Gentian Diagnostics ASA

OSE:GENT

Earnings Call Transcript 2022-Q3

[Njaal Kind, executive]

Good morning, and welcome to this webcast of Gentian Diagnostics third quarter results. My name is Njaal Kind, I'm the CFO. And with me today, I also have Hilja Ibert that will start part of the presentation shortly. Before we get going, I just want to make you aware that you have a questions box on the right side of your screen. Please submit your questions during the presentation, and we will try to address as many of them as possible in the Q&A section that will commence after the presentation.

So with that, I will leave the word to Hilja that will go through the first few slides of the discussion.

[Hilja Ibert, executive]

Thank you, and good morning, everybody. Yes, this morning, you see a quite happy CEO. And I hope at the end of this presentation, you will better understand why. I would like to kick off the session this morning by introducing you to the company before we get to the financials. And I need a little bit of help from Njaal to move the slides, please.

Thank you very much. Yes. So for those participants this morning who had not heard about Gentian Diagnostics before, we are a company acting in the health care market but being fully focused to the clinical diagnostics segments within this market. That is the part where treatment is not happening. In fact, it is the step before helping treating physicians to diagnose a disease.

And in this case, our products, which are reagents, are not facing a patient. They are facing the samples of the patient, which could be blood, which could be serum and plasma, wound swaps, many, many different parts of the body, which are examined in laboratories. And the laboratories are the end users of our products.

We are a technology innovator, and we are fully focused on one of the major needs in this market, which is efficiency, gain of efficiency on both sides, the laboratory efficiency but as well as clinical efficiency. And the overarching goal is obviously to support clinicians by doing so to have better -- to take better treatment decisions.

So a little bit of an explanation before we go more into the details of our growth ambition and our growth plans is that our products are reagents, reagents which are used on clinical analyzers, which are provided by many other companies in this market. And major IVD companies are often found in those laboratories, but they don't have all menu items or biomarkers on their instrument platforms.

And this is where we are coming in, in adding value by adding biomarkers, which are relevant to such kinds of menu. The most important element in terms of efficiency is here as well that we enable the laboratories to shift those biomarkers from lower productivity, lower efficiency -- efficient platforms to be shifted to the highest throughput and therefore, as well, the highest laboratory analyzers from a productivity point of view.

That is the element, which drives value for the laboratories to use our biomarkers. By doing so, the laboratories have a value opportunity to provide now results from those relevant biomarkers to clinicians faster. That is a part of the efficiency gain using this highly automated instrument platform.

So having results faster and having now biomarker results, which have clinical value in addition to this, enables clinicians to take treatment decisions now based on information which are very important and relevant for the diagnosis of certain diseases.

So this is in a very high level an explanation of our core value proposition. And a high summary of our growth plan is that we have the ambition within the next 4 to 7 -- 6 years to grow the business to NOK 1 billion. And this ambition is based on 7 products, which we have in the market or in market development or in product development. And I will speak in a minute more about that. But it is equally important as well, and the ambitions that were equally based on the team, which we have assembled during the year, as you say, since the company has been started. So we have assembled a team of know-how, which is unique but very important as well for this market. And I will speak as well in a minute about that.

We are confident about our ambition, but when we are looking back, we have achieved a 27% growth between the years 2018 and '21. So I mentioned that I will speak a little bit more about these individual items I had mentioned before, starting with the team. We have a management team, which represents quite nicely the entire employees of the company.

Diverse and -- has been successful in supporting Gentian with the start and is being already many, many years with the company or having helped other companies to be successful and having joined Gentian more or less recently. But altogether, we have a deep understanding of our technology, and we have a deep understanding of the needs of our end users, the laboratories, but as well our commercial partners. The ones, who are selling our products especially as they have instrument platforms and adding them to their menu, they treat our products as if they are their own developed products.

Speaking about the products, 7 are part of our current growth plan. As you can see on the left side of this slide, we are addressing different kind of disease areas. Our focus is not 1 disease area. Our focus is those biomarkers, who drive efficiency on the laboratory and on the clinical level.

The laboratory efficiency is driven by all of these 7 on this list. The clinical benefit is very individual, very different. And I would like to give you a few examples. So cystatin C is the first product on this list. It's a protein which is addressing the kidney disease segment of this market. And it is a biomarker, which detects kidney failure, kidney function reduction earlier than alternative markets in the market.

And being able to have this cystatin C results fast provided to the clinician is supporting the clinicians to take action on reduced kidney function; with this, avoiding severe kidney failure. And with this, morbidity mortality and, of course, significant cost to the entire health care system.

Another example is the next product on this list, which is addressing the inflammation infection market, it's called fCAL. And here in this case, we detect protein in stool and not in blood samples like the cystatin C. The added value of fCAL is that -- physicians often are faced these patients, who have unclear symptoms in the bowel. And very often to be safe, they are sending those patients to the colonoscopy to better understand if there is anything wrong in the gut. That's uncomfortable and it's a high -- costly examination. And in many, many countries of this world, it is very limited so there are long queues. So in order to help physicians to have a better triage, which patients really need this examination and which patients don't need it. It's not severe, a normal diet can help here.

These results of fCAL help physicians significantly, and that is well demonstrated by the growth we have seen with this biomarker since the last year. So cystatin C and fCAL are examples of our category established products. We have as well Canine CRP in this category, we have as well the last one of this is fPELA in this category, just for your information, as I will speak later on about established products.

We have, as a next product on this list, GCAL. And GCAL is a product where we have as well one of the good news today and one of the reasons why I'm very happy today. And I would speak a little bit more in detail about that. GCAL is an example of a product, which is in market development. And as I mentioned, I will speak in a minute more about it. SARS-CoV-2 antibody is another example of a product, which is in market development, but the market development, which we will not drive ourselves.

It is a development, which we have to follow based on key opinion leader and respective governmental decisions to take on that opportunity to measure the immune status of patients. What not? This is what we always said from the beginning, we offer a tool, and I hope that it's taken by governmental decision makers.

And last, but this is being not least on this list is NT-proBNP, which belongs to the disease area, cardiac. An NT-proBNP is in product development. So we have communicated a lot in the last quarters about it, and I will therefore will continue with this, and we'll have a dedicated slide of it. So about GCAL. We have started market development efforts for GCAL 7 years ago in Sweden. And the last 3 years, we had rolled this further out as well in other European countries. Our focus both Europe and East Europe. This is as well important a small company to be focused.

GCAL is a biomarker, which detects early inflammation or infections within patients. And it is described scientifically as being earlier than alternative biomarkers, and this scientific discussion description has been supported as part of our market development in the last years by studies, which we have as well started and our collaboration with key opinion leaders.

And as an outcome of these efforts, we are very proud and happy to have announced another distribution agreement with a major diagnostic company. Yesterday night -- in fact, we announced it this night and we just announced this morning and believe that with this additional distribution agreement with a major diagnostic company, we have now a good basis to continue to go to the next level of market development, with this, supported by very well trusted and strong partners in the market.

I mentioned a second. So earlier this year, we have announced the collaboration distribution with Siemens. Siemens will concentrate to start with on the inflammation part of the market, while our new major partner is addressing the entire opportunities of this biomarker inflammation, but as well our efforts in the field of infection and respectively avoiding severe infections, which automatically can lead to sepsis.

Yes. So this is the beginning of a journey of acceleration of commercial effort. We had focused in the last year for market development. We see now the early results. We continue market development, but we have now much stronger means to have a commercial efforts and the rollout of the new partner is planned for early second -- first half of 2023.

And the NT-proBNP, our product in product development is progressing well. NT-proBNP is a well-established biomarker, high demand for this product, as it support clinician to identify congestive heart failure as early as possible so that prospective treatment can start. It's a high volume marker and shifting such a biomarker then to the highest possible automated and productive instrument platforms obviously appreciated by the market.

In addition to this, we aim as well to support this market with standardization of results, which is an issue. It's a confirmed issue in this market. And we had last year reported certain challenges, which had resulted in a delay of the product development, I believe, not really so uncommon since 30 years working in this market.

Yes, if you are working on breakthrough innovation, there are as well delays to be expected. Since the beginning of this year, we have been able to report progress made and as well for this quarter, I'm very happy to report that we have made further progress to -- with our new immunoparticle lead candidate. We have been able to develop a working prototype further robustness testing are required. So before the optimization cost of the product and final product design is accomplished, but so far, so good news.

So with these 7 products, how have we counter our ambition that is based on bottom-up indications we have from our partners and as well end users and top down as well, obviously, from market data, which we had acquired from Kalorama covering 2020. As we speak, we are updating these data. But corona had a significant effect on the market, and it was not helpful during the last years to update anything as it's a big flu.

But it's now the right moment to understand what are the new estimations and expectations for the future for the categories we have established. So I mentioned before, the so-called established products, and we have differentiated between the total addressable market and the serviceable market. So let's focus on the serviceable market as that is the market which we completely address with our biomarkers and for the established product, that is the market of USD 180 million.

GCAL alone is addressing with outstanding of 2020, a market of USD 300 million and NT-proBNP $800 million, I mentioned it's a high-volume product. And SARS-CoV-2, we focus currently only on the Nordics market, therefore, we have -- we are very modest with our assumptions on the service of the market. So all in all, we are getting to USD 1.3 billion serviceable market as our target markets.

We strongly believe that we have the opportunity together with our partners to achieve market share between 15% and 25% depending on the category and the respective competitiveness in these categories. And as Gentian is selling mainly via commercial partners, we take from that share of 30% to 50%, depending on the contracts we have in place. All in all, the market growth was in 2020 estimated to be 8% to 9%. Let's see if this continue, but overall, it's a nicely growing market.

And with this, that all we concluded with we have an opportunity to bring our company within the next 4 to 6 years to USD 1 billion. And why are we confident? I mentioned this already before during the last years, we have been able to grow our business by 27% in average. And we have been able as well to grow our commercial footprint with partners like Siemens for GCAL, as I just mentioned before, Beckman Coulter for cystatin C and Roche for fCAL via our partner BÜHLMANN from Switzerland.

And more contracts have been established this year as we had announced them, but there had been with partners, which do not want to be named in public yet by us, and that is as well a common practice. So nothing special about this. And with this, I hand over to Njaal to speak a little bit more about what happened in Q3.

[Njaal Kind, executive]

Thank you, Hilja. So I'm going to give a rundown of the figures that we disclosed in our quarterly report this morning. I'm pleased to announce that sales are up by 34% compared to the third quarter last year and coming in at NOK 23.1 million. The third quarter for us is normally a seasonally weak quarter due to the summer holidays in Europe where the outpatient market is going down.

But compared to last year, it's quite stronger. We have over time -- for some time now invested in the U.S. market with feet on the ground and also market activity. And we now see a quarter again with very strong growth, although from a low base, but the progress is being made there. We also -- Hilja spoke about distribution agreement for GCAL. We have also completed a distribution agreement for cystatin C, and we expect to see sales from that distribution agreement for next year.

Another big milestone for us is, of course, the IVDR certification. Our regulatory affairs department has worked hard to achieve this certification, which will become a requirement over time, and this is basically our license to operate. So we are obviously very satisfied that we have achieved this IVDR certification quite quickly, which proves that our regulatory affairs department has done a good job on this project.

Also, as Hilja mentioned, we are making progress on NT-proBNP with now a working prototype and further optimization will continue, and we will update the market accordingly when the progress is being made. And as mentioned GCAL, we have already an agreement with Siemens, which is operational, developing positively, and this morning another agreement on the same product.

So quite a busy quarter. We are happy with -- satisfied with the activity during this quarter and also these few days after the quarter.

If we break down the sales, you will see that in absolute figures, it is Europe that's being the biggest contributor to the sales with NOK 17.3 million compared to NOK 12.4 million same quarter last year. You also note that sales to Asia is down by just over NOK 1 million.

This is due to continued lockdowns in some major Chinese cities, and that has had an effect on the demand for cystatin C. We don't see any other effect for cystatin C in any other markets, really. And as I briefly mentioned on the previous slide, you see that there is a percentage-wise large increase in sales in the U.S. going from just over NOK 0.5 million to NOK 2.6 million in this quarter. That is mainly cystatin C.

So looking at the product split, you'll see that this quarter, we have a growth in all the segments we report on. So despite China being on the weaker side, we still report growth on cystatin C, but the biggest contributor to the growth is culturable, where we have had a nice development, continued good development of sales, but we also have effect of third quarters -- this quarter. So nice contribution there. The other revenue part is smaller products that we don't report on separately so that will be cCRP and our fPELA [ project ] and the third-party distribution activity that we run out Sweden. We also see continued growth there.

We also have -- of the revenue booked in the P&L. And for those of you who doesn't know us that well, that revenue is related to tax breaks and grants, which we are awarded based on our R&D activity. Total of about NOK 2 million from that activity as revenues this quarter.

Cost-wise, we have an OpEx of about NOK 18 million this quarter, which puts it sort of in the middle between what we reported for the first quarter and the second quarter. Normally, we have an increase from the third to the fourth quarter. So we expect operating expenses to increase somewhat for the last quarter of this year. We are quite conservative in our R&D cost treatment. We capitalize only when the products or projects are quite close to completion. So capitalization on R&D this quarter was NOK 1.2 million. Last year, it was NOK 3.9 million, and that was related quite much to the finalization of the COVID-19 antibody test.

Looking at some of the balance sheet parameters, we have positive free cash flow this quarter. That's an improvement of almost NOK 8 million compared to the same quarter last year. The reduction or the improvement in free cash flow comes from a reduction in working capital. We had a strong development on the accounts receivables, but we have also had our tax settlement in -- received in September. Normally, that's a fourth quarter item. So that's a timing effect of about NOK 5 million.

CapEx. So then we'll be taking both the capitalization of R&D expenses and equipment CapEx of NOK 3.1 million, the equipment CapEx is less than NOK 1 million here. And that is, I think, more the normal level for CapEx going forward. In the first half, you remember we had booked quite significant amounts on CapEx due to the plant expansion here, which is now completed, and we now see only maintenance CapEx going forward.

Working capital, just to mention that very good development this quarter. We do not expect to have this low level of working capital on a permanent basis. So we believe that it might increase a bit again in the fourth quarter. With that, I leave the floor on the screen again to Hilja to give some closing remarks before we start with the Q&A. Please submit your questions in the questions box if you have any. Thank you.

[Hilja Ibert, executive]

Thank you so much. I would like to conclude our presentation this morning by recapping our long-term ambition and prospective strategic goals and somehow taking that in context of our achievements in Q3. So -- we have the ambition to grow our business significantly to NOK 1 billion within 4 to 6 years. During these years, we expect our established products to grow 20% or more on an annual basis. And looking now back to Q3 and the year-to-date performance, I'm pleased with what we have achieved so far.

An accelerator of growth is expected to come from GCAL. So we continue to demonstrate the clinical value, but of course, speaking about the commercial element as well gaining commercial partners, but as well as the support and trust of key opinion leaders. All of that has happened in this quarter. So as well, I'm quite pleased about that.

With NT-proBNP, we have another growth accelerator and the product needs to be -- the development need to be finalized. And we are quite pleased with the progress made for this quarter and more to report, as we have made more progress on this. We have as well additional product in our pipeline. And of course, as it takes several years to develop a product, their influence on our 4 to 6 horizon is lower, but it should not be underestimated.

So therefore, we have products in pipeline, and we are pleased that we have moved now the second product into the so-called proof of concept phase, which is an early phase, a phase where the chance of succeeding is still relatively low. So therefore, our general communication strategy is not to speak about those projects in detail, as we may stop them as well due to technical reasons or as well because the business opportunity is not confirmed throughout that phase.

So as well during Q3, we have made progress by shifting one product into the, let's say, pre-development phase and another reason to be pleased with the performance of Q3. We have mentioned today our great news about adding another contract with a major player in the chemical diagnostics market. And we have the strategic goal to at least -- to achieve at least one per year.

We have now already achieved 5 this year and for several products. So this is as well what is important that we start with cystatin C and that we have with GCAL as well as now continued to fill or to increase our commercial footprints.

From a financial point of view, we have the aim to increase our gross margin from about 50% today to 60% based on the increased volume to be expected during the next years. And with cost discipline in place, we have the ambition to achieve EBITDA margins long term in the area of 40%.

And volume a little bit down from long term 4 to 6 years to what you can expect to see from us in the next 12 months. On the established products, we are continuing to gain or we aim to gain additional large commercial partners all over the world. And we aim as well to bring additional products to the market. And we have as well thought and have opened ourselves to include the third-party products into this based on the great success we have as well with our distribution efforts we made in Gentian AB reported in earlier quarters.

With GCAL, we aim to continue to secure global commercial partners focus on the EU to start with. Those negotiations, especially with an early biomarker until market development, takes much longer time than for established products. Continue as well with the clinical study program, we have a good collaboration with the key opinion leaders all over the world.

And this altogether will lead to publications to be expected within the next 12 months, which further supports the clinical support and the clinical true source that -- about the value of the GCAL in severe infections, but as well inflammation.

For SARS-CoV-2, I mentioned before, it is a product we have developed, strongly supported by the Norwegian government, as well with a key opinion leader here in Norway. And it is now up to the government to decide if they aim to better understand immune status of the population. And if that is the case, we are ready to provide a very powerful tool to laboratories.

And with NT-proBNP, great progress made, to be continued. We aim as well within the next 12 months to publish information about our reference method, which is a tool to allow or to support the market with the standardization and harmonization effort of results. And by doing so, we obviously continue to secure endorsement of key opinion leaders in this field, in addition already to the already established Scientific Advisory Board.

With that, I will leave my last slide, and we are ready for the Q&A.

[Njaal Kind, executive]

Thank you, Hilja. So I will moderate the Q&A. And please feel free to post questions in the question box on your screens. I think we'll start today's Q&A with some of the questions that we see here related to GCAL and today's announcement of this contract with GCAL.

I think we say in this announcement, Hilja, that we expect a rollout of GCAL during the first half of 2023.

Do you -- could you give a bit flavor or comment a bit about how this relationship with these big distributors or players, how it works after we have signed the contract?

[Hilja Ibert, executive]

This is when a completely different kind of work starts. So we have put all our efforts now to sign this contract. During that period, we have a validated, qualified our value proposition and robustness of the product and the needs in the market. So this is now written in a contract. But now we have to make hundreds of employees, mainly commercial employees, being aware about this new menu items.

In parallel, there is still a step called validation, which we do now, as we speak, to make sure that the product works perfectly well on the instrument of that partner. So that requires a few months of work because we don't want to see any problems with new customers in the field.

It's better to know about that before, and then we can fix it and then we roll it out. So that will take now a few weeks or month. In parallel, we do the training and awareness of our partner employees. We are involved -- directly involved in training and as well in the development of material -- sales material and marketing materials.

[Njaal Kind, executive]

So substantial amount of work that actually needs to be done also from our side to entertain and capitalize on...

[Hilja Ibert, executive]

And I think that is very important what you just said about our side. It is not possible as a partner of those companies to sign a contract and to go away and say, "Now please order, and you do with the product what you want." In fact, they don't want it. They want to be supported from the originator of that product because they have so many products to sell through, and they need us being focused on that line.

[Njaal Kind, executive]

Understood. If you look at some or more detail around that contract question here, is we say that this agreement covers inflammatory diseases and infection. And does it include sepsis? And you might want to comment a bit about sort of sepsis, and the problematics around the diagnosis.

[Hilja Ibert, executive]

Yes. Very good point. And it is as well important to differentiate between what the tool like GCAL does and what the effect is. So what we do with GCAL is we detect the reaction of the body to an inflammation reason or -- and inflammation is somewhat as well an infection. The infection is more severe part of causing a potential disease.

And sepsis is a disease, which is [ quite hard ]. At the end of the day, in a high percentage, people die from sepsis. And in order to avoid the status of sepsis, clinicians all over the world aim to detect an infection as early as possible, even before the fever comes up and treat respectively, already early enough. And as earlier you treat as higher the chances that you avoid sepsis. So that is here the difference. We target infection, so detection of infection in -- early in order to avoid ultimately the development into sepsis. Is that clear?

[Njaal Kind, executive]

Yes, I think so. Let's see if there is some follow-up on that. And related to market and our initial launch that will be in Europe. There's also a question here on what other countries or regions that we are looking at. And the question is, who will be responsible, I guess, for the regulatory approvals? Will it be our partner? Or will it be us?

[Hilja Ibert, executive]

Yes. So we focus as we speak on Europe, and that makes a lot of sense because we have with the IVDR certification, as you just heard from one of the great achievements within Q3 as well, as well for GCAL. So the focus is on Europe, and that will keep us busy for the next months, potentially years.

In parallel, we are looking with our partners, not only for GCAL and this new contract. In fact, we are looking constantly with our partners, which countries do we go from a commercial point of view and start registration.

The registration process is in the -- for major countries long so that means we focus on the growth in the next year, 2 or more is from Europe, the growth for 3 years and beyond is coming then from other countries because of the registration process takes time for key countries.

Having that said, there are smaller countries, which we will go after, definitely a big milestone-wise. It's a question of years, and to the second part of that question, who is in charge. That is very dependent of the contracts in place. And especially now for this recently announced, we agree to not speak in public upon that.

[Njaal Kind, executive]

Thank you. I think that's some additional detail and information about the GCAL contract. A few questions regarding revenues. One here is -- whether we are satisfying with the growth in revenue so far.

I think I can answer that. I think we are quite satisfied with the growth of existing products that we have seen in the second and the third quarter of this year. First quarter was a bit on the soft side that we are seeing now a good increase. When it comes to GCAL, we are, of course, impatient.

We want more, but this is a market development project, and we work on that and the results are starting to show the disagreements. And when we have these agreements, if we work on those, we will see where the new from GCAL picking up. That's the ambition.

Having said that, as you know, we recently expanded the plant multiplying our capacity with a lot. We have production capacity, we have treatment capacity. We can take on more growth. We can take on higher volumes. And that's what our marketing and production people work on almost every day.

So I think, yes, we can say we are on 1 side. We are satisfied. On the other hand we can do -- and that's what we are working to do.

A question on the U.S., Hilja, could you provide a comment into -- I mean, we go from a NOK 0.5 million to NOK 2.6 million in the U.S., while we have NOK 70 million of revenues in Europe. Could you elaborate a bit on maybe the potential or how we see the U.S. developing going forward?

[Hilja Ibert, executive]

The United States market is a great opportunity for us. We have made limited investments earlier, and due to corona, the yield of these investments have been somewhat delayed, but what you just described on a low level is confirmation that when you do the right investments in the U.S. and don't believe that you can run a successful business as a European in U.S. You need to be local. You need to be there. The market is very different than European or as well as an Asian market.

So we're there, we are there, and we see the results now. And as we go, we have -- obviously as well we aim to further build the business in the United States, but there is as well this element of registration, which we have just discussed before.

The U.S. has a different market access registration so-called FDA approval or clearance and that is a different process than the IVDR, very similar, similar thorough and requires time and as well, the positioning of products might be different in the United States. So therefore, be first there, be local, understand needs of this market, the dedicated need and position of the product and do the registration. So this is mid- to long term.

[Njaal Kind, executive]

But then when we look at our current products, so for cystatin C, we have a 510(k). For fCAL turbo, our partner is BÜHLMANN and a 510(k). And for fPELA and CCRP, they are exempt from registration. So is there any reason, let's say, long term that our existing product portfolio should have lower sales in the U.S. than what we are performing -- currently doing in Europe.

[Hilja Ibert, executive]

As I said before, the markets are different. And for example, the fCAL, the examination of stool in the U.S. is less popular than in Europe. While we say this, there is a trend that this is increasing. So that is 1 of the reasons why you see there a lower demand than in Europe so far. But of course, our partner BÜHLMANN is working hard to change that as well with our partners like we have mentioned before, Roche. So powerful partners together, we make the market aware as we see positive front as well in those markets. But this is the reason why there are differences.

[Njaal Kind, executive]

Thank you. Yes, I think we have -- in fact, there was not a lot of questions today. I think we have then come to the end of the list, in fact. So with that, we want to thank you for attending this webcast. And we will be back again in February, date to be announced with our fourth quarter results. So thank you very much.

[Hilja Ibert, executive]

Thank you.