Arcticzymes Technologies ASA

OSE:AZT

Earnings Call Transcript 2023-Q1

[Marie Roskrow, executive]

So good morning, ladies and gentlemen, and welcome to the First Quarter Presentation from ArcticZymes. We have a gentlemen in the room and hopefully, ladies and gentlemen online. On a practical note, I'm reading here, for those of you attending virtually, you can ask your questions via the chat function, please. There's no facility to ask verbally online. And obviously, in the room, you can ask questions at the end.

So I'm Marie Roskrow, as you know, and my colleague, Borge, has joined me today. So let's make a start. So I should be giving a business update and talking about some of the projects that we've been working on in the last quarter. And then Borge will walk us through the financials in some detail.

So as you saw from the press release this morning, we achieved quarterly sales of NOK 31.2 million with an EBITDA of just over NOK 6 million. So I think before I start into the details of the project, I just want to -- which I'm sure that facts you all very well aware of, but let me start by stating the obvious.

We're operating in a very tough environment right now, first quarter and certainly into the second quarter as well, and we face macroeconomic winds. Global political situation is still very unstable, there's recession uncertainty and obviously rising levels of inflation, all of which have been contributing to a very nervous financial market and overall depressed company valuations. The IPO market is pretty much dead, and raising money in the secondary market is really tough. So that obviously puts companies in a very difficult situation.

And as a result of all of that, companies have really, we've noticed, been tightening their belts. So they want to reserve cash so that they can get through these lean times without having to go back to the markets. And all of that has obviously affected customer buying patterns, and we've noticed that as well. In general, orders are still being made but of a much lesser volume than we've seen in the past. Secondly, and very importantly, in the sectors that we play in, our orders have been affected by customer destocking. So basically, in the COVID era, many customers overbought components. And now that they don't want to spend too much money, they're using those components off the shelf.

And it's not just me using that word destocking. If you look certainly at first quarter reports from some of the big players in the space, and I'll "Sartorius, our friends at Thermo Fisher, Repligen, Danaher Corporation" and others have all reported that destocking has been a major issue in the first quarter for them and strongly affected their sales. When that will come out of the market remains to be seen, and I think some analysts are saying this will go through the end of 2023 and other analysts are saying this will go into 2024. So I think all of those factors are serious considerations when you look at companies like ours.

So I'm going to run through now some of the projects and some of the situations that we've been working on before we get into the numbers. So let's look at this. As you all know, Jethro resigned at the end of March, so the effective date is the end of September. So we're hoping to get a CEO signed up by that date. We've hired Coulter Partners, who are a specialists in the life science space. We have partners in London and partners in Copenhagen, who cover the Scandinavian region looking for our new CEO. And this is the process that they go through, which obviously I'm not going to read.

Early indications from Coulter Partners are telling us that there is significant interest in the position, which I think is a positive. There are lots of quite good candidates and some very good candidates out there who are in high demand. So there is competition to get good people. I think the downside that from early feedback has been that traveling to Tromsø, unless you live in Tromsø is going to put people off because it's a serious time commitment. So that's been the early feedback. But despite that, we are getting a lot of high-quality candidates that are interested in ArcticZymes.

And when you look at a lot of companies out there, there are a lot of companies that are looking for CEOs, but they are troubled companies. They need cash, a lot of these companies. And that, of course, for a new CEO in this market, is not a very attractive proposition. We're not in that situation. We are in a very strong position, a growth company with a good underlying cash reserves. So that -- this sort of profile does make us very attractive to potential CEOs. So that's the process. I'm running the process. And when we get to the point of interviewing, obviously, the rest of the Board will be involved.

So if we look a little bit of R&D. If you remember, Darren was here at the fourth quarter presentation, went through quite a lot of detail about what the R&D department was hoping to achieve in 2023. And you've seen from a press release not too long ago that the first box has been ticked and that was releasing to the market the enzymes proteinase high quality. And this was launched in the middle of April. I won't go through too many details, but that was the first tick in the box. The next product out of the gate will probably be the AZ Taq or the Taq DNA polymerase, and we've also got 1, if not 2 other products that we aim to put out at some point during this year.

We also had a press release, which is quite a interesting 1, a new patent application. I obviously can't give you too much details because this is a new patent application, I can't give away too much. But it's a nuclease enzyme, which is a unique enzyme. It's not a me too or a generic. And it's basically used in the processing of RNA. So this is a pretty little picture, which fills up the slide quite nicely.

And basically, all it's meaning to show is that this enzyme, which is that little yellow triangle, it cuts RNA at a specific sequence. And when you cut the RNA, cuts it into 2 pieces. So the 50, as you can see on the top line, once you cut the RNA, you get rid of the long template and you get 2 templates of smaller size.

So it's a very specific enzyme and it's very early, it's in discovery, but it's a new class. And we anticipate if it goes through the whole development, it will be used, for example, in RNA -- messenger RNA vaccines, as an example. So discovery is working well and we have other things equally exciting in the early pipeline. If you're going to ask me, when is that being launched to the market, which I know somebody might be dying to ask me, we're looking at late 2024. So I'll just preempt that question.

Right. Let's come on to the Drug Master File because this is, without question, the #1 most important project that we're working on. We explained last time what a Drug Master File is. This is being filed for the SAN HQ GMP grade, so the highest grade SAN HQ that we can make. And as we said in the fourth quarter presentation, all hands are on deck at this project.

So we've had to take resources from R&D and from all over the place really to put them on to this project to make sure that we can file this on time. We have said, and I say it again, that we're aiming to file to the FDA at the end of the second quarter. At the moment, touch wood, we are on track and we are optimistic that we -- we're very optimistic that we can achieve that. And for us, that will be a significant achievement.

But the next question that I'm going to preempt, somebody asked me this, it was the gentleman not in the room, said, "Well, Marie, once you file that DMF is it like flicking a switch?" I'm like, "Oh, no," No is the answer to that. It is not like flicking a switch. It is a very complex process. So I've tried to sort of simplify it here. So what happens once we file that DMF, it disappears off into the FDA. And what is the process?

So we file it at the end of the second quarter. It then gets formally assessed by the FDA. This is not a technical review. This is just a box-ticking exercise. So they look through it and they say, "Is it formatted correctly? Does it contain all the pieces of paper that we expect?" But they're not looking at the quality at that point, right?

So that takes them about 30 days. And once they've done that, they give us a DMF number. So it's on their files under our name that we have filed a DMF. It goes on the website and it's available as a reference. So basically, potential customers can see it on the website that we have now filed a DMF for San HQ. If any potential customers are then interested in looking at that DMF for potentially using SAN-HQ, they have to ask ArcticZymes for a letter of authorization. And in that letter, it will tell us what they want to use SAN HQ for, which is very useful for us.

So we issue them that letter of authorization and they submit that letter along with all of their other documents. So for example, if they're filing an IND, which I'm sure you know what's an IND is or an NDA or any other application, they file this in association with everything else.

Once they've done that, that's a trigger for the FDA to start looking at our DMF and complete a technical review. Now how long that takes is a bit of a mystery because it's reviewed in conjunction with the other documents that they filed. And depending on what those other documents are will determine the level of technical review that they need to do. Hence, it's not quite so straightforward. And that will probably take -- generally takes a few months, but it is variable.

Obviously, if the technical review of our DMF does not meet the standard that is required for the application that the customer is making, they will come back and ask us to fix things. And that's completely normal. So different parts of the DMF will be scrutinized differently depending on the proposed usage, if that makes sense.

And that's it basically. So it is a convoluted process. Once we file, that's not the end of the saga because we have DMF maintenance, there has to be reports every year, and also DMF developments. We are filing an early-stage DMF. So we're filing for use in preclinical and Phase I, early Phase II clinical trials. If anybody wants to use this in later big Phase II, Phase III clinical trials, we need much more documentation. So we do the initial filing. We get this process rolling so we can be looking for customers in the meantime,and we will be adding to the DMF as we proceed. So not quite flicking a switch.

One of the big things that we are doing, and we haven't done this before to any great extent, is pre-marketing. Because this is such an important project and potentially the SAN HQ GMP is such an important future product for us, we need to be going to customers and saying, "Look, we're about to file the DMF or we filed the DMF. Do want to take a look at it?" And they'll say, "Well, what's the data? Why should we look at it?" So obviously, we'll produce our own data, which we are in the process of doing. But I think even more compelling is when third parties come out and produce data. We haven't paid these people to do this work. This had nothing to do with us. And this is an example of a paper that's been recently published. And if anybody wants to be excited by this paper, we can certainly send it to them.

But it's very relevant because it's using our -- well, endonucleases in the production of recombinant measles virus. There are lots of clinical trials in the market right now that do use recombinant measles virus. So this is not an abstract virus. This is a relevant virus. And I think this sentence basically sums it up quite well, I'm not going to read all of this. But the SAN and the M-SAN that they tested were more efficient in the removal of chromatin as compared to Benzonase and DENARASE. And those are our competitors. Those already have a DMF, as you know, and there will be already being sold to customers. So we need this so that we can compete with them in this market.

Another piece of very good third-party evidence was presented at the ESCGT, with cell and gene therapy, a very large conference, one of the global leading conferences at the end of last year. And this was a poster presented by UCL. And again, they looked at M-SAN HQ being benchmarked against Benzonase. And as you can see here, the evidence is suggesting that saves costs, saves time, it's a purer product, and it's got higher potency. So again, very good third-party data that we will use in our premarketing brochure.

And this is a little bit of data from us that came hot off the press yesterday, thanks to Darren and his team. And this is showing pretty much the same thing. We've had this graph before just showing Benzonase, but now it's showing those 2 graphs together there, both Benzonase and DENARASE, which, of course, as you can see, the relative activity which is on the Y-axis, decreases as the salt concentration increases. In contrast to our SAN HQ, where the activity significantly increases as the salt concentration increases. And that's very relevant because, as an example, if you look at AAV, or adeno-associated virus, which, as you know, is a virus that's used extensively in the clinic, it works best within that range of salt concentration between 400 and 500 milli ml.

And the only enzyme that is active in that range is ours. But people are still using DENARASE and Benzonase because it's got very small activity, but that's all there is in the market. So why wouldn't they buy our product? I sound like a salesman. No, I'm not a salesman, so I'll stop. Don't quite like my sales technique. And then if you look at the right-hand side of the slide, it's really just a very simple table to show different regions where our SAN product seems to be superior to the other 2 competitors. So obviously, we're producing more data in-house, but I think that very strongly supports what we've been harping on about for so long.

So coming to the end. So coming to now sales and marketing, and taken from Dirk's presentation that you heard in the fourth quarter, there was a lot of key areas that we were looking to improve on this year. And as you can see, there's quite a lot of green ticks on this slide, which means things have either been completed, present from the beginning of the year and also introduced our shipping and handling fee, which we hadn't had before. We actually paid for that ourselves. So lots of things that we've been trying to actually kick start and improve on the top line. Some of these are more longer-term aims, but I think there's been significant activity. We've just hired -- to bolster the team in the U.S., we've hired a high-quality salesperson on the East Coast, which we haven't had before. Comes from a very relevant background, actually a competitor of ours it was pawned from. So we're hoping he can kickstart sales on the East Coast. We're also looking for a new person on the West Coast to bolster the U.S. sales as well.

And of course, you saw yesterday that we announced a collaboration with Genovis. A lot of speculation. There is nothing to speculate. I'll preempt that question as well. This is something that we've been working on in the first quarter. It makes absolute sense, this sort of thing to do with Genovis. They have a bag of enzymes which is different than ours, but synergistic for many customers. If you've got 2 small bags, you put them together, you become much more attractive. This is a very simple collaboration. We share costs, we share profits. And we start small. And if it takes off and we all make money, we will add more people potentially into that framework that's been created in China.

So we're excited about this. Genovis are excited about this. And I think it's a very good way to proceed in territories like China, pan-Asia in general, where you need feet on the ground. You can't run sales from the West in Asia. So you have to have a very good infrastructure and people on the ground, working with the distributors every day sitting there and working with them to make sales. So this is a very good move forward in China for us and let's just see how that goes.

So thank you very much. And now Borge will give you the gory details on the numbers.

[Børge Sørvoll, executive]

Thank you, Marie. Yes, I will give you a little bit of update on kind of how sales progressed in the first quarter. And for the sales update, I would like to start with on the commercial side within Molecular Tools area. We achieved NOK 16.4 million in quarterly sales, and this represents a decline of 46% compared to the same quarter last year. But of course, if you adjust this one for COVID-related sales, and first quarter last year was an exceptional quarter where we had close to NOK 14 million in COVID-related sales, so that basically means that taking away that COVID effect, sales are equal in Molecular Tools Q1 last year as Q1 this year.

And also, as we talked about in the fourth quarter, there were basically 3 reasons why we had a big decline in fourth quarter last year. And it's because we didn't see any larger orders from our key customers that we normally see. We saw the -- there had been an inventory buildup, and there we basically had close to 0 win in COVID-related revenues as well in the fourth quarter.

In the first quarter, however, the larger orders have returned and we have experienced, I would say, more normalized purchasing patterns now from our customers, even though there are, you can see, global challenges out there. But at least, we have seen improvement and we see the return of the major customers basically.

Molecular Tools had a 52% contribution of total quarterly sales in the first quarter. And this was basically evenly split between the Research and Diagnostics with around 26% on each of those 2.

And as I said, as a follow-up after the kind of the fourth quarter, and this is probably the last time we would ever be talking about COVID, hopefully. And as I said, the trend is continuing and it is as expected and it is as announced, as we talked about in the fourth quarter. Sales are 0 in COVID-related sales here. And of course, as I said in the last slide, this is creating a tough comparison when you compare Q1 to Q1 last year, and of course, this will continue moving forward again. But of course, we don't have -- for the second quarter, we don't have any -- we didn't have any COVID-related sales either in last year.

And we can also see that, when it comes to COVID testing. We see that in those places or regions where there are still testing going on. There are no more PCR tests ongoing now. There are more lateral flow tests that are being conducted now. And that, we saw -- I saw that for basically from the high-risk area in the U.K., it's a lateral flow test. And we also see that kind of China, which has been really tight over the last few years. They are opening up much more now. And if there is testing there, it's going to be lateral flow test as well. So it's going to basically going to be no more PCR tests, where our products are being used.

Moving into the Biomanufacturing side of the business here. Quarterly sales were NOK 14.9 million, which is a 21% decline compared to the same quarter last year. But we are also basically on the same levels as we had on the second and third quarter last year. And -- but they're only lower than you can see the first and the fourth quarter last year. Except for that, I think we are on a positive trend. We are continuing to grow the business, even though we see that there are some fluctuations in the business.

Biomanufacturing's contribution towards the Q1 sales were 48%, which is a little bit lower than the 69% we experienced in the fourth quarter last year. But it is, however, important to mention that Molecular Tools in the fourth quarter last year were historic low. As I said, we didn't have any major orders from our key customers in that quarter, hence Biomanufacturing was much, much higher in the fourth quarter than what it normally is.

Even though we did not experience kind of the quarterly upturn in sales following the pandemic that we've seen over the last year, we believe this is part of the challenges that we have seen and as Marie talked about. There is -- it is a challenging market out there these days. But of course, we continue to see that the customers are there. The engagement with our customers is still going well. And we see that it is getting back to normal even after a little bit tricky times here. But I think we will see how Q2 progresses as well now, if we can kind of get out of that slump we've been in -- at least in the fourth quarter.

And as Marie also mentioned, the DMF is that priority one project that we are working on now. It's all hands on deck for that one. And I think I'll leave it with that one. We talked more -- enough about the DMF now.

So what about the trend in our business now? Where I've tried to take out kind of this anti-quarterly fluctuations, I've also eliminated kind of the COVID-related sales over the last few years to give you an idea of how the business is actually going on from an underlying basis here. And as you can see from the graph above, you can see the growth has flattened out over the last 2 quarters, where we have moved our average quarterly rolling sales from NOK 31.3 million to NOK 29.5 million. So it's just -- it's gone down NOK 1.5 million over the last, you can say, 6 months basically.

But even though the trend has been negative over -- both in Q4 and in Q1, nothing fundamentally has changed in our business here. We are still in those kind of growing markets and we have attractive products, we have novel products. So -- and also, we see that the number of orders have come up now from the fourth quarter last year, where we had 396 orders to 408 orders in Q1 this year. And -- but what is even better now is that we had 28 new customers that have never been on our radar before in Q1, where 17 of those customers were within Molecular Tools and 11 are new Biomanufacturing customers. Some of them are just buying samples, but some of them are buying more products. And that's some how it develops. They start with just those tiny orders to test our products before they move into those next stages of utilizing our products.

But also, I think it is still important to emphasize there is some uncertainty in the short term as with the kind of the global challenges we see with the macroeconomic climate, the war, even though doesn't impact us in materially at the moment. But who knows. But the macroeconomic climate, there are the financing cost that we also talked about, it is tough out there for -- at least for some of our customers, even though we don't see any challenges from our internal land. So there are -- out there, there are challenges.

Looking a little bit about kind of the -- how the sales contribution was. And usually, you can see the European region has been the most dominant region for our sales, followed by the American region and then the APAC region. And -- but as we have seen over last year as well, you can see the shift has been more towards the American region and less towards the European region. And then you can see that for 2022 and also for Q1 this year that -- and the majority of sales are now coming in North America, basically. APAC is, of course, a region where we see the potential for future growth, and we are really excited about the kind of the Genovis collaboration now and how that will pan out in currency the next year. So we're really excited to see if we can grow those 4% we had in the first quarter this year.

Currency impact. Of course, we are -- our sales are in kind of -- we work in the global market here. And our revenues are, of course, impacted by fluctuations in currencies and especially, since our -- you can see our sales currencies are U.S. dollars and euros. And the Norwegian kroner is only a marginal part of our sales, but of course, it's much more important when you look at our expense base. But for the first quarter now, 83% of our revenues were in U.S. dollars and 70% were in euros. And based on the exchange rates we've seen over the last year, this has of course an effect on our profit and loss statement as well.

And based on the U.S. dollars and euros we have in our bank account, we had a financing profit of NOK 0.6 million in currency. And -- but you can see -- we can also see this under other -- our trade receivables are also impacted by currency fluctuations. And this can be seen under other operating expenses. And for the first quarter of this year, our operating expenses were basically reduced by NOK 1 million because of the weakening of the Norwegian kroner towards the other currencies basically. And that -- you can also see that on the graphs on the right-hand side, where you can see that the Norwegian kroner has just, I would say, crumbled toward both the euro and the U.S. dollar.

If you are to look at the growth in the underlying business now, what's excludes kind of the fluctuations in currency, meaning that we have a constant currency rate for both 2022 and 2023. First quarter sales would have been NOK 3.8 million lower in the first quarter compared to the first quarter last year. But it is, however, important to remember that the currency fluctuations are inherent in the business. For 2021, we had a currency loss, when we did that same currency comparison of NOK 11 million. And in 2022, we had a currency gain of NOK 8 million when we did those same calculations here.

But also, as a general principle, I think we try to limit the amount of currency we have in our bank accounts also. But of course, with the nature of our business, there is a limit to how much we can mitigate that risk.

Looking at a little bit about the organization, and this is a slide that I showed at the fourth quarter presentation. And as you are aware of, personnel expenses that have grown significantly over the last couple of years. And this has been in alignment with kind of the strategy we put in motion, where you want to go for inorganic and organic growth in the organization. And we've had kind of a 30% increase -- we had a 30% increase in employees from '21 to '22.

And we have also seen our per at the end of 2023 (sic) [ 2022 ] and we haven't hired any net new people now per end of the first quarter. So we're still at those 61 employees. But we have, however, hired -- as Marie mentioned, we have hired a new business development manager for the West Coast in the U.S. He started on May 1, so we are really excited to get him onboard. And we have hired 3 new people that is going to be starting at the second half of the year. 2 of them is backfilled from people that has left the company and 1 is a new position as well.

And also from the pie chart, you can see that the organization is pretty much set up the same -- is similar to what we had at the end of last year. R&D contributes to around 40% of the organization. Operations and regulatory is around 30%. And then you have business development, and the commercial side of the organization is around 20% and then the administration is a little bit less than 10%.

And also looking a little bit beyond, where we are today and moving into kind of the rest of the year on the personnel side. As we said in last quarter, 2023 will be a year, where we will kind of reconcile the investments we have done over the last few years, making ArcticZymes becoming a kind of a more effective and productive organization. Because when we hire a lot of new people, it takes time to get them up and running. There is a learning curve before they can, I'd say, be self-sufficient and do a good quality job in the organization. And I think that now in 2023, we will be able to do that, for sure.

Looking a little bit more on the profitability side of the business. And as I said, we -- as Marie started up, we continue to deliver a positive contribution towards the bottom line. Even though you can see first quarter is just a little bit stronger than what we've seen over the last 3 quarters here. And our EBITDA were at NOK 6.1 million compared to NOK 28 million same quarter last year. If we adjust that one for the COVID effects we had in first quarter last year, we had NOK 13.9 million in EBITDA for that one -- for first quarter last year.

Our expenses have increased by NOK 3.7 million in the quarter, which is also in alignment with what we said at the fourth quarter presentation, where we also gave a little bit more update on kind of where we see our expenses moving in this year. Personnel expenses for the first quarter were at NOK 15.5 million and/or this is an increase of NOK 2.5 million compared to the same quarter last year. And if you do that, we kind of guided that we are looking at the personnel expenses of NOK 75 million, which will basically mean that there's an average of around NOK 19 million per quarter. You can see this one is -- okay, it is lower than that NOK 19 million. But there are explanations behind it.

And part of the explanation is that we did a reversal of CEO Jethro's options, and that was a reversal effect of NOK 1.8 million basically in the first quarter. And also, we see that we had a capitalization of the DMF expenses, which was basically NOK 1.3 million in personnel expenses. And also, as we said, there are new people coming in that will start both now and they will start a little bit later in the year as well. And there were, of course, we also -- we have the annual employee salary increase. And I think you've seen how kind of the Norwegian market has been. There's been quite high salary raises this year. So we will see how that one will end up. But of course, it will impact our figures at the end of the year. But at the end, I think we are very confident with about NOK 75 million for 2023 in personnel expenses, unless there are something that will be different.

Other operating expenses were at NOK 7.5 million, which is NOK 1 million higher than the same time last year. But this is also in alignment with what we said at the end of the fourth quarter. It will -- we are looking at a reduction from those NOK 32 million we had at for end of the year. So -- and also, I think what we have also talked and also looking at the graph on the left-hand side here, you can also see that we are improving our EBITDA margin again after kind of a challenging fourth quarter and third quarter last year. And now we are back to a 20% margin this quarter, and we hope to kind of improve it even better or even further in the coming quarters to go. And also, I think in the market, there's kind of a common denominator of NOK 2.5 million in revenues, how people can look at how -- what's an efficient organization here, and then you can do a calculation of NOK 2.5 million in revenues per employee. And of course, with the current traction that we see now and how we believe the year will pan out, I think you can see that NOK 2.5 million in revenues per head is something that we can see is achievable within this year.

Looking at the cash flow side of the business here. And the cash balance and the changes in cash we're of course a little bit different this year or this quarter compared to what we've seen over the last few quarters, where we kind of have seen a steady increase in cash and cash equivalents here. And also, in this quarter, we had a decrease of NOK 11 million. And you can see there are really good reasons why we had a decline in cash this quarter. And I think I will talk about it. And first of all, is that we had kind of a fourth quarter that -- sales weren't that high in the fourth quarter. And normally, you can see that the payments from kind of all our customers are, they are normally -- they are coming in the following quarters normally.

We also had -- we had 2 external production scale-ups here, where we kind of -- you can also see that we had a buildup in inventory of around NOK 5.5 million, where we did a scale-up of the SAP -- our SAP product, which we are doing once every 1.5 to 2 years. We did that in -- at the end of last year, but the product was delivered in the first quarter this year. But we also did a scale-up of the SAN HQ enzyme that we did at Paras Biopharmaceuticals in Oulu. And that one was also delivered in the first quarter this year. And you can see those 2 had a net effect of NOK 5.5 million in our cash balance. That is basically in an inventory that is going to be -- going to be used in the coming quarters, when the sales are coming in.

We also had a tech transfer that was quite -- that was expensive well. When we did the scale-up of the SAN HQ at Paras, part of that was a tech transfer as well and that impacted our figures as well. And we also have had investments of close to NOK 1 million in equipments related to partly the DMF production as well or the validation batches that we are doing on the DMF. Yes. And there's been just a general that we have paid our invoices. So there has been a reduction in payables from the end of the year as well. So all of these have affected our cash flow basically.

And for the end of March, we still have a comfortable cash position with NOK 232 million in our bank accounts, and I am confident that we will be able to grow the cash position in the coming quarters as well and especially if you are growing the sales side of the business.

And I think with that, I'm going to also hand it over to Marie now, who will give us kind of the what we can see for the last part of the year, what kind of expectations we have.

[Marie Roskrow, executive]

I'll take out my crystal ball now, so it's what it is. There's nothing much different here to say. We said at the end of last year, we talked about inorganic and organic growth. This year is certainly all about organic growth. But we are opportunistic. A couple of things are coming across our desks every week that we're looking at. There isn't a whole lot out there that even if I was in a buying mode that we would want to buy. And I think we have to sit and wait a little bit.

The interesting thing is, as you can all imagine, that last year, the valuation expectations were huge because they had big revenue numbers because that was all COVID-driven. And being smart, they thought, "Right, we've got a huge revenue number this year. Let's sell out at a nice multiple." And some of those companies, there was quite some consolidation in the spaces that we're interested in and high multiples were paid.

Now, of course, it's a different story. And I think we have to sit and wait a little bit, and I think opportunities that perhaps we might have looked at before and thought, "No, we can't afford that," might well become within our domain in the next 9 to 12 months. And the reasons for that, obviously, is that all their COVID-related sales have disappeared. All of a sudden, their top line has been halved or less. The multiples expected in the market are now less than what they were. And so all of a sudden, expectations become more aligned. So we're keeping very close eye on certain opportunities.

But we're also, I think it's fair to say, looking and thinking outside the box a little bit. And I want to put that on the table. We've got a superb suite of enzymes that are used in the biotech and pharma space. There are lots of other potential uses for our enzymes, lots of other markets that we are not experts in, but that are worth exploring. For example, one quick example is the plant genomics space. The plant genomics space has exploded, right? See the whole seed world. And why is that? Because the population of the world has exploded and we have to feed people. And the only way we're going to be able to do that is with genetically modified plants and animals.

Our enzymes are used in that plant world. We don't know anything about it. But it's one example of, at some point, we perhaps have to think a little bit more laterally about how we can produce sales with our enzymes and start to explore and start to be a bit more forward thinking potentially about new markets for our currently existing portfolio. So that's all work that goes on in the background.

We do expect sales to grow this year as compared to last year. We are optimistic about that despite the global headwinds we've talked about, and they're not to be underestimated. They have impacted, we believe, our sales quite considerably. And listening to the voice of customer, there's no question that they're saying, "We are still buying, but we're buying lesser volumes. We're trying to reserve cash. We're trying to be conservative." And we appreciate that. But that will change, right? And we're hoping towards the latter end of this year that a lot of that headwind will be out of the market.

As you've seen, and this is one of the drivers to opening the market, is that the M&A world, certainly in biotech, is taking off again. There's been a number of high-volume -- high-value deals that have been announced in the last month or 2. And looking historically, once M&A starts to take off in the biotech world, that can turn things reasonably quickly. And that's all remains to be seen.

So new products will be coming out. We've had 1. We're aiming for at least another 2, hopefully more than 2, coming out this year. And let's see how we go in China with Genovis. And also keeping our eye on the rest of Asia, India has now got more people than China. They have less capita per head, so there's huge growth in India to be seen. And they are very savvy nation, obviously, who wants to progress quickly. So we are keeping our eyes on the rest of Asia as well and maybe there are markets to explore in the future.

So thank you very much, ladies and gentlemen, for your attention. And we will now endeavor to answer some questions. I know there's some online that I've just been looking at. But if anybody -- of course, privilege in the room first, would like to ask.

[Marie Roskrow, executive]

John, of course.

[Unknown Analyst]

I think you answered all the obvious questions apart from one.

[Marie Roskrow, executive]

Oh, no.

[Unknown Analyst]

That is -- I know it's difficult to tell, but what is the market, the size of the market for the SAN enzymes?

[Marie Roskrow, executive]

Well, the nucleases, those type of endonucleases it's hard to find a written number, but I know because we've heard it from Sigma, that they're talking $300 million to $500 million. That's the total market.

[Unknown Analyst]

Dollars?

[Marie Roskrow, executive]

Yes. Dollars, yes. Sorry, not NOKs, I don't talk NOKs.

[Unknown Analyst]

But that's -- so...

[Marie Roskrow, executive]

That's what they've said fairly recently. But you can't find it written in their reports because, of course, it's such a small part of their business. Selecta doesn't give insight. But we know that obviously the DENARASE is their largest product. So we reckon they're selling quite high, close to $100 million maybe. So yes, the potential is there, let's say, $400 million, pick a round number. If we can really show superiority and get that message across, it doesn't take many customers to build sales really quite rapidly.

[Unknown Analyst]

I can see that you have an average order of 75,000 this quarter based on the 400-and-something orders.

[Marie Roskrow, executive]

Right, okay.

[Unknown Analyst]

Divided by their revenue. Would you say that is a normal average on the orders? And the second 1 is, when you say you have 18 -- somewhere, you said 18 new customers and...

[Marie Roskrow, executive]

28 new customers, yes, yes.

[Unknown Analyst]

28. So what's the average order on the newcomers? And how long would it take the newcomers to reach the average order, so to speak?

[Marie Roskrow, executive]

Well, I think average orders are down. And our big players that maybe didn't -- can't name names, obviously, but a couple that didn't buy in the fourth quarter, that killed us in the fourth quarter have bought in the first quarter, but not to the same level that they had projected. So they give us projections last year, for this year or forecast, let's say. And they're not always very accurate. But looking at the forecast we've been given from some of the bigger players, they're not living up to the forecast.

So they are buying, but they're buying less volume. So I think the average is less overall. But of course, we've got customers that buy millions and we've got customers that buy 10. So the average is very skewed. It's more a median value that's probably more applicable, I would say, if you look statistically.

And our 28 new customers, some of them are just in the testing phase, so they're buying a handful, let's say. And some of those customers will probably never buy again. That's how it goes. There's attrition. So how many of those will actually turn into really large orders remains to be seen. Depending on what their usage is, that can take from a few months to come to a decision as to whether they want to order big. Or that can take -- we've had people that test for like 2 years and they gradually increase what they buy before they plunged for the big orders. So it's very tricky to sort of generalize, I think. Thank you.

[Børge Sørvoll, executive]

All right. I can do a question from online then, Marie. Did any of the postponed orders from fourth quarter materialize in Q1? Or were they just canceled?

[Marie Roskrow, executive]

No, some did come through but with lesser volume. And again, talking about the bigger players, what we thought they may have ordered in the fourth quarter and didn't and some of them ordered 0, have ordered in the first quarter, but less than we thought they were going to. So they are buying and they've come back, but some of them not quite to the same level that they -- we thought they might. But that's not to do with us. That's to do with the situation macro, in my view.

[Børge Sørvoll, executive]

Can you also quantify a little bit about how much did destocking affected sales in the first quarter?

[Marie Roskrow, executive]

No. I can't, because we have very little insight. We're a B2B business. So we're not selling to the end customers. So our customers were also destocking, but the clients that they sell on to were also destocking. So it's very difficult for me to predict. But it's certainly -- and again, it's listening to the voice of customers right? That's the feedback that we're getting. So that is real amongst our customers, for sure.

[Børge Sørvoll, executive]

Okay. You also say that the destocking effect within the Biomanufacturing side will decline during the second half of the year now. Do you think this will be gradual? Or will also Q2 be as -- will you also see a significant destocking effect in the second quarter as well?

[Marie Roskrow, executive]

Well, I think you've got to have a look at what the analysts are saying, what the U.S. analysts are saying in particular, and that's who I follow quite intently. And I think there is a consensus that the second half of 2023, some of the destocking will decline, and it will be a gradual thing. But then you look at other analyst reports and they're saying they expect it to go through 2024. So I think we know it's there. We know it's significant. When it will actually go away, I think, will also depend on what is happening in the markets as well, how quickly the markets will open. People will be less conservative once the markets are open and they can go out and raise capital. So destocking won't become such an issue or won't remain such an issue. I'm hoping it will have gone by the end of 2023, but remains to be seen.

[Børge Sørvoll, executive]

All right. I have one more. In light of the launch of the ArcticZymes Proteinase HQ and the patent application for novel nuclease enzymes for RNA therapeutic applications, could you provide an overview of the company's innovation strategy and how you intend to reinforce the product portfolio to strengthen our competitive position in the market? Elaborate question.

[Marie Roskrow, executive]

Yes. I mean, I think as Darren explained quite nicely, to produce novel enzymes from start to finish is a very lengthy process. And we've got a number of enzymes in our portfolio, which are generics. And frankly, that's not ideal. We need to be spending more time looking for the really novel, innovative enzymes. But they're rare and difficult to find. So in order to obviously grow the bag, if you want to do that more quickly, you have to buy, right? Back to the old M&A question. That's how you increase the bag. That's how you increase the number of enzymes that we can offer to our customers in a shorter time frame than we can do organically. So obviously, we continued the organic growth at a rate that we can sustain. And hopefully, when the right opportunities come, we will add to the bag inorganically.

[Børge Sørvoll, executive]

Let's ask a follow-up to that question here. There's an R&D -- what kind of R&D innovation excites you the most then?

[Marie Roskrow, executive]

You mean ours or someone else's?

[Børge Sørvoll, executive]

It's ours. Yes.

[Marie Roskrow, executive]

Well, of course, all the enzymes -- or they're not enzymes, prototypes, let's say, that will play in the RNA space, because that's a huge potential future space. the whole RNA vaccines, particularly in oncology. We have a number of very early prototypes that might play in that space. And I think they're novel and innovative, and we hope to be pushing those out. But that's, again, a lengthy time frame. But those excite me because they're novel and they're different. Generics don't excite me.

[Børge Sørvoll, executive]

Okay. Thank you. A little bit here. When will the China collaboration be effective? And nice touch with Genovis, by the way, that's the question popped here. So yes, when will be operative on that collaboration agreement?

[Marie Roskrow, executive]

Well, as soon as possible, straight away. We're hiring a second person to join the team that Genovis have established in China. That's going to be a product specialist to support the salesperson they already have working with the distributors. So it's ongoing immediately.

[Børge Sørvoll, executive]

Good. Another question here. Why not relax somewhat regarding the location requirements for the new CEO, i.e., part time in Tromsø?

[Marie Roskrow, executive]

Well, the company is based in Tromsø. So the CEO has to be in Tromsø. We haven't said that the CEO has to live in Tromsø, right? That is a stretch too far. And obviously, Jethro didn't live in Tromsø. And Christian before him didn't live in Tromsø. So that is not an absolute requirement, but it is an absolute requirement that they're going to be up there very frequently. So I can't really relax that part of it. Unless, of course, we move everybody from Tromsø, but that's not happening. So...

[Børge Sørvoll, executive]

And there's -- I have 2 more questions here online.

[Marie Roskrow, executive]

Are there any for you, any questions, Borge?

[Børge Sørvoll, executive]

It depends. You indicated revenues of NOK 2.5 million per head. That is in within the reach of 2023. That basically means NOK 152 million in sales revenue.

[Marie Roskrow, executive]

Does it? Yes, right.

[Børge Sørvoll, executive]

That compared to the NOK 120 million in revenue for the last 12 months taking out Q1 last year, where do you see those additional NOK 32.5 million in increase in revenue in the next 12 months to come from?

[Marie Roskrow, executive]

Well, I haven't stated that number and I'm not going to state any number for this year. So you can do your own calculations. NOK 2.5 million indicates an efficient organization. So if you look at comparator companies, if you're hitting that between 250 -- NOK 2.5 million and NOK 3 million per head, you know that you're running an efficient organization. So where is future sales going to come from? Well, obviously, it's from organic sales of our products. And hopefully, maybe the latter end of this year, but certainly going into next year, we're looking at the SAN portfolio.

[Børge Sørvoll, executive]

That's good. And I think we have one last question here it's regarding forecast here. And could you also indicate, when you will give an update on the long-term revenue forecast?

[Marie Roskrow, executive]

I'm not doing that this year because there's too many uncertainties in the market. And I think we have to get back to a normalized situation, where there's normalized patterns of ordering and all the things we've talked about that are outside our control are out of the market or in a much more diminished state. And then I think we can really establish a bit more, where we currently stand. But I think it wouldn't be a good thing to talk about that in these sort of times.

[Børge Sørvoll, executive]

I just have one last one and then I think we are -- have completed most of the online questions. Was Q1 the trough for Molecular Tools. .

[Marie Roskrow, executive]

Trough?

[Børge Sørvoll, executive]

Yes, I'm not really sure what it means.

[Marie Roskrow, executive]

Was it the trough, like the Nordea?

[Børge Sørvoll, executive]

Who knows? T-R-O...

[Marie Roskrow, executive]

Well, I know what trough is. It means on the floor, the Nordea. Was it the trough from...

[Børge Sørvoll, executive]

Not really sure.

[Marie Roskrow, executive]

Not really sure. Why would it be a trough? No.

[Børge Sørvoll, executive]

All right. Any more questions from people in the room?

[Marie Roskrow, executive]

Okay.

[Unknown Analyst]

That's more one for you.

[Marie Roskrow, executive]

Good, John.

[Unknown Analyst]

About cash flow, I mean, I know that we don't invest that much. So I mean, our EBITDA is very close to our EBIT. So what do you expect actually to happen seeing from investments in the normal -- normalized investment in one quarter?

[Børge Sørvoll, executive]

You can say, normalized investments. Right now, there's a lot of investment, especially intangible investments that are going on in the company. And as I said, we had spent quite a lot of money on the DMF now, both internal hours, and there have also been some expenses related to kind of equipment as well. Because the normalized capital expenditures should be around NOK 3 million, NOK 4 million on an annual basis here. But of course, then you have some of those special projects that we are also capitalizing on that will also impact, kind of, is on the cash flow as well. But we do expect to have positive cash flows moving forward. But of course now, as I said in the first quarter, we had some big production runs, scalar projects that we had that impacted especially the cash flow side of the business here.

[Unknown Analyst]

What you are saying is that EBITDA is very close to cash flow on a normal basis?

[Børge Sørvoll, executive]

On a normal basis, yes, that's true.

[Unknown Analyst]

Minus a couple of millions [indiscernible] and then they are at the cash flow?

[Børge Sørvoll, executive]

That's -- it sounds like a good...

[Marie Roskrow, executive]

Okay. Well, no more questions. Thank you very much, gentlemen in the room, ladies and gentlemen online, for joining us. And we look forward to seeing you in the second quarter. Thanks very much.