Arcticzymes Technologies ASA

OSE:AZT

Earnings Call Transcript 2022-Q2

[Jethro Holter, executive]

Welcome to the Q2 presentation. It will be myself, Jethro Holter, the CEO; and Borge Sorvoll, the CFO, who will walk you through the presentation today. For those of you calling in virtually, you can forward your questions via the chat function. Unfortunately, we cannot cater for verbal questions for you calling in virtually. But we do have people in the room today and it was busy at the last time. So thank you for coming to Oslo. And of course, you guys can answer questions verbally at the end of the presentation.

So the agenda today will follow the usual fashion. We'll start with the highlights for the quarter. Then we dig deep into different areas of the business and give you an update there. Borge will go through the financials, and then I will end with the outlook and for the year and beyond.

When it comes to the highlights, what we see and expected is the growth trend continues. We achieved growth for the quarter, where we achieved a NOK 30.4 million. That's equivalent of 43% growth for the quarter, and that's compared to same quarter last year. And remember, this was on the back of a strong first quarter. And we did expect and did communicate last quarter that Q2 would come in lower than it did following a strong Q1.

Year-to-date, we're very much on track on what we planned. When it comes to EBITDA performance here, we continue to perform well. And that's -- at the same time, you need to take into consideration we're investing in a business and in the strategic growth initiatives. And we -- so this is a Biomanufacturing and Molecular Tools business. And what we've started to do now is to initiate the establishment of a drug master file. In short, we call it a DMF, and that is related to the SAN HQ product.

Also, we're delighted to appoint a new Vice President of Business Development and Marketing, namely Dirk Hahneiser. He joined us on 1st of July, and I'll tell you a little bit more about him in a bit. When it comes to the business update. As I mentioned, for the quarter, we grew the business by 43% compared to the same quarter last year. And in a Biomanufacturing part of the business, and remember, Biomanufacturing relates mainly to the SAN products today, and those enzymes are used in viral vector manufacturing, such as vaccines and gene therapies.

And for the quarter, we achieved NOK 14.8 million in sales. That's equivalent to 78% growth for the quarter, compared to same quarter last year. Overall, biomanufacturing sales contributed 49% towards Q2 sales. What we've seen, we continue to see the upturn in sales in this area following the pandemic. And we see that those sales are leveraged across all the geographical regions. What we noticeably see is that the Americas has the highest contribution over 60% biomanufacturing sales we have had in Q2 came from the Americas.

And we -- and certainly, we're seeing that trend earlier. So with that, that's why, for instance, implementing a DMF is important. The drug master file for the SAN products will be submitted to the U.S. FDA. And that is not a small task. It's a major task. We have a lot of people working on that within the company. We also had to hire regulatory specialists to help us get us to the goal line here. And we do expect to have that in place by the end of the year or early next year. And why is it important? Well, for many of our customers, they have requested that. And certainly, new customers have requested that, particularly those who are going to commercialize in the United States. They see it's an essential requirement.

There's something we need to have as we grow and develop the business with those customers. With respect to molecular tools, and this is where we serve both companies who manufacture research, technologies and products. and also companies that develop and manufacture diagnostic products. That's a Molecular Tools business.

And we own basically all our products are relevant to, including the SAN products, they're used, for instance, in next-generation sequencing as well. This business performed for the quarter with NOK 15.5 million in sales. This is a growth of 18% compared to same quarter last year. And overall, Molecular Tools had a 51% contribution towards total Q2 sales. And if you split that up, 33% of these came from research, 18% from diagnostics.

In research, it is the Recombinant Shrimp Alkaline Phosphatase enzyme that was the main driver for sales in the quarter, accounting for 60% of the sales and research sales. And Shrimp Alkaline Phosphatase, what we've seen is over the last year, we have seen sales pick up for that enzyme. And we're seeing more frequent orders from the key accounts that purchase that enzyme. So we are seeing a different behavior in the market with respect to purchasing of that enzyme. The rest of the enzymes drive the remaining 40% of research sales for the quarter.

When it comes to diagnostics, we did see a steep drop in Cod UNG sales. And this is very much linked to the change in supply chain needs following the Omicron pandemic, which is natural, particularly what we saw in Q1. And what we're seeing now is readjustment of the market with respect to supply chain needs when it comes to coronavirus.

And but overall, this is with in line with our expectations for the year. We've always said, and it's in our guidance that coronavirus sales will be lower in 2022 compared to last year. But overall, we do expect for the year that the diagnostic business that will grow during 2022.

I'd like to talk a little bit about geographical sales. We haven't done that much before, and I think it's important to do that. If you think ArcticZymes based in Tromsø have a strong presence there. It's a remote location. But despite that, we are a global company, and that's reflected in our sales. You sort of see here, when you look at 2021 and Q1 this year, you can see that the EMEA is our largest territory geographically.

And one thing to add, even though we sell products to customers in the EMEA, some of those also in U.S. dollars. It's not always euros here. So that needs to be taken into account when you look at currency.

Then it's the Americas, of course, is a second contributor, not far behind the EMEA. And then we have approximately 13% in the Asia Pacific region. What's interesting here between Americas and EMEA, sometimes that line moves left and right here, you can say approximately 10% from quarter-to-quarter.

The reason is we do have some large international customers who have multiple sites around the world. And sometimes they say, well, this quarter, we need to ship more products to Europe and other time, they say more products to Americas. But it does move backwards and forwards. The Asia Pacific area is quite constant quarter-to-quarter apart from Q2. The reason why it shrunk for Q2, the kind of proportions there is very much linked to China.

What we saw during the quarter was, and I think it was very much in the media as well. There's a major coronavirus lockdowns in China. And at the same time, a lot of the borders, the international borders were closed to ship product into China. Even though we had customers who wanted product, we just couldn't simply get product into China during Q2. But now, of course, those restrictions are lifted now and it's easier to get products.

Also what we're doing is strengthening our global reach within our commercial team. So I'm delighted to appoint Dirk Hahneiser as our VP of Business Development and Marketing. You can see him in the picture here. He's very smarty and a happy chap. And he has an impressive track record in growing commercial organizations. He has experience from Johnson & Johnson. Ecolab and Thermo Fisher Scientific, and Thermo Fisher Scientific was his -- that's where he came from to come here. And in that company was leading an OEM business. And that's a very similar business to ArcticZymes.

So again, he understands how this market and our customers and how things work. And he replaces Dino DiCamillo, and Dino DiCamillo has done an excellent job over the years, an outstanding job in growing the commercial business. And I would like to take this opportunity to publicly thank Dino for his dedication and contribution over the years.

We have also doubled our commercial presence in the United States, I should say, North America, where we've hired a second business developer now where we've -- and his name, Scott Frayo. And what we're doing now is we're splitting the U.S. into 2 East and West. In each of the business developers will manage 1/2 of the U.S. each.

And that's important because we are a growing organization where the number of customers are increasing in the U.S. And so we need more support. And of course, we are launching more products so our portfolio becomes much more relevant and door openers to new key accounts. So hence, it's time to have more commercial presence there.

When it comes to innovations, we announced earlier in the year that we were setting up an application lab in Oslo at ShareLab. And we refer to this in the future as our Oslo site. And we hired Darren Ellis, Dr. Darren Ellis, to lead those activities there. We have been successful, being now hiring 2 application scientists to support him.

They're now on board actually joined on the 1st of August, and you can sort of see them in the picture here, this is kind of what the ShareLab looks like and some interesting instruments there, robots that those robots there will run workflows at the end of the day. And the focus of this lab is about demonstrating utility of ArcticZymes enzymes in complete workflows.

So what this means, for instance, it's sort of demonstrating the use of several of our enzymes that fit together like jigsaw pieces, for instance, into a virus diagnostic workflow, such as a PCR test. There, you may need to isolate the sample from the blood then you need to then do several steps and then you need to amplify.

And do you have, for instance, COVID or do you have HIV there, there's multiple steps, multiple enzymes are used and what we want to do to make sure we can offer every single enzyme. But we've got to demonstrate that in the real world, hence, why we have a robot that runs those workflows we can put our enzymes and demonstrate that. And that's the kind of application data we need to show our customers stimulate in their environment.

And that's what share lab is about. It's not about innovating the enzymes. It's about demonstrating the utility of the enzymes. And we've done that to some degree in Tromsø. But of course, ShareLab, that's where we get the people season from industry. Who've done this day in, day out. and then we can demonstrate that, and that makes us match the strength of value proposition much more towards our customers.

And it's a natural part of the product life cycle because when you launch an enzyme, that's a [ buffering ] enzyme. It can be on the market for 20-plus years. And you always need to build application data and continue building it during the lifetime of that product. So it's not just a onetime thing. It's continuous application development with all products. and also as they fit together as package offerings.

In Tromsø, we continue to move forward with our product launches in the next half of the year, you'll start to see these being launched also we're working on scaling up some enzymes to. We are making progress with the RNA therapeutic enzymes. These are a bit more long term, and we do expect those to launch the first enzymes next year. In operations, the new production facility is running smoothly, and we continue to increase capacity, and we do this through incremental recruitment, where we're hiring more production people and quality control people.

What we're seeing now is that on-site customer audits are becoming much more routine. And during the quarter, we hosted 2 customer GMP audits. What they did was to audit the new manufacturing facilities associated with SAN manufacturing. One of those was a top 10 international pharmaceutical company. It was the same company it audit us earlier, and it's a routine follow-up audit, and that's normal. Customers don't just audit you once, they will keep auditing you on a regular basis.

And then another one was a leading international viral vector commercial development manufacturing organization. And I can say both of these customers are purchasing SAN enzymes today. Both audits were successful. And this is important because at the end of the day, the audits are all about qualifying ArcticZymes as a critical component supplier.

And of course, we have to -- so basically, we retain our status as a supplier there, following these audits. And of course, it's important for them for regulatory approvals, so they audit their critical component suppliers as well.

When it comes to strategic growth initiatives, we continue to execute on these. And the first is really about organic growth. And it is about people. People our employees are our biggest assets. And at the end of the day, we want to strengthen our organization in the right areas, and that is certainly cross-functionally. There are certain areas we need to build up, and we need to have greater competences, for instance, in quality, quality assurance. Regulatory, particularly now, we're working on drug master files.

Today, we have to use external support. But drug master files will become much more routine in our business moving forward. Since we are heavily going into Biomanufacturing, we're developing RNA therapeutic enzyme again, DMF will be important there and regulatory documentation, hence, why we will need to we're building out that -- organization. Project management as well, now we're getting larger, more complicated, we need much more professional project management in the organization.

Also, GMP product development and commercialization competence. As ArcticZymes has had 20 years of serving molecular tools where you know that business very well. When it comes to Biomanufacturing, we've been doing it since 2016. So of course, we need to really build our competences much more in that direction. So when it comes to investments, particularly our investments are heavily leaning towards the Biomanufacturing area.

Inorganic growth, that's about mergers and acquisitions, and we continue to intensify activities. Most of my time is spent there and -- which is good. And we have got to a stage where we've got a priority list of mutually interested targets, which comprise of earlier, some earlier targets as well as some newly identified targets. So we have those initial discussions ongoing between ArcticZymes and many of those targets right now.

So with that, I'll hand over to Borge, and he will walk you through the financials.

[Børge Sørvoll, executive]

Thank you, Jethro, for that introduction into the second quarter and for the first 6 months of 2022. And looking at the financial side of the business, we are, as Jethro talked about, so we are delivering growth on an annual basis here, even though we don't have the same sales figures as we had in the previous 2 quarters here, but we are still performing well. And with that, our sales revenues in the second quarter increased by 43% compared to the second quarter last year, generating in excess of NOK 30 million in sales revenues compared to the NOK 21.3 million that we saw in the same quarter last year.

For the first 6 months of the year, total sales revenues are at NOK 79.5 million compared to NOK 62.2 million in the same period last year or an increase of 28%. And for the first 6 months. And as we said, last year, you can see last year, we saw that both of the main currencies that we are using is U.S. dollars and euros.

They had a negative impact on the underlying growth of the business by almost NOK 11 million when you are comparing year-on-year with constant currency rate. And in the second quarter this year, we had a positive impact of NOK 2.5 million, primarily explained by the U.S. dollar that has strengthened towards the NOK. And for the first 6 months of the year and we have seen now close to NOK 3.5 million in currency effects on the sales side.

And of course, with the exchange rates that we are seeing now, we are also optimistic for the future with regards to the financial statements in 2022 now. Looking at the commercial segments here. Both areas showed growth in the quarter. But of course, the Biomanufacturing side delivered an increase of 78% or NOK 6.4 million from NOK 8.4 million last year to NOK 14.8 million this year.

And also, as Jethro talked about in his part of the presentation, we continue to see an upturn in sales following the pandemic. And also for the first 6 months of the year, we see that sales have grown from NOK 8.5 million to NOK 33.6 million or a growth in excess of 80% comparing the same 2 periods there. For the Molecular Tools side, sales are up by 18%, generating sales of NOK 15.5 million compared to NOK 13.1 million in the same quarter last year.

And for the first 6 months of the year, sales are up by 6% from NOK 43.4 million to NOK 45.9 million. And of course, we have seen in this quarter that the Cod UNG had a significant lower contribution in this quarter due to the lower demand following the pandemic. Looking at the trend side of the business, where we have -- where we have taken out all the quarterly fluctuations that are inherent in our business. And as you can see here from this graph here that we continue to deliver growth on a quarterly basis, even though sales in the second quarter are lower than the previous 2 quarters.

And -- but from a low end in -- from a low end of NOK 7.5 million in Q1 2019, we are now driving, you can say, average quarterly sales of NOK 35 million per quarter. You can also see for the last 2 quarters, we have not estimated now the COVID effect of the business like we did in 2021. And this is also in alignment with what we have been talking about over the last few quarters and also because we believe that the COVID part is now -- is part of the underlying business now essentially here.

Looking at the profitability side of the business. It's another solid performance, cannot match the last 2 quarters, but we are still very pleased with the figures that we are presenting now. And we already touched upon the sales where you have seen the growth in that area.

But our EBITDA came in on NOK 9.5 million compared to NOK 6 million in the same period last year, and this represents an improvement of close to 60%. And also for the first 6 months of the year, our EBITDA ended up on NOK 37.4 million, up from NOK 31.8 million in the same period last year, and this represents an improvement of more than close to 20%.

And also that we have talked about earlier in the presentation and in past presentations, we are investing heavily into the organization through new people and equipment, which can be seen through increased personnel expenses and increase in other operating expenses.

And it's also fair to say that our activity levels are much higher now in 2022 than we had in 2021 also because we have a lot of projects ongoing that requires additional external support, for instance, the DMF project that Jethro talked about that had -- it requires external expertise on those projects.

On the sales side, we talked about that currency had an effect on the underlying growth, but it had also had a positive effect on our, you can say, operating expenses where you can see that on the receivables and liabilities side, we have managed to reduce our operating expenses by NOK 2 million for the quarter and NOK 1.3 million for the year based on -- you can see just on how the currency has moved over the quarters.

That's between when we send an invoice until we receive the money. And of course, that is explained by the extreme you see volatility in the USD-NOK exchange rates. Our EBITDA margin for the quarter landed on 31%, which is slightly better than the same period last year. And for the first 6 months of 2022, our EBITDA margin is 47%, and this is slightly lower than the 51% that we had last year. But still, it's a solid performance so far.

Of course, cash flow for the company follows the same trends that we have seen over the last few years with a continuous positive improvement in our cash position. And of course, the second quarter was no exception to this, where we had a positive cash contribution of NOK 16.4 million. And for the first 6 months of the year, our cash position has increased by in excess of NOK 30 million now. And this gave us a cash balance of NOK 231 million per end of June.

And with this, I will hand it over to Jethro, who will talk a little bit about what we expect for the last 6 months of the year.

[Jethro Holter, executive]

Thank you, Borge. So this is a very familiar slide by now. But I think that's the important thing with the outlook and beyond, but it remains unchanged. And when it comes to 2022, the annual sales target of NOK 155 million, we stick by that. And if you look to the right here at the top, you can see where are we at the halfway point now, we've achieved 51%. So very much on track. If you look to the graph at the bottom, this shows the last 12 months revenues on a quarterly volume basis. And when you look at that and look after Q2, we were at NOK 146 million. So we're creeping closer to that NOK 155 million target.

Of course, with such a business, we are a B2B business that cannot be forgotten. And we're not a run rate business. Our quarters will fluctuate, and that will be inherent always in this business. So -- and certainly, that's what we mentioned last quarter that we do expect Q2 to be lower than Q1. But -- and hence, why we put out the guidance, the annual and the longer-term guidance here.

Also, as mentioned is the contribution from COVID this year will be lower compared to last year. But it's not going to go away longer term. It's always going to be there. At the end of day, COVID testing is still going to be needed. It's going to be part of our underlying business. There will be potentially a few outbreaks down the road, which will put a few little spikes and demand in the supply chain there, but not to the extent it was during the pandemic.

We can take the next one off. This is about the Oslo site and the -- and expanding our innovations into the Oslo area. We've done that now. We're there. We're operational. We have the people in place, the labs there. And that facility will be very important in making our products even more relevant than they are today in demonstrating the utility of our products. in current applications where we're serving and also applications we're not serving in the future.

Also, what we find is -- what we're noticing is it's the Oslo site is certainly something we can expand in the future. I'm actually spending quite a lot of my time there, it's actually convenient for us since we are an international team. Rather than have meetings in Tromsø, we bring people down to Oslo and bring our international guests into Oslo. And I think beyond that, we are looking at potentially putting other functions there in the future. And particularly those that you cannot hire in Tromsø not all skills sets and the experiences that you desire, you cannot find necessarily in Tromsø. So you got to go and find them elsewhere.

And in Oslo, you can -- certainly is a location where you can certainly find certain people particularly, for instance, in the Biomanufacturing, biopharmaceutical world, you have a richer source of people in Oslo. So we need to bear that in mind.

We also continue, as mentioned earlier, to bring new products to market, and we are certainly on track to launch products this year and upscale enzymes and of course, have a rich portfolio of enzymes more longer term. What's really important to growth is personnel, and we continue to incrementally invest in personnel and talent acquisition to support both short- and long-term growth initiatives.

And merger and acquisition activities, as mentioned, I'm spending a lot of time there. And of course, my time's demand in many places. So actually, I'm cutting back in a lot of other areas and just prioritizing very much on this. So it kind of gives you an indication of how much efforts I'm putting into this.

And with this, we do have a goal to announce a deal this year. And so far, I think, as a project and the external support that's helping me with that, we're certainly -- I think that's doable. Longer term, we have a target to realize annual sales of NOK 350 million by 2025. That's through organic growth.

And that's about growing both sides of the business, the Biomanufacturing and Molecular Tools. But going beyond 2025, what I can say is that the Biomanufacturing certainly has a greater potential. And that's why you're starting to see as an organization, a lot of our investments currently are towards Biomanufacturing and future investments will be leading in that direction as well. And part of that, you're already seeing, as we've mentioned, we are now developing enzymes for RNA therapeutics and then, of course, we will look at other areas as well in that space as we move forward.

So with that, I think that's a convenient place to stop. And I really like to thank you for your attendance today, particularly in the room for making your way here to see us and also for those calling in, and we're happy to answer any questions.

[Børge Sørvoll, executive]

Do we have any questions in the room because I have a long list from the viewers online here. So we can start here in the room, if there is something.

If not, then I can start. You are now halfway through the quarter into Q3. Can you say something about how Q3 has progressed and a little bit about how the visibility for sales in the second half of the year will be?

[Jethro Holter, executive]

Well, I think as I mentioned, we will have quarterly fluctuations. We're not looking at -- and we will see that in the second half too. And the one thing that I can say is we've seen during this summer, people have actually taken vacations this year. And you certainly see that in the customer base. So what you see is the kind of interactions you would normally have with customers. They haven't been around as they normally are for the summer.

That's all I can say. And that's kind of normal when you think after the COVID situation and you think people weren't traveling and now we're seeing that it's the people are out, but now we're seeing they're coming back. And of course, there's always -- each quarter has 3 months, and that's how it is. So July is very much a holiday month in Scandinavia. August is very much for the -- as you go to the South of Europe.

And the U.S. typically don't take holidays. But -- so I think here, you see different dynamics across the different regions at the end of the day. But it has been -- but I can't say it's holiday time for a lot of people right now. But -- so that's why I think when you look at the quarters, I think they will fluctuate, but it's the annual guidance we stick by at the end of the day.

[Børge Sørvoll, executive]

Many of the larger DX companies have posted good growth ex-COVID now. And yet you posted relatively weak Molecular DX sales in the second quarter. Can you give us a little bit of more color on this?

[Jethro Holter, executive]

Well, I think remember, we're not a diagnostic supplier. We're not -- we don't sell diagnostic products. We sell components. We're at the front end of supply chain. So you can't necessarily take that comparison. And at the end of the day, if you think about it, our customers need to buy first components, they need to make the products and then get them out on the market. . So there, there is a kind of how the supply chain works like a spring going like this, we're at one end, the customer is at the other end. So it's not necessary -- you can't compare apples-to-apples. But what we did see in Q1 and then was that in diagnostics, those customers who purchased for COVID, many of those also purchasing enzymes for their other products, too.

And the important thing is when customers purchase enzymes, they want to purchase in bulk. And the reason for that is in diagnostics is every time you purchase an enzyme, you bring it in-house, you have to do it for qualification, that takes time and money. So that's why people want bulk. They don't want to keep buying small quantities because every time you buy it in, you have to qualify that. So that's what we're seeing. I think what we saw in Q1 was people were buying enzymes, not just for COVID, but there are other diagnostic tests as well.

And of course, then we had -- and that's why you have a drop in Q2 because they purchase what they need also for Q2 to some degree. So it's part of this quarterly fluctuation. But of course, the COVID that sort of puts an extra bump and trough in the sales that sort of explains the dynamics that are working in the market there.

[Børge Sørvoll, executive]

Can you give a little bit of color on your participation in the new multiplex products being launched by other DX companies?

[Jethro Holter, executive]

Sure. We see a lot of interest there now because, of course, that's what people -- typically, once you have a virus that is becoming important, it tends to be a single test to start with and then later on, then you integrate it into panels, i.e., like the split for COVID is respiratory pans and sure we see that. But that's -- there's certainly the interest and that's where our customers are going as well.

But beyond that, what we're seeing is it's also looking for new variants, things like that, and that's where sequencing technology is important and that's where what we think what's happening with the rSAP, for instance. But that enzyme is actually going very much into looking for new variants. And that's that doesn't -- the PCR doesn't do that. PCR will look at a known target.

With sequencing, you can look for targets for the -- that are not there. So we're just seeing -- so 2 directions. I think, one, we're seeing the use of enzymes for COVID in for looking for new COVID variants and the other is a multiplex testing. We're seeing that within our customer base. It will take time for them to get those onto the market, of course, because they need to get their approvals as well.

[Børge Sørvoll, executive]

Can you say anything about how the DMF for the SAN HQ product will influence future sales of the company? And do you plan to have a DMF, for instance, for RNA [indiscernible]?

[Jethro Holter, executive]

Now the thing -- exactly DMF is important one for many of our existing customers. And of course, it's that trust and motivation you have with customers. Even though we don't have it today, we promise to have it for them because of the important time we have to have it when they commercialize. And because when they go to file with the FDA, our DMF needs to be there at the same time. So for many of our customers, that they are -- that's fine. They're happy, but we're working on it and the timeline is fit with their timelines.

But of course, some new customers, particularly some customers that are very traditional. Some large pharma can be very traditional, and they want to see that upfront. So of course, that's why we're working on that. So that's going to be really important for existing and new business for those who want to be in the U.S. market.

And for new enzymes, yes, that's very important. That's why we're ramping up and investing in the team now as well. So but we will need to put heavy package of documentation, regulatory documentation together for our new products, particularly in RNA therapeutics. And yes, we will likely need DMF, where we will need DMFs for them as well down the road.

And that's part of the company maturing it from being serving the IVD industry. They're now serving Biomanufacturing. We have to really invest and massage your organization in a different direction there. And that's kind of what we've been doing since 2016. We're maturing as a biomanufacturing supplier.

[Børge Sørvoll, executive]

Okay. Thank you. Can you say something about the proportion of smaller R&D biotech companies among your customers? Or -- and can you say something about the kind of the challenging funding situation they are facing and how -- or if we have seen a decline in our order patterns now?

[Jethro Holter, executive]

I think our main focus is different to talk about the small accounts. I think at the end of the day, it's about how we do business is really, we want to support those customers that have the potential to really grow and be those key accounts. So -- and I think that's kind of a 2-way street. So it's really about the companies that really have the potential and want to work together. If they don't, then we don't work with them. So I think, generally, we're quite selective there.

So I think the ones we're working with do have that potential to grow. And -- so I think it's kind of a tricky one because there's a lot of companies out there and there's lots that have potential, but they just don't have what it takes to get there. And so we're kind of a bit smart in terms of how we work with customers. because is a 2-way thing. So it's kind of a tricky one to answer. But again, most of those are -- remember, a lot of the business are with the larger players at the end of the day.

[Børge Sørvoll, executive]

In the EMEA, do you experience any kind of ordering hesitance with regards to the Ukrainian war, the war that we see in Ukraine?

[Jethro Holter, executive]

I think we had -- not so much, no. I think we -- of course, we have concerns more about how does it impact you? Do you have any supply chain issues? But that's actually more from the U.S. actually than Europe, where -- are you able to get all your raw materials? Are you able to ship to us? Remember, some -- I think some people are not necessarily understanding of geography and we're pretty -- this business. We've been -- we haven't had much impact from that.

The only impact we have seen, a little bit, is sometimes when we want to get certain raw materials, particularly chromatography resins, but then we're smart, we're able to get a hold of those and foresee and make sure we buy large quantities to get us through and no lead times out there. and that's what's important.

But we foresaw that. And that's that goes beyond what's happening in Ukraine. That's been kind of a supply chain issues have been there for the last couple of years. And of course, we've adjusted to increase our inventory of raw materials.

[Børge Sørvoll, executive]

Okay. A little bit on the M&A side. You have talked about M&A since 2019. So far, no deal is closed. Why have you been unable to close the deal so far?

[Jethro Holter, executive]

Well, I think it's -- I think if you have a look at the market, we're not -- it's quite an active in markets. It's not just us looking to purchase enzyme companies. I think anybody can see if you have a look, there's been some significant transactions over the last year or so. And I think -- and so I think you had some competition out there in terms of trying -- getting companies. And it's also -- and some of those have had processes as well. And that -- and you need to try and compete at the speed and things to get into those process. So it's kind of a tough, you can't win them all. And that's what I can say.

But we are -- but also what we've done is we've had -- we took a little pause as one and had to rethink because the kind of targets we were looking at initially since 2019, we're evolved as an organization. So the criteria we used to search for targets in 2019 are now different and very much leaning in kind of a different direction to what it was before.

And that's why we now opened up a whole new suite of targets as well. And what we want to do is we don't want to -- yes, we want to do an acquisition, but we want to make sure we do the right acquisition. We don't want to just let's do an acquisition for the sake of it. So we will spend the time needed to make sure we make that right acquisition.

But again, I think we are in a much better position than we were before and also it's about being realistic and getting the support that you need to try and do this internally is -- and using the time of the team and myself is -- maybe, just us that's a difficult task.

That's why we really engage the external support to get the right people to do the heavy lifting and help us with this task. So I think there's multiple things there. But I think I'm confident now and that we will be able to announce a deal this year.

[Børge Sørvoll, executive]

And on that, how do you separate between kind of that strategic needs and the financial targets on the M&A side? Not 100% sure what they are.

[Jethro Holter, executive]

Yes. I think the -- there's qualitative and quantitative aspects. Often, it is about numbers is about what can you achieve the revenue synergies. I think that's what they're getting to. And certainly, we are looking at revenue synergies, but there's all -- there's other things as well extremely important, and that's really about -- for instance, where we -- things that we kind of are trying to build ourselves, but other companies have been building that for a couple of decades.

For instance, like GMP Biomanufacturing. We've been in that since 2016. There's other companies that have been in there for 20-odd years. And -- but then they want that and those companies might want to get into the Molecular Tools side, you see what I mean? So it gives you kind of hint maybe on -- we're looking for both things that led top line growth, but also add those competencies and things that can really help us accelerate what we do in terms of innovations, bringing new innovations to market in terms of giving us greater operational freedom and scalability beyond what we have because, of course, what we've built in Tromsø now will support us for the next 5 years.

But beyond that, then we'd also need to have even higher capacity, you see what I mean? So we're looking at many things there. It's not just about the top line at the end of the day when it comes to these. So there is that qualitative and quantitative aspect.

[Børge Sørvoll, executive]

Do you have any comments with regards to how you're going to fund an M&A deal?

[Jethro Holter, executive]

Maybe I'll let you answer that one.

[Børge Sørvoll, executive]

I think it will also be dependent on the deal that we are looking at or if it will be a cash plus some shares, but I think it will -- it depends on the deal as such and the size of the deal as well, how we set it up financially here. I think that's the answer on that one.

A little bit on the innovation, how is the pipeline products progressing, the innovation?

[Jethro Holter, executive]

Yes, they're certainly progressing. We, like I said, we have several products for launch this year in the works. One thing we will have is our first reverse transcriptase. We don't have those at the moment. So we'll launch that. And that's really important because reverse transcriptases are used, particularly, in viral diagnostics and many other applications.

And that will be a very important thing for the Oslo applications lab will do because there you can marry that together. For instance, we've -- for instance, with the Cod UNG also we launched and the polymerases we have. We're also launching attack polymerase, and attack polymerase, they're hot polymerases. They're used in PCR.

And again, that fits into what we want to do in building the workflow. So many of those enzymes that we're missing, a class of enzymes, we're going to have for this year. And those are really important to get to that complete workflow status where we can have each enzyme for the workflow. So I think by the end of the year, we'll have all the enzymes of it would be needed to build a molecular diagnostic workflow, but then we need to demonstrate that, and that takes a bit of time to be able to demonstrate those enzymes working together. Because It's like jigsaw pieces.

You need to show that this enzyme works together with this enzyme, it's like 2 jigsaw pieces fitting together. So that's what applications is all about showing that they fit together as jigsaw pieces and demonstrating that in a customer setting. So I think here, you will start seeing those enzymes are launched. We're also launching a new ELISA kit to support the SAN HQ enzyme 2.0. Today, we don't have that, and that's important for therapeutic customers using the SAN HQ 2.0 enzyme, they will need that ELISA kit.

[Børge Sørvoll, executive]

Okay. I have one more question regarding the DMF side, and that is also regarding -- does competitor in the biomanufacturing side have a DMF for their products?

[Jethro Holter, executive]

I think at the end of the day, but in terms of benzenos, which not -- that's a different enzyme to SAN. That's a generic enzyme. We know that there are DMF out there from their competitors. And again, with SAN is not the same enzyme. It's a different enzyme. And of course, we see the timing is right now to put the DMF in place. But DMF benzenos is kind of irrelevant when it comes to SAN. It's not one of those things that somebody could use a DMF -- could you for benzenos to sell for SAN. So it's tied to that particular end our enzyme like ours would be tied to our enzyme.

[Børge Sørvoll, executive]

Okay. Are you experiencing an acceleration in cGMP audits from new customers? Or has it been kind of slowing down now recently?

[Jethro Holter, executive]

No, it's a mix, and I think that's what we -- when you sort of see that now we are getting those audits regularly, I think it's 2 to 3 that we're seeing right now for a quarter when it comes to that but also, we have to bear in mind that in the molecular diagnostics space, we will see that too, particularly as IVDR comes in, the regulations and even those customers will be forced to audit us.

And that's part of what we're doing in Tromsø now is making sure we have the resources in place to host all these audits because it's something we have to do, and we even have slots planned for the year, ready for when somebody says, can we audit you? We can accommodate them. And we're just going to see more and more of those as the business grows.

[Børge Sørvoll, executive]

Okay. Thank you. And here is probably a question to me, I would think. Financial income of NOK 2.5 million is significantly higher versus earlier quarters. And what does this include? Is this a revaluation of balance sheet items? And I think the answer is no. This is directly related to currency. Currency we had a lot of USD and euros in the bank accounts going into the second quarter. And of course, when the USD moved significantly towards the NOK in the second quarter, and we did some favorable transactions in this quarter, generating a positive financial income on that area. And that summed up to NOK 2.9 million for the quarter.

And I think we are getting closer to getting closer to an end now. I think we have still a few more questions, but I think some of the questions we have here has been covered in other areas. And let me see if there's something that I missed here.

Just regarding COVID here. COVID-related sales in the second quarter for 2021 was NOK 4.5 million. Can you say if -- you said it was lower in this one, but was it -- were it significantly lower than NOK 4.5 million or...

[Jethro Holter, executive]

Yes. I can say it was significantly low. What I can say -- I won't say about COVID-related sales in general, but I'd say, in generally, one of the main products would go into that into area is Cod UNG. And what we saw was normally Cod UNG sales would be around 20% more, 20% plus of our sales and it was below 5% this quarter. That's what gives you some kind of indication. But of course, with COVID-related sales, it's becoming extremely complicated to calculate that.

Since you know, many of our customers are purchasing enzymes for multiple products that they're developing multiple diagnostics. And even when you try and ask them what is the split, they don't know. They're just procurement or receiving the orders internally. They get their work order.

And of course, that when we send the enzymes, it's a big bulk of enzymes and made in the warehouse a split that enzyme, it ends in 2 different parts of the organization. So it's becoming extremely complicated. We cannot give you a definitive answer on that. So that's why even though we say, okay, it's dropped there. It's just an estimation on what's happening there.

[Børge Sørvoll, executive]

Okay. I think we can take one last question now from online, and then we can see if there are some questions here in the room.

Could you please comment on how the new OEM partnership is progressing? When are you expecting this partnership to start contributing in sales in a material way?

[Jethro Holter, executive]

Yes. Sure. I think that is a good question. I think now it's at where they're now starting to bring the enzymes in and evaluate those and launch them as their own products, and that's kind of what OEM is. And so of course, they need to then put on the documentation and do a launch of those products and then start getting the market traction. So it's moving in the right direction. But of course, they will need to then build up a presence over time.

[Børge Sørvoll, executive]

I received one more question here that could be interesting to you. What can we expect from China and the APAC once lockdowns are clearing? Is there a backlog? Or how has the push into the market been?

[Jethro Holter, executive]

No, it's a very good question. I think there, we are now back in communication. And now we're just -- and again, it's realigning ArcticZymes, and our partners are realigning on how the next half of the year will line up as and we do expect that now to get -- to start picking back up.

And of course, there, when you look at what's happening in China, a lot of things around COVID testing is stuff done domestically. And of course, even if we wanted to do something there in Q2, it wasn't possible to even get products in the country. So of course, naturally, it means that they've developed and COVID's been supported by internal stuff there. But again, we're not concerned, we're not there to be chasing off the COVID business.

That's not what we're interested about. We're interested around getting ourselves into the other technology there, particularly Biomanufacturing because China has a significant biomanufacturing capabilities and -- and of course, they are strong in other areas such as next-generation sequencing and other areas, too. So that's what we're working with through the partners we have. So I think you know that, that will pick back up next, over the next 2 quarters.

[Børge Sørvoll, executive]

Any question in the room? No?

[Jethro Holter, executive]

No.

[Børge Sørvoll, executive]

If not. And I think we thank you all for coming today and listening to this second quarter presentation. And I think we wish you all a great day. Okay. Thank you.

[Jethro Holter, executive]

Thank you.