Arcticzymes Technologies ASA

OSE:AZT

Earnings Call Transcript 2021-Q3

[Jethro Holter, Chief Executive Officer]

Good morning. Welcome to the Q3 presentation. Both Borge Sorvoll, our CFO; and I, Jethro Holter, the CEO, will walk you through the presentation today.As this is a virtual meeting, we will kindly ask you to switch off your microphones during your presentation. Microphones are going to be unmuted at the end for the Q&A session. We also ask that you switch off your videos as well, and this gives us maximum bandwidth for the call today. We know some of you may be calling in by phone. You can toggle mute on/off by using star 6.So let's kick off then. So the agenda today, we'll start with the usual -- go in the usual fashion, where we start with the highlights for the quarter. We'll then go through the business update, where we'll go through each of the different parts of the business in a bit more detail. Then Borge will walk you through the financials, and then I will go through the outlook for [ 2021 ], and that's more about the financial guidance for the year. So for the highlights. What we're seeing is a return of business back to normal, and similar to how it was prepandemic. In particular, our sales team is back out on the road. They're visiting customers, attending trade shows, conventions and conferences. And the picture in the background really shows this, 1 of our business developers a nice, big, small 1, so he's happy to be out and who they're attending the -- he's attending the sixth Biomanufacturing Congress in Lyon. And you can see him there manning the booth. And I think there is no good substitute for face-to-face interaction. So [indiscernible] we really welcome this and so do our customers.And you can sort of see that the business is returning to normal. This is reflective in our sales numbers there. When you look at the quarterly performance, we see that 89% of the sales are related to non-coronavirus-related sales. On top of that, we have had our second-best quarterly performance with respect to non-coronavirus-related sales of NOK 22.7 million.When it comes to therapeutics, we've actually had our best quarterly performance of therapeutics, achieving NOK 12.6 million. And what we're seeing now as we talk more to customers, and then we are experiencing it, there is much more or less focus on coronavirus and reengagement back to earlier activities that they were doing prior to the pandemic. And for ArcticZymes, we really view this positively because it supports our main strategic focus, which has always been, and will always be towards a non-coronavirus-related part of the business. Sometimes -- we called this the underlying business earlier, and I know Borge will likely refer to it as underlying business when he goes through the financials.[indiscernible] Please. I ask for the microphones to be muted, please. So innovations are progressing. We are -- and 1 thing we're doing now is releasing advance prototypes of our customers to give our customers early access to our enzymes before we launch them and before enzymes that we're providing to customers, and we will come back to that a little bit later.Also, with the pandemic largely behind us now, we are certainly fully engaged now on executing on the strategic growth initiatives. In particular, we have now intensified activities around mergers and acquisitions, and we come back to that a little bit later.So in terms of business updates, let's start with the segment sales. And as I mentioned, it has -- it was the non-coronavirus-related sales that were behind Q3's performance. And in therapeutics here, which we also put in brackets, Biomanufacturing, and I'll come back to why we call it Biomanufacturing, a little bit later, but when you look at this, we see that, as mentioned, we had the highest quarterly sales performance of NOK 12.6 million. The therapeutics sales contributed 49% towards Q3 sales. And mostly, sales did come from non-corona-related sales activities that customers are utilizing since the SAN enzymes in the gene therapy, vaccine development, and now looking towards using the enzymes for general biomanufacturing processes.And what we do see, activities are returning to normal across the geographies. Also, in Asia, we see that new business, now we're starting to contribute to all sales, particularly in Japan and China. And it's early days, but some of this business will eventually represent future key accounts.In Europe, many of our customers are also back to normal. However, we do see some slow progress in sales and does remain with a few customers who are engaged in the contract, manufacturing of coronavirus vaccines. This is something we've communicated in earlier calls, and this still remains slow. But it's just a few customers.I think a common question that comes up again and again from our investors is when you look at the therapeutics there, what type of customers does this revenue come from? And it's a very good question, and I think it's important to revisit it in the presentation today. And it is a mixed bag of customers. It's a combination of academic, specialized biotech companies. It's contract development -- sorry, contract development manufacturing organizations, i.e., CDMOs for short. And now we're seeing more presence of pharmaceutical companies as customers.So the vast majority of sales does come from the CDMOs. And with that, it does provide us limited visibility with respect to which therapeutic indication [ SAN ] is being used in, and where they are in the development pipeline of those therapeutics. And that's just the nature when you work with CDMOs.When it comes to pharmaceutical companies, it's -- we are aggressively getting much more presence there, and that is either direct or indoor reps. And indirect comes in different shapes and forms. For example, this happens following acquisition of our customers buying pharmaceutical companies. And actually, 1 of our biggest performing customers was actually acquired by a large pharma company recently.Secondly, several of our well-established partners are also channeling SAN into big pharma companies, and the reason why we work with these partners is they have large portfolios of products for Biomanufacturing. So for them to put SAN into their portfolio and position that to big pharma is a very good way for us to get SAN into the pharma companies. But at the same time, we also have direct relationships, too. So we use all different relationships in terms of driving and growing potential future business then.So -- and you cannot forget also that even the CDMOs we work with, they are likely serving pharmaceutical companies as well, and we may not have visibility to that.So taking direct and indirect groups together, we can see, today we have visibility that ArcticZymes is serving at least 7 pharmaceutical companies, big pharma companies today. And this includes 1 of the top 10 pharmaceutical companies that [indiscernible] ArcticZymes last year. And we know to date that they are evaluating SAN for 2 potential therapeutic projects. And for the quarter, we've seen that this company has purchased around about NOK 0.6 million of SAN products for the quarter. So our business is starting to emerge from that company now.In the future, we are going to rename the Therapeutics segment to Biomanufacturing, and Therapeutics is essentially part of that. And the reason for this is that following the recent launch of SAN HQ enzyme, this is certainly gaining interest beyond therapeutics and more into biomanufacturing, but it also fits our design strategy to expand its nucleases and other enzymes that we have into the broader biomanufacturing market.When it comes to research and diagnostics, you can see research made a 24% contribution to Q3 sales. Diagnostics made a 27% contribution to sales. When you look at research, what we've seen is for 3 consecutive quarters now, we're seeing sales are reestablished back to what we consider normal levels, and it is anticipated that this trend will continue as well.In diagnostics, we got to take a little step back because since the beginning of 2020, molecular diagnostic sales have been dominated by coronavirus-related sales. And for Q3, sales has slightly been impacted here because there has been lower demand for Cod UNG for coronavirus testing. However, on the flip side of that, 58% of the molecular diagnostic sales were non-coronavirus-related sales.So both the research and diagnostics, when you look at that, we're seeing that, again, customer engagement is certainly shifting away from coronavirus and back to earlier business activities. So we certainly see this as a good sign. And of course, there's certainly customer interest of our products across the portfolio are attracting attention for the new business as well as ongoing opportunities we have in the pipeline, where customers are looking to integrate or are integrating our enzymes into their product portfolio and pipelines.And some noticeable examples of areas where we have customers developing technologies are in, for instance, next-generation sequencing, [ lab-based ] testing, multiplex testing using different technologies. Multiplex testing is where, for instance, you're testing -- you're looking for more than 1 thing rather than just looking in a virus test -- rather than just looking at corona alone, we're looking at many different viruses in the test. And we're also serving synthetic biology.It's not in the presentation here, but we actually also signed a strategic distribution agreement with LT Biotech, and they're based in Lithuania, which is very convenient for us. And this company also has relevant experience to channel our products into the Baltic states and Russian territories. This will really aid ArcticZymes in driving opportunities for COVID and non-COVID vaccine development in the Russian territories. I think many of you are aware that new Russia has a good confidence in developing vaccines in general, COVID and non-COVID vaccines. So this is a good -- I think this is a good partner for us to really try and tap into the Russian territory, and we certainly need partners to do that.When it comes to COVID, the coronavirus-related sales, we sold for NOK 2.9 million approximately. This accounts for approximately 11% contribution to Q3 sales. And we -- the decline in corona-related sales is directly linked to the fall in demand for corona testing. We do expect that -- we do expect recurring business will continue with our well-established customers. But we do recognize that this business will progressively becomes a little bit smaller with smaller orders over time. And we do expect fluctuations still to continue there.However, we do still see new business opportunities coming in. And what we're seeing is much more interest rather than doing a stand-alone corona tests, where we've seen customers are interested in looking to integrate corona testing into multiplex testing. And I think this is a really exciting opportunity for ArcticZymes because this means that we can -- ArcticZymes can get SAN enzymes into a broader range of test indications such as respiratory test panels is a good example with existing and new customers.Vaccine-related sales are expected to increase, but it will be slow. We -- it will take time before they have a noticeable impact on sales. We do have several customers who are using SAN in -- all consumers use SAN in coronavirus development programs.I think we -- when it comes to corona-related sales, although they're decreasing, I mean you've got to remember that ArcticZymes has always emphasized that its main focus has always been towards its bedrock an underlying business, namely the non-coronavirus-related business. And I think -- but at the same time, what we have been able to do and done in a good way is to capture value, and make a positive contribution to the coronavirus pandemic. So I think we've always considered coronavirus as a transient business, I think we communicated that at the beginning of 2020, and where a proportion of this will translate into long-term underlying business. And I think that's what we're certainly going to see moving forward.So let's move on to innovations, and innovations are very important for us because it's 1 of the key drivers to accelerate our growth. And the team has been very busy working on bringing new innovations closer to the market. We actually have a picture of 1 of our scientists purifying 1 of our enzymes. You see the column to the far right here, and there's 1 of our enzymes in there, and it's been purified.So where are we? Well, I mentioned we have 4 advanced prototype enzymes. These are being made available to customers now, and that's prior to launch. And we'd like to do that with a lot of our enzymes before they're commercially available. We do provide them to customers to give them early access to our technologies. But these 4 prototypes are destined to be launched in Q4 this year or early -- or during Q1 next year.So the first of these enzymes is a Dual Splint Ligase, and this is a ligase with novel specificity. And ligases can be seen as glues. They glue DNA and RNA together. But this is a very -- this is a novel glue. Essentially, what this glue does, it can glue DNA to 2 ends of an RNA molecule, and that opens up possibly to similar applications with our customers.Not only that, we're also working on a series of other novel ligases which are in the pipeline as well, which will provide -- which have activities that aren't available to do. We also have a Heat-tolerant Duplex-Specific Nuclease, and this is essentially our new DNase. And I think many of you know that our enzymes -- many of our enzymes are heat-labile, which means when you heat them up, you destroy them. This is the opposite where you have an enzyme that is tolerant to heat, where you want it to resist heat. That's how it is heat tolerant.So that's important for particularly applications relating to RNA. So what we see here is that this new enzyme really complements our [ DNase ] portfolio and broadens the application of our [ DNase ].The third 1 here is high-quality Reverse Transcriptase. And this is our first reverse transcriptase enzyme. It's not a novel enzyme, but it is an enzyme that has been in high demand by commercial developers, particularly in infectious disease diagnostic testing. For instance, with RNA viruses, if you're going to do -- if you want to analyze by PCR, you need a reverse transcriptase upfront.Since it is not a novel enzyme, it actually conveniently fits into customers' existing diagnostic workflows with minimal product activities. People know how to use reverse transcriptase. So it's very much plug-and-play enzyme, and that's different to many of our other enzymes. Furthermore, we are working on novel reverse transcriptase technologies, too. And we are -- we do expect to launch the company's first novel reverse transcriptase technology during 2022.The last 1 here in terms of the [ prototypes products ] we're putting out the door is the High Concentration BST+ DNA polymerase. This is products where we already have the enzyme on the market, but what we needed to do is form a highly concentrated version of this enzyme. And this is really targeted towards point-of-care diagnostics. We see for several customer opportunities and for other applications, too, but it was necessary to formulate this for these customers at a higher concentration to fit their applications.We've also been making progress on the M-SAN ELISA kits. We've done a pilot production. That was successful. We're now working towards the first commercial manufacturing batch. Assuming all goes to plan, we will launch this during Q4. And the ELISA kit is very much a support product to drive the sales of our M-SAN enzyme, but they go together as a solution offering. So we need those.At the same time, we've been working on -- for the SAN HQ 2 enzyme, which we recently launched. We're also developing an ELISA for that, and that ELISA kit is in the early development stages. At this stage, we are developing the antibody pairs, and we're making progress there. So it does take time to develop ELISA, so the targeted launch date we have for that is the second half of next year.We have talked earlier about Taq DNA polymerases and novel reverse transcriptases. These are taking a bit longer to optimize their manufacturing processes than we originally anticipated. We were hoping to launch these this year, but that's not -- will not happen. We expect to launch this during the first half of 2020. And I think it's important that we don't -- we launch products when we have the quality and the robustness. We would never want to launch them too early. So sometimes it will take us a little bit longer to launch products.Another important thing, what we do is it's not just about new innovations. It's also often scaling up our enzymes and the manufacturing size of the enzymes. So 2 enzymes in particular we're working on right now is the M-SAN enzyme upscaling that, and that coincides with the launch of the ELISA kit.So all preparation work has been completed, ready for the first pilot production batch in Q4. And before this, we're actually going to use all the similar upscaling and downstream process that we followed and are following for the upscale SAN HQ enzymes. So we're confident, we have everything in place for that to be successful.When it come -- so the other enzyme we have is Proteinase, and this enzyme, we're currently optimizing the conditions that we need to do prior to scaling it up. And for ArcticZymes, we really want to prioritize this upscaling because we're seeing there's a growing interest amongst our customers for utility in molecular diagnostics. That's what it was originally intended for. We're now seeing a broader utility towards cell therapy, particularly in the isolation of cells that are going to be in gene therapy.And actually, it's very, very new and at the heart of the table is interest now in using our proteinase in mRNA therapeutics. So I think here, there is an -- and that's why we really want to get this scaled up as quickly as we can.So let's go to operations then. And it's been a busy time for operations. They've had to manage running the daily business, and getting everything out, stocking products up at our warehouses. And in addition, they've been busy finishing off the new production facilities at SIVA Innovation Center, where we're located here today. And new facilities are progressing according to plan. All the infrastructure changes have been done. And actually, we've been very smart because all the equipment we actually purchased very early on, and that was very good planning because in many parts of the industry, there have been supply chain shortages when it comes to equipment.So we're very smart to get all that equipment very early on, had it all in boxes. And so we've got everything we need. And now what we're doing is unboxing all that equipment, and you can sort of see this in the photos here to the top right. You have 1 of the fermenters being unpacked and put into place. The bottom picture here is 2 of the chromatography systems being installed. So there's a lot of hands on deck now putting all the equipment in place.So the next thing where we're working on and where we're working on now until we open the facilities is around about qualification and verification of all the equipments and processes that we have, in accordance with ISO13485 requirements and cGMP guidelines.So we do expect the relocation to the new facilities to be accomplished and to be fully operational by the end of 2021. At the same time, what this means as well that when this happens, it means that ArcticZymes' technologies will all be located on 1 site at SIVA. And the remainder of the Biotec BetaGlucans, people here will have moved over to the [indiscernible] site. So then BBG will be on an independent site, too, by the end of the year. And that will also complete the transition that we have of Biotec BetaGlucans as well.I'd like to talk about the strategic growth initiatives. And we do continue to focus on these, and we are committed to executing on the strategic growth initiatives here.With respect to organic growth, I mentioned R&D earlier, and new innovations, is very critical for this. And we're not just resting on our laurels here. We are looking to expand innovations beyond Tromsø and now into Oslo. So we are going to establish a laboratory in Oslo, focusing on application development. And application development, is very important for both our existing and new enzymes. So -- and it is a critical part of the sales process to have application data behind new enzymes, prelaunch, and postlaunch, and actually for all existing products. So from the birth to a death of a product, you need to constantly update your application data to make it relevant to customers.In addition, as we launch more enzymes, there's new ways of using and combining our enzymes into workflows. So what you need to do is also support that by applications and showing our enzymes working together in potential customer workflows. So we will certainly continue building out our capabilities and team when it comes to applications as we move forward.So also there the rationale of Oslo, why go to Oslo, well, at the end of the day, it gives us access to a talent pool of commercially experienced application scientists, who have worked in some of the big companies, who could be -- who, in many ways, could be -- represent like a potential customer for us. So they have that kind of experience in commercial experience in developing those molecular technologies, which our customers are developing. And hence, we need to internalize those people into ArcticZymes.So with this, we do expect to be operational within Q2 2020 as -- if it all goes to plan. We have located -- we've got -- we have a location identified, and negotiations are undergoing in order to secure foothold in those facilities. We're soon going to start the hiring process as well to get the people in place, who will be doing the work from there.Inorganic growth. Here, we have intensified our activities towards acquisitions. And with this, we have actually reestablished discussions with several of the early acquisition targets, and there is certainly interest there. In addition, we have also expanded our search activities to identify new acquisition targets we haven't considered earlier. And that is that -- these are targets in all of the 3 market areas that we serve, as well as expanding it to new geographies. Originally, we're just looking in Europe, but also have expanded that to look for potential companies in North America. And there's no reason why ArcticZymes could not acquire a company in North America.So we are really looking much more than we did before. And of course, this is intensive work. It takes time. So we have engaged the services of a specialized consultancy to help us with those activities.And with that, I will hand over to Borge, and he will take you through the financials.

[Borge Sorvoll, Chief Financial Officer]

Thank you, Jethro. And as Jethro has talked about, it looks like our business is transitioning back to how it was pre -- before the pandemic started. The COVID-19-related sales have played a smaller role now in our turnover for the last 2 quarters, and we have also experienced good growth in the Therapeutics/Biomanufacturing segment in the third quarter.Even though our sales have grown significantly last year, you could say our profitability has not grown to the same increment due to investment in both organic growth through the hiring of new personnel, and we've had some extraordinary items during this year. But we do, however, manage to drive a profitable business with a solid gross and EBITDA margins.Going into the sales side of the business here. In the third quarter, our sales increased by 31% compared to the same period last year, where we went from NOK 19.5 million up to NOK 25.6 million. And for the first 9 months of the year, our revenues are up by 22% from NOK 71 million to NOK 87.5 million. And we have also received a couple of questions regarding currency in the company, and of course, currency plays a vital role in our sales here. And also, since the majority of the revenues are nominated in U.S. dollars and in euro, and of course, that means that we will have a currency effect when -- especially when you compare quarter-to-quarter and when you're looking at the first 9 months of the year.And you can also say -- if you look at the first 9 months of the year, you can say -- you can see that the Norwegian krone strengthened 10% towards the U.S. dollar, and 4% towards the euro. And if you look at this 1 and see that -- and consider that the exchange rates were the same in third quarter, and the first 9 months of 2021, as they were in 2020, our revenues would have been NOK 0.5 million higher in the third quarter, and NOK 8.4 million higher for the first 9 months than what we've actually delivered here. So based on this, you can say that the underlying growth is actually much higher than what we have presented in the financial figures here.Looking at the Therapeutics segment. In the third quarter, sales increased by NOK 2.4 million from NOK 10.2 million to NOK 12.6 million, which is, as Jethro mentioned earlier, the best quarter in history for this segment. This is also around a 20% (sic) 24% increase compared to what we've seen in the previous quarters over the last 2 years.For the first 9 months in 2021, sales at NOK 31.2 million, which is also NOK 2 million higher than the same period last year. And hopefully, we'll see a steady growth in this segment moving forward as the world continues to normalize.In the Research and Diagnostics segment, sales have increased by 41% from NOK 9.4 million to NOK 13.2 million this quarter. And as Jethro talked about, and we are really happy about is that we see that the sales are driven by demand in the underlying business and not only COVID-19-related sales. And also looking at the first 9 months for this quarter, you see that sales in this segment is up by NOK 14 million from NOK 42 million to NOK 57 million. And of course, this is explained by the really strong first quarter we had this year and all the first quarter and especially in the research segment and, of course, the COVID-elated sales we saw in the beginning of the year.Going into the COVID-related sales here. Third quarter gave us an estimated NOK 2.9 million in sales. This is primarily within the diagnostics area. And this is actually the lowest figure we've seen since the pandemic started here. And as we stated in the second quarter this year, and also as Jethro talked about earlier in this presentation, we do expect corona-related sales in the diagnostics area to level off over the next 12 months and the next year as more and more people become vaccinated.And we also expect the magnitude of orders to decrease and fluctuate, as we have experienced in the last year. We expect this to continue moving forward as well. And also -- but of course, on the other hand, we do believe that the sales within there Therapeutics/Biomanufacturing segment to grow moving forward.And as we have talked about in the last 2 quarters, we have introduced a graph showing the 12 months rolling average sales to eliminate some of the quarterly fluctuations we've seen in, to tell you a little bit more about more how the company is trending and how we are actually growing in. And as you can see from the graph here, we've had a continuous positive trend over the last 3 years, where sales have grown basically in every quarter here.From a low end in 2018/'19, where we had NOK 7.5 million, NOK 8 million in sales, we are now averaging in excess of NOK 25 million per quarter here. And third quarter is no exception to the positive trend we've experienced over the last few years. And we see that especially sales development ex COVID-19 has had a positive growth now after a slightly more challenging second quarter this year. And also, we managed to increase the trend, as we talked about and predicted in August when we presented the Q2 figures.Looking at the profitability side of the business there. Third quarter is better than both second quarter this year, and in the same quarter last year. Our EBITDA for the quarter landed on NOK 9 million compared to NOK 7.1 million last year and NOK 6 million in the second quarter this year. And year-to-date, our EBITDA is at NOK 41 million compared to NOK 38 million at the same time last year. You can say, even though our revenues and EBITDA have increased, our expenses have also increased this year. And last year, we were all in lockdown, meaning that we did not take on a lot of variable expenses such as travel, and conferences, and exhibitions. But now as the world has opened and been more opening, we have been able to travel and participate at conferences to a much larger extent than in the past.We have also hired a lot of new people in order to grow -- to drive our growth initiatives through new product innovation here. And we have also taken on an accrual of NOK 4.8 million relating to national insurance contribution and options, whereas NOK 0.5 million on this which we cite in the third quarter. Looking at the margin picture. We have an EBITDA margin of 35% for the quarter and 47% for the first 9 months. This is really good, really high. And of course -- but this is slightly lower than we had at the same time last year, and it is explained by the same things that I talked about earlier here. It is by investments in organic growth and some extraordinary items that we have this year.On the cash side, as with previous quarter, our cash flow remains positive with a change in cash of NOK 9.9 million for the quarter and NOK 46.7 million for the first 9 months of the year, giving us a cash balance of NOK 187 million for the end of September. And also, from the graph here, you can see that we had a major spike in our cash -- our changes in cash during the fourth quarter last year. And for those of you who don't remember, this is associated with the divestment of Biotech BetaGlucans, where we received NOK 70 million at the end of 2020, plus an additional NOK 16 million at the end of first quarter this year.And as we have talked about in earlier presentations, we are -- and as Jethro touched upon here, we are also investing in new premises for the production department of our operations here. And after the first 9 months, we have spent NOK 9 million on this project, which includes both new equipment and a rebuild of existing premises. The majority of expenses relating to these premises has now been taken, and we expect only minor changes during the fourth quarter.And with this, I think I will leave and hand it over to Jethro now to tell us a little bit what we expect for the remainder of the year.

[Jethro Holter, Chief Executive Officer]

Thank you, Borge. So for the outlook, it is about financial guidance, and we did provide some guidance last quarter. And that was -- further, we have an annual sales revenue target of NOK 120 million for this year 2021. And we continue to hold this guidance. But I would say that this guidance is what I would say is our mid-line guidance and not what we'd say our conservative guidance.We're making -- what I can say is we are making progress. So this, we have the eyes on the prize there. And of course, there's some more work to do here, and that's what the team is here to do. So we're working towards that to bring in that number there.In terms of longer-term growth, we're certainly committed to that. And I think that is evidently -- you see that in some of the things we're doing in terms of expanding. What we do in terms of new premises, doing more things in R&D. But of course, this is also expected as well because we do have underlying momentum in the business, particularly in the non-coronavirus-related business, and that's something which has been -- momentum is generated year on year on year, and that just continues at the end of the day because that's already inherent in the business. And basically, this is also supported by a growing product portfolio and expanding customer base. So we do expect year-on-year growth long term.We do appreciate and understand that the expectation and need for future guidance, and we will certainly provide future guidance with respect to expectations for what is our target for 2022. We will come with that. And we will also provide longer-term guidance as well, and we will do that during the beginning of next year.That's where we'd like to end today. But before we open up for questions, what we'd like to do for future quarterly reports is we do plan to mix this up in terms of we will have virtual meeting -- virtual calls, but also we want to reestablish getting out with and doing these presentations in person.Traditionally, we've only done this in Oslo, but what we're looking and considering to do now is to do these in different locations, so for instance, at Stockholm, and potentially other locations where our investors are. And this means that we will be able to have more face time with our investors, if we go to the locations where our investors are.So with that, I'm going to stop, and we -- Borge and I are happy to answer any questions that you have, and thank you.

[Jethro Holter, Chief Executive Officer]

[Operator Instructions] Peter, I see you've raised your hand.

[Peter Östling, Life Science Analyst of Equity Research]

Yes. Can you hear me?

[Jethro Holter, Chief Executive Officer]

Yes.

[Peter Östling, Life Science Analyst of Equity Research]

Yes. Okay. I have a couple of quick ones. Some of them is probably more towards Borge. These upscaling projects that you described related to M-SAN and proteinase, is there -- what kind of cost is related to that? I guess it's a smaller 1 than the upscaling project that you have done during '21.

[Jethro Holter, Chief Executive Officer]

The kind of -- firstly, I can talk about the SAN -- a similar cost to the scale-up we had. The M-SAN will have some of the cost to what we had with the SAN HQ enzyme. At the end of the day, we're following very similar processes here because the enzymes are similar, so we can follow the similar processes and how we did things there. But of course, since we are doing a large-scale fermentation that there are some costs associated with that.And of course, if that ends up being product, then it goes into our inventory as well. So I don't know, Borge, if you want to comment on that.

[Borge Sorvoll, Chief Financial Officer]

Yes. No, you are right. You will see it as an inventory moving forward now with -- if the product passes all of our standards and requirements. And then you will also see it down the road. There will be cost of goods as part of the cost of goods now when they sell the products.

[Peter Östling, Life Science Analyst of Equity Research]

Okay. So an investment of around NOK 4 million, NOK 5 million then.

[Borge Sorvoll, Chief Financial Officer]

No. That's way too high. It's not real. We are not going up there.

[Peter Östling, Life Science Analyst of Equity Research]

Okay, okay, okay. And the establishment of the lab in Oslo, how many people do you plan to employ there?

[Jethro Holter, Chief Executive Officer]

Yes. It's a good question.

[Peter Östling, Life Science Analyst of Equity Research]

The cost associated with that? [indiscernible]

[Jethro Holter, Chief Executive Officer]

Yes. It's 1 of those things where we start out gradually here. I think at the end is what we do with other -- it'd be 2 to 3 people initially we're looking at. And then -- and they will start expanding out as the business demands. So that's what we're doing.Yes, we want to be careful since we haven't signed the contract yet. So -- but we have -- we know where we're going to go, and what we want to do there. But of course, it's still early days.

[Peter Östling, Life Science Analyst of Equity Research]

A question that is always asked at quarterly business [ meetings ], to give visibility of your sales. Can you talk a little bit about that? I mean it is good that you kept your NOK 120 million full year guidance, but can you talk a little bit about the visibility that you see in Q4 and early '22?

[Jethro Holter, Chief Executive Officer]

Yes. It's a very good question. I think you are on the underlying business, that's always been kind of thing where we've always had to give visibility. I think 1 thing is you certainly appreciate COVID is 1 of the difficult ones to have visibility on because that is -- of course, it's unprecedented, and I think all companies have the same thing, where is this going to go, and we've had those.Those things that have been quite volatile. When you look at our numbers, it has been the COVID that's really made our numbers quite volatile here. And that's why we sort of -- and I think it's natural in there. We do see there's a decline there in the -- at least in the testing because, of course, now people are -- you sort of see there's a lot more focus on actual flow tests and things like that as opposed to PCR tests, and our enzymes don't fit into actual flow.But there, again, that's why we say it could still be lumpy. And that is -- we don't have full visibility to the COVID stuff. So there, we could have some nice surprises, but it could also go against us. And that's just how it is when it comes to the COVID side of things, and that's sort of why we had the lumps and bumps in Q1 and Q2, because we had some nice -- partly because we had some expected upsides, I would say, in Q1 and not in Q2 when it came to the COVID stuff.So that's really where it is. The underlying business we have good a visibility, in COVID is a bit more unpredictable. which is handable soon.

[Peter Östling, Life Science Analyst of Equity Research]

Yes. You've said that you normally -- from your largest customer, you get -- it tends to -- they tend to place a large order at least once a year. And as I understand it, previously, those orders has mostly come in, in Q4, but this year, it came in Q1.Could it be so that they return to the normal pattern and place an order in Q4 as well in order to get into the normal cycle of things soon?

[Jethro Holter, Chief Executive Officer]

Yes. I want to be very careful on commenting on that because, of course, we are talking about something that -- we don't want to talk about these things publicly when it comes to our main customer like this. It's -- of course, we have a relationship there, and we have to be careful what we talk about that. So...

[Peter Östling, Life Science Analyst of Equity Research]

Yes. I expected that kind of answer. Just finally, before you move over to somebody else, there has been a lot of discussions, and we know that, the FDA held today an advisory meeting, during the autumn when it comes to potential side effects of reducing viral vectors as delivery vehicles for gene therapy. And there is a lot of work going on in order to, I don't know, place, but to find alternative ways of working with gene therapy without viral vectors. What kind of -- what's your business -- if viral vectors would go away and we will reduce more direct gene editing and CRISPR and that -- some of those things, is it still that you use your SAN HQ in those novel kind of gene therapy delivery, all other things?

[Jethro Holter, Chief Executive Officer]

It's very good question, and there's a lot of things there, actually, because we sort of communicated something last quarter where we do have ambitions, now to expand what we're doing in innovations. And certainly, you're correct. There are other technologies out there.Do I think viral vector is going to go away? Certainly not. Our other technologies going to be used in what I would term genetic medicine? Yes. And there's CRISPR. There's RNA technologies. There's, of course, other potential gene-editing technologies out there as well. And of course, we have the viral vector. So all these tools are going to be needed, and the beauty of this is for ArcticZymes, we're certainly looking in all these areas, and we are going to expand our innovations into each of these areas.And today, I did mention, for instance, the RNA therapeutics. And already, we're seeing that our proteinase has potential applications there. We are going to develop enzymes in RNA therapeutics. We are looking into gene editing.Actually, we actually already have customers who are using -- our [ DNase ] is in -- together with CRISPR technologies, for instance. So -- but this is really early stuff. We -- so we -- our existing enzymes are already starting to find their way into these other areas as well.But of course, what we want to do is also manufacture enzymes but also novel enzymes that fit into gene -- into more of the broader cell and gene therapy area as well as beyond that into biomanufacturing. Remember, gene therapy is a small part of the biomanufacturing market in general. And I think ArcticZymes can certainly play more in these areas than it has done.So we are building out the innovation pipeline. And that's part of our -- some of that we would do organically. Some of that will be inorganic.

[Borge Sorvoll, Chief Financial Officer]

Any other questions? Feel free to ask the questions to us. Maybe first, again, Peter, if you have some more questions.

[Peter Östling, Life Science Analyst of Equity Research]

I just raised my hand again. Just 2 quick ones. You just remind me, we all know where you use the SAN HQ and the SAN HQ 2.0, just remind me where you use the M-SAN. Is it in both therapeutics and diagnostics or...

[Jethro Holter, Chief Executive Officer]

The M-SAN is more similar to Benzonase at the end of the day. So that fits more into -- but also it fits into kind of more a lentivirus well. That's why we developed it mainly lentivirus and those types of viruses. And then, of course, the 1, of course, in our SAN HQ 2.0, that is the 1 which is we think will have the broadest utility as well for more general use as well.And what we did also with that enzyme is to make it much more plug and play. So it integrates much more with a downstream processing because when you put the enzyme into the process, it does 1 job, i.e., to remove the contaminating [ nucleic acids ] you don't want in the biomanufacturing, but then you need to remove the SAN enzyme afterwards. So that's what magic we did. We did some kind of -- with our know-how, we made some changes and some engineering in that with our enzyme so that it's much easier to remove in all of the different downstream processing across all these different biomanufacturing processes [ that could potentially been used ]. So you need to look at all aspects when people use these enzymes, and that's it. So that's what we built into the SAN HQ 2 enzyme. So -- and of course, we're also looking at other SAN enzymes as well. So there are things where we are -- we see the need or potential opportunity, I would say, for other flavors of these SAN enzymes, or new cases in general here. And it's sometimes subtle differences that you need to do to make these fit into different workflows as well. So you'll certainly see more of these enzymes coming from us at some point.

[Peter Östling, Life Science Analyst of Equity Research]

Okay. I thought that SAN HQ were also used with Benzonase.

[Jethro Holter, Chief Executive Officer]

Yes, it is. Yes, it is. In all cases, the Benzonase is used across the board in everything. It's a very general purpose, but it's not optimal for everything. So...

[Peter Östling, Life Science Analyst of Equity Research]

Okay. So you have tailor-made them for specific them.

[Jethro Holter, Chief Executive Officer]

Yes.

[Peter Östling, Life Science Analyst of Equity Research]

So SAN HQ is more for viral vector, and the M-SAN is more for lentivirus.

[Jethro Holter, Chief Executive Officer]

Yes. Exactly. And you remember, we're using nucleases also in our when you do, for instance, CRISPR technologies and things like that, we're also using nucleases there. So -- and other applications here.So at the end of the day, you want general purpose, and you want specific, tailor-made nucleases. And I think nucleases, when you look at it in general, you remember the [ DNase ] is a nucleases as well. So we do have quite a whole range of nucleases already. And I think in many ways, they're one of the most exciting class of enzyme there is and why we certainly have a strong focus on it because they have such broad utility across everything.

[Unknown Analyst]

More of the same. First of all, thank you for a very detailed and rich report. I enjoyed reading it. But more on SAN and the 2.0 variety. You spoke on that last time. How is it received? I assume it's sent out to customers at the moment.

[Jethro Holter, Chief Executive Officer]

Just that we will be launched our product, and it's been commercially available during Q3, certainly attracting attention. Of course, the other thing we're working on as well, what's important with these enzymes is also the ELISA kit as well because they -- and that's why I emphasized that in the presentation today is with the enzyme, for instance, we have ELISA kit that we're going to launch soon. The SAN HQ 2. The difference with SAN HQ 2, since it's targeted to a broader audience and just for manufacturing, and some of those customers will not need the ELISA kit. Others will.So I think here, we do expect the SAN HQ 2 enzyme to pick up. Quicker with some customers because some of them won't require ELISA. Others will require only ELISA. So that's kind of the positioning of that enzyme. And we do see -- seeing that there is interest and customers purchasing the SAN HQ 2 enzyme. But of course, it will take time, of course, to see them having a major impact on sales just -- we only just launched it last quarter.

[Unknown Analyst]

You have managed to make wonders earlier on. So I have full confidence in you.

[Jethro Holter, Chief Executive Officer]

Thank you.

[Unknown Analyst]

What's more -- you have changed very much in the distribution chain over the past year. Can you say something about that and how it has influenced? How the regions are coming to play? Something on that?

[Jethro Holter, Chief Executive Officer]

Yes. It's a very good question. I think how we do business, most of our business is done by our own business development people. And we have business developers in -- we have -- in Europe, in North America, and Japan, and those make sense. And of course, there's other regions where we could have our own people, but it's too early days for that. So that's why we have -- we use distributors or [indiscernible]. So I wouldn't say they're traditional distributors. We would have specialized distributors who understand how to do B2B and work with other companies. It's not the kind of traditional distributors you'd want to work with who are used to selling to -- selling end-user products. And you need that -- for instance, in China, we're building a network of partners there to help us sell into China. And we're making some nice progress there.And again, with Russia. There, to try and work directly with Russia, that is difficult. And so it's much better to go to a company who understands how to do -- how to work and get products and deal with all the complications of doing business, for instance, in Russia. So that's why we work with a company such as LT Biotech. So we do certainly early on when we're going into new geographies is we do look to work with partners initially, and when business gets to a certain critical mass and predictable, then we will put our own people in place. And I think that's a smart way of doing it as well.And of course, as we build out the product portfolio as well, it will also -- we have become much more relevant to our customers. So that's [indiscernible]. So certainly build out our team as well or, if necessary, bring in specialized partners to help us. And I think that's very interesting, for instance, in the pharma space there.We are knocking on the doors of other pharma companies. But as well, it's good to use channel partners who also have a nice mixed bag of products in biomanufacturing because for that, that actually makes it much more tantalizing sometimes to some pharmaceutical companies because then they can get SAN along with the other bits they need together. But of course, as we build out the portfolio as well in the biomanufacturing space, we'll have more content. So we'll become much more relevant, and we'll manage that with our own people as well.So it's a combination of things we see right now in terms of using our own business developers, and using channel partners, and distributors at the end of the day. But when I say distributors, it's specialized distributors.

[Unknown Analyst]

You make so much sense. I admire what you do.

[Jethro Holter, Chief Executive Officer]

Thank you.

[Unknown Analyst]

I mean it.

[Jethro Holter, Chief Executive Officer]

I see another hand raised.

[Peter Östling, Life Science Analyst of Equity Research]

It's Peter Östling again from Pareto Securities. Yes, yes, yes. First, a quick 1. I noticed that the cost of goods was relatively high in this quarter. Was there any specific behind that?

[Borge Sorvoll, Chief Financial Officer]

No. I don't think there is anything specific around it. And I think that's -- you will probably see that -- you will kind of see those fluctuations as seen before. We are still having good margins now, even though we had a slightly higher number this year than we've had in the past. And it also has something to do with how our inventory transitions from finished goods also over to -- from work-in-progress to finished goods as well, and when we take it out to the customers.

[Peter Östling, Life Science Analyst of Equity Research]

Okay. So could you see an order that has not been delivered yet that has boosted the inventory this quarter or in Q3 that we will...

[Borge Sorvoll, Chief Financial Officer]

Not sure when you talk about the inventory a bit of. I think you will see an increase in our inventory, especially now that we are using kind of -- we have this upscaling project. That means that we are getting a lot of more raw materials in stock now. So instead of -- as we talked about in the past, when we did this upscale instead of doing 50 batches of 1 product, now we do 1 big batch essentially here. So that gives us a little bit more raw material or inventory in our stock.

[Peter Östling, Life Science Analyst of Equity Research]

Okay. And finally, you established discussions with several earlier acquisition targets. Could you elaborate a little bit about that? Are you getting closer to reaching some kind of deals with them?

[Jethro Holter, Chief Executive Officer]

Yes. Well, we've had discussions with a few of these now, and there's certainly interest to move forward. And these are quite recent discussions. So -- but the interest is certainly there. And actually, in many cases, it's sort of good, but times pass because the rationale to the story to come together is much better as well because I think you sort of see the progression that each company has made some actually -- when you look at some of these targets. So -- but of course, beyond that, it's also looking deeper as well in other areas. And that's why we also expanded the search as well now, not just what we had before. We want to look for more as well. So -- and it is not -- and remember, we are looking at a bolt-and-build approach here.So it's not just about looking at doing 1 acquisition. It's looking at a kind of a bigger map of sequential acquisitions in the forthcoming years in the each of the 3 market areas as well.

[Peter Östling, Life Science Analyst of Equity Research]

Yes. Last quarter, you added the possibility to do [in line to a deal ] as well. Can you talk a little bit how those discussions progress?

[Jethro Holter, Chief Executive Officer]

Yes. And the main focus is certainly mergers and acquisitions. So what we're doing is we have a couple of enzymes that we are testing from a couple of companies at the moment. And of course, we need to balance that up with what we're doing organically, too, because, of course, R&D needs to look at this, and if we license it, then we have to do a full product development as well. And we're balancing those things out.So we have some -- a few things currently coming in. But of course, it's also balancing it with the organic stuff, too. We are sitting on, I would say, interesting -- we are sitting on a lot of innovation potential within ArcticZymes and hence why we are building out the team to bring more of that to market as well.So I think it's a balance of this. And so I think, yes, we have some stuff that we're looking at. And if we think it is something that could be nice, really work for our customers and the enzymes that we're looking at, have the features that are claimed, then we would then bring them in-house and get them to market. But it's still early days. We just started doing that.So -- and it takes time to bring -- we still have to go through a full product development when we license something.

[Borge Sorvoll, Chief Financial Officer]

Last question from anyone before we round up?

[Jethro Holter, Chief Executive Officer]

We have a...

[Borge Sorvoll, Chief Financial Officer]

[ Elias ]?

[Unknown Analyst]

Yes. I just want to ask you about -- what's your biggest competitor in Europe right now? Yes. That's my question.

[Jethro Holter, Chief Executive Officer]

I think when you look at it, certainly, the larger companies out there with the large portfolios such as, I'd say, companies like Thermo Fisher Scientific, those types of companies and the [ Roche ] of the world. Those are the biggest competitors that -- and actually, they have large portfolios, but at the same time, there are certain customers they can't reach since they don't have the novel enzymes. They have a lot of generic enzymes. There's a lot of companies competing around generic enzymes.So I think those are what I would say are the biggest competitors out there.

[Borge Sorvoll, Chief Financial Officer]

Okay. I think -- do you have 1 more, [ Elias ] or -- but I think we just leave it at that...

[Unknown Analyst]

That's fine. That's fine.

[Borge Sorvoll, Chief Financial Officer]

I think we just leave it at that. And I think we all wish you everyone a nice day, and moving forward now. And yes, have a good day, everyone.

[Jethro Holter, Chief Executive Officer]

Thank you very much. Bye-bye