Arcticzymes Technologies ASA

OSE:AZT

Earnings Call Transcript 2022-Q1

[Jethro Holter, executive]

Today, it's the first time we've had a physical meeting in just over 2 years. So it's fantastic to be here and see many familiar faces and some new faces as well. And of course, we have people calling in today as well. For those calling in, we have the chat function. So if you have questions, you can pose your questions to that. Unfortunately, we cannot cater for verbal questions for those virtually. But of course, anybody in the room here can ask questions verbally at the end.

So for the presentation today, it is myself, Jethro Holter, the CEO; and Borge Sorvoll, our CFO, who will walk you through the presentation. So the agenda, we have the standard agenda. We go through the highlights for the quarter. We will then dig a bit deeper into the different business areas. Borge will walk you through the financials. And then we finish going through the outlook for 2022 and a little bit looking beyond that.

So for the highlights. We are very proud of our Q1 performance. It's been a strong performance, and that's been on the back of a strong Q4 performance as well. So some of the highlights here is we've achieved our highest-ever quarterly sales, coming in at NOK 49.2 million. We also had a strong EBITDA performance of NOK 27.9 million. In terms of the 2 business areas we have, Biomanufacturing and Molecular Tools, again, we achieved our best-ever performance and I'll come back to that in a little bit.

We also signed a new OEM agreement with a global life science company, and what that means is this customer will private label several of our enzymes and integrate them into their extensive portfolio. We also are excited now to expand our base beyond Tromsø. And we're now in Oslo now, where we expanded into ShareLab at the Oslo Science Park. And there, we are establishing an applications lab, and you'll hear more about that in a minute.

In terms of the business update, let's start with the commercial sales. And as mentioned before, we had our best quarterly performance ever, and we experienced growth in both Biomanufacturing and Molecular Tools. But before I go into that, I want to say something about geographical distribution of sales. When you look at total sales for the quarter, 46% of sales came from EMEA, 41% of sales came from the Americas and 13% from APAC. So you can see we certainly have a good geographical reach when it comes to sales. And I think it's important to talk more about that in future and thought we'd show where our sales are coming from, from a geographical perspective, particularly since a lot of our customers are paying in dollars and euros, of course. And that does -- we have some exchange rate things always to deal with there.

In terms of the 2 different areas, in Biomanufacturing, we had our best-ever quarterly performance, very strong coming at NOK 18.8 million. That accounts for 38% of total Q1 sales. And it's really the shrimp -- sorry, the SAN, the Salt Active Nuclease products that are already driving those sales today. And what we -- and those -- that's in, for instance, these enzymes are used in gene therapy, viral vaccine manufacturing and other biomanufacturing applications.

We have certainly experienced an upturn in sales, particularly following the pandemic now when it comes to the SAN sales. That's in all regions. And what we're seeing now in Europe, we're seeing sales are certainly bouncing back. We see an improvement in sales there. And actually, when you look at this 39% of sales from Europe were in Biomanufacturing when you look at the Biomanufacturing sales there.

Beyond the SAN products, we've been in very active discussions with numerous customers regarding RNA therapeutics. This is a new area we're wanting to get into and innovating. It's very interesting. We've also been to several trade events as well, and there speaking to customers and learning more about what's going on. And what we're seeing is, of course, we're developing enzymes. There's enzymes in our pipeline that customers are interested in. But also, it seems that some of our existing enzymes are of interest in that area as well. So we're looking at potentially reformulating some of those or even reengineering some of those enzymes in order to meet the needs for RNA therapeutics. So that's kind of interesting to see, even our existing products fit as well.

With respect to Molecular Tools, this is where we sell enzymes to research kit manufacturers and diagnostic test developers and manufacturers. And there, we had our best quarterly performance, coming in at NOK 30.4 million. it's slightly ahead of what we had in Q1 last year. Remember, Q1 was a very strong performance. So we just shaved and slightly ahead there, so that's good. So overall, Molecular Tools contribution to total Q1 sales was 62%.

If we break it down into research and diagnostics, research contributed 23% towards Q1 sales; diagnostics, 39%. And again, when we do that split, it is an estimated split because for some customers, they buy our enzymes and it goes in both directions. So that is an estimation at the end of the day.

When it comes to research there, the main product driving sales is the Recombinant Shrimp Alkaline Phosphatase product. That was the first enzyme. It used to be the flagship enzyme of ArcticZymes. And still, that's going strong after 20-odd years. And that enzyme accounted for 50% of research sales during Q1. And over the last 3 quarters, we have seen the sales of this enzyme increase. On top of that, we're seeing that our largest customer and some of our other key customers have purchased that enzyme though their purchasing patterns have changed, and we're seeing more frequent orders now. We suspect the increase in demand is very much related to classical Sanger sequencing for use of infectious disease testing and monitoring, and that's where we suspect the increase is related to.

When it comes to diagnostics, this is -- it's a Cod UNG and dsDNase, which are the primary growth driver there. And this very much relates to, again, infectious disease testing, particularly viruses such as HIV, HCV and coronavirus.

With respect to coronavirus-related sales, these remain, and they will continue to remain, but we now consider them part of the established business. I think today, what we're seeing with our customers now, they're really now supporting what we call endemic testing and look at monitoring surveillance of variance. And we suspect that will continue for the long term. And of course, ArcticZymes will be supporting that through its customers.

Not shown on this slide is we -- is the deal, where we've signed an agreement, an OEM agreement, with a global life science company. And basically, what they're going to do is private label several of our enzymes and incorporate them into their extensive synergistic portfolio. And for us, it's a way of indirectly gaining commercial reach beyond what we do directly, and that will be within all 3 areas: within Biomanufacturing area; it will be in research and diagnostics. They have reached -- unfortunately, I cannot disclose who the customer is. That's due to -- we asked, and they're not willing -- they won't allow us to use their name, which is normal. That's how our business works.

But to give you an idea, they are a large company of -- it's a tools and solutions provider of around about 20 -- more than 20,000 people. So that will give you a kind of idea of the size of this company. It is a starting point of a relationship, though. It's the beginning days of a strategic partnership, but it's one of those things in years to come, it could be something the size of our largest customer today. So -- but again, we need to -- like I said, it's a starting point, and we can do a lot more together as we move forward as well.

And I think the highlight for us is establishing ourselves in Oslo with our applications laboratory at ShareLab in Oslo. It's good to finally have another leg, another site, and now we're here in Oslo. And we signed an agreement with ShareLab AS to rent laboratory and office facilities. The ShareLab facility at Oslo Science Park, Forskningsparken. Borge and I were there yesterday actually. So that was kind of good to -- have a good day there.

So what this lab will do -- sorry -- actually, sorry, first ShareLab is basically a platform provider of laboratory and office facilities for biotech companies. And there's quite a few biotech companies out there already today. And for us, what we're going to do initially, we're going to -- this laboratory will be sorting -- will be supporting application development. And what application development is all about is demonstrating the utility of our enzymes in customers' workflows and technologies. And again, what ShareLab is a very flexible model. It's something we can potentially expand further and build a bigger base in Oslo as we move forward. But we're going to start with applications.

It also has strategic relevance for ArcticZymes to be located there in -- at ShareLab. I think when you look at where it is, that is the heart of Norwegian biotech. So for us, it's good to be there. It means that we can interact much more with the Norwegian biotech community and have a greater presence. And that's certainly going to be important as we grow as an organization and also bring in more talent into the company as well.

To head up activities there, we've hired Dr. Darren Ellis. He's pictured there in the middle between Olav Lanes and myself that's Darren. He's a British like myself originally, moved to Norway because of a Norwegian girl. That's how it is. So -- and we actually worked together before at Thermo Fisher in the past and -- so I know him very well. He has over 20 years of experience in industrial R&D application development. He comes from companies such as Solexa, which was -- which is now part of Illumina, and Thermo Fisher Scientific and several other companies, too. So this is the kind of experience we want to bring into the company. And of course, you can get that in Oslo. So that's part of the reason for establishing in the Oslo area.

We're currently hiring 2 application scientists at the moment as well to support Darren. I think we're well moving forward with that. So once we got those 2 on board and we're fully up and running there. And again, it's something we'll be thinking about expanding further down the road as well.

So in Tromsø, what's going on up there? Well, the innovation pipeline is progressing with several products anticipated for launch this year. So this could potentially be a new polymerase with transcriptase, new -- different DNase, and the SAN HQ 2.0 ELISA kit and potentially new formulations of enzymes as well. So a lot is going on there. That's just this year. But of course, we have a very active pipeline of products more longer term as well in development.

And I think if you recall last year, we made the decision to expand innovations into developing enzymes for a suite of -- a whole suite of enzymes for RNA therapeutic manufacturing. And [indiscernible] has kicked off very well, and I think we're still on track to launch our first enzymes for that in 2023. So that's where we are on innovations.

Operations, we -- end of last year, we moved into our new production facilities, the SIVA Innovation Centre in Tromsø. I think those facilities are now fully operational with all production processes transferred, and it's going very well there. And this will certainly support all future manufacturing, at least for the next 4 to 5 years.

It's also been busy on the customer front. We've had actually 3 customer audits, where they've come and audited -- have conducted a cGMP audits of the company and the new production facilities. So -- and that's related to the Salt Active Nuclease manufacturing.

What was interesting is now we had our first on-site, in-person customer audits, where we had the customers coming to us and -- rather than doing a virtual audit. So we haven't had that for over 2 years because of the pandemic. And I think that's good because when -- on-site audit is always better. When you see things in the flesh, they go much more efficiently. When somebody is walking around with a camera, you just don't get the same kind of meetings. I think it's very good that we can entertain audits again physically and customers are also willing to come to Tromsø.

And when it comes to audits, it's really about a mandatory process that customers do, and that's important because it's about them qualifying us as a critical component supplier and also as part of -- often, it's a requirement for their regulatory approval process as well.

In terms of strategic growth initiatives, we remain committed to executing on our growth initiatives here. And organic growth at the moment is very much focusing on incremental investments in talent acquisition. So we have an ongoing recruitment drive this year to strengthen the organization cross-functionally. What we mean is we're putting more people into, for instance, quality assurance, quality control, production, R&D and applications and business development as well. We need to strengthen the organization.

And also, this also fits with what we talked about, about expanding activities much more into Biomanufacturing area, in particular, RNA therapeutics. And if we really want to play hard in that space down the road and be a strong player there, then we need to very much have greater competence and support in quality, in GMP product development and commercialization. These are critical for us to leverage the future potential in Biomanufacturing. So again, this is -- well, it's also good to have different sites as well because, of course, sometimes we're not going to be able to get everybody to Tromsø. We can hire in Oslo, and we're looking also hiring elsewhere as well. It's very much recruitment effort beyond Norwegian borders as well.

In terms of inorganic growth there, we continue to intensify activities towards acquisitions. We are still in discussions with several of the earlier acquisition targets. But beyond that, we've reached out, we've looked for new targets, and we've seen some very new interesting targets that we're considering. And this is following the extended search effort. And we continue to look for new targets as well. I think we can do that now. And we're very committed and prioritizing these efforts this year. And also, we have engaged external support. It takes heavy lifting, and we realize we need a lot more support than we're using external expertise to help us as well to make this happen.

So with that, I'm going to stop and hand over to Borge.

[Børge Sørvoll, executive]

Thank you, Jethro, for that introduction of the first quarter highlights and the things that we have managed to achieve now in this quarter. And I'm going to take you through a little bit about the financial side. And as you have seen -- already seen, we have managed yet again to deliver our top performance in the quarter both on the profitability side and on the growth side.

Moving on to the sales side here. We managed to deliver sales with a growth of 20% compared to the same quarter we had last year. Our sales were NOK 49.2 million this quarter compared to only NOK 40.9 million at the same time last year. And what is also interesting to see is that we are now actually delivering a really strong Q1 after a strong Q4 as well that we had last year.

And it's also interesting from the graph on the right-hand side, you can also see that we have now kind of changed the trends that we've seen over the last few years, when we had kind of 2 weaker quarters, 1 strong quarter, 2 weaker quarters or not as strong quarters and then 1 really strong quarter, and that trend has been broken now. And hopefully, we can continue to break it moving forward.

We've also -- Jethro has talked about -- he talked about currency as well. And our trading currencies are, of course, in euros and USDs. And based on -- or in 2021, we had a negative impact. These -- the currencies had a negative impact on our business of around NOK 11 million when you have the same exchange rates in 2020 and 2021. But for the first quarter this year, we had a positive currency effect of NOK 0.6 million in our figures. And this is, of course, explained by a U.S. dollar that strengthened towards the NOK and a euro that weakened towards the NOK. So we had -- one effect was positive and the other was negative. But in sum, it was more positive than negative here.

Looking at the segment side. Both areas showed the growth, as Jethro talked about. But of course, the Biomanufacturing side showed a significant growth of 85% in the quarter or by NOK 8.6 million, moving up from NOK 10.2 million to NOK 18.8 million, which has been a significant increase. And of course, this is also -- as Jethro talked about, this segment has now moved into kind of the more normalized activity levels following the pandemic that we have experienced over the last few years. And it's also good to see that this is also the first time where we see a really good spike in this -- spike in sales for this area as well. Over the last few years, we've been around NOK 10 million per quarter in Biomanufacturing, and now you can see that we are delivering close to NOK 20 million for a quarter.

For the Molecular Tools, we are -- I would say we are on the same level as we had last year. Last year, we had NOK 30.3 million and this year, we have NOK 30.4 million. And this is, of course, explained by Cod UNG and dsDNase is driving the majority of the revenues in this area.

Looking at the trend here. We have -- this is a graph we like to show the investors because we have a fluctuating business here. And our sales are going up or going down in the quarters here. But it is important for us to highlight kind of how are we progressing as a company and how is the trend for us. And as you can see, we still continue to deliver growth in our figures. And from a low point in 2019 where we had around NOK 7.5 million in turnover, we are now delivering a turnover -- a average turnover of around NOK 35 million per quarter. And of course, with the expectation of even further growth now in the coming quarters as well now on this side.

From the graph, you can also see that we have taken out the COVID-related sales, and this is also part of the things that Jethro talked about. It is in alignment with what we have been talking about in the last few quarters. We believe now that the COVID-related sales are part of the underlying business. And it's also becoming more and more complex to estimate what is the real COVID-related sales as more and more of our products are integrated in our customer solutions moving forward now. Hence, we will not be presenting COVID-related sales separately moving forward either. So it is part of the business now.

Going into the profitability side of the business. As I said, we are delivering another strong quarter with sales going up by 20%. Our EBITDA is only up by 8% from NOK 25.8 million to NOK 27.9 million. And you can see, even though the revenues have increased, we have also increased our expenses. And this is also in alignment with our strategy. We have invested significantly in internal resources. We are actually now more -- we have 10 more employees in the company at the end of Q1 compared to the end of Q1 last year. And also, we see that, yes, our personnel expenses have grown by NOK 3 million now. This is also including -- we had a reversal of an accrual of NOK 0.5 million relating to, you can see, options and national insurance contribution or [indiscernible] in Norway. It had a huge negative effect last year, but depending on how the share price fluctuates, this accrual will also fluctuate as well.

Our operating expenses have also increased somewhat. Of course, we are on a higher activity level now compared to the same time last year, and the expenses are up by NOK 1.4 million now. And also, our cost of goods and inventory has gone somewhat up in this quarter also because we have acquired some products that we have sold out. Now it's products that are complementary to the Biomanufacturing portfolio or SAN products.

Our margin remains strong. We have delivered our EBITDA margin of 57% for the quarter. It is a little bit lower than we had in the first quarter last year when we had 64%, but we are still delivering a strong and solid high number. And we also have a tight control on our expenses. We will continue to have a tight control on our expenses moving forward as well.

And of course, when we are driving a profitable business, this will also generate a positive cash flow. Hopefully, it will generate a positive cash flow, and it does in our case. Our changes in cash for the first quarter was NOK 14 million. This is explained by a change in operating cash flow of NOK 15.4 million. We had investments in equipment of NOK 0.4 million, and we also had financial expenses of NOK 0.8 million. And this is more a technical issue. It's payment on lease or rent of premises. It is kind of just the accounting rules in IFRS standards we have to adhere to.

You can also see that -- from this graph that first quarter last year, we had a really strong quarter with NOK 23.1 million in change in cash, but this is also explained by the divestment we did of BBG at the end of 2021 -- end of 2020, where we actually saw the final settlement was settled in first quarter when all the records was finalized. And we had a settlement of NOK 16 million in that quarter that, of course, helped the cash flow -- the changes in cash for us in first quarter last year. So taking that out, we would have been around -- we would only have had around NOK 7 million and change in cash for Q1 last year.

But of course -- but at the end of Q1, we had NOK 214.6 million in our cash balance. This is, of course, significantly up from the other quarters where we had NOK 200 million at the end of Q4, and we had NOK 164 million at the end of first quarter last year as well. So we are -- I would say our cash position, it's a nice graph that just goes up and up. And hopefully, at some point, we will utilize this money to kind of more inorganic activities as well.

And I think with this positive cash position, I think I will hand it over to Jethro, who will give us a little bit more input on what we expect for the future.

[Jethro Holter, executive]

Okay. I'd like to just finish off with the outlook. And for those of you who attended the last quarterly presentation of the outlook, it's the same outlook we presented, and that's good because the outlook remains unchanged. It's the same. But I'm going to go through it anyway.

So the outlook for 2022, we have annual sales guidance that we're bringing NOK 155 million in sales. And when you look to the right, you can see where are we today? Well, we're 32% underway there based on sales from Q1. And when you look at the graph below, it's another way to look at it. When you look at the last 12-month revenues on a quarterly rolling basis, you can see after Q1, when you look at 12-month sales accumulated, that is NOK 137 million. So when you put those together, we got off to a very good start. And again, we maintain and stand by the guidance we have here.

Of course, our business is prone to quarterly fluctuation. So you need to bear that in mind. The quarters will vary. That's how it is, and that can be up and down. That's just how it is. And I think you're very familiar with that these days. So we will expect that in subsequent quarters that the sales will be up and down. It's not a run rate business.

We -- when it comes to COVID-related sales, we do anticipate that overall this year, the sales for COVID-related sales will be lower compared to what we had last year, and that's natural when you think where we are. We're now in most regions, we moved out of the pandemic into endemic state. And -- but of course, endemic testing and variant testing is going to be needed very much down the road. And of course, many of our customers are doing that with ArcticZymes enzymes today.

We have -- as mentioned, we have now expanded into Oslo. So we already got a footprint there. And it is the innovation activities that we're going to do there, the application development initially. I think we can tick this box after we've hired the 2 application scientists, and we can certainly tick this box off. So we'll keep you updated on that.

It's also about new innovations where we are working on new products, as mentioned earlier. So we do anticipate new products this year. But beyond new products, it's also about upscaling and increasing the batch sizes of some of our existing products, too. So we're working on that, in particular the proteinase is one enzyme which is really important for us to get scaled up. So that's one we're working on as well.

And it is about investment and investing in people, talent. That's what really drives the value from ArcticZymes. So of course, what we're doing is beefing up the team to support both short-term and long-term organic growth, particularly if we want to expand and grow and be a competitive force in biomanufacturing beyond SAN, we certainly need to build the team. So that needs to be built today in order to capture that value long term. So we're working very hard to beef up the team.

Then it's about M&A, merger and acquisition, activities. This is very much a priority for us. We've been talking about it for a long time, and we're certainly now in a very good position. The market is in a good position to do something now. And hence, why we have it as a goal to secure a deal this year, and of course, why there's heavy lifting to do. That's why we engage in external support and help to make that happen because, of course, we've got a business to run at the same time as doing this. So hence, why it's important to get outside support to help us.

So longer term, the outlook is that we have that goal to realize an annual sales potential of NOK 350 million by 2025, and that is solely through organic growth. Of course, if we make an acquisition, then of course, that number is going to be different. But that's where we are today. So I think that's a good place to stop for today. We'd like to thank you for your attention and also everybody in the room for actually coming today. We appreciate that. So we will open up for Q&A, and Borge has been moderating the chat board. And of course, we'll take some questions from there and questions from the room here today. So thank you.

[Børge Sørvoll, executive]

Yes. I think we'd probably just start in the room here if there are any questions.

[Unknown Analyst]

Maybe if you can talk about -- yes. Maybe if you can talk about geopolitical situation, if you have seen any impact from war and rolling lockdowns in China and things like that, logistical or other risks.

[Jethro Holter, executive]

That's a very good question. In terms of the war in Ukraine, it has very little impact. I think in terms of sales, we had very low incidence. Of course, we have been -- last year, we did mention we were -- we had a distributor to help us to get into Russia. But of course, as a company, we just suspended any activities there. But there wasn't, apart from just having some samples initially going out to customers, that's all we've had in the past so -- because we just started out there. So it wasn't something we had a lot of ongoing business. But as a company, we have this stance where we've just suspended all activities to those territories right now. And so that's where we are on that.

In terms of -- it hasn't affected any other parts of the business in terms of suppliers. Of course, we have suppliers as well that supply raw materials and equipment and all these different things to us, and that has not influenced us. Of course, in general in the supply chain, you do see longer lead times generally, but that was even before this. So of course, we're very smart when we need something is to be very much forward thinking and all the things that we need for manufacturing or R&D much earlier. So that's where we are on Ukraine.

In China, I think we have not seen a major impact there actually, positive or negative. I think that also shows -- we would have seen it in our Asia numbers there, the APAC numbers, which we presented. So I think the Asia numbers came in as expected. So we still see business going well in China despite what's going on with the tight lockdowns. And so Borge?

[Børge Sørvoll, executive]

Just one question about China. How big is the figures of the sales to China last year?

[Jethro Holter, executive]

No. Can you remember off your head? I don't have it on the top of my...

[Børge Sørvoll, executive]

What? I didn't get...

[Jethro Holter, executive]

China, last year, sales.

[Børge Sørvoll, executive]

I don't have that number in my head. But it was -- we haven't gone out with that number.

[Jethro Holter, executive]

We haven't gone out with that number, but it's -- I think China was still -- there's several million sales in China, and that's where we're doing very little effort. So basically, today in China, there's a lot of potential there. And today, we've been doing that remotely. But of course, we're very much monitoring that, and we want to eventually have our own person on the ground there. And through the -- and I think how you do China even with one person on the ground, what they need to do is build a network of sales agents around them to really develop that. So we certainly see a lot of potential there.

So I think we -- what we've done now is really found our feet, how to do business, how to get products into China, how to work there. Now we will eventually -- we'll get somebody with feet on the ground there because we've seen that we can -- that's scalable and from what we've done. But of course, China is not easy to do business and get stuff into China. And of course, you've got to deal with IPR, and there's a lot of things we need to work on that. But I think we'll figure it out and that's scalable. So we can certainly see that could really have a good impact on the APAC numbers moving forward. So...

[Unknown Analyst]

Yes. Can you say something about price expectations in potential M&A targets? Do you see that coming down as a result of just general market -- financial market weakness? Or is it too early to say?

[Jethro Holter, executive]

When I say that there are several moving factors there, of course, you've got the war and things and of course now you can speculate if you look at certain targets in Europe that can make it a little bit -- yes, you have to be -- yes, depending on where they're located, that could potentially have a positive impact in terms of negotiating a deal. But I want to be careful here because I don't want to give away too much to who we'd potentially be negotiating with.

But also, I think what's really good now is we're at the backside of COVID. I think that's been a real thing that's driven valuation sometimes crazy. And now we can really see how companies are performing or potential targets post COVID. And the caution -- what you're seeing is some companies are very much dropped everything run over COVID, and now they're paying for it. And I think that's kind of what we're looking at there. So I think it's -- that's why I think it's a good time now to do the deal because you can also quantify and have an understanding what that COVID effect has had or will have in the future.

A year ago, you could not do that because you're in the middle of a pandemic trying to separate what was real business compared to kind of temporary COVID business was very difficult when you're looking at targets. Now it's much easier. And then you sort of see -- starting to see that in quarterly results as well. It's interesting when you look at companies now and seeing how they're performing post COVID. And I think that's why it's sort of smart, but we haven't actually done a deal yet. Of course, we want to get the right target as well and pay a fair price. And I think that's what's important as well. So that's the best I can say. I don't know, Borge, if you have anything to add to that?

[Børge Sørvoll, executive]

No. I think that's fine. I have a -- I think we have a question from online. Jethro, I can take here. With regards to last week's significant supply agreement, you're also -- are you also negotiating or in discussions with other large pharma companies regarding supply agreements?

[Jethro Holter, executive]

I think, in general, we're always in discussions with these -- with large companies, of course. But when you work with large companies, particularly one that's very significant, it is a slow process to negotiate. These types of contracts can take 1 to 2 years often. And this contract took way over a year to negotiate itself. And it is just because with large companies, you have many layers. Things have to go through a change, and any amendments or anything can take weeks for each one of those things to be discussed and it goes back through the chain. So it's a painful long process. But yes, we're in discussions with many. And we -- and again, it's also very much, as we broaden the portfolio, we make ourselves much more relevant to get some of the big players. We don't have today, for instance, Biomanufacturing as we expand into RNA therapeutics and things like that. And as we expand out the molecular diagnostic tools, it allows us to work with some of the bigger giants out there we're not touching today.

So -- and that's the point of our innovation pipeline now is to really build it out and get that complete workflow of enzymes because that will allow us to touch some of the giants we cannot touch today. So we had -- and hence, that's why we're in a lot of discussions with those companies about our innovation.

[Børge Sørvoll, executive]

One follow-up question on that was, how frequently do you think you will have those kind of agreements, those larger OEM agreements in international?

[Jethro Holter, executive]

We have agreements, large and small. We have agreements signed quite often. But again, we will announce the very significant agreements. So I think those types of agreements, you would have to get them, hopefully, 1 to 2 a year would be kind of what we'd like to see. But again, they're always -- even though it's large agreements, large companies, those are a starting point of a relationship. It's not like they generate huge revenues on the day it's signed. It takes a few years for that to really ramp up. But it's the significance of the companies and what they will do with our enzyme is what's important here. So I say like I said, yes, maybe 1 to 2 a year.

[Børge Sørvoll, executive]

Okay. We have a question here. Do you see any stocking effect or early purchases now in the first quarter this year, like similar to what we had first quarter last year?

[Jethro Holter, executive]

No. I don't think so because when you look at how Q4 was and Q3 and how things are, we have seen some differences in how the purchasing patterns are. It's a bit too early to tell because -- to see how -- we've seen the purchasing patterns for the SAN products, also for like the Cod UNG. I think we are on this kind of post-pandemic trend now where all companies are adjusting in the markets, adjusting in supply chain. So I don't think so.

[Børge Sørvoll, executive]

We have a question here regarding a little bit about the annual report in some sales in geographies. And you can see that 30% of our sales comes from Lithuania. And you also see that the sales from the largest customer is around 30% as well. Can you comment on this?

[Jethro Holter, executive]

I don't know. Where does Lithuania?

[Børge Sørvoll, executive]

It's in the annual report on the geography.

[Jethro Holter, executive]

Lithuania as well, not -- yes. So I think in terms of how it's split, I think here, when you look at geographies, we also have large customers who are in all those geographies. And sometimes, they also will purchase, they will change. Maybe we manufacture here in this country and other countries, it does move around. But generally, it is pretty stable. You'll get typically 40% in the U.S., 50% in Europe. And sometimes that can switch depending if somebody moves manufacturing around and then the rest in Asia. That's what we typically had. But of course, we are really trying to push geographical reach and expansion. So particularly in Asia as well, we really want to expand there. We see a lot more opportunity. We have a business developer in Japan. We're also considering putting feet on the ground in China.

And also, since it is remote, we are using a lot more sales agents, specialized distributors to help us in Asia. So you sort of see often we will announce not through a stock exchange press release, but through our website and LinkedIn that we now got a new distributional sales agent to help us to expand in that region. So I think these things are pretty stable. But of course, as we push harder in regions, we see -- we want to see growth across it. But it's kind of -- those percentages will roughly stay the same, I would say, because we're pushing much harder in all regions. And of course, we are also hiring and beefing up the business development team as well in the existing territories as well.

[Børge Sørvoll, executive]

Maybe I can -- do we have any more questions in the room here that you want to take? Or I have a few more questions on line, if not. Okay. How is Q2 progressing so far?

[Jethro Holter, executive]

Well, what I can say is -- I will say, I don't think Q2 will be as strong as the Q1. That's what I can say -- but again, it's still early days. Of course, Q2 -- Q1 performed better than we originally expected. But of course, we know how this business is, how it fluctuates. So we have some good visibility. But the order book is not full yet. And that's just how it is as you know at the start of the call.

If the order book was full now, then we're not doing a hard enough job to say. That's what I can say. So that's all I can say on that. But we do expect fluctuations quarter-to-quarter, and you've seen that. So that's the best I can say right now.

[Børge Sørvoll, executive]

Okay. Can you say something about the M&A targets you are focusing on? Are any of those kind of -- do you expect them to contribute on the RNA side?

[Jethro Holter, executive]

Yes, potentially, that could. We're looking at, of course -- mainly what we're looking at is complementary products. And of course, some of those might have enzymes for RNA therapeutics, Biomanufacturing in general as well, as well as -- and enzymes that beef up or are complementary to what we have for diagnostics and research. Again, we just -- we have to look at each target on its merits and see -- well, it has, and we're prioritizing those and seeing which fits best. But yes, there are some that have potentially enzymes in that as well that are a good fit.

[Børge Sørvoll, executive]

Okay. One more question. It's about innovation and the release of products here. How has the new release products done and especially in the R2 ligases, can you say something about that?

[Jethro Holter, executive]

Yes. Sure. The R2 ligase is being received well by the market, but of course, it's a very novel enzyme. And remember, our customers will then will have to implement and develop it into a product themselves. And for them to develop a product will take them several years. So of course, yes, we're getting a lot of interest and people are testing and figuring out how they'd like to integrate into their technology. So that takes time. The real money comes when they commercialize those technologies. So I think it's early days. As always, when we launch an enzyme, it will take several years until you see the revenue stream really come in and ramp up.

So that's why how our business is developing now. That's -- a lot of that's come from innovations we've done in the past. And the enzymes we launched, ideas like the polymerases now, they're going to start gaining traction. We launched those back 3 years ago, and now they will start gaining traction and start building that ramp that we talk about, that NOK 350 million in 2025. So that's built into those early innovations we launched.

So things that we launched today or let's say the RNA therapeutic enzymes we launch next year, they will have very little impact in 2025. The revenues will come after that because it takes that -- there's a long lead time until you will realize those revenues since we're not selling to end users. We're selling to companies who integrate and have it into their products and they need to develop those products fast. But of course, they need to buy enzyme for that, but the real money comes when they commercialize.

[Børge Sørvoll, executive]

Okay. I think we have at least one more -- one final question here. Costs are a little bit higher in Q1 compared to previous quarters. Is this a new level going forward moving into 2022?

[Jethro Holter, executive]

Well, I think what we talked about is the main thing we're investing in is personnel and also we have some

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