Gentian Diagnostics ASA

OSE:GENT

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Njaal Kind, executive]

Welcome to this presentation and webcast for Gentian Diagnostics second quarter results. My name is Njaal Kind, I am the acting CEO and CFO of Gentian. With me today coming into the webcast in a few minutes, is also Aleksandra Havelka, our Chief Scientific Officer; and Markus Jaquemar, our Chief Commercial Officer.

Before we start, please note that you should have a questions box on the right side of your screen. And if you want to ask us some questions, you can do that during this webcast, and we will address those questions in a Q&A session towards the end of the presentation.

With that said, we will start this webcast now. Just a short reminder in case you have not familiarized yourselves with our company. We are an IVD company dedicated to increasing the efficiency of the diagnostic products that we produce and sell. And our value proposition is to take existing markers, running on low throughput platforms and by reducing our technology, converting them into markers that can be run on high throughput analyzers. The effect of that will be reduced costs in the laboratory and faster results to the patients. So clearly, an attractive value proposition, both for laboratories, clinicians, and at the end of the day patients.

We have built our business and strategy on four pillars. First of all, we do have seven tests, five of them are what we call the established tests. They are in the market. And then we have a promising test called GCAL in market development and NT-proBNP, our cardiac marker, is in product development.

We have a strong team. People is everything in this business, and we have built an industry-leading team both in terms of R&D capabilities, manufacturing and commercialization of our products. Our strategy is not to build a huge commercial organization with sales representatives in every country in the world. We rely on strategic partnerships with the large IVD players.

Today, we have entered partnerships with many of the large IVD players for our existing and established products. So we know that this business model works, and it keeps our cost down, but maintains our ability to scale the business and grow the business as demand increases. And that is shown by the around 30% sales growth that we have seen per year in the period 2019 to 2023. Yes, that's a short introduction to the company.

If we now look at the second quarter results, we announced today sales of NOK 38.3 million in the second quarter. That is up 12% from last year. Currency adjusted organic growth, as we call it, is 13%. If we look at the first half, it's been a good first half with 17% top line growth or 16% currency adjusted or currency-neutral growth.

EBITDA has seen a strong improvement, both in the first and second quarter. For the second quarter, we now report EBITDA NOK 6.8 ,that is versus NOK 3.1 million (sic) NOK 3.6 million EBITDA last year, which was a strong quarter EBITDA-wise last year. Year-to-date, we have NOK 11.6 million in EBITDA. That compares to NOK 3.1 million in the first half of 2022. So a tripling, more than a tripling of the EBITDA compared to last year.

Gross margin, very good performance on gross margin, 57% compared to 53% last year. we have a long-term ambition to have a gross margin of around 60%. So we're not too far off there.

We are positively influenced by the product mix in the quarter and also the first half. We will come back to that in the product review. But all in all, we are now completed the integration of Getica, which we acquired in July '23. And these numbers reflect the full effect on the gross margin from that acquisition and integration.

Integration, by the way, has grown, run very smoothly. And we have now we are now running the majority of manufacturing processes that Getica was running. We are running those in-house here in our production facility in Moss.

If we look at the best performer in our sales, it is the fCAL turbo assay. This is fecal calprotectin that is used to measure problems or inflammation in the bowel. Sales increased by 26% in the second quarter, and it's up by 33% year-to-date. So very strong sales performance on fCAL turbo.

Cystatin C, we are still seeing growth, 8% in the second quarter and 9% sales growth now in -- for year-to-date. What we have noted is that we see some weakening in China. And this is due to a tender process, which, I believe, Markus will speak about the change in the tender process and our, let's say, our sources in China are indicating to us that this might continue also in the second half.

On the product development side, a major milestone was reached in June where we declared that the optimization phase of NT-proBNP was completed and that we now move this marker or assay into the verification phase, after that validation and then regulatory, and then launch, but a major derisking of the project, and hopefully, verification will prove that everything we have done in optimization is good.

Looking at the breakdown of the sales, we can start with the geographies. And since fCAL turbo is the highest-growing marker, we see that, that has an influence on the European sales, which went from NOK 25.5 million in Q2 '23 to NOK 28.6 million in the second quarter of this year. U.S. is for the quarter, flat. But for the first half, we still see an increase, and it's ahead of where it were at the same time last year. Please note that in the U.S. numbers are still small. So we will see variations from quarter-to-quarter.

In Asia, so far, we see some moderate growth for the quarter. We have seen sales increasing by 17% year-to-date, it's up by 10%, somewhat lower than where we wanted it to be, but we will speak to that a little bit later.

On the product side, we have already spoken about Cystatin C and fCAL turbo. You will note that third-party product is flat compared to the first half last year. However, it's a bit down compared to the second quarter. Second quarter last year was very high due to some one-offs in terms of sales. And there's also been some rescheduling of orders, meaning a bit of delay in orders. So we are looking for this to normalize sales wise a little bit later in the year.

Cost development. Let's start with the gross margin. 57% is -- we are getting closer and closer to our target of 60%. We are, you can say, somewhat ahead of plan, and this has to do with the product mix. But in a longer-term perspective, that the trend here is quite clear. And as sales grow, we aim to improve gross margin.

Looking at the other OpEx, not related directly to the manufacturing of products. It's quite stable. We see increases in sales and marketing and admin expenses. This is mainly cost inflation not necessarily addition of people or activity in sales and marketing. There is some addition, but not in the admin part, and we see a reduction in R&D. That reduction is due to the fact that in the developed -- different development phases, we have somewhat different costs in terms of both reagents and consultants and external services mainly. So that's a bit down, but I would take that as something which is necessarily happening going forward.

Cash position. So compared to the same date last year, our cash position is essentially unchanged, means that we have stabilized the cash. Very limited CapEx, as you can see, compared to where we were in the quarter itself, we had a cash burn of NOK 4.6 million. That is mainly related to changes in working capital, which will vary over the year, and our working capital consists mainly of stocks and receivables. Long term, we have said that working capital will be around 30% of sales.

I think I will now leave the floor to Aleksandra, which will explain and give some details about the optimization, completion and optimization of NT-proBNP and what that has to do what are the implications for us on that.

[Aleksandra Havelka, executive]

Thank you, Njaal, and good morning, everyone. I have a pleasure today to talk about the progress we made with the development of our NT-proBNP assay. As you know, NT-proBNP is a biomarker for detection and management of heart failure. So as we have previously communicated in the press release, we have achieved a very important milestone, moving this assay from optimization to verification phase.

So during optimization phase, we have done extensive validation, technical and analytical validation of the assay prototype, and we are sure that we have been able to develop a prototype that meets criteria required for moving this assay from optimization to verification phase.

In the optimization phase, besides this extensive analytical and technical validation, we have also done a comparison between the results obtained on different instrument platforms. And we see a very good and strong correlation between results on different platforms, different instruments from several manufacturers, which is very important for assay as ours, which is an open channel assay that could be applied on many different turbidimetric high-throughput analyzers. So what does it mean? Yes, that means that having the assay with the comparable results or different instruments, we'll make this assay more available with gain of both cost and the throughput efficiency.

So now moving the assay into verification phase means that we will confirm good results from the optimization phase. We will do testing of the scale-up of the product, and we will also perform clinical evaluation of the assay using clinical cohorts and samples, clinical samples for the patients.

The final time line for the final commercial launch is difficult to predict because, as you know, it involves the regulatory review and approval from regulatory authorities, the process that can take 6 to 12 months. So that's why our aim is to launch a research use product in second half of 2025. And that product can be available for partners and customers who are willing to familiar with the product and test the product on their own instruments and in their own environment.

So this is everything from me. I will be happy to answer any questions at the end of the presentation. So I leave the floor to Njaal.

[Njaal Kind, executive]

Thank you, Aleksandra. Thanks for that rundown. We also have an organizational updates, as we have released previously. We have made two key hires that's made post quarter. First of all, we have hired Matti Heinonen as our new CEO, and long-standing experience from the life science industry. He will start October 1, and we are looking forward to having him on board. The second key hire is Frank Frantzen, hired as Chief Technology Officer. Frank also has a long experience from the diagnostic industry. He was actually a Board member of Gentian Diagnostics from May '22 to December '23, he knows the company very well. And he is already at work full speed. So these are two key hires, which will contribute to the development of the company. So we're very happy to have those both of those.

Product update, yes, that was basically for me for a few slides. I have Markus here with me, and he will give a few more details on the product side. Markus?

[Markus Jaquemar, executive]

Thank you so much, Njaal. Good morning also from my side. And I'll provide a little bit more detail on the three major revenue-driving products that we have in our portfolio. And I'm actually going to start with Cystatin C our traditional flagship product that was introduced more than almost 20 years ago now.

What has been a significant change, and we have mentioned that in previous webcasts is that there was a global guideline that was published and issued at the end of the first quarter by KDIGO, which is a global nonprofit organization, providing guidelines for clinical use and implementation of kidney-related testing. And so Cystatin C is now recommended to be used as part of testing of patients that are suspected of having kidney failure. And using Cystatin C in the testing procedure, we help or will aid in actually diagnosing and treating suspected CKD patients better and earlier.

Now the implementation of this global guideline is not something that has an immediate effect overnight but it's a significant change recommending a different practice and implementing Cystatin C testing globally in hospitals, but also in outpatient settings. So this has a significant effect long term, but we see an implementation of those guidelines over the next couple of years, and it will drive demand globally.

What we have seen in the first half, we've seen continued product sales. In the U.S., adoption of Cystatin C testing has happened in the U.S. a bit earlier. KD was actually originally U.S. organization. So that implementation has happened earlier. But also, we have seen good success in Europe already in the first half in 2024.

The reason for this is that our customer base is growing directly, but also through our partners that we have on board. And at the same time, also the average number of tests per institution per laboratory is increasing also based on the increased demand by clinicians for that assay.

On the other hand, and Njaal has mentioned it, we see some different trends in Asia. What has been very significant is that China, specifically China has implemented a new tendering process in 2023 and has actually implemented that in almost all provinces in China. Now the demand has not changed. What has changed is that there are partners in China that are more prudent about stocking product at the current time, which we will see until the impact of this tendering process has normalized, then we should actually see a more standard order pattern as well from our side and through our partnership with Beckman Coulter Gen.

As you see across the quarters, you do see some variation overall. Quarter-to-quarter, we have actually seen small growth, but we are on a strong trend and trajectory growing the Cystatin C business in general.

As Njaal already mentioned, a very, very strong performance on our fecal testing portfolio, especially fCAL turbo in collaboration with our exclusive global partner Bühlmann. And you see 26% growth in the second quarter with even 33% in the first half. And this is driven really because this product is really ideally suitable for the need of automation in the laboratory. And at the same time, it provides a very ease of use and an easy workflow for the adoption and implementation in core laboratories with a challenging sample type, which is [indiscernible].

What we have seen also and if you actually look at the quarterly trend, you also do see some variations. We have a few large IVD partners that operate globally. And so those orders from those partners actually also impact the quarterly performance in general. But what we're seeing is the orders from these large IVD partners are increasing, which is obviously in line with the overall trend of adoption of the assay and successful commercialization with our partner, Bühlmann.

The third element of our larger revenue contributors is the third-party products. These are products which complement our own portfolio in the Nordics via our subsidiary, Gentian AB. What Aleksandra actually and her team have been able to establish a very high level of sales on a continuous level. You do see some variation, especially when you compare quarter-to-quarter. Njaal already mentioned it, it was influenced by one-off orders last year, but we have been able to establish a continued high level of continued sales within Gentian AB. And we have some -- acquired some large customers with promising outlook also for further growth going forward. That was my contribution for the selected products, and Njaal back to you.

[Njaal Kind, executive]

Thank you, Markus. Just wrapping up with a few slides before we go into the Q&A. As you can see from this longer-term chart of geographical sales, you see that in Europe, we are growing steadily, and we are also -- although not large yet, we are growing in the U.S. market. When it comes to the Asian market, we have seen and we expect to continue to see significant or large variations in the order pattern. Just for the last 2.5 years, quarterly sales to Asia has varied between NOK 3.1 million and NOK 11.5 million per quarter. And right now, we are at around NOK 7 million per quarter. But here, we do expect some variations and coupled then with the uncertainty in China on the tender situation.

Summary from this Q2 rundown is that we still have good sales momentum, but there is some uncertainty in connection with volumes to China, which we expect will continue into the second half. We had a strong improvement in gross margin. So together with growing sales and improvement in gross margin, we then see a significant improvement, a strong improvement of EBITDA to NOK 11.6 million for the first half compared to NOK 3.3 million in total for 2023.

And obviously, we are now in the verification stage with NT-proBNP being out of optimization. That's a big achievement here in terms of the product development for NT-proBNP, and we are pushing on, and we will keep you updated once we have more news regarding the development phase.

So with that, I will ask Markus and Aleksandra here to join me again and we will have a Q&A session.

[Njaal Kind, executive]

So again, if you have any questions, please go to this side maybe because I need to see the screen. So if you have any questions, please use the question box in on your screen. We have already a few questions in. And I think I will start with the on Cystatin C. It says you have signed several partnerships for Cystatin C in the U.S. and Canada. When will these deals be reflected in sales.

[Markus Jaquemar, executive]

Canada, I'm not sure about Canada now. I mean we have, yes, we are working with Beckman Coulter in Canada is already like we do globally actually. So that includes the U.S. and Canada. We have one additional partnership in the U.S. that is correct, which is support -- which is supposed to see an impact on a slightly larger scale because we had some initial sales already in 2025.

[Njaal Kind, executive]

Thank you. Sticking with Cystatin C because I think I saw KDIGO here. You say that full commercialization from updated KDIGO guidelines will take 3 to 5 years. What is the full commercial potential in this regard?

[Markus Jaquemar, executive]

Very good question. And we've done some market analysis on this. Yes. So our estimation based on market input, but also based on discussions with key opinion leaders is here that full implementation of the KDIGO guidelines means an approximately 4 to 5x increase of the market demand over the next 4 to 5 years. So that is significant, yes.

[Njaal Kind, executive]

That is significant, yes. Okay. Let's see, we can stick to -- we try to group these questions a bit. Excluding China, are the strong sales momentum expected to continue.

[Markus Jaquemar, executive]

So the market in general for Cystatin C.

[Njaal Kind, executive]

I think for all products, really, it's my interpretation. It doesn't make reference this question to any product.

[Markus Jaquemar, executive]

I mean I think the good news is that all of our products are addressing segments with increased demand. So that means the market is growing for all of our product portfolio. And obviously, this depends a bit on our capabilities to commercialize those products together with our partners. But the answer is yes, strong demand will continue for those products, including sales growth for us.

[Njaal Kind, executive]

And then maybe a prediction on China. If we can talk a bit more to the China dynamics, what is affecting the demand in the short term and when you believe it will ease as we are coming into a to separate between end user demand and distributor demand there.

[Markus Jaquemar, executive]

Yes. So actually, Cystatin C testing in China is when established since many years. That means it does show different dynamics compared to some other markets. However, the market demand for Cystatin C and the testing demand with this implementation of tender is not changing. What is changing is that local partners take a bit of a cautious approach at the moment, stocking up with Cystatin C assays because the full impact of the new tendering system is -- has a certain in predictability. And that is what is affecting short-term the business.

But long term, the demand is not impacted by this new procedure. At the same time, what we do see in China is the so-called China First Initiative. So the government is obviously interested in providing Chinese-made products. However, from our side, as our business model with our partner in China is it is actually considered a Chinese-made product. So we actually are part of that China First Initiative.

[Njaal Kind, executive]

Thank you. Shifting to NT-proBNP. Yes, as we stated, we are now in the verification phase. And the question is, what is -- have we experienced any interest for this product from partners? And more do we have any negotiations ongoing?

I think that will be to not the type of information we would provide. But I think if we can indicate something on interest from potential partners on this project.

[Markus Jaquemar, executive]

So we have done a few things from a commercial perspective. We have obviously tested the market. We have done some extensive market research on the probability of adoption of such a product which has been favorable for one. At the same time, we have provided information to potential partners that have a gap in their portfolio for such an assay. And we have seen a good level of interest. They are looking to be provided with clinical data and the performance of the assay. But the interest, including global IVD partners is existing, and we're following up with that on a continuous basis. Very promising.

[Njaal Kind, executive]

Good. Thank you. A few questions related to M&A here. M&A activity are expected to pick up from the second half of '24. And the question is, again, to notice any interest from the industry.

When it comes to M&A, we have stated that we are, let's say, on a more opportunistic basis. We are interested in adding to the business, but we are patient. And we really need to know that if we make an acquisition or merger that it will be successful and value-creating for our shareholders.

When it comes to the increasing activity, what we have seen is that, yes, in some segments of this industry. We have seen activity increasing, especially where companies are in need of funding. We are looking more towards companies that has existing products, hopefully, an existing revenue base and earnings base like we now do. So that's where we would look, and we would not necessarily look at companies which are in an earlier phase.

I think the other question related to M&A were if our relationship with Bühlmann will be affected by Bühlmann being acquired by our partners. We have no indication of that. And obviously, Bühlmann being one of our most important partners. We are looking to continue that relationship.

Yes. So yes, the last question coming in here. Can we speak a bit to the continued GCAL rollout and what we should expect going forward. If there are any specific hurdles you need to overcome in order for sales to really take off.

So yes, I think the background here is we have GCAL is a marker we have in market development. We believe that this marker has a significant potential. However, current sales are not fantastic, but we are working in terms of market development to increase sales of that marker.

So I think for the question itself, Aleksandra or Markus, if you want to take.

[Markus Jaquemar, executive]

Clinical side, I will add on that from the commercial perspective.

[Aleksandra Havelka, executive]

So what we are doing, as you probably know, we have promising results from the field of infection and inflammatory response infection, and we will continue that part to raise the awareness of the good performance of the biomarker. In addition, we are looking into expanding our efforts and initiatives in another fields like autoinflammatory diseases, rheumatoid arthritis and other autoinflammatory diseases. So because calprotectin is well known as inflammatory biomarker in that field, and it's already included into guidelines related to specific informatory diseases.

So that's not what we are doing now. We are expanding our network within clinicians and customers, and we are planning new collaborations. So, yes, a lot of activities are ongoing both in the field of the infection, but also in other inflammatory disorders.

[Markus Jaquemar, executive]

I think from a commercial and marketing perspective, initially, the product was positioned in a rather wide area from a clinical perspective. And as we move forward, we are actually very diligently working on positioning the product in specific segments, which what we call patient center benefits. So we actually create actionable items for the clinicians based on the results from GCAL.

And that is a learning in the market development of a product. And so we're actually moving into that phase and both from a, let's say, clinical target area, but also looking at additional regions, including the U.S. in the future, how we position the product and we're making great progress. And we have commercial partners, which are also now starting to roll out the product through the organization.

[Njaal Kind, executive]

Thank you. Yes, we have another question in here relating to our ambition of signing partnerships deals, at least one annually. And the question is can we expect the same for 2024.

Let's say, we have this ambition, and we will never give up on that ambition. Some of these partnerships deal take a long time. We have several in the pipeline, let's go with that. when they will come to completion is difficult to say. So the timing aspect here is uncertain, but we will push as much as we can to close those deals as quickly as we can. So the ambition is here, the timing is difficult to be specific.

So with that, I think our list of questions. We have come to the end of the list of questions. So with that, we would like to thank you for participating to this webcast this morning. We will be back towards the end of October with our third quarter results. And in the meantime, if you have investor-related questions, please don't hesitate to get in touch with us.

So with that, thank you, and see you soon. Bye, bye.