Arcticzymes Technologies ASA

OSE:AZT

Earnings Call Transcript 2020-Q3

[Jethro Holter, Chief Executive Officer]

Welcome to the Q3 presentation. Both Børge Sørvoll, our CFO; and I, Jethro Holter, the CEO, will walk you through the presentation today. As it is a virtual meeting today, it does put some limitations on us. So for the Q&A session, we kindly ask you to post your questions via the chat function. We are unable to cater for e-mail and verbal questions today.Can we go to Slide 2, the agenda slide please. So for the agenda today, we're going to walk you through the highlights of Q3. Then in the usual order, we will go through ArcticZymes to give you some updates there. We'll then walk through BetaGlucan updates. Then Børge will take you through the Q3 financials, then I'll end with the outlook. If I go to Slide 4, so we're going to take you through the highlights now. So on Slide 4 here, what you see is these are highlights where you can see in a nutshell, the company continues to achieve strong underlying growth. On top of it, we continue to benefit from corona-related upsides in sales. We've actually reached a new milestone this year. For the first time, the company has already exceeded NOK 100 million in annual sales. And for the 9 months, we've achieved NOK 109 million -- just short of NOK 109 million. For ArcticZymes, the enzyme business, we've achieved our second best quarter in quarterly sales. We reported at NOK 19.5 million, sales we achieved, this is compared to 13 -- sorry, NOK 12 million for the second quarter last year. In the therapeutics segment, where we sell the SAN products, we received the largest order to date during the quarter for NOK 3 million from our most well-established customer. In molecular diagnostics here, we're working on our sales efforts towards going into new markets. So new geographies. In particular, we made our first steps into China and India. I'm going to talk [Audio Gap] the -- in terms of Biotech Betaglucan, this business continues to operate profitably since we restructured it back in December, and it has done now for 3 consecutive quarters. So those are the main highlights. So I'd like to now skip to ArcticZymes' updates on Slide #6. So in terms of commercial updates for ArcticZymes, we continue to achieve strong underlying growth, where the business has grown 63% compared to Q3 last year. The therapeutics continues to be our fastest-growing segment for us. And for the quarter, we've grown by 300% compared to the same period last year. When you look at the contribution of sales, 52% of the therapeutic sales contribute to the overall enzyme sales for Q3. I mentioned it a minute ago that we received our largest order of NOK 3 million to date from our well-established customer. And this is actually -- this customer is using the enzyme in gene therapy in non-COVID-19 application. Last quarter, we communicated that we signed a supply agreement for ReiThera. This is an Italian vaccine company that is making a COVID-19 vaccine. ArcticZymes has been supporting their efforts in supplying them SAN. And they've now moved forward into Phase I clinical trials. And of course, we are providing the enzyme to those clinical trials. And of course, as they advance, we continue to provide more enzyme down the road. Another milestone for us here is that we were audited by a top-tier pharmaceutical company recently. And they actually had a 3-day audit, a CGMP audit, and that's a really tough audit. We did very well. It was a successful audit for us. And for the customer, it was -- the audit was a prerequisite before moving forward for potential supply to several global sites for the SAN products. When it comes to research and diagnostics, we see in the molecular diagnostics that sales continue to grow. And one interesting development in the diagnostic areas that -- we had the first customer integrate our enzymes into their COVID-19 LAMP diagnostic test. And this company now is in the process of initiating clinical trials, and they will soon seek approval from the FDA before going to market.What we're seeing in molecular -- when it comes to molecular research sales, the kit manufacturers, we have seen a temporary slowdown there, and this is due to coronavirus lockdowns. As you can appreciate, the lockdowns that -- the researcher is normally working in university labs or in -- have been. We have not able work in those labs, have been working from home office. So they haven't been doing their experiments. This has a knock-on effect because our customers who we sell enzymes to, who integrate our enzymes into kits. have not been able to sell those kits to researchers. So they've got their kit -- they've got a lot of inventory on the shelves they haven't pushed. So what this means is that this reduces the demand, which reverberates back down the supply chain to suppliers like ArcticZymes. We do expect to see a slowdown for the short term, but we are starting to see that researchers are getting back to the bench. Though our customers will eventually start moving those kits and then the supply chain, then more demand for our enzymes will come in when it comes to the research market. In terms of COVID-19 upsides, as expected and communicated during Q2 update, we -- the corona upside for Q3 are lower than Q2. Now when you look at it, corona upside account 20% of our total enzyme sales during the quarter. When you look at it, it's -- as a component supplier, serving future demand in the supply chain for corona-related applications is far from predictable. When you just look at the market dynamics, it's complex, it's uncertain, especially when you're at the front end of the supply chain. There's absolutely no disputing that a need for corona tests is far beyond what industry can serve today, and I think we certainly see this with our customer base. We are able to serve our customers. We've been very -- we're able to provide all the enzymes our customers need from ArcticZymes. However, what we're seeing from our customers is that they have found it difficult to source all components they need from all their suppliers that they have to manufacture their kits. So for some of our customers, there's been long delays in launching their kits or sometimes getting supply to keep their kits on the market. And of course, what we also saw, another point we saw, something we saw in Q2 already was that there was a lot of overstocking because of this fear of the supply chain drying up. And certainly, that has happened. So of course, the supply chain is catching up still, and we're just one of many suppliers to our customers. That said, we have had numerous customers who have been successful in getting their tests on the market and with our enzymes in. And some of these customers are doing very well. However, some have experienced quality issues. And in the worst case, we have observed the odd customer that has been forced to withdraw their test off the market. But hence, why it's not such an easy, clear picture out there, but there are different forces in play here and why it's complex. So what we see here is that there's always, there is demand certainly moving forward, and there will be, and it will grow when it comes to the need for enzymes to coronavirus, but we will expect quarterly fluctuations. That should be expected, and we might see large fluctuations quarter-to-quarter. And that's natural when you look at the complex in how supply chain is working here. But we do expect, over time, this will normalize and it will come to a natural equilibrium, but this is going to take 1 to 2 years. So for ArcticZymes, when it comes to the coronavirus, our focus is twofold. One, it's really -- we're focusing on capturing the short-term opportunities, and that's what we've been doing during Q1, Q2 and Q3, and that will be up and down. But more longer term, what's critical is that we capture the long-term value in getting our enzymes locked down in the next generation COVID-19 tests and technologies. And the example I mentioned is a good example, where I mentioned just a few minutes ago that we had our first customer integrating our technology into their COVID-19 test. And that's the kind of technology which will be more a long-term technology that would be there for the test of time. Could we move on to the next slide, please? It's the geographical expansion. So in terms -- for ArcticZymes, we're primarily focused in our sales efforts in North America, Europe and Japan. However, we have had ambitions to expand our geographical reach, in particular, into developing and Asian market. And why we're interested in these markets is because they have sizable populations. And there is -- there are national focus in diagnostic initiatives. So for us, 2 countries we are particularly being interested in and it's China and India. And we are stepping our toes into the water here. So in China, we recently signed a supply agreement with a company called Simcere Diagnostics. In China, the parent company is a significant company there. It's recognized as 1 of the top 10 innovative pharmaceutical enterprises in China. And what Simcere is going to do is that it's going to be using our HL-SAN active nuclease enzyme in developing and manufacturing infectious disease diagnostic tests based on next-generation sequencing. And also, the deal provides certain distribution rights within China for the HL-SAN enzyme. So for us, this really does mark our first step into the Chinese market. And of course, we have ambitions to go further. But today, we are just stepping our toes in the water. The next thing is to dip our feet even more as we move forward. And that will be a gradual process. In India, we've been serving a customer for just over a year. And what we've been doing is providing a diagnostic company, Cod UNG enzyme. And what they've done is they've integrated this into the tuberculosis test. And this is pretty important in India because India bears a disproportionately large burden on the wells of tuberculosis cases. There's around about 2.2 million cases per year. That's approximately just -- this is -- it's just over 20% of the world tuberculosis cases, hence why it's significant. And why this is of interest now is during Q3, the customers switched to buying the large bulk package sizes that we have. And since business is starting to materialize from them. So what we see is these long-term sales are expected to exceed NOK 1 million. And of course, this is just our first customer in India, and we are looking to expand our reach there, too. So moving forward, what we will do, we will greatly expand our commercial footprint in China, India and other developing countries, which do have sizable populations and national diagnostic program. Can we go to the next slide, please? So I just want to give you an update on innovations. And when it comes to innovations, we're adopting a forward-leaning approach. We want to ramp up our enzyme developments and bring more products out to the market faster. And so with this, we have a lot of projects ongoing, and I can quickly walk through some of the key ones here. One thing we're doing right now is -- one thing is about developing enzymes, it's also about scaling up enzymes, and that is one of the things we've been doing is working to scale up Salt Active Nuclease, and this was partly funded by the new grants we got in Q2 from Innovation Norway. And we're making good progress there. We're soon in the process of initiating our first medium-scale pilot production batch. Assuming this is successful, we will then move forward into large-scale pilot batch production. And assuming all things go to plan, we should be doing this towards the end of Q4. The second thing here I'd like to talk about is viral diagnostic component. So what we did is, partly funded by Innovation Norway grants, we've ramped up our innovation efforts to develop enzymes that more components for viral diagnostics. And R&D is making very good progress in the short space of time, where we have managed to start expressing and purifying thermostable polymerases and reverse transcriptase enzymes. Of course, there still need to be now going to product development and the manufacturing processes need to be worked out, but it's -- we are making good progress there. And what we will do is these enzymes will be optimized for virus-based diagnostics, such as HIV, hepatitis C and of course, COVID-19 diagnostic testing. We have a lot of other innovations in the pipeline, too many to talk about today, but I just want to give you a flavor, we're working on a lot of things. It's that we have new SAN products we're working on to capture more value from the gene therapy and vaccine manufacturing market. We're working on novel ligases. We're working on -- rDNase have been very popular. And of course, be are working on other DNA-like enzymes. We're working on other polymerases, reverse transcriptases as well as formulations of our existing enzymes. Often customers come to us say, we like your current enzyme, but we need it in a different formulation. So we do that as well. And of course, we work on nonenzyme support products, for instance, like the ELISA kits. We have one in development to support a new SAN product. And there's a lot in the works. And of course, we need people for that. So what we're doing is we've made some hires during Q3, which helps support the above organic growth initiatives, and we're going to continue to expand the R&D team as we move forward. And so I'd like to go to the next slide, please. And part of this organic growth initiative is about expanding our operation. And what we're going to do is share with you today what we're going to do here. So we're going -- the facilities in Tromsø, we're going to expand these. We are preparing to expand both manufacturing, so production and R&D. When you look at the enzyme business today, it operates on 2 separate sites in Tromsø. And what we do -- what we plan to do is bring the ArcticZymes enzyme business together onto one site, the SIVA Innovation Center. And this is showing in the picture on this graph -- sorry, on this slide. So -- and today, actually, part of ArcticZymes is based there. So it's the -- its R&D is based at SIVA today as well as the marketing function and the administration for the group is based there. So when it comes to R&D, what we're going to do is expand the lab space that we have within the SIVA building. And we want to do this so we can capitalize on ramping up the innovation efforts. Also with this, what we would do is we also hire more laboratory personnel, and this will allow us to ramp probably the innovation -- this allow us to do our innovation project -- more innovation projects in parallel. When it comes to production, we are going to relocate production into a new state of the art and larger production facility at SIVA. This will enhance our capacity and capability to serve both CGMP and diagnostic-grade enzymes to the growing customer base. The whole process is expected to take approximately 1 year. Okay. Can we go to the next slide, please, to the Biotec BetaGlucans updates and then go to Slide 11. So with Biotec BetaGlucans, this business is operating profitably. It has done now for 3 consecutive quarters, probably in the restructuring we did back in December. The main drivers here to growth are primarily the consumer health business and the BetaGlucan achievements. So if we quickly walk through each of these areas. So in animal health, the M-Glucan sales continue to fluctuate quarterly. This is expected due to a large order we received from our main customer in Q1. It's quite normal as fluctuations because there are seasonal fluctuations in need from our main customer. In consumer health, we continue to see growth in the M-Gard sales. And actually, we saw 300% growth compared to the same quarter last year. What's interesting about this business is it continues to attract a handful of new customers each quarter. So when you look at the growth, what's attributing to that is basically expansion of the customer base and growth rate within individual customers. The SBG achievements here, we expedited the third SBG order relating to commitments this year to support clinical trials. Also, we are still working on the licensing deal. That's progressing, we're in the negotiation phase is still ongoing. When it comes to the wound healing, Woulgan, where sales delivered to expectation. If you recall there in Q2, we made a decision and we discontinued the production -- the manufacturing of the Woulgan product. So in Q3, we have sold out the remaining -- sorry, we shipped all the remaining inventory to our customers. We stopped all sales activities now. So -- but we may still see some small sales in Q4, which relates to consignment stock that some customers will have. When it comes to the divestment process, this is now drawing to a close. The process has generated several possibilities and options for the company that are now under consideration. So that's where I'm going to now switch over to Børge , and he's going to walk you through the financials.

[Børge Sørvoll, Chief Financial Officer]

Okay. Thank you, Jethro. Can you please take the next slide here. And of course, as Jethro said, I will give you a few more details on the underlying numbers on what Jethro has talked about. And as we have said over the last few quarters now, we are really proud of how we have managed to turn the group around from a loss-making business to a business that is well positioned for future growth and profitability. And as I said before here, Q3 has not been -- is not an exception to this. Going into the ArcticZymes side of the business. So if you just skip to the next slide, please. We do -- we have continued with our good sales growth for the ArcticZymes side of the business, even though we did not experience the same sort of sales levels as we experienced in the second quarter this year. In the third quarter, we delivered NOK 19.5 million in sales, which was a growth in excess of 60% compared to the same quarter last year. And also, if we exclude the COVID-19 upside of an estimated NOK 4 million for the quarter, we had a growth in the underlying business of close to 30%, which is, of course, higher than we experienced in previous years. For the first 9 months of the year, we have achieved NOK 71 million in sales compared to NOK 29 million at the same time last year. And of course, this is a growth of close to 250% just for the first 9 months here. From the table on the right-hand side, you can see that the therapeutics or SAN segments continue to be strong in sales with an excess of NOK 10 million for the quarter. While the underlying research and diagnostics segment has a decline of 7% for the quarter and a decline of 49% when you exclude the COVID-19 upside. And of course, the reason for this decline is, as Jethro talked about, a slowdown in the research segment, where research are at home rather and at the lab benches. And of course, we do expect these numbers to continue to fluctuate from quarter-to-quarter. But overall, we expected the business to continue growing on an annual basis. The next slide, please. Going into the ArcticZymes performance side. But -- and by combining ArcticZymes sales with the expenses, we get a good overview on the performance for both the quarter and for the first 9 months of the year. And as I said in the previous slide, sales are at a much higher level than previous years. And we also -- but we have also increased our expenses somewhat due to the ramp-up of R&D projects and the general activity levels we are experiencing in the company here. And our operating expenditures for a second -- for the quarter was up NOK 2 million compared to the same quarter last year, and this increase is primarily driven by higher personnel expenses. We have more people on board now than last year. We had the restructuring that we did end of last year, but we are also have new people on new products that we are driving now, as Jethro talked about on the R&D side here. On an EBITDA level, we have another good quarter with close to NOK 10 million in profit compared to only NOK 3.8 million at the same time last year. And of course, for the first 9 months, we have an EBITDA of close to NOK 45 million compared to only NOK 5 million at the same quarter last year. And of course, you can say that the second quarter performance that we had this year plays, of course, a vital role in this. But it is important to see how we have elevated the business to new levels now over the last few quarters. We have seen now good growth now in all these quarters now. On the margin side, we delivered an EBITDA margin of close to 49%, which is a little bit lower than the previous quarter, as expected. But we are still at levels that are significantly higher than we experienced in previous years. And for the first 9 months of the year, we have an EBITDA margin of 60%, which is really high historically for the company and for the industry as such. Next slide, please. Moving into kind of the noncore part of the business. We are experiencing the kind of the same sales levels as we had in the third -- since we were in the third quarter last year and that we experienced in the second quarter this year. But you can see one of the good things with this quarter that we have experienced good sales now in the high-margin business. And as Jethro said, consumer health, it continues the same trend as we saw in the second quarter with sales of NOK 5 million. And of course, there are some upsides or there are some COVID-19-related sales there of NOK 1.2 million. But if you look at the first 9 months of this, consumer health business has experienced a significant and strong growth and sales are now at NOK 14.1 million compared to only NOK 4.2 million at the same time last year. And this is an increase of NOK 10 million for the first 9 months or close to 300% for the year as such. And of course, as we talked about in the second quarter as well, we are no longer producing Woulgan, and we are running out of stock now. And third quarter, as Jethro also said, will be the last quarter where we should see sales revenues of significance. We experienced NOK 1.2 million in this quarter, and this was basically all of our inventory. There are some small numbers there going forward. But for all practical purposes, this is the last quarter where we'll actually show Woulgan sales. And of course, as Jethro said, we continue to drive sales in the adjuvant segments, and we expected these to be on the same levels in the fourth quarter as well now going forward. Animal health, it will fluctuate from quarter-to-quarter. Even though we are at higher levels than the second quarter this year, we are close to NOK 5 million lower than the same quarter last year. But of course, if you look at the first 9 months of the year, sales are at NOK 16.4 million compared to NOK 17.4 million at the same time last year. And we do expect these sales to be close to a flat. We're flat on an annual basis. Of course, this will depend on what happens in the fourth quarter as well. Next slide, please. On the performance side, Biotech BetaGlucans continue to deliver profitability with a third positive consecutive quarter and an EBITDA of NOK 2.5 million. Of course, improved sales in high-margin business, as well as reduced expenses in the overall business, is a key factor to this. Operating expenses are reduced by NOK 2.5 million for the quarter and close to NOK 8 million for the year, giving us a result now for the first 9 months of close to NOK 11 million compared to a loss of NOK 4.7 million at the same time last year. And this gives us a total improvement for the BetaGlucan business of more than NOK 15 million year-to-date here. And of course, you can also see this from the table on the right-hand side, where you can see how the business has developed over the last 2 years. And also that we can see that we have an EBITDA margin of 23% for the quarter and close to 30% for the first 9 months here. And you can see all is this after we did the strategy change in December last year. That's when we [indiscernible] after that, we started to see the improvement in the business. Next slide, please. Going to the consolidated group figures and performances, we continue to deliver solid figures, even though we did not reach kind of the same set of numbers that we did in the second quarter this year. But overall, this is the third best quarter in history on an EBITDA level, only beaten by the first and second quarter this year. Our consolidated sales, they were at NOK 30.8 million for the quarter compared to NOK 22.5 million in the last -- the same quarter last year. Our EBITDA was just in excess of NOK 10 million compared to NOK 800,000 last year, or an improvement of more than NOK 9 million on a quarterly basis. But of course, looking at the first 9 months, sales are up from NOK 54 million to an amazing NOK 109 million this year. And our EBITDA is up from minus NOK 4 million last year to NOK 51 million this year, or an improvement of more than NOK 55 million, if you just look at the first 9 months. But of course, in the third quarter, we had a little bit lower sales than in the second quarter, and this also [indiscernible] that we have a reduced margin. You see the margin is only 33% this quarter now. But of course, looking at the first 9 months of the year, we have an EBITDA margin of close to 50% for the group as well. Next slide, please. And let's -- looking at the cash flow side of the business. We continue to strengthen our cash position through our strong underlying growth and development. And of course, at the end of September, our cash balance was just shy of NOK 70 million. And of course, this is explained by a change in cash of in excess of NOK 13 million for the quarter now. And this is, of course, the fifth straight quarter with positive cash development. And [ from we ] bottomed out in the second quarter last year, our cash position has increased by close to NOK 50 million now over the last 12 months now. Looking at the third quarter and the first 9 months from the financial perspective now, we can definitely say that we have turned this company around from a loss-making business into a company that drives profitability. And with that, I will hand it over to Jethro, who will tell us a little bit more about what kind of expectations we have for the remainder of the year.

[Jethro Holter, Chief Executive Officer]

Thank you, Børge, for giving us a view under the hood of the financials. That's good. Can we move to Slide 20, the outlook slide, please. So for the outlook, it remains unchanged. For us, it's really about driving our strategy around profitability and growth. The first thing, when it comes to profitability, it is about delivering our #1 goal to achieve profitability in 2020. And certainly, looking at the numbers, you can see, this milestone is achieved. And of course, what's important, of course, is to maintain this profitably moving forward, and that's what we're going to do year-on-year. Secondly, since you cannot forget this company, our main business is about serving B2B customers. And when you serve B2B customers, it's natural to have quarterly fluctuations. As you see now, we have some fluctuations, and that's natural. That's to be expected in this business. And when you look at it, our B2B business, it's likely looking out in the ocean, it's like waves, and this is how it is, and it will continue like this in the future, irrespective of our size. So it doesn't make you immune from quarterly fluctuations in B2B. What's important here is really about the annual perspective. So when you look at our annual perspective, we do have strong growth. And that strong growth is really backed up by inherent growth in all areas. When you look at the business, we have an expanding customer base, which are forged on long-term relationships, i.e., our business is long term, not transient. Secondly, we operate in 3 attractive and growing market segment. And thirdly and finally, we have an expanding, innovative and synergistic product range. And as you've seen today, we are ramping up efforts to bring more products to the market. So -- and all those things are what will drive [ generate ] the future growth of this company. And so with that, I'm going to stop here, and we're going to open for questions via the chat function. We will -- there may be a short pause while we quickly review the questions and then start answering those. Thank you.

[Børge Sørvoll, Chief Financial Officer]

Okay. Jethro, I think I have a few questions here from the online viewers here. I have one question here that it's a question about, is it fair to assume that the lockdown had some negative effect on the therapeutics segment as well? It is hard for me imagine that it had such a big effect on molecular research, but no effect on the therapeutics segment.

[Jethro Holter, Chief Executive Officer]

So I'd walk through on the Therapeutic segment, no, there has been little effect. Early on, we did see a little effect in Q1 because people didn't quite understand what was going on, so some efforts slowed down a little bit in a therapeutic area, but not at all. That's going full speed, and you can see that at the numbers that we have when you look -- our numbers show that things are moving forward. Of course, there may be the odd company that is still a little bit slow and not doing the vaccine or the gene therapy developments. But no, we haven't seen that. But of course, on the research kit manufacturers, that's where we've had a negative impact, and that's totally natural. If researchers are at the bench, if they're not at the bench doing science, which they weren't during Q2, during lockdowns. And remember, our customers have been making kits during Q2, so seeing that they have for kits in -- for the rest of the year. And of course, what's happened is they haven't been able to push those kits. So of course, that comes back down to supply chain to us. So I think there's always -- you can't have a -- it's not a one-to-one relationship to the end user market and down to the front end of the supply chain. It is not one-to-one relationship, and it isn't the same -- on the same timeframe. It's a bit like an elastic band. It's stretching and contracting. Things are happening at different times. So I think here, this is what you're seeing in a research market. So of course, now we are seeing researchers coming back to the bench since lockdowns were lifted. But of course, now there are local lockdowns and things like this. So it's going to take a little bit of time for things to normalize again and people get used to a new normal. Research, we're going to get back, research is going to happen, but it is a reduced capacity to what it was. And of course, now our customers of supply kits that will have a knock-on effect to their sales. And of course, and that comes back to the supplier. So that's natural. But we see that as a short-term thing, and it will equilibrate itself. So that's where it is. And of course, in the diagnostics segment, no, we're actually seeing, of course, there's diagnostics. It's very much hot on coronavirus. But we're seeing that people are still -- customers are still purchasing and we're always getting new customers as well, who are looking to develop new diagnostic tests like, for instance, the prime example is what we've shown in China. What we show in India is just some examples of new customers. And of course, our traditional customers is still are in U.S.A., Europe and Japan are still developing and still selling and obviously, because they're still developing diagnostic tests that aren't corona related. So I think we need to put it in perspective here because, of course, there's a lot going on coronavirus. But we got to understand that there's a lot going on outside of corona as well. People are just not dropping everything to run after corona here. And of course, for us, we're trying to capture all value in all areas here. And when it comes to the corona, yes, it's about long term. We're trying to get the long-term value down the road. And of course, we are capturing all we potentially we can in the therapeutics and the non-corona related diagnostics. And we continue to support the molecular research area. And of course, as we launch more products, those will go into all 3 areas as well. And as you've seen with the SAN enzymes, and the SAN enzymes go into the therapeutics, but also, you see that it's going into the molecular diagnostics as well. So I hope that gives you a kind of flavor of 3 business -- each of the 3 areas we're in and the dynamics there and sort of what to expect for the future.

[Børge Sørvoll, Chief Financial Officer]

Okay. Thank you for that one, Jethro. We have a few more questions. How will the scale up of the SAN be compared to today's capacity?

[Jethro Holter, Chief Executive Officer]

It is quite significant. So what we're doing now is we're scaling up into the hundreds of liters range. That's where we are now. So where going to go to today, our scale is tens of liters. So it's a factor of 10 to a factor of 100 we're going to over time.

[Børge Sørvoll, Chief Financial Officer]

Okay. Thank you. What was the effect from COVID vaccines on the SAN sales in Q3? Is it still minor like in the second quarter?

[Jethro Holter, Chief Executive Officer]

It's progressing, of course. That's -- of course, that's moving forward. Of course, I'm not going to give an exact number because that exposes our customers, of course. But know that's progressing and it's progressing as planned. And you can sort of see the example of the typical gene therapy customer. We talked about that early in the gene therapy world. We have seen now our most advanced customer to date is now in -- purchased single orders of NOK 3 million. So you can sort of see that's a kind of good example of how business can materialize with the customer -- each customer is different here. Their needs will vary to some degree depending on what that therapeutic is.

[Børge Sørvoll, Chief Financial Officer]

Okay. Let me see if we have one more question here. Can you give some more color on the kind of the Simcere deal. Regarding the press release, I get an idea that it's about tailoring new or specialized product for them. And I get the idea that it involves mercantile components as well. Do you have any comments on this?

[Jethro Holter, Chief Executive Officer]

Sorry, I didn't get that last bit. Can you repeat the last part of the question?

[Børge Sørvoll, Chief Financial Officer]

And I get the idea is that it involves mercantile components as well, [ I'm not sure ] what that means?

[Jethro Holter, Chief Executive Officer]

No, I don't understand that last bit. So in -- so that deal is our first deal in China. And of course, we've never been there. We've got to learn how to do business there. And I think here, for us, it's getting our enzymes into China. And with this, we see this as a very good company. Hence, why they're very well recognized there. So that's why we've given certain distribution rights as well, not just to integrate our enzyme into a diagnostic test. And remember, we are looking at -- when you go into these countries like China, they have huge domestic populations. And of course, you want to get locked into national diagnostic testing programs, and that's what we're doing now. We've got our enzymes put into this next-generation sequencing diagnostic test for infectious disease. So it's looking at different -- in fact, different things, it could be viruses, bacteria and we've seen different organisms that infect you. So here, this is a good first step for us to get our enzymes into the diagnostic -- into domestic diagnostic programs here. And of course, since they do have good commercial reach, we are seeing how they can do with the HL-SAN enzyme. I mean this is just a start of a relationship with them, and we both have ambitions to grow that relationship. They are developing interesting technologies there. And it's our first step. And we're into China, and of course, we have ambitions to expand that. It's a significant market, China. And remember, a lot of these Chinese companies aren't just serving the domestic markets, they're also trying to compete on the international stage. And if they're going to compete on the international stage, they need high-quality component. And hence, why a lot of Chinese companies like to reach out to European and U.S. companies to get the quality components they need from recognized suppliers like ArcticZymes.

[Børge Sørvoll, Chief Financial Officer]

Okay. Thank you, Jethro. We have just a few more questions here. I see that profit margins have been reduced in the last quarter. Is this a tendency that will continue and due to restructuring expansion or due to reduced prices, see increased competition here?

[Jethro Holter, Chief Executive Officer]

No. Actually, Børge, maybe you'll probably better to take that one, actually.

[Børge Sørvoll, Chief Financial Officer]

I don't think the answer here. It's not -- I think it's a clear answer here. You can see that we have -- we still have good margins in the business. And of course, our profit margin really at the end of the day depend on how our sales are progressing here. And I don't think that you say that this will continue or if that they will reduce going forward now, but we have good margins on our product. And of course, we have a quite steady expense base in the company now. So I think it will all depend on how we are doing now on the sales side. And of course, but as we said here earlier, our numbers will continue to fluctuate from quarter to quarter. Some quarters will be better and some would be lower. But as we also said, we expect this business to grow on an annual basis here, that we do. Okay. I think I have one more question here. Is it likely to believe that Woulgan will be sold during 2020?

[Jethro Holter, Chief Executive Officer]

I'm not going to comment on that. But I think we are moving very forward on -- we're moving forward on that. And we have got several options we're exploring now. And what we can do is take the time needed to get the best deal for the company.

[Børge Sørvoll, Chief Financial Officer]

Okay. I have one last question here. And what is your plan for distribution and marketing of M-Gard? it has been very difficult to source in certain parts of the world after you closed the Web shop.

[Jethro Holter, Chief Executive Officer]

So at the end of the day, when it comes to the Web shop, this is about selling small pots of capsules. When you look at it, it's not a very -- we're not set up for that type of business. It's filling a lot of pots. It's a lot of effort. It's costly to make. It's not going to make great margins. Where we make the best margins and the margins that you're seeing now, the good margins is from the larger bulk sales. So I think it's about making the right choices. Yes, it's very nice [indiscernible] but the -- it isn't a cost-effective to do, and you do need a quite significant sales, marketing and effort. And plus, it's a major logistics effort to ship, pack and send out thousands and thousands of small orders. And we're not set up to do that. That's why we don't do it anymore while we're focusing on the large bulk package that we send out, which have very good margin.

[Børge Sørvoll, Chief Financial Officer]

Okay. I don't think we have any further questions. And I think with that, I think we can say we thank you for the time that you spent with us today, and we wish you all a good day going forward now.

[Jethro Holter, Chief Executive Officer]

Likewise. Thank you.