold rooms in place. There should -- there may be some changes to the ventilation, new firewalls and new doors, all those types of things that you do when you want to tailor a facility for your use. So what you see here will change. And once this is done and the renovations are done and signed off, we will then start moving in production and laboratory equipment. And then what we will need to do is then validate and qualify that equipment before we're able to start manufacturing in this new facility. So there's still some way to go, but we're progressing according to plan. We continue to make incremental investments in hiring new personnel and talent in Tromsø. And this is really important because this is about supporting our growth initiatives. So we're recruiting in different areas. We're recruiting in R&D, operations, quality assurance and QC. And that's really important because we are getting more customer audits. Our customers are -- our customer base is growing. And with that, the regulations are tightening up both in diagnostics and in the therapeutic area. So we will need more support there moving forward. And also in terms of our customers, we need more support when it comes to order handling and sales in that. So we are going to be putting more support to handle the growing customer base. And these are all good signs. This is all -- all this is about investing in order to leverage the greater potential from the business. So with that, I'm going to hand over to Børge, and he will orientate you through the financials.

[Børge Sørvoll, Chief Financial Officer]

Thank you, Jethro. And as Jethro talked about in the beginning here, now Q1 2021 is the best quarter we've had in our history in terms of sales and profitability. And what makes this quarter even better is that is on the back of historic strong 2020, where we achieved new milestones on kind of on a regular basis. And also in the first quarter, we have continued to support our customers with on-demand deliveries and of the highest quality of deliveries. Going to the sales side of the business, we experienced a growth of almost 120% for the quarter, generating sales in excess of NOK 40 million compared to NOK 18.5 million in the same quarter last year. And this is also substantially up from the fourth quarter 2020 figures where we had sales of NOK 22.1 million or -- it's almost 100% increase compared to that quarter as well. And of course, with current sales, we are well on track to beat the NOK 93 million we had in sales for last year. Looking at the segments for the Therapeutics segment, sales grew by 35% or close to NOK 3 million, giving us NOK 10.2 million in sales for the quarter. And it is worth mentioning that the sales are on the same level as we have experienced in the last 3 quarters. But we do have expectations to grow this number moving forward, even though we know that the quarters will be a little bit choppy. For the research and molecular and diagnostics segment, we experienced a substantial increase of 176% in revenues here or up from NOK 11 million in Q1 2020 to NOK 30.3 million in this quarter or an increase just shy of NOK 20 million compared to the same quarter last year. And of course, as presented earlier, we experienced for the research segment, if this is a catching up effect of underlying growth remains to be seen, but we expect this to be partly driven by -- but we expect this to be partly driven by a catching up effect. We have also experienced larger orders from customers that normally only buy products maybe once a quarter or not that many times each year. And as Jethro also said here in the beginning, we do expect large fluctuation in this area moving forward. It is, however, worth mentioning that currency FX has been negative in the quarter by almost NOK 0.5 million as we see that the NOK has been strengthened toward our main sales currency, USD and euros. Moving into COVID-19-related sales. And as with some of the previous quarters, COVID-19 -- COVID continues to impact our figures, and the first quarter is no exception to this. An estimated 41% of quarterly sales or NOK 16.5 million of quarterly sales are considered to be COVID-19 related. And as Jethro also said, the majority of these numbers are associated with molecular diagnostics, but a small part of this can also be associated with vaccine producers. And for the quarter -- for this quarter, we have also introduced a new graph showing how the business has grown using a 12-month rolling average calculation. And this is to take out some of the choppiness of the business here. So you can actually see a little bit how we are growing. From the graph above, you can see that growth has been steady over the last 3 years with a boost in 2020. We have continuously grown sales from an average of NOK 7.5 million in 2018 to our calculated average of NOK 28 million in 2021 -- Q1 2021. We have also tried to show how the business has grown without the COVID-19 effect. And based on the graph above, sales have grown to an almost NOK 20 million in the first quarter of 2021. It is important to highlight that we have not done any calculation on the negative effects of COVID-19 as it is challenging to say how things could have been without the corona. But one of the things that is challenging to calculate is measure -- challenging to measure is the consolidated effect of researchers leaving the benches in 2020, for example. And of course, if we are able to continue with the trend we are experiencing now, remains to be seen. But as Jethro said, earlier, we are investing in organic growth -- growth initiatives to sustain this growth moving forward now. Looking at the profitability side of the business. Q1 was stronger than anticipated, both in sales and profitability levels. And as presented in previous slides, sales grew by 119%, while EBITDA grew by 194% to almost NOK 26 million for the quarter versus only NOK 9 million in the same quarter last year. We also managed an EBITDA margin of 64% for the quarter, which is in the high end of expectations. But due to the fact that we are investing in the business now, our expenses will continue to grow. And for the first quarter, operating expenses grew by NOK 4 million from NOK 11 million in Q1 last year to NOK 15 million in this quarter. And of course, this increase is explained by growth in personnel expenses, increase in property plan and equipment expense, and expenses related to external support needed to drive our growth initiatives that we are working on. Our cash balance continues to be strengthened on a quarterly level, with a change in cash of NOK 23 million for the quarter. Of course, this one is driven by the final settlement we received from the divestment process of NOK 16 million at the end of this quarter. You can also see from the table above, that our changes in cash is bumpy. And especially, you can see that from the fourth quarter last year. But as most of you remember, we divested Biotec BetaGlucans for NOK 70 million in December 2020, giving us a solid cash contribution in that quarter. With the changes we've experienced in the first quarter, we generated a cash balance in excess of NOK 160 million at the end of the quarter with the expectations to strengthen this even further in the coming quarter, especially Q1 sales are being settled now. And with this note, I will hand it over to Jethro to give you some further input on what we can expect for the remainder of the year.

[Jethro Holter, Chief Executive Officer]

Thank you, Børge, for orientating us around the financials. So for the outlook, as mentioned earlier, we are now in 2021, and we are a pure enzymes company. And now our brains have changed. Our brains are all set on -- with our undivided attention on enzymes. So the outlook I presented last time is the same as before, it's unchanged. And there's 4 key areas we're really focusing on. One, is about performance. This is about the top line sales growth, and I think you see that in the numbers already in Q1. And when you look at what's really fueling this growth is our customers. That's the most important thing to us, our customers. And when you look at our customers, we are serving 3 market segments, each with different dynamics, and they're growing and they're innovative. So we're serving therapeutics, molecular diagnostics and molecular research. We also have a growing customer base supported by over 300 customers, and that just continues to grow. And as we launch more products, that alone can open up more opportunities to reach customers we can't reach today. And lastly, we are expanding our product range and, of course, ramping up our innovation efforts to get more enzymes into our portfolio. So all these things are which fuel the top line growth. Secondly, it's about profitability. Our enzymes are high-value enzymes, high-margin products that allow us to be profitable. And so their focus remains on increasing that profitability. And that goes hand-in-hand with top line growth. Of course, we want to leverage to greater potential out of the business. So investment is really important. And you've already seen, we talked about that today. 2021 is a year of investment, and we're investing as you've seen in expanding facilities as well as talented personnel. And I think as you saw, Børge has already demonstrated and shown that people already increased our expandage there in more personnel and external services. New innovations are very important because today, we do have a limited small portfolio that's driving our sales. So there are parts of the market we cannot reach today. So new innovations are important to really allow us to take more of the value chain moving forward. So with that, we are ramping up organic growth. We're putting more people in to allow us to ramp up our innovations. And that is to allow us to eventually achieving complete portfolio offering of molecular biology enzymes in the next 2 to 3 years. And on top of that and down the line, merger and acquisition will also be important to realize this goal as well. So with that, I would like to say thank you for your support. And also, I'd like to quickly say thank you to the team for a job well done. I want -- I'd like to also remind you that we have the Annual General Meeting on the 20th of May. So please look out for those announcements. And with that, I'd like to now open for questions and answers. So anybody calling in, you can unmute your microphone using Star 6.

[Peter Östling, Life Science Analyst of Equity Research]

Yes. Can you hear me?

[Jethro Holter, Chief Executive Officer]

Yes. Yes.

[Peter Östling, Life Science Analyst of Equity Research]

It's Peter Östling from Pareto Securities in Stockholm. Firstly, congrats for extremely strong quarter. I think that Q1 sales probably exceeded even the most positive expectations. So very well performance there. Just a couple of quick ones and then I jump back to the queue. You always state that sales will fluctuate between the quarters. In this quarter, in this presentation, you say that the fluctuations will be slightly less. And many of the one-off orders that you saw in 2020 is now becoming more recurring one. So I'm just wondering what your visibility is when it comes to sales in 2021? And if we could expect that this level of sales between let's say, NOK 30 million and NOK 40 million is the new normal going forward?

[Jethro Holter, Chief Executive Officer]

Yes. So thank you, Peter, and there are several things to answer there. So I'll start top level first. I think as you rightly pointed out, this exceeded our expectations, and we never expected this -- and that's sometimes how it is. And I think there was a strong contribution, of course, from COVID-19 sales there, that attributed to that overshooting as we saw it. But when it comes to fluctuations, it is, in general, that's the nature of doing B2B business. We're not there to serve EUR 50 orders. We're there serving large bulk orders to our customers who many of those orders are in excess of NOK 1 million. And that's across all the segments. That's in the therapeutics, that's in molecular diagnostics and in molecular research. And particularly for some of the largest customers, some of those will purchase maybe one-time a year. Others maybe purchase twice a year. Other customers purchase every month. And that's why you have this volatility in sales. And it's across all 3 segments. And on top of that, you have different market dynamics as well between those 3 segments. And I think this is sort of -- and of course, then you have the COVID effect as well, which did put the -- it put some turmoil in the market in 2020 and some unpredictability. So I think here, when I talk about less fluctuations, and that was purely for the COVID-19. Those fluctuations will continue because we do have customers purchasing large amounts, and that might not come every quarter. But we know they're regular, and we have visibility to that. But the good thing there is why it's going to be less choppy is because we won't have those one-off orders. Some of those customers who launched COVID tests or had ambitions around COVID were unsuccessful in 2020. So that business has gone away. And it's always what I said going back to this time last year, we said with COVID-19, what we want to do is work with those customers who will be there for the long term. And that's what I talk about when I say reoccurring business. That's what we've achieved to date. We are now working with those customers who are going to have robust COVID-19 technologies on the market now. And that's what's reflected in our numbers now as opposed to these one-off orders. But despite that, those fluctuations will still be there in all of the 3 segments that we serve. So there were several questions there, but hopefully, I've answered all of them for you, Peter.

[Peter Östling, Life Science Analyst of Equity Research]

Regarding the visibility on sales, when you put -- lay down your own forecast, are they always wrong? Or is the visibility for a couple of quarters ahead pretty good?

[Jethro Holter, Chief Executive Officer]

Yes. So we plan our budgets -- annual budgets on a quarterly basis, and that's along with our customers. So we have -- with many of our customers, we have contracts. In those contracts are forecasting mechanisms we have with our customers. So we work around. So of course, we work -- our budgeting is very much planned around what our customers' expectations are. But of course, customer expectations can change and of course, they can sometimes change those forecasts and things like that. And of course, then you have those things out of the blue as well. So there's a lot of science and lot of thoughts in preparing that. So yes, we do have good visibility. But of course, things happen in the market and of course, which sometimes impact our customers. So you need to have good foresight, but not foresights.

[Peter Östling, Life Science Analyst of Equity Research]

The sales level that you achieved this quarter, do you think that is extreme at this point of time? Or is it a new level that you have established going forward, and it will oscillate around that level?

[Jethro Holter, Chief Executive Officer]

I think this is, I think, going back to what we said earlier, this is unexpected this level. But of course, we do expect growth in quarterly sales to previous levels. So I think you need to look in between those. And of course, there's always those kind of things where you have the unexpected as well. So I think I would say, look at the historical quarters we've had, and look at what we achieved now, and that's the kind of expectation you should see. We are -- we said we're going to grow this business. This is what we're doing. But of course, sometimes, we will have, like what we saw in Q2 last year. And we have -- so we'll see this fluctuate. But of course, down the line, of course, we do want this business to grow with sales bigger in this quarter. And that's on the cards. So I think that's the best answer we can give.

[Peter Östling, Life Science Analyst of Equity Research]

Looking at Q2 last year, do you expect year-over-year to show growth even if you...

[Jethro Holter, Chief Executive Officer]

Yes, year-on-year, that's certainly -- yes, that's what we've said this year. It's -- we -- I think last quarter, we mentioned that going into this year is really about exceeding NOK 100 million in sales. Of course, we had NOK 90 million -- NOK 94 million last year, if I recall correctly. And of course, we want to -- and of course, we want to go -- it's always been a goal to go beyond the NOK 100 million. Originally, we had that on the card for 2023. That was our guidance too. But of course, now we're going to -- we can move that forward and confidently say this year will be the year where we go beyond NOK 100 million.

[Peter Östling, Life Science Analyst of Equity Research]

On the -- just taking that a little bit further, in December 2019, when you more or less started the journey that you're on now and presented the new business plan, you also established this 6-year plan where you said that you would have around -- or above NOK 180 million in sales in 2026. Do you think that if things are proceeding like in Q1, that this number is -- needs to be updated? Could you...

[Jethro Holter, Chief Executive Officer]

Yes, yes, so I think I've alluded to that in previous quarters that look, there were 2 targets there. One was NOK 100 million in 2020. 3, then it's in 2026, was NOK 180 million. And those -- I think that's our guidance, and that is no longer relevant. We will achieve those target numbers earlier than that. And again, NOK 100 million, we will exceed that in this year. That's our goal. And then, of course, NOK 180 million, it will certainly be before 2026.

[Unknown Executive]

Any other questions?

[Unknown Analyst]

Yes. It's [indiscernible]. So difficult to find the words today to congratulate with a fantastic quarter. No offense, but looks like we are entering the Super League. I would be filming that story. Well, I don't have so many questions today, but just enjoy the day and congratulations to all of you in the company. It's fantastic.

[Jethro Holter, Chief Executive Officer]

Thank you, [indiscernible], and thank you to all our investors for your support.

[Unknown Analyst]

[indiscernible] markets. Can you hear me, Jethro?

[Jethro Holter, Chief Executive Officer]

Yes, I can. Hello.

[Unknown Analyst]

Good. So a couple of questions, please. And with less than 10% of COVID-19-related sales coming from vaccine producers, help me understand the potential upside if and when ReiThera's vaccine becomes commercial. So that's the first question.

[Jethro Holter, Chief Executive Officer]

Yes. So what I -- I'm not going to answer ReiThera specifically. Because we do have confidentiality with them, and I don't want to get into trouble there. So I'll talk more general, if that's okay. So -- and what we've seen, and if you just look at what we've achieved so far, when you go back, the largest order we actually expedited to one of these therapeutic customers as being NOK 3 million in a single order. Actually, last year, we had several customers who purchased over NOK 5 million of SAN products. And what we're seeing as well, we've seen many customers who are regularly purchasing NOK 1 million products and some of those purchase, not every quarter. So that sort of shows why the numbers are up and down. What we -- and none of these customers are commercialized. That's what's important to understand. When they commercialize, and we haven't -- none of our customers have commercialized yet, but when they do, whether it's in a vaccine space or in gene therapy, we have an estimate that annual sales with those customers will be between NOK 5 million and NOK 10 million. And that is a window because each customer is different. Some customers are just focusing on developing one gene therapy or one vaccine. Others are actually commercial manufacturing organizations. And actually, that is growing in the market. What we're seeing in this arena is that there is not enough capacity in the market to make these vaccines. Hence, why you're seeing commercial manufacturing organizations springing up and actually are -- we serve many of those. And of course, so there, those ones will be the ones that will be serving many clients who are developing virus technologies. So those are the ones that will probably be topping at the NOK 10 million kind of sales. And then the ones who are just developing single indications will be around probably the NOK 5 million kind of sales, but it really depends on what disease they're targeting, things like that. So that's just a rough kind of ballpark where we consider business to be and those customers win. One last thing you got to pay in perspective is not all these customers will commercialize. It's in therapeutics. It's very binary. Either you will get approval of your clinical trials or you won't. That's different to the rest of our business. So some of those customers will drop away, but I think we have a large enough funnel and sales funnel that you won't necessarily see a big drop in sales, but the growth trajectory will change as customers, as we mature that business. And we get the winners and we see who the winners and losers are. And that's just the nature of therapeutics. So hopefully, that answers your answers the question for you.

[Unknown Analyst]

Sure. And secondly, has the COVID-19 revenues from diagnostics opened up doors in terms of product development into new non COVID-19 diagnostic tests with customers who may not have pursued that otherwise. I mean has that led to opportunistic new situations for you and an anecdotal evidence of that?

[Jethro Holter, Chief Executive Officer]

Yes. Most definitely, I think here, this is within our existing customer base and new customers. As I alluded to earlier, we signed supply agreements with a U.S. customer. And they are developing COVID-19 tests, but also they're looking at -- including other respiratory viruses too. So I think all in all, what COVID has done, it has put a lot more focus on infectious disease and in particularly, viruses. So I think in general, infectious disease viral diagnostics has become much more relevant because this isn't -- I don't think COVID will be the last virus to be troublesome for the world. We've seen others before it. And again, it's not only virus disease, it is bacteria as well. And of course, we have enzymes that fit very nicely with bacterial diagnostics as well. But I think what COVID has done is really opened up the door and opened minds, that actually, we need to take infectious diseases more seriously. And so you'll see more opportunistic stuff coming in beyond COVID there.

[Unknown Analyst]

Got you. And just lastly, and I probably should know and understand this, but I don't, so I ask anyway. So there's a lot of discussion around improving influenza diagnostic test beyond this pandemic because the currently available ones is not very predictable. Your technology base, would that enable -- that's assuming influenza testing would be more prominent, let's say. Would your technology enable that?

[Jethro Holter, Chief Executive Officer]

Most definitely. At the end of the day, we've been in viral diagnostics since I've been in the company. I came in the company in 2015, and we already had a nice base of customers using our enzymes in virus diagnostics from anything from HIV to hepatitis C testing, influenza; upper respiratory virus is in that lot. And of course, it's only really become on the map now because of COVID. So across the board of viruses, our enzymes can be used.

[Peter Östling, Life Science Analyst of Equity Research]

Jethro, It's Peter Östling from Pareto Securities again. I have a couple of more questions. The other day, one of the large diagnostic players [indiscernible] posted close to 120% growth in their diagnostics business, mostly related to COVID-19 tests in their point-of-care platforms. I was just wondering, they said that testing is now shifting from more advanced platforms to more rapid testing? And how will that affect you? I noticed that some of their rapid testing platforms are isothermal platforms. Are the demand going from more Cod UNG to more IsoPol? Or could you describe how this shift will affect your business in the diagnostic area?

[Jethro Holter, Chief Executive Officer]

Excellent question, Peter, and a very relevant one. So putting even COVID aside, we saw this actually back in 2015. At the end of the day, we've seen that isothermal amplification is an alternative to PCR. And while PCR uses more sophisticated equipments, it's not that portable compared to isothermal amplification. There, it's much simpler because you can use simple machinery, it can be used much more remotely. That's why you sort of hear things like in the U.K., where they're considered using LAMP, isothermal amplification technologies at airports and things like that because it's much quicker, it's easier to use. And so we saw this, and that's why we developed the IsoPol family. We started innovating those in 2015 and developed our IsoPol enzymes to fit into those isothermal amplification technologies such as LAMP. And also what happened is last year and now -- and this year now. All the patents relating to the use of LAMP technology have expired, which means it's opened the door for a lot of commercial -- for a lot of companies who jump on the bandwagon to develop isothermal tests. So as, I think here, our IsoPol enzymes what we foresaw this, not for COVID, but for the market in general. So we've developed those. We were there at the right time. We have those enzymes. We're further innovating the IsoPol family. So we'll have new enzymes coming out the door in the future. But also with that, Cod UNG is still relevant for those technologies too and some of our other enzymes, too. Because what you got to understand with these technologies, the amplification if whether it's PCR, isothermal application is just one part of the workflow. Other enzymes are needed too, and we have some of those other enzymes. So we are there to be able to really support this isothermal world points of care, remote testing moving forward.

[Peter Östling, Life Science Analyst of Equity Research]

Can you say anything in this quarter, this split roughly between more advanced PCR and isothermal rapid testing platforms.

[Jethro Holter, Chief Executive Officer]

Yes. This -- where we are, we're still in the kind of early stages there. So I don't want to -- I want to be cautious of what I say because this is competitor information as well. So there is of course, a lot of stuff we're doing. A lot of this technology is still early days. We have communicated earlier, but we do have some supply agreements with customers developing these technologies as well with our enzymes. So...

[Peter Östling, Life Science Analyst of Equity Research]

Okay. Just a quick housekeeping questions to end this. How many employees did you have at the end of Q1? And how many do you expect to have at the end of 2021? You've talked about adding people in different positions.

[Jethro Holter, Chief Executive Officer]

Yes. Børge, can you remember the exact number?

[Børge Sørvoll, Chief Financial Officer]

With all the people that we are using both state and internationally and in Norway, we are I think we're around 36 people now. And we are hiring new people moving forward now.

[Peter Östling, Life Science Analyst of Equity Research]

So will you be around 45 -- 45?

[Børge Sørvoll, Chief Financial Officer]

I think it'll be somewhere between 40 and 45 at the end of the year. I think that's a good...

[Peter Östling, Life Science Analyst of Equity Research]

The operating cost in this quarter was roughy NOK 15 million. Is that multiplying by 4 adding maybe a little bit? Is that a good estimate for the annual OpEx?

[Børge Sørvoll, Chief Financial Officer]

I think we're going to be a little bit cautious about saying that this is the new base, but we are -- as we have said, we are investing in the business, and we are hiring new personnel. So yes, you can definitely say that I think 15 is definitely going to be in the low end here moving forward. It's not that we expect this to have a major shift in expenses. But yes, we will see a slight increase as we increase the staff and the organic growth initiatives moving forward as well.

[Jethro Holter, Chief Executive Officer]

And it is incremental. And that's what -- so it's a gradual thing. And we earmark what we need. And of course, we -- sometimes you see actually, you need to boost up some areas other -- than others because of caution that we're growing. And of course, things come in from customers, which make you think differently and you want to align your organization, your personnel have to be dynamic and you have to have a dynamic organization as the market changes and grows, and that's the exciting thing about this business. When you serve those 3 different segments, you have to look at that and look at your personnel constantly and be dynamic with it. And we are a dynamic business.

[Peter Östling, Life Science Analyst of Equity Research]

In your presentation, you didn't talk anything about the inorganic endeavors that you have alluded to in the past. Can you mention anything about this, what you're doing in that field?

[Jethro Holter, Chief Executive Officer]

Yes. So I think in the outlook, I mentioned at the end, I think there, we do -- this is important. This will -- we will -- this will go into building that complete portfolio. And I think for the time being, we are -- we're still a small team. So at the moment, we are focusing on those expansion projects and getting that done. But at the same time, we still remain opportunistic at the time being to do a merger and acquisition. And I think towards later on this year, we will then step up our efforts as we've done earlier. And I think here, we've got to remind ourselves, when we started the M&A process, we are a different company today to what we were then, and we can think differently. But I think the most important thing when we do an M&A, we don't do an M&A for the sake of it. We do it because it's the right fit. And it has the right synergies to leverage those revenue synergies from that business we buy. And for us, it's really about the products they have and that synergize or are complementary to what we have. So I think here, we're opportunistic for the time being. If something lands on the table or one of the partners we've been talking to says hi, we would like to consider moving forward or something faster now then, of course, we would -- yes, we potentially entertain those discussions. So it's opportunistic for now.

[Unknown Analyst]

Jethro, this is David [indiscernible]. I'll just chip in with a final question. Congratulations again.

[Jethro Holter, Chief Executive Officer]

Thank you.

[Unknown Analyst]

Awestruck by the numbers. Really happy for you guys. And for all the shareholders and everyone involved, obviously. I was just thinking about what asked about earlier. Potential for sort of a golden age in diagnostics on the back of the increased awareness following the pandemic, obviously, and the opportunity for you there. Could you talk about sort of the long-term impact on a company such as ArcticZymes from this pandemic, not necessarily the COVID testing and vaccines itself, but rather on more general, so general what do you say near the wind -- tailwind?

[Jethro Holter, Chief Executive Officer]

Yes, exactly. Thank you, David. So for us, we've always had a strong strategy in molecular diagnostics way before COVID came along. And for us, it's really about bringing those relevant enzymes to this space. So at the end of a day, when you do a diagnostic test, it uses a sequence of events, which use several enzymes and as well as we hear a lot about PCR, but that's not the only technology in there. That's just a piece of [indiscernible] amplification technology. And so there's a lot of other technologies that are used anything from sequencing. There's even things like mass spectrometry, things like that are used. There's a genotype, and there's a lot of different types of technologies that are used. And what's important to us, and it's always been on our map, even before COVID is to become much more relevant. So we bring the complete portfolio of enzymes to serve each of the steps of a diagnostic test as well as the different technologies that are used there. So that's why we -- it's going to be a continuous long-term projects or even when we have a complete portfolio with all the major classes of enzymes, we still want to build each of those classes out. Because our customers will require new innovations all the time. So we'll always be innovating new enzymes as we build it out. But the #1 goal right now is to make sure we have a complete portfolio of all the classes of enzymes. So we can tap into all the technologies and all parts of the workflow in diagnostics. And today, we can't do that because we have a limited portfolio. So I think here, I hope that was -- answers your question, if not, please, ask something else.

[Unknown Analyst]

That's good. With regards to the LAMP technology specifically, can you allude to what applications or diseases, you can apply that to? Or is it a general testing technology or is it more specific to airways...

[Jethro Holter, Chief Executive Officer]

I think it's used in anything you want to use in detection, LAMP technology can be used in. And I think if you think more broadly, yes. Here, the virus diagnostics is on -- is what people are talking about. But generally, LAMP is where it's something you can have batteries in one of these machines. You can take it anywhere. So it can fit even into environmental testing, remote testing, testing waters, testing -- for instance, that's just one example. It can be used even for researches out in the field doing ecology studies. There's so much ways this can be used. So the point is you can test and detect a piece of DNA from remotely, that's the point of technology. So it's limitless how LAMP technology can be used. It's very difficult to put a PCR machine remotely. You need -- and set that up. You would need to have a lab environment where LAMP, you can potentially do that remotely in a dirty environment. So I think here, this is the beauty of it. So there's a lot of applications more than I could talk about today. But of course now what we want to focus on is really the ones, the applications, which will have the highest value here at the end of the day. There's a lot of market areas we could serve, but we don't because we would not be very successful there. So I think it's very important that we are very focused about these things. But LAMP, yes, sure, it opens up a lot of potential for how to detect a piece of DNA in future from different environments. And also one area as well is bioterrorism, actually. I think here bioterrorism as well. When you get a swab in the airport and they put it in a machine, that's -- there's a potential later on. And there are companies that have been working on molecular diagnostics based on LAMP technology for bioterrorism as well. And I think -- so I think there is the -- and of course, then you want something very rapid. It takes maybe 15 minutes as opposed to 2 hours to get a result. You don't want somebody hanging around in an airport for 2 hours or something. So I think -- so hopefully, that kind of gives you a broader perspective on how these technologies can be used and applied.

[Unknown Analyst]

Great. Can I just ask one more quick on geographical progress in Asia, specifically, you announced a partnership with distributor in China in Q3, I think.

[Jethro Holter, Chief Executive Officer]

Yes.

[Unknown Analyst]

Has that resulted in any material sales yet?

[Jethro Holter, Chief Executive Officer]

We've got -- sales are coming in, in China and in Asia in general as well. And I think one thing on Asia I didn't say in the presentation, and it's in a report was in Japan, we had a very good quarter actually. There, we have actually -- one of our main customers there has been purchasing our enzymes for a long time. But now they really -- they've now moved into COVID as well, and we've certainly seen a nice effect of that. And the important thing about that Japanese customer is also they are very much a well-known and renowned company in Asia. So they just -- they sell really strong into all the Asian countries. So when you look at China, actually, we have -- I think we've had sales going into China for many years, but we don't necessarily have visibility to that. So I think here, we are pushing -- what's new is we're pushing direct now. We've new distributors, new partners and down the road, at some point, we will then have our own people in China at some point because it is a very relevant market. And then that person in China would manage a lot of our partners there because you can't grow China with one man. You need somebody there to manage the network, to grow the sales there. So it's really early days for us. But yes, we are seeing sales in China, but they are -- our direct sales are starting out. But like I said, I think there has been indirect sales in China through our existing customer base as well.

[Unknown Executive]

I think we take 2 more questions here. Richard and Arne has a question. I don't know if they want to take that one, and then I think we'll end this Q&A session.

[Unknown Analyst]

[indiscernible] from ABG Sundal Collier in Stockholm. Hopefully, you can hear me okay. So first of all, congrats to a very strong quarter. I want to touch upon the M&A agenda a bit more. Given the fact that you do have sort of best-in-class product portfolio today, are you confident in your ability to find products and technologies and sort of new targets that are at the same level or doesn't dilute the product quality, if you will, in your offering?

[Jethro Holter, Chief Executive Officer]

So very good question. So our goal is to find complementary products. We don't want something that's going to cannibalize our business. And there are some interesting companies out there that are lean in different areas and some of the things we're developing and have ambitions to develop, they already have those [indiscernible]. They know those enzyme technologies very well. And those enzymes will be complementary to what we have. So I think that's the first thing. The second thing, you're right. What we need to do is when we -- any acquisition we make, we really need to look into the quality and the robustness of those products because, of course, we do not compromise our brand. We would have to ensure that those products meet that quality and level. If not, then we will elevate it to that quality level at the end of the day. And I think that that's always been -- that's why customers work with us because we -- not only do we have interesting enzymes, we have the highest quality. We have good robustness. We have good security supply. So we'd also have to look into their manufacturing capabilities. And yes, if we buy somebody, it could mean that we also have to invest in them for them to potentially ramp up their manufacturing capacity and things like that. So these are the things we would look at and are looking at when it comes to M&A targets.

[Unknown Analyst]

Great. Great. And just a final one from my side. Looking at the therapeutics and vaccines, obviously, it seems like, to my understanding, that there's a big exposure or use cases in the viral space and the viral vectors, et cetera. And there has been some recent backlash for these technologies looking, for example, at AstraZeneca and Johnson & Johnson, Vaccines as well as BioMarin in the viral vector, complete response vector, et cetera. Do you see any worries in the field of virals in the longer term? Obviously, the pipeline is quite massive at the moment. But do you see any worries on the longer-term horizon? And I guess that your product expansion will sort of mitigate that potential risk, I guess. So how should we think about that?

[Jethro Holter, Chief Executive Officer]

Exactly. It's a very good question and I suspected a question would come up on this. It's very relevant. At the end of the day, when you look at how our SAN enzymes are used, they're used in AAV. They're used in adenovirus. They're used in lentivirus and other viruses here. Of course, what you're seeing is -- the things that you're seeing today is very much related to a DNA virus. And actually, when you look at where we're -- and actually, when you look at who we serve, we're mainly serving AAV customers, people you're doing AAV and not a DNA virus. So I think here, it's kind of going in different directions ourselves here. But when it comes to DNA virus here, you do need to put it in perspective here. It's -- this is all new technology. And there will be always. It doesn't matter even in traditional drug developments in -- even when you develop a new surgery, there's always risks. There's always adverse risk. So you need to put these things in perspective. So long term, no, I don't see an issue here. But of course, there's always risk in everything when it comes to medicine. And I think there has to be some perspective there when it comes to that. So even yes, general surgery has its risks. Being put under anesthetic has its risks. So I think here, it's a pragmatic viewpoint you need to take on this. So -- but longer term, I don't see any issues when you look at where -- what we're doing and what we're serving, viral -- adenoviruses for vaccines is just a part of what we're doing here in supporting those customers.

[Unknown Executive]

Arne, one last question.

[Unknown Analyst]

Congratulation Jethro, very good results. I have one question about some in gene therapy. Is it possible to give estimate of the market share for the project development in gene therapy? How many -- what percentage are you seeing some enzymes?

[Jethro Holter, Chief Executive Officer]

Yes. It's a good question and a very good question. I'd love to give you an answer, but because of the competitive landscape there, I do not want to say that publicly. I'm sorry about that, but that's just how it is.

[Unknown Executive]

Okay. I think we are done. Jethro?

[Jethro Holter, Chief Executive Officer]

Thank you for all your questions and again for all the support.

[Unknown Executive]

Okay. Have a good day, everyone.

[Jethro Holter, Chief Executive Officer]

Have a good day.