Arcticzymes Technologies ASA

OSE:AZT

Earnings Call Transcript 2022-Q3

[Jethro Holter, executive]

Welcome to the Q3 presentation. Today, it will be myself, the CEO, Jethro Holter; and Borge Sorvoll, our CFO, who will walk you through the presentation. For those of you who are calling in virtually, you can post your questions via the chat function. Unfortunately, we cannot cater for you to post verbal questions today. In the room, of course, you can certainly post your questions verbally at the end of the presentation. Today, we have 14 people in the room. And we're also joined by our Chairman today, Dr. Marie Roskrow. The agenda today is usual procedure as always. We will start with the highlights for the quarter, then we'll go through the business update. Borge will walk you through the financials, then I'll go through the outlook for 2020 and beyond. With respect to the highlights, what we can say is, the growth trend continues, but that's despite the expected slowdown related to corona-related sales. And for the quarter, we achieved quarterly growth. We came in at NOK 29.3 million. That's equivalent of 16% growth.

With respect to EBITDA performance, we came in with NOK 2.8 million. And of course, we have increased our cost base there. And we're going to talk more about that. But briefly, this relates to, firstly, kind of project-related costs we have right now. In particular, we are working on a DMF project, so that has increased cost where we're using external support. We're also working on M&A. And there, we've engaged external help as well with consultants helping us there.

We've also been working on ESG and other kind of projects. We have many projects in the works, but are putting cost into the business. But those projects are very much about supporting the growth and moving and expansion in the biomanufacturing area, as well as inorganic growth activities that we're doing. And of course, we are investing in the team. We're growing the team a lot this year. I'm going to come back to that and then what to expect for the future when it comes to personnel.

We've also continued to grow the Biomanufacturing business, particularly following the pandemic. And as I've alluded to in previous presentations, biomanufacturing is where the largest growth potential is for ArcticZymes. And linked to that, we've been very active in R&D with respect to innovating the RNA enzymes. And today, we have achieved -- we successfully achieved expression of some of those enzymes. And those represent R&D prototypes, which I'll come back to you in a moment.

The last point here is really about inorganic growth. It's about M&A and we're at this stage where we've entered discussions, we have a select group of international companies, and what I'm going to do is come back -- we'll come back to each of these topics as we go through the presentation.

It's a bit of business update. As always, we start with the commercial sales. For the quarter, as mentioned earlier, we grew the business 16% for the quarter compared to same quarter last year. And it's really the biomanufacturing part of the business where we achieved the growth for the quarter.

And for this, we achieved NOK 15.9 million. This accounts for 26% growth compared to same quarter last year. Overall Biomanufacturing contributed 54% of total Q3 sales. And what we've seen in the biomanufacturing space, particularly post pandemic, is that we've certainly seen an upturn in sales. And that's to be expected because attention now is really much on gene therapies and other vaccines outside of COVID. And we see this across all geographies. And in particular, what we see is it's pretty strong in the U.S.

And that's very much for the quarter 2. We saw over 72% of biomanufacturing sales that came from the North American market. And what we have seen also is we've seen a seasonal effect as well, particularly in Europe, and we saw that in biomanufacturing as well where we saw -- customers were on extended vacations and customers were not naturally placing orders at that time. We mentioned it last quarter about the Drug Master File or DMF for short. This is something that we're working on to put a Drug Master File in place for the Salt Active Nuclease HQ product or SAN for short. And we plan to submit that to the U.S. FDA. And that project is going very well.

But it is a mammoth undertaking. We've had to reprioritize resources internally to support that project. And also we've had to engage quite a lot of external support on a project basis. So of course, that does add to our cost. And this is a very important project because at the end of the day, for many of our customers who want to take their therapeutic applications to the U.S. market, for them, they deem the Drug Master File as essential. And as we keep that moving forward more into the biomanufacturing space with new products, we'll also need more Drug Master Files down the road.

And so with that, that project as I said, is progressing well. We do expect that based on the current status, that we will have that submitted to the FDA in first half of next year. When it comes to the Molecular Tools, Molecular -- remember that serves both research and diagnostics. The quarterly sales came in at NOK 13.4 million. So essentially, we had flat growth for the quarter. For the first 9 months, it came in at a slight growth of around about 5%. And I'll come back to the reasons for this in a moment.

Overall, Molecular Tools contributed 46% towards Q3 sales. And if you look how that splits up, 90% of those came from research and 27% came from diagnostics. When it comes to research, as I mentioned previous quarters, the main product driving that has always been the Shrimp Alkali, the recombinant Shrimp Alkaline Phosphatase or rSAP for short. But this quarter, what we saw in Q3, there was a dip, and that's because we didn't receive any large orders from our key customers. And that's understandable because many of those customers are based in Europe. And what we're seeing is they had extended vacations. So we did not get no kind of orders. And we do see those seasonal dips from time to time.

But what's interesting is when it comes to research, we did have strong DNA sales and the DNA sales contributed 67% towards research sales. And we also had an equally strong performance of DNases in the diagnostic side as well. What we saw in diagnostics, and this is something we've been talking about and we have been expecting, is a lower contribution from Cod UNG. Of course, there is a back end of the pandemic, and now we see that, that demand for, for instance, Cod UNG is much lower than it was during the pandemic. And of course, that has an impact on sales.

So I think it very much aligns with our annual guidance that we do expect with sales from -- COVID-related sales will be lower this year compared to last year. So the question you're probably asking right now, what's the prognosis for both of these business segments moving forward? When it comes to biomanufacturing, it's 3 things. One, we do expect there's going to be -- the growth trend will certainly continue. And with that, the 2 things go into that. Firstly, it's about geographies. We're really focused on expanding the sales of our SAN products across the geographies.

Also, it's about customer reach. We've actually increased our customer base quite significantly since the pandemic. I think I've always mentioned before, we've got 100-plus customers, but I haven't updated you on that number. And since the pandemic, we've got over 180 customers purchasing the SAN product today. And beyond that, we also have a pipeline of customers, potential customers who aren't purchasing yet that our customers we will convert as we move forward.

Also, the third part of that is also more products. And today, biomanufacturers has propped up by just the SAN products and a lot of the investments we're doing, both project-based and increase in personnel is very much linked to building out that biomanufacturing business, so we get more products on the table. But it's also about the documentation such as Drug Master Files as well.

In Molecular Tools, it's a slightly different picture. From a short-term perspective, we've had COVID. We're now out of COVID. Of course, that impacts our short term. So we do expect a kind of short-term impact on the growth of sales over the next 6 months in the Molecular Tools business. But beyond that, we do expect the growth rate to reestablish itself. And that's through the broader offering of products that we have. And also it's linked to the kind of activities we're doing in Oslo.

We have the applications lab we put together, and that's really about demonstrating utility of our products together as a synergistic offering to our customers. So that really will help fuel future sales in Molecular Tools. This is a slide about geographies. So I introduced it last quarter. And the reason for that is there's always been a lot of questions, where do your sales come from, which parts of the world. So we put this on the table last time.

And if we just take approximate numbers, what we see is in Europe is we've always sort of had around about 50% of the business came from European customers, round about 40% from the Americas. You can see that in last year Q1, this year Q2 as well. Then just over 10% in the Asia-Pacific region. What we can see for Q3 is, seeing a different shift where we had a majority of sales came from the Americas. And again, this comes to what we talked about, the seasonal effect that we've seen. It is quite unusual actually in Europe to see it so quiet, what we saw during July and August. A lot of customers were away. And I think it's -- I think since the pandemic, people just have not got away, and we've seen that our customers were literally out for a lot of the summer.

But what we saw is the customer activity return back to normal in September. So this did have an impact, particularly on European sales. This slide is about our product offering and our innovation pipeline. And I think it's important to look at this together and how this fits -- and the boxes in green, they represent the products or product lines that we have today on the market that have been selling for many years. The boxes in green represents some of the products in our innovation pipeline. And before I go into these in detail, it's important to understand ArcticZymes is not a solution provider. We don't make it for the molecular research market. We don't make diagnostic kits for the diagnostic or test for diagnostic. We're not making therapeutics for biomanufacturing.

What we are is a component supplier at the end of the day. And that's important because at the end of the day, what we -- it is about supplying bulk products to customers who will use our enzymes in their manufacturing processes or integrate them into their products and their technologies. Well, sometimes we sell our products as OEM. And what that means is customers will private label our products and sell them alongside their technologies too.

And that's why we actually invested even last year when we invested in the manufacturing facilities. We actually purchased a robot so we can label tube and fill tubes because that allows us to leverage more in the OEM business. And of course, sometimes we have to customize enzymes. For instance, enzymes that are used in for instance next-generation sequencing. There, often they need a tailored kind of offering. So this is kind of what we need to think about when we design and bring our products to market.

So when it comes to molecular tools, we've been selling enzymes since the 1990s into this area. And there, it's an attractive offering where customers will integrate our enzymes into their products and their technologies. But we are missing, we don't have a portfolio where missing 2 key enzyme classes, and that's the reverse transcriptase and Taq DNA polymerase. And those are very crucial enzymes. They are used -- they're essential for most molecular biology, also in molecular tool workflows.

So our immediate priorities is to make sure we launch our first reverse transcriptase and Taq polymerase enzymes before the end of the year. And those will be the first, and later on we will add more products to those product lines. And what's interesting is when we launched the reverse transcriptase and Taq polymerase, that really does fuel the activities that happen at ShareLab. So the timing of getting -- sorry, the time they're getting the Oslo lab in place very much fits with the launch of these enzymes, because that laboratory will demonstrate the use of these enzymes in combination with the DNases, for instance, the Cod UNGs in a workflow environment.

But one of the immediate things the Oslo lab are going to be working on, is putting together a viral diagnostic workflow, showing our different enzymes working in that. And so that's going to be one of the immediate outputs we will have from the ShareLab as we move -- sorry, from the Oslo lab as we move forward.

On the Biomanufacturing side, you can see there's more innovations there. And that's certainly how it will be as we move forward because the biomanufacturing is the side of the business that offers us the greatest potential. And there's 2 ways of looking at this. When you look at the external market, you can see that just by the sheer size of the market, it's 20x larger than the Molecular Tools market. The second point is from our own firsthand experience. We've seen that the biomanufacturing market is one that's growing rapidly. There's high demand, and we've seen this through SAN -- through our SAN portfolio. The market needs 2 things: one, extremely high-quality, well-documented enzymes as well as novel enzyme technologies.

So for us, this is certainly an area where we can really bring these technologies to the market for this customer base. And our immediate priority right now is we're working on an ELISA kits and that ELISA kit is linked to the SAN HQ2 enzyme, which is shown here. And why we need that is that for customers who want to use our enzymes or therapeutic applications, they need the ELISA. So we plan to launch at ELISA either very late this year or early next year.

Most of our efforts at the moment in this area is really around the RNA enzymes where we're developing a suite of enzymes that will be used in -- which will be used in the manufacturing of therapeutic RNAs. And you can see some of these enzymes listed here. And where we are today is, as mentioned earlier, we do have some R&D, we've got early prototypes where the first thing you need to do is clone the genes for the enzymes, then you need to put them into microorganism and then you've got to make sure that they express functional like protein or enzyme. And that's where we are today. We've got functional protein at low-level R&D scale. And now that's important because part of our innovation process now where we'll be testing those early prototypes with our customers. And then that feedback is very important because that will say, okay, these look good. Then that means that we can put them into product development or if there are some things where you may need to go back and do some tweaking, we do the tweaking with test with customers, then put it into our product development pipeline.

So we really engage our customers through our innovation processing. And with this, we -- I think we're very much on track to launch our first RNA enzymes next year. So a little bit about strategic growth initiatives. We very much remain committed to these. And when it comes to organic growth, we have had a recruitment drive this year. And each quarter, we've incrementally increased the size of the team, particularly cross-functionally. A lot of those hires are being very much related to biomanufacturing. And if we want to take that big slice in biomanufacturing, it's about investing in people today to extract it for the future. So this year has really been about hiring. That won't continue. We're building that critical mass of people, and that's what we've done. And we certainly won't be recruiting as heavily as we've done this year going into next year. And that's kind of important to emphasize.

But again, as mentioned, that's supported by biomanufacturing. You sort of see here to the left, there's a photo with a team, and we took this further in September this year. So this is a global ArcticZymes team. We needed to be on 2 floors here to fill us into the photo. And I came in the company in 2015. And then we -- the Enzyme business was supported by 18 people. And today, we're 60-plus people. But we have recruitment -- it's been difficult. We've hired many of the positions, but some are difficult to hire. And that's why we need to have an open mindset with respect to location. And that's why we -- some positions have certainly we've hired in Tromsø. But some of you -- we can't, that's why we have the Oslo facility where we can hire people there. And also we're hiring people in other locations.

What's really important is we hire the most relevant people to this company. So that means that extends to hiring international talent. It's also like commercially, industrially seasoned people as well. And that's really important as we take the company to the next level. We also need industrially experienced people in this organization.

Inorganic growth. Here, we've been focusing a lot of my activities, actually almost all my time is spent on the M&A activities. And it's kind of -- it's really intensive period for us. And with that, we're not doing it alone, we have engaged external support. So Alira Health is really a top-notch M&A advisory, is helping us in this process. They know this market very well. They're doing an excellent job. They're steering this process for us. And what's important to highlight is that this is strongly supported by the Board of Directors and the whole of the management team at ArcticZymes. We're united on this.

And where are we? So today, we are in discussions with a highly focused and limited group of international companies. That's where we are. And what's important to highlight here is that while any potential deal we do, we really want to make sure it's accretive, and it's very much is an alignment with our growth strategies, both short term and long term. We think that's the most important thing. Of course, we've said, yes, we'd like -- we had a goal to have this done by the end of the year. And since we want to make sure, we make sure we have that right deal in place, it may extend into very early part of 2023 where we would announce a deal. And I think it's very important we focus on getting the right deal rather than just lying in the sand of making announcement at the end of the year.

So with that, I'm going to hand over to Borge, and he's going to go through the financials.

[Børge Sørvoll, executive]

Thank you, Jethro, for that introduction on the third quarter and the first 9 months of 2022. And looking at the financial side of the business, we are still managing growth on a quarterly basis here, and also on a 12-month rolling basis. But as Jethro talked about, investments in organic growth impacts our expenses. And as there has been a need for both -- you can see we have increased our internal resources and there's also been a need for external support on several projects in this quarter so far. Moving to the sales side of the business here. Our sales revenues in the third quarter have increased by 16% compared to the third quarter last year, generating now NOK 29.3 million in revenues compared to NOK 25.2 million in the same quarter last year. And for the first 9 months of the year, total sales revenue now are close to NOK 110 million compared to the NOK 87 million that we had last year. And this is also an increase of 24% for the first 9 months.

Looking at the 2 different areas that Jethro has talked a little bit about. Both areas showed a growth for the quarter. But the Biomanufacturing side delivered an increase of 20% or NOK 3.3 million, going up from NOK 12.6 million to NOK 15.9 million. And this is also that we continue to see an upturn in sales now following the end of the pandemic here. And we also see this for the first 9 months, where sales have grown from NOK 31.2 million to NOK 49.5 million or a growth of close to 60% for the first 9 months here.

Molecular Tools. Sales are basically flat in the quarter, but we have a small, small increase where we've grown from NOK 13.2 million to NOK 13.4 million in the third quarter this year. And for the first 9 months, we have -- sales have increased by 5% now, having gone from NOK 56.5 million to NOK 59.5 million. And this is also due to the fact that even though we do see a much lower contribution by Cod UNG now that we see that the pandemic are getting closer to an end now.

Currency plays a vital role in our business here. And as you might be aware, we work in a global market and our revenues are impacted by currency fluctuations. And especially since our main sales currencies are USD and -- are U.S. dollars and euros, and the Norwegian kroner plays only a small part when you look at the sales side of the business, but of course, it's kind of the main driver behind our expenses. But also in the third quarter, 73% of our revenues were in U.S. dollars and 27% were in euros. And even though, as Jethro talked about, that we had around 50% of our base is in -- now in the Americas and a lot more in euros, there are some of our European customers that have U.S. dollar -- that we invoice them in U.S. dollars here.

We also see that the fluctuation in the exchange rates that we've seen over the last year, this impacts our profit and loss statements. And based on the USD and the euro that we have in our bank accounts, we have seen, we have had a profit of NOK 0.2 million now on the financial side in the third quarter and a NOK 3.9 million positive contribution for the first 9 months. And as a general principle, we try to reduce the amount of currency we have in our bank accounts to a minimum here. And that this is, of course, to offset the risks of having too much currency fluctuations on the bank accounts.

Our trade receivables are, of course, also impacted by currency fluctuations, and this will be seen -- this will be seen under other operating expenses in our profit and loss statements. And for the third quarter this year, our expenses were actually reduced by NOK 1.3 million now. And for the first 9 months of the year, we can see that our expenses have been reduced by NOK 2.7 million now due to the currency fluctuations -- favorable currency fluctuations now, especially on the USD side.

We have also talked in the past about growth in the underlying business here, where we try to exclude the fluctuations in our currency, meaning that we have constant exchange rates. And if we have constant exchange rates for 2021 and 2022, our sales would have actually been NOK 2.8 million lower in the third quarter this year compared to the same quarter last year. And also, we see that for the first 9 months now, we have had a positive contribution of NOK 6 million this year compared to the same year last year.

And it's also -- when we look at this, of course, we don't have control of the currency rates, but it's also important to highlight that. If you remember in 2021, when we looked at kind of this constant exchange rates, and when we compare 2021 to 2020, we had a loss that year of NOK 11 million in kind of -- in currency here. So actually, our underlying growth was much higher than we actually did deliver in 2021. Moving to the trends of our business, where we've kind of taken out the quarterly fluctuations that are inherent in the business here. And as you see, we continue to deliver growth on a quarterly basis here. And in the third quarter, we passed NOK 37 million in 12-month rolling quarterly sales. And if you annualize this number, you can see that we are now up on NOK 150 million now on an annual basis. And this is just shy of the NOK 155 million that we aim for at the end of the year this year.

And you can also see from this graph, we have taken out the COVID part of the business, we took it out in the first quarter this year. And this is kind of also in alignment to what we've been talking with over the last few quarters here, where we see that we're coming to an endemic state now in the pandemic and where the COVID part plays a smaller and smaller role in our sales figures.

Looking at the profitability side of the business and some of the expenses that we have. We continue to deliver a positive contribution to the bottom line even though this quarter has been -- is weaker than the same quarter last year and the 2 preceding quarters this year. And our third quarter EBITDA ended up on NOK 2.8 million compared to NOK 9 million in the same period last year. And for the first 9 months, we managed to deliver NOK 40.8 million -- or NOK 40.2 million now versus NOK 40.8 million at the same time last year. And of course, and this is even though our sales have increased by close to 20%.

So why -- and then it is -- and the main reason why we haven't seen a significant impact in our EBITDA is, as we have talked about earlier a little bit, we have done several investments now in organic growth initiatives here. We are also -- we are now more than 60 people in the organization, and this is compared to a little bit more than 40 people at the same time last year. We have opened new facilities in Oslo, which has also had some set-up expenses associated with it. We have had several large projects ongoing now, you see in the last -- in the year and the quarter as well, but that has been driving expenses. And this goes towards what Jethro talked about.

We have the M&A activities, where we needed for external support. We have the DMF, the Drug Master File project that has also required some external support. We've also had, kind of a lot of acronyms now, ESG that we were working on, where we had some support. And we have also been working on kind of an ERP project now where we need to swap out our existing ERP solution here. And all of this has required a need for external support. And of course, these have been -- has driven our expense base in this quarter. But these are also more of temporary art, and we expect them to end, I would say, quite soon.

And also, you can see from the graph here on the left-hand side, our EBITDA margin ended up on only 10%, which is, of course, weaker than what we've seen over the last 2 years. But of course, for the first 9 months, we are still driving a strong business, and we have a 37% margin now so far for the first 9 months of the year.

Looking at the cash flow. The cash flow follows more -- sorry, I'm going to move that one. Looking at the cash flow side of the business, and the cash balance follows more or less the same trends that we've seen over the last few quarters with kind of a steady improvement in our cash position even though we have quarterly fluctuations in sales and profitability. And of course, the fluctuations that you see in our changes in cash, those follows kind of the EBITDA that we deliver on a quarterly basis. And normally, you can see the changes is in cash. It's coming in the following quarter after we have.

So the Q2 or the Q3 cash change will be kind of dictated of the Q2 numbers we delivered on an EBITDA level here. And for the third quarter here, we had a NOK 7.6 million positive cash contribution. And for the first 9 months, our cash position was increased by NOK 38 million, and this generated a cash balance of NOK 239 million for end of September so far this year.

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

[Jethro Holter, executive]

Thank you, Borge. Okay. For the outlook and beyond, and this mostly remains unchanged -- this remains mostly unchanged. And for 2022, the first thing we said we had -- our guidance is we have an annual target of NOK 155 million in sales.

Where are we? After Q3, we are 70% on the way there, as you see in the buy chart to the top right. Underneath shows the last 12 months revenues on the rolling quarterly basis. So what you can see after Q3, the 12-month accumulated revenues were at NOK 149 million. So we maintain and stick to this guidance.

And one thing we -- in order to -- sorry, in Q4, we need to -- we're going to need a quarter similar to what we had in Q1. And there's a key difference to Q1. There, we certainly had more flexibility when it came to COVID related sales. Of course, we don't have that in Q4. So what I will say to that is we have -- there will be limited potential for upside beyond the NOK 155 million. So I think that is kind of what we're looking at.

And of course, as I've said in most quarterly presentations is, we do have quarterly fluctuations in sales, and we're always going to have that as a component supplier. And our business primarily being B2B is always going to be that way. So I'll always urge you more to look towards the annual targets and what the longer-term targets than the quarters.

You've sort of seen this already in the presentation, but we said that we will get a lower contribution from corona-related sales this year. And of course, we've seen that. We're experiencing that now, particularly since the problems of Q1 and -- sorry, Q2 and Q3.

The next one we've ticked off, and this is really our expansion into Oslo. We are now -- the Oslo facility applications lab is up and running. We have the people there. We're now working hard to build that workflow data to build that application data for our customers. And I think also it's also something we're really looking at in detail because we can certainly expand and do other activities there. We said we're going to launch products this year. So far, we haven't, but we plan to have product launches at the end of the year, as mentioned earlier.

And it is about we are investing today for tomorrow. Particularly with the team, the most important asset for us is talent acquisition. And of course, we've had this recruitment drive, and that's to drive both short-term and long-term growth initiatives. As mentioned earlier, we're not going to be hiring as many people next year as we've done this year since we've got that critical mass we need. But the important thing is, when it comes to talent acquisition, we've also been -- some of our costs actually have been using external support as well -- for this as well. So of course, some of the cost is fixed, some of it is also using consultants and specialists when you need. And we've even used that in -- even in our innovations, we are also sometimes using external support who have better knowledge than us in the product development.

So some of those costs also wraps up here in Q3 as well. But also when it comes to talent acquisition, it's also about inorganic as well. So think certainly talent acquisitions are very much linked to M&A activities as well. And on that note, as mentioned, this has remained a priority for us. We have set this goal to announce a deal this year. But as mentioned, this could extend into the very early part of 2023.

So when it comes to more long-term outlook, that remains the same. We have a goal to realize NOK 350 million by 2025 through organic growth. And that's both from the Molecular Tools and the Biomanufacturing business. So I think that's a good place to stop. And I'd like to thank you for your attention today. And we're here to answer questions, Borge, myself and our Chairman, Marie, as well.

[Børge Sørvoll, executive]

Okay. Maybe I can take one question now that we have received from some of the online viewers here, Jethro. Regarding the enzymes to be launched now with the Molecular Tools business, the technologies of reverse transcriptase and Taq polymerases are not new innovative as such. How can you compete in this market with a range of large players offering these types of enzymes already?

[Jethro Holter, executive]

So it's the same with all our product families. There's all generic versions of all of our enzymes. And of course, when it comes to polymerases and reverse transcriptase, we are just launching our first enzymes. But beyond that, it's really with those enzymes. You're not going to win with one, you're going to need to build out a portfolio of those. And 2 things. One, you want novel enzymes and the second thing you need, really high-quality enzymes. And also, you want to show them, and of course, the point with reverse transcriptase, for instance, you can marry them together with our other enzymes.

So what a lot of companies are doing. Our DNA is actually are -- what other companies do, they buy our DNA and marry them with reverse transcriptase. We can do the same. We can marry reverse transcriptase as well with our DNAs, so it will also enhance the sale of other products too. And that's a point where I'm talking about workflow. Sometimes you need -- so first, we may -- we will start with generic, high-quality generic reverse transcriptase and Taq polymerase, then we will go deeper in terms of making those more novel enzymes in that space. So it's not just going to be one enzyme. We're going to build those out. And again, these will also help sell our enzymes.

It's similar to the SAN products. Today, we make ELISA kits. Those are support products to sell the SAN products. And of course -- but we got to start somewhere. We need to get the first start with reverse transcriptase and polymerase on the market, and then we will build those out.

[Børge Sørvoll, executive]

Okay. Maybe I'll take one more question here before we open up here. In the second quarter, this -- or second quarter of 2021, you mentioned an opportunity with a large international life science company for a potential integration of SAN HQ 2.0 in the routine manufacturing processes for all recombinant protein production. Can you elaborate a little bit how that's going and the potential impact on the business this has?

[Jethro Holter, executive]

Sure. As I've always alluded to, that's going to take time. You've got to -- if somebody is going to integrate something to their manufacturing processes, they've got to update all their document systems and things and do that stepwise. So that's going to be a long project. So of course, that's progressing, but that will take time.

[Børge Sørvoll, executive]

Do you guys in the room, you ask a question here or -- I have more questions. Okay. Can you say anything about the costs related to the M&A activities during the third quarter this year?

[Jethro Holter, executive]

Maybe Borge, you might want to answer that one.

[Marie Roskrow, executive]

Yes. Well, as Jethro said, we've hired a group called Alira Health, a global company, and we've hired a group based in Munich, who personally myself and other a couple of other people have a long history of knowing. These are world-class people. We pay them on -- and I won't give the exact figure because that is confidential, but we pay a monthly retainer to these people, which we negotiated heavily on. And I think if you look at other groups of the similar caliber, we've got a very good deal with them. And I think that was because we got a little bit of a net rate.

But also, of course, when you do a transaction, if we're successful, we do pay a success fee, and this is a market sort of level fee, but the retainer that we've paid on a monthly basis will be deducted from the end success fee. But overall, the costs incurred so far with that project are certainly on the lower end of what you would expect to pay for such expertise.

[Børge Sørvoll, executive]

Okay. I take a question here. Is the company considering currency hedging, given the cash balance is in NOK and likely an M&A opportunity within U.S. dollars? How are you investing the cash for it to keep up with inflation? And I'm not sure if it's correct to say that the transaction would be in U.S. dollars.

We have already -- I think we've said in the past that we are looking at the European area. So I would say it's probably more likely as we've been in euros rather than U.S. dollars. And because at the moment, we haven't done any hedges since we don't -- nothing has been signed, and there are no agreements here in place, so it's a little bit difficult to hedge towards that as well.

[Marie Roskrow, executive]

But it's not in British pound.

[Børge Sørvoll, executive]

One more question here for -- maybe you can answer this one, Jethro. How do you see the speed and progress of product development versus your competitors going? Are things taking longer than expected? Are developments in line with client expectations? Or is there a risk of clients moving away due to slow progress now?

[Jethro Holter, executive]

No, these are a good question, hence, part of the reason why we're growing the organization now. A focus for us in Molecular Tools is something we know very well, we're doing since the 1990s. But of course, biomanufacturing is new, relatively new to us, and that's the important thing is to really build out the team, to get that speed in place, but no, I do not see that we're behind by any means. I think we -- that's a point we want to be in front. That's why we're investing in people right now and having that big recruitment drive. So it's -- I'm sure we can actually get ahead of everybody else as well.

[Børge Sørvoll, executive]

Okay. Your 155 '22 outlook, is that in constant exchange rates now or is the FX tailwind included in the outlook here?

[Jethro Holter, executive]

It's not -- we don't look at -- when those goals are set, we don't consider the currency. So it's basically based on -- it's not adjusted for currency there.

[Marie Roskrow, executive]

We can only control what we can control.

[Jethro Holter, executive]

Exactly. Exactly.

[Børge Sørvoll, executive]

All right. Let me see what else we had here. Were there any nonrecurring costs in Q3 mainly related to personnel?

[Jethro Holter, executive]

There are -- it wouldn't go under personnel external expenses and that's related to -- we are doing some of our innovations, as mentioned. Sometimes we need to hire external support. Sometimes, we don't have order knowledge. We're a small team. And the well is big and sometimes we will lean on others to help us in our development. So we -- from our external costs, yes, we have some things related to R&D activities there.

[Børge Sørvoll, executive]

Yes. And I think it's also fair to say we also had -- we did some change. We had a new position that started. So we actually had -- in the third quarter, we had double up for a time period in at least one of the senior positions. We've got a new VP of the commercial side. So you've seen a transition period, we had, let's say, doubled up on the expenses, but of course, that one is taken out of the equation today. So that one's noted moving forward as well either.

[Jethro Holter, executive]

And we've heard a bit more reliance, at least this year, on head hunters. Because sometimes it gets difficult to hire. So of course, there are fees associated, one time fees that you have with recruiters. So of course, we've had to use them a bit more now to hire to get the most important talent into the organization.

[Børge Sørvoll, executive]

In regards to ShareLab, will they publish their findings to a wider audience or will they be kept on a kind of client level?

[Jethro Holter, executive]

Two things. One, it will support marketing data. They also support what we do out in the field. So it allows us to build the knowledge what we need. Firstly, it builds data to say, "hey, look, our enzymes work together." It's like a tool box for you to develop your workflow as opposed to buying a screwdriver, hammer and all those things you buy whole toolbox together to go and build your molecular workflow or your house if you think about hammers and that -- so it's about showing that data that our enzymes can do that for you.

But then the second thing is it also gives us our knowledge to go out for our technical team to go out and work with customers directly, where you put sign to scientists to help them integrate our enzymes into their product developments. And this very much worked well from when I was doing that job many, many years ago, and that's how we managed to grow sales very well, is having that application development and also to demonstrate then also go out in the field with technical people to implement it into the customers' technologies. So it has 2 parts to that.

[Børge Sørvoll, executive]

Okay. I think I've covered the majority of the questions here that I received online. And anyone in the room here that wants to speak or have a question? And I think we thank you for your time and that you had availability to show up to our quarterly presentation. We wish you all a great day.

[Jethro Holter, executive]

Thank you.