Photocure ASA

OSE:PHO

Earnings Call Transcript 2023-Q2

[Daniel Schneider, executive]

Well, good morning, good afternoon, everyone. This is Dan Schneider, President and CEO of Photocure. With me today is Erik Dahl, our Chief Financial Officer; and David Moskowitz, our Vice President of Investor Relations. Welcome to Photocure ASA's Second Quarter 2023 Results.Just a reminder, usual disclaimers are in effect for today's presentation.All right. So if you recall on our earnings call in Q1, we discussed two headwinds heading into Q2. The expected phase down of flex BLC, Blue Light Cystoscopy, and the difficult year-over-year comparison, primarily the German hospital stocking that occurred last year in front of the price increase in the European business and also the snapback from the Omicron phase of COVID. So keep that in mind, I think the overall results were good and despite those headwinds, we had 16% revenue growth in Q2 with positive EBITDA from our commercial operations.Importantly, on a sequential basis, both our North American and European businesses grew off a strong quarter that we reported in Q1. Sequentially, revenues were up 9%, with unit volume up 6% compared to Q1. We continue to expand the base of rigid towers Saphira in the U.S. during the quarter with 13 installations, 8 were for new accounts, 5 for upgrades, and we'll get into this, but this was in a nonpromotional quarter for Karl Storz, and we'll talk about that in a moment. So we believe some of the customers did defer their purchases and ultimate installations in the Q3 and rest of the year.Kicking off Q3, however, Karl Storz shared with us, and they don't typically do this, they were 40 quotes sent to customers in the month of July alone. And we know this discount program of 20% off towers and 30% off camera heads approximately, it really generated a lot of interest. It has resulted in 12 purchase orders. So these are quotes that have now made it through the capital budgeting system of hospitals and have now moved to the purchase and then ultimately, the installation and the use of Blue Light for the second half of 2023. We believe this is going to bode very well for the rest of the year.This promotion they're running for third quarter, which began in the beginning of July, intended to end the end of September, there is a good chance they will run it to the end of the year. They've indicated that as such.If we go to Panel 2, we've received a $2.5 million milestone from Asieris for the Cevira program. This was a timestamp on the program itself. It drove EBITDA to NOK 23.4 million in the quarter. Notably, we are containing our expenses with operating costs roughly level for the last seven quarters, excluding the impact of foreign exchange and business development expenses. So we are working on the leveraging of the base business. We had positive cash flow, enabling us to fully pay off our term debt and increased our cash balance to NOK 259 million. We remain fully funded to run the current business into the future.Panel 3, key news and events. We also had a good news flow for the quarter. May 2, the Nordic registry clinical data in multiple scientific programs at AUA 2023 Congress reinforce the benefits of Blue Light Cystoscopy. The conclusion was BLC in the surveillance of non-muscle invasive bladder cancer may reduce patients' tumor burdens through immediate full gyration.On May 4, a new publication, clinical data demonstrates reduced risk of reoccurrence in non-muscle invasive bladder cancer with the use of BLC. This is the VA BRAVO publication, in a peer-reviewed journal called Clinical Genitourinary Cancer on April 28. The conclusion, significant decrease in the risk of reoccurrence and prolonged time to reoccurrence for Blue Light cystoscopy versus the White Light cystoscopy.On May 11, a new publication again reinforces the clinical benefits of Blue Light cystoscopy, demonstrating improvement in detection of carcinoma in situ, the flat lesions. The conclusion was simple as that Hexvix provides superior detection and diagnosis of carcinoma in situ in patients with previously White Light cystoscopy.And when you think about this, and I want to kind of put this in everyone's mind, bladder cancer has suddenly gained a lot of attention from the therapeutic manufacturers and developers -- of Merck's KEYTRUDA, immunity [ Bio ] product, which is pending approval of CMC issues. There are several others. UroGen announced their data. Many of these future therapeutics are meant to treat refractory patients, i.e., patients who are not responding to BCG and/or patients who are CIS. So the importance of Blue Light cystoscopy in the detection of CIS is going to become increasingly important, and we believe is a catalyst for Photocure in the future.On July 6, post period, our partner, Asieris, announced the completion of enrollment for Hexvix Phase III clinical trial in China. The data are locked, and we're expecting top line results in the near future.Lastly, but not least, the process remains ongoing for Karl Storz' petition to reclassify the BLC equipment from Class III to Class II. On July 31, upon the request of Photocure, we met with the FDA in what's called a Q-Sub meeting to discuss the implications of Class III and withdrawal of flex off the market. I'm happy to report the FDA was highly engaged with over 16 FDA representatives across devices, therapeutics of urology, et cetera. It was a late on a Friday, a large -- a major U.S. holiday, the 30th of June. The afternoon before a major holiday, these folks were all available and they were listening.We are now subsequently aware the FDA have reached out to Karl Storz. We think all of this bodes very, very well. It's caught their attention that Blue Light cystoscopes as a Class III need to be addressed. This is not a statutory requirement for any timeline. I know that's what everyone is hoping for. There is no requirement from the FDA to do anything. But we think that the fact that 16 individuals showed up on a holiday weekend to listen to the story about the safety of the product, the fact that it was used in Europe, by -- it's being distributed in Europe by three different manufacturers, and that it has implications for patient care and that flex was withdrawn because of that Class III designation and the ability to get the supplies that it needs to repair itself. I think all of these things bode very, very well. So we will continue to update you on the progress that we make.All right. Going to segments, -- so here, graphically, we see both successes and challenges in the second quarter. In the U.S., we continue to grow despite the phase down of the use of Flex BLC. In our accounts that have only one Flex tower, kit sales were down 31%. So these are accounts that have only flex. We have many accounts that have both Flex and Rigid. It's very difficult to measure because the kits go into the system, the hospital, and then they can go to either using for Flex surveillance or for Rigid. But in those that are only for Flex, the kit sales are down 31% from the first quarter of this year.As you recall, Karl Storz has announced they ceased selling any additional Flex Blue Light towers, and they've also ceased or will be ceasing servicing any existing installed Flex towers by the fourth quarter. We estimate that our unit volume growth of Rigid towers grew in the low double digits, both year-on-year on a sequential basis. We have to make the assumption the percentage of use of Flexible cystoscopy in our accounts that have both Flex and Rigid towers. Importantly, we estimate that this low double-digit growth will more than offset the decline of Flex sales going forward, and we also see gaining momentum as well in the Rigid market.In Europe, the graphic on the right, the asterisk illustrates the inventory stocking that occurred in Germany last year. However, we will manage to grow the business off the positive Q1 results earlier this year. Reminding you, last year, Germany grew at 3% and this year, first half, we've grown at 7%, taking out all effects of stocking. So I think this is illustrating the ability to move a major market that's already highly penetrated. We're also starting to gain and we'll get into this in the European data, some traction in some of the other countries as well. So we're seeing some good year-on-year growth beginning.So highlighting the quarter in the U.S. We grew the business 19% during Q2. Volume growth not only was impacted by the phase out of Flex, but we're up against a tough comparison due to the snapback in 2022 of Omicron in first quarter. Again, we're moderately pleased with the increased installed base. I think you have to take in the context that there was no promotional discounts offered by Karl Storz and the fact that they were aware they were going to launch a promotional effort by mid-quarter. So you can only imagine both customers and their sales reps. We're going to hold orders until third quarter, but we still are pleased with what we were able to do with 13, 8 new.Also, I think it's notable. The first half of this year marks the most productive first half of Rigid installs in Photocure's history with 26 in total. So said another way, we never in the first half of any prior year, installed more than that. So that, I think, is notable. And especially, if you think back to Q4 and how many installations there were once we launched the fire and how hard we work to get those in the beginning before the year began.As I mentioned previously, Q3 is off to a strong start with Rigid tower sales. We have a record 40 quotes sent in July alone, and this is the beginning of a 3-month promo. The pipeline remains strong, solidifying our confidence in the guidance. We expect that we will meet our guidance of 65 to 75 new tower installs this year.We've already talked about two key activities, the reclasses and petition and the Q-Sub meeting that we subsequently have had. And then subsequent to that, the FDA is reaching out and communicating with Karl Storz directly. We're still remain uncertain on the timing. We're doing everything we can to support the process. For the Flex discontinuation by Karl Storz, the phase down will continue through the rest of the year.I think from a modeling perspective or if you're thinking about Flex units, we've said roughly 15%. It is a calculated number of our total business from 2022, it could actually be higher. We expect that to wash out by the end of the year and so that's the way we're looking at our business. We're working on the solutions for flexible cystoscopy, bringing it back to the market. It's probably likely going to take 1 to 2 years beyond the sunsetting of BLC at the end of this year. It's our goal to get greater control of this razor-razorblade model. So what we are looking for and working with and speaking with our manufacturers who can produce flexible Blue Light scopes that we'll be able to sell alongside with our Cysview and Hexvix.This solution is not just for the U.S., it's also for Europe. I will say with an asterisk on the U.S. that the down class reclassification will be an important part of bringing Flex back into the market. But we believe that the simultaneous pathways of both the reclassification and the development of a future flexible Blue Light scope state-of-the-art will take -- will happen at the same time, and I think we'll actually meet it at the right moment.We believe that Flex is an important technology. It's going to be increasingly important as new treatments come out in the market for BCG refractory and CIS patients. So we see that the flexible market as good as it was, and I will tell you that at the beginning of this year, we had 25 POs, thinking that more than half of them are going to be installed in the first quarter. All of them were canceled by Karl Storz when they announced the discontinuation. We believe the growth in the interest and the momentum was building and we think that the future demand will be quite good. So we will continue to update you as we make progress in that space.All right. We mentioned about the towers. 28% of the base now is Saphira. We are aware -- and the reason we're showing here is just the Rigid only because Flex is slowly being discontinued. We are aware of at least 10 flexible systems that have been returned in Q2. I can tell you there's been another handful so far this quarter that have also been returned. These returns, by the way, are returns for future discounts with Karl Storz equipment. There's many accounts that are just turning off the Flex once they break and stop using it. We're not going to track all this. Again, our assumption is that this is going to -- the Flex units will wash out by the end of the year.For reference, there were 69 flexible cystoscopes stalled in the U.S. and as I mentioned, we anticipated at the beginning of this year that there would be north of 35 installs this year of Flex. So this is -- it's bittersweet in the sense that we know the future and what we're doing strategically in finding a flexible scope that we can sell alongside our product is the right path forward, both to the U.S. and EAU. We look forward to making an announcement on this in the coming months.Turning our eyes to Europe. Our revenues in Europe grew 14% in Q2 with a difficult comparison to last year's second quarter, pressured year-over-year unit sales results from the German stocking and the Omicron snapback. We showed modest growth, minus stocking, but recall the swing back in procedures at the Omicron surge on '22 also raised the bar for this year.We got a very strong reception in EAU. We mentioned in the Q1 presentation. It's -- I think it's worth reiterating since AU happened in Q2. Our team was focused on image quality upgrades. Our team currently in Europe is focused on image quality upgrades to bring Blue Light into the 21st century. There have been 77 upgrades so far throughout Europe. We believe there's a whole new growth cycle for business throughout Europe that's beginning to evolve as they upgrade.And accounts don't upgrade and spend money and unless they believe in it, prior to us taking over Europe in the midst of COVID, there was no very low activity and interest in Europe. But now we've got 77 accounts so far this year that have upgraded their equipment. It's a major strategy for us to reenergize the base. There are new accounts, particularly in the U.K. that are popping up; small amounts, but the major momentum is on the upgrades to bring the technology up.This also includes the anticipated upgrade of Olympus Blue Light equipment, which their official launch at this point looks to be the end of Q1 at the EAU Congress, where they'll make a big splash about it. Certainly, they'll probably be like most device companies, some are already installed out in the market. This is a new high-definition equipment and keep in mind, Olympus has a stronghold on the Danish and the Nordic in Norway as major strongholds for them. So getting this new equipment in the market will help us grow and begin energizing those markets as well. So we look forward to that launch.Flex for EU, just reminding, additionally, the same solution we're looking for the U.S. is a solution for the world. So we'll be launching surveillance, most likely in Europe like possibly in Europe first, but it's definitely launching -- we'll launch in both regions.The final part I'll make is the German bus tour. We've talked about this in the past. This tour is organized from the 4th of September to the 2nd of October. It's stopping at the DGU-Kongress on the 20th to the 23rd of September. There are already 20 stops so that's high demand, 20 stops being 20 hospitals, institutions have requested the Blue Light bus show up. What it does, it provides scientific programs, programs for patients and marketing activities, discussing the benefits of Blue Light technology in treatment of bladder cancer diagnosis and detection of bladder-line cancer.So docked by far is the most profitable region to date and our biggest contributor globally, continuously consistent improved performance. We had 3% growth in 2022 and 7% growth in the first half of this year, and we see that continued growth rate through the rest of the year. Growth rates in Benelux is the first to turn around with excellent growth rate of 34% in the first half. Other markets throughout Europe have been a little bit slower, hampered by market conditions, but good pipeline underneath. We're expecting acceleration in the second half of this year.France is our second largest European market and has been improving image quality to date despite the delayed volatile deliveries of equipment budget constraints. We've had an installed base upgrade of about 16%. So of the accounts that are out there, 16% of them already installed better image equipment this year. So we think the impacts will start coming to the second half of this year and through 2024.U.K., there's been a lot of strikes. There is orders for equipment, new accounts that we want to install that will resolve over time. But already, the buying customer base has already expanded by 10% through new installments and reactivations. In Italy, it's challenged by outdated equipment and it's really the only market that's still primarily standard definition. So it's -- for the first time during the second half of the year, one of the leading oncological universities are anticipated to use Hexvix. So we'll give further updates. But what I guess my point being is in all these European countries, now that we're getting full access, now that we're upgrading the equipment, the traction is beginning. I think we'll start seeing it through the second half of this year and certainly into 2024.Nordics will continue to be hampered by the old outdated Olympus equipment. But as I said, they intend to launch the new equipment at the end of first quarter next year. And I think that's probably all I want to say about that.So with that, I'm going to turn it over to the Q2 Financials. Erik?

[Erik Dahl, executive]

Thank you, Dan. Well, I will give an overview of the second quarter financials, including the consolidated income statement to look at the segment report, and finally, we'll look at the cash flow and the balance sheet.Before we go into the details of the numbers, a few words about foreign exchange. As we all know, Norwegian kroner has depreciated significantly this year. The first 6 months year-over-year and measured by unweighted monthly averages, since the U.S. dollar increased 14.6%, and euro increased 13.4%. So it's significant.If you go from the percentages and into the financials, we have the year-over-year FX impact in Q2 for sales revenue was positive, approximately NOK 15 million. And for COGS and operating expenses, it was negative approximately NOK 12 million. So that leaves an EBITDA positive, approximately NOK 3 million. Year-to-date, the year-over-year impact was for sales to revenue, positive approximately NOK 26 million. COGS and operating expenses, negative NOK 22 million and EBITDA positive, approximately NOK 4 million.And just as one final remark before we dig into the numbers, when I discuss the financials, all amounts mentioned in his presentation are in Norwegian kroner and, obviously, I specify another currency So let's talk about the numbers. We're looking at the consolidated income statement, and we'll start with our revenue. NOK 144.3 million in second quarter, which is an increase of NOK 44 million or 44% from Q2 2022. And the new drivers were obviously the milestone payment from Asieris for Cevira, which was NOK 27 million. And we also had foreign exchange impact of approximately NOK 15 million as well as an increased average selling price. And the average selling price was positively impacted by last year price increase in Germany and U.S. as well as the country mix between Europe and U.S.Consolidated Hexvix issued revenue in Q2 increased 16%. Consolidated in-market unit sales decreased 3% year-over-year, which was impacted negatively by the phase down of situ usage in the flexible BLC setting in U.S., as well as German hospital stocking last year at the end of our July price increase. Total operating expenses, and I exclude business development expenses first, it was NOK 104 million, the operating expenses, which is an increase of 18% from second quarter 2022. And the increase is mainly driven by FX, a total of NOK 11 million, and the remaining increase approximately 5% reflects the general inflation from second quarter last year to this year.Business development expenses were minor in first quarter but increased to 9.6% in the second quarter. And operating expenses within business development were related to life cycle management for Hexvix/Cysview, and the activities are within the business side of life cycle management, including potential collaborations. And the expense level, obviously may vary from quarter-to-quarter given the one-off nature of these expenses.EBITDA second quarter, after business development expenses was NOK 23.4 million, which is an improvement of NOK 22 million from last year's second quarter, and the improvement is revenue driven, both milestones and Hexvix/Cysview. Currency impact included in EBITDA was approximately NOK 3 million positive for the quarter.Depreciation and amortization NOK 6.6 million in second quarter, and main cost item is the amortization of the intangible assets related to the return of the European business from Ipsen. Net financial items, in line with last year, we had NOK 4.9 million this year and NOK 4.5 million last year. And then tax expenses, NOK 7.6 million for the quarter, and the net tax expense is mainly driven by group results but also into company items in the parent company.So after net financial items and tax, we have for second quarter a net profit of NOK 4.3 million compared to a net loss of NOK 18.5 million same period in 2022. And the main drivers of this improvement is improved revenues, including milestones, combined with flat operating cost adjusted for FX and inflation.Now we go to the segment performance. Next slide. Thank you.Yes, in the segment reporting, we will focus on the two main segments, which is obviously North America and Europe, and the North America segment includes U.S. and Canada. And revenue for North America increased 19% in the second quarter. And the drivers are an increase in market unit sales of 3% as well as a 3% price increase second half of 2022. Furthermore, FX improvements were significant as the value of U.S. dollar appreciated 14% year-over-year.Second quarter direct costs increased year-over-year to NOK 4.6 million or 12%, and the increase reflects the strengthening of U.S. dollar. In local currency and dollars, we were flat or slightly negative. The contribution was breakeven and improvement from same quarter last year and sequentially from Q1 this year. The improvement is revenue driven, combined with flat operating cost in local currencies. And EBITDA was negative NOK 10.3 million in the second quarter.Looking at Europe, the European business year-over-year and increased revenue of 14%. This is very much driven by FX and price increases, partly offset by a decline in in-market unit sales. The decline in volume was expected given the German stocking in the second quarter last year. Sequentially from Q1, volume increased 6%.Direct costs increased year-over-year with NOK 1.3 million or 5% in the second quarter, and this reflects an expense reduction in local currencies compared to second quarter last year. The expense development is partly driven by different phasing of activities over the year and between years. And we ended the second quarter with a contribution of NOK 37.6 million compared to NOK 31 million last year. And the EBITDA for the second quarter was NOK 19.5 million, reflecting an EBITDA margin of 28% compared to 26% second quarter last year. Next slide, please.And here, we're looking at the cash flow as well as the balance sheet. And net cash flow from operations in the second quarter was NOK 29 million compared to negative NOK 1.9 million in second quarter last year. The improvement was mainly driven by the milestone from Asieris as well as less impact from working capital.Cash flow from investments, second quarter positive $0.1 million, and cash flow from financing in second quarter was negative NOK 16.3 million, which is driven by the repayment of NOK 6.3 million of the term loan from Nordea and the Ipsen earn-out payment of NOK 8.1 million. And the turn loan from Nordea was fully repaid at the end of the second quarter. So this gives us a net cash flow in second quarter positive NOK 12.9 million compared to negative NOK 12.4 million in the second quarter last year. And the year-over-year improvement is mainly driven by the milestone from Asieris as well as less impact from working capital. With this cash flow, we ended second quarter with a cash balance of NOK 259 million.Looking at the balance sheets. We ended the quarter with total assets of NOK 707 million, and noncurrent assets was NOK 345 million at the end of the quarter, and this included customer relationship with NOK 121 million, and the customer relationship is the intangible assets identified in the purchase price allocation for the Ipsen transaction. Noncurrent assets also include goodwill from the Ipsen transaction of NOK 144 million and a tax asset of NOK 46 million.Inventory and receivables were at NOK 102 million at the end of Q2, which was level with Q1 and the increase from year-end last year is driven by increased revenue. Long-term liabilities, NOK 162 million include the earn-out liability related to the Ipsen transaction totaling NOK 130 million at the end of the quarter. And finally, equity at the end of the quarter, NOK 467 million, which is 66% of total assets.And this concludes the financial section. Thank you. Dan, it's back to you.

[Daniel Schneider, executive]

All right. Well, thank you, Erik. All right. Let's wrap it up.So in summary, 16% revenue growth, 2% unit sales, excluding the German stocking, which take place in June, July. 9% sequential revenue growth despite the U.S. Flex phase down. We've had 13 new Saphira towers installed that gets 28% of the base. They're now Saphira. Eight were new fiber upgrades, reminding you that this took place in a quarter that Karl Storz did not have any kind of promotional incentive for accounts to purchase. However, they were aware and launched a new promotional program beginning July 1. And in July alone, there were 40 quotes. 40 of those quotes turned into 12 new Blue Light cystoscopy tower POs so far, and I quote, flow continues to move forward and as well as the PO process.And maybe it's a good time for me to just kind of mention the process on this in the sales cycle because I think maybe this will get lost a little bit. After we've gotten the interest of a user, a urologist, your oncologist, the next step is to get them in the institutional agree that they want to quote on pricing and the pieces of parts they want so that they can bring that quote to the capital budgeting process within the hospital, which could be scheduled at how or it could be already scheduled on a calendar, including the value analysis committee and sometimes PNT.After it moves through that process, -- and if approved, they will then issue a PO to which Karl Storz can then apply their shipping and then ultimately installation, training, and launch. We have been and will continue to only count towers where a patient has been treated. So even though there's a PO, and that means that pretty much that account will get a Blue Light scope. There is a -- there can be a different lag for different accounts. So not until that account is actually -- has a tower in it and treating a patient that we counted here at Photocure.As I mentioned, supplier is now 28% of the Rigid towers in the U.S., and there's a strong pipeline. And I think Karl Storz discounts are extremely helpful in the driving the quick adoption of Blue Light cystoscopy.We had positive EBITDA of NOK 23.4 million, NOK 33 million, excluding business development -- and I think importantly, the commercial business EBITDA is positive in the quarter and reiterating off the first slide, we've had seven quarters in a row minus FX and some other effects of basically flat spending. So we are gaining leverage out of our operations. We paid the term loan debt off in full in Q2, and our cash balance remains at NOK 259 million, which Erik just went through.We believe and they're seeing BLC awareness continuing to rise. We witnessed the AUA and EAU. The KOL support is extremely strong. The engagement -- I mean just systems petitional loan will show you the level of defense that they come to. There was many who wrote in on the photo trial when it hit the market that really supports Photocure and are great partners to us. And then you see all the equipment and the image quality upgrades that the manufacturers are going through. And the last one we're waiting on, of course, is Olympus first quarter next year.So we're reiterating our guidance despite the flex phase down, we're remaining staffing shortages, strikes in the EU and of course, budging always remains a challenge in '23, but we're going to stay with it. We have a potential reclass of BLC equipment could unlock the market for Cysview in the U.S. in the future. And as I went through the Q-Sub meeting that we had held, it seems like the FDA has taken notice. Timing and ultimate decisions unknown, but at least we are on the radar for the FDA or, I should say, Karl Storz is on the radar for the FDA.So finishing off with anticipated milestones and corporate objectives, reiterating the guidance, 65 to 75 Saphira installs, product revenue growth above 20%, and generated positive EBITDA in 2023. We'll continue to grow the base of Blue Light towers in North America. We'll continue to upgrade Blue Light cystoscopy imaging throughout all of Europe. We believe both of those are key growth factors for those regions. And then we will, and I believe we will successfully find a solution for flexible Blue Light cystoscopy to look forward to announcing in the future.We're going to continue to proactively support the Citizen's petition for the U.S. and do everything that we can do and support to help the reclassification or down classification. Again, this is a situation or a thing between Karl Storz and the FDA but to the degree we can do and help and assist we will. We'll continue to geographically expand our commercial business, penetrating on many of the untapped markets. As I mentioned earlier, many of the markets are now coming into their own. Benelux grew at a very nice rate in the first half of this year, and we expect to continue.We're looking for some of the other countries now who are gaining traction with the upgrades to begin their growth rates. Now that the sort of COVID behind us, the staffing, I think, is resolving. Hopefully, the strikes that are taking place throughout the U.K., which is unprecedented of what's going on in the health care system there. All of this resolved, and I think we're in a great place with the KOL support.We'll continue to present and publish additional data. I guarantee you, you'll be very excited about some of the data coming out later this year and into next year. And the event -- we anticipate our partner, Asieris with readouts on Phase III data for both Hexvix and Cevira here in the near future.I think we can turn it over to Q&A. So David, over to you.

[David Moskowitz, executive]

Okay. Thanks, Dan. Appreciate it.So we had a number of questions in the queue, pretty good amount. So let me start right from the top. The milestone for Cevira in the quarter, is that for the Phase III results?

[Daniel Schneider, executive]

No. I'd said it was a time-based milestone. So the way we had done the contracts is they had to make progress along the way and/or time line. So this was a 48-month milestone that they've owned the asset, and they continue to move forward, so they owe this milestone. The Phase III results were coming. The next milestones, most of them have to do with filings and approvals and then ultimately launch.

[David Moskowitz, executive]

Okay. Excellent. On to the towers, do you have to compensate for both Flex towers declining as well as the legacy towers, the old standard definition towers going away.

[Daniel Schneider, executive]

Well, Flex for sure. The standard definition going away is upgrades to Saphira. They're upgrading those accounts to Saphira. So that in itself is a step change and in a high hypothesis, which we promised in the future, we will -- once we have enough robust data, we will -- we think we can prove that hypothesis that this high definition more reliable Saphira system will have better utilization than the old standard def systems.There's a challenge here when you're dealing with products like this and the measurement. This is why and I know everyone is eager to get that data on Saphira and what the impact is. I can tell you that it's impacting in Europe every time they upgrade their equipment in these different accounts. But I think you have to appreciate that accounts, we just recently had an account who bought 200 units. They have a Flex that they've reduced use on and they have a Saphira. It's uncertain as to -- and when you buy it, you could buy 200 units just before getting a Saphira install and then not need units for 2 or 3 months. So you've got to let time lapse. You need more robust data sets to really measure the impact of Saphira.On Flex, it's easy to measure the impact of Flex in flex only accounts because that's the only thing they have. So every unit they buy is every unit that goes through Flex, and that's where we measured a negative 31% erosion of that business. When we get to what we call dual accounts, these are accounts that can have 2-Rigids and 2-Flex, 1-Rigid and 2-Flex, 2-Rigids 1-Flex -- the problem is they buy the units and the units go to something, to one or the other. We don't know exactly. So we try our best to triangulate. We ask the accounts. We use some business rules as best as we can to sort of measure the impact of that erosion on our business.But I think -- and again, depending on how you measure it, the total amount of Flex usage in the U.S., we initially estimated at around 15% of our 2022 sales. It could be slightly higher than that. But nonetheless, we think all of that will wash out by the end of the year and we will overcome it with Rigid growth.

[David Moskowitz, executive]

Great. On the 10 Flex units that you mentioned that were returned to Karl Storz, are they able to be redeployed back into the market?

[Daniel Schneider, executive]

No, guys, they're discontinued. Karl Storz isn't even providing equipment or parts or support or service or any of this. They are returning them because Karl Storz said, "if you return them and you want to maintain being a customer of ours, we'll give you a discount on Saphira or some other systems." So no, once they're out, they're out, they're done.Now what we have done as Photocure is trying to do everything we possibly can do, controlling the uncontrollable as best as we can do. We hired a third-party company called Agility, who is going out and doing the best they can to repair Flex and keep it moving in the accounts that really still do want to do Flex even though Karl Storz may not support them, we're going to do what we can to support them. So... Best we can do. Yes.

[David Moskowitz, executive]

So here's a follow-up on the Cevira milestone. This is the first time you've called it out specifically in the quarter. Does this mean you're more optimistic.And I will answer that by saying we have called out Cevira milestones before. In fact, in the fourth quarter, we had a $1 million milestone that was specifically in the report. I can say, of course, we're optimistic that the results are good. And as Dan said, we should see them later this year.

[Daniel Schneider, executive]

Yes, and I'll add one more thing. Cevira is Asieris' product. That's where the information should come from as far as the program. We can't deliver any information beyond what they deliver because they're a public company as well.I will tell you a major thesis on their initial public offering was based on Cevira so they have a keen interest in the success of that program. And we're looking forward to seeing the results ourselves and what the next steps will be.

[David Moskowitz, executive]

Okay. Moving to business development opportunities, one listener is asking, when we have news on the BD opportunity given the higher spend, when can we expect to be updated?

[Daniel Schneider, executive]

Yes. So our focus now -- we have -- we had a broader focus, I think, last year. Our focus now is business development opportunities specific to Blue Light cystoscopy, Cysview and bladder cancer in and around Blue Light cystoscopy. So I think part of the business development is kind of the major project which you all want to see us probably pull through, which is bringing Blue Light Flexible scopes back to the market. And the intention is that we have something that we can sell that we have control over at some degree, alongside our Cysview, which is really the primary driver of revenues.So that's where what you're seeing some of the -- a lot of the business development costs going into because you can imagine, working with other manufacturers, there's a lot of work that has to be done to figure out if it can be done. And then there's agreements and all those things that have to be shown up. So I hope to be able to report something later this half.

[David Moskowitz, executive]

Great. I have multiple questions from Rickard Anderkrans at Handelsbanken. So I'm going to take them one at a time.First one is can you offer some insights into your ability to get to the growth you need for your product revenue guidance, especially given the Flex phase down, specifically, what are the key drivers of how you believe you can get there?

[Daniel Schneider, executive]

Continued installation of Rigid, I think, is primary. The traction that Europe is gaining with now having promotional effort throughout Europe and engagement with all the KOLs as well as 77 upgrades so far this year. We see that rate continuing. The interest is very, very high. I see momentum building. It is a challenge to get over that Flex erosion. And we don't know exactly what that number is. We've estimated that number, and we feel that estimate where we are today, we can overcome it.But those things, I think the other things that will pride bode well is some of the data that we believe is going to be coming out. I think will also help solidify our position as the purpose and the importance of using Blue Light technology.I know this is something you guys can add along with what I've added. Maybe not. Okay.

[David Moskowitz, executive]

I think we're good. Excellent. So on the market, how is the volume of TURBT procedures developing in key markets? So we've seen continued strong momentum in elective procedures in Q2, yet growth volume growth seems muted. What can you say about the TURBT market?

[Daniel Schneider, executive]

It seems to have sort of leveled off. We know we've had several years of decline, slight declines in TURBTs. In the U.S., I'm going to speak about the U.S. Europe is a little bit more difficult to measure because it lags by a couple of years but we do see it kind of leveling off at this point. At the same time, even though it was slight-- and these aren't rapid dissension -- it's a slow bleed over the last several years. We continue to grow. So we've gained penetration/market share in a market that sort of has leveled off a little bit. But we see it kind of leveling out now.Will that change in the future? I guess, it's anybody's guess but at this point, I think we can safely say it is where it is.

[David Moskowitz, executive]

Yes. And perhaps with some of the new products that are coming to the market, Merck's KEYTRUDA and now UroGen's strong data. The interest certainly is building in the space.

[Daniel Schneider, executive]

Yeah.

[David Moskowitz, executive]

That's where it is. So, okay, good.

[Daniel Schneider, executive]

Let me add something, David. The TURBT, I think, was kind of one of those procedures every physician is going to go do and you did because it was just kind of the thing. I think your point about there being these new therapies coming out, they're becoming more and more dependent upon accurate diagnosis. The whole idea of precision medicine deserves precision diagnosis and the data is overwhelmingly in favor of Blue Light cystoscopy in the detection, staging, and ultimately, the treatment pathways for patients.So as these new therapies hit the market, I can tell you, we have conversations with them. They are highly interested in Blue Light cystoscopes' role in helping them to be successful. So I'm really excited about this and where this is all developing and going and there'll be more news on this in the future.

[David Moskowitz, executive]

Excellent. So what share of the U.S. and European installed base you expect to have upgraded equipment by year-end? I don't know if we can answer that. But...

[Daniel Schneider, executive]

Well, I mean, we had 77 in the first half, hopefully, another 77 in the second half or more. So that will get you to well over 100 something, and that's of the 700, 800 accounts -- it's probably 25%. We're about 28% with Saphira so far. That's single manufacturer but I think estimating that is out right now.

[David Moskowitz, executive]

Yes. I mean I think it's a good question. It's the first time we've gotten it, Rickard, and I think it's fair for us to think about including an analysis for the next quarter.

[Daniel Schneider, executive]

I know our targets are overall north of 100, and we're at 77 already. So...

[David Moskowitz, executive]

Great. And his last question, which is repeated a couple of times, so I'll ask it here. As the business development expenses, how should we think about those in the coming quarters? And kind of another question related is what was included in the business development line?

[Daniel Schneider, executive]

Erik, do you want to go?

[Erik Dahl, executive]

Yes, sure. I mean looking at the expenses by nature, this is one-off spending. So I can always calculate or communicate some kind of an average per quarter and I did that last quarter saying that I would expect NOK 3 million to NOK 3.5 million per quarter, but it will jump up and down. And it's very hard to kind of estimate an exact number for the year. And right now, I'm really hesitant on giving an estimate for the year. I told you before, Rickard, that you could, as an example, use NOK 3 million to NOK 3.5 for the remaining two quarters, by quarter as an estimate but these expenses will jump up and down.In terms of -- I think we already touched on what type of activities is behind the business development expenses. This is not traditional business development. This is really partnering with other organizations, potential collaborations, and we're looking at adjacent products. Dan mentioned various activities that we have included so it's a number of activities that we are working on.

[David Moskowitz, executive]

Okay. Moving on. What about AI? How do you see that impacting Blue Light and the field of other technologies?

[Daniel Schneider, executive]

Well, I mean, AI is -- they haven't figured out how they're going to approve it in the first place and to have to come up with that. It's probably going to come. We are talking with AI companies ourselves. So I -- it's interesting, some of the things you read out there. I think it will probably be inevitable. Our goal is to make sure that if AI algorithms are out there that the AI algorithms incorporate Blue Light. So theoretically, White Light find something, AI- Blue Light find something more, AI finds maybe as much as Blue Light and Blue Light AI finds even more.I don't know. it's not really a fair question today. I think we'd save it for a different meeting.

[David Moskowitz, executive]

Got you. Okay. And let's see. I guess the last question is, do you have any insights into the timing of down classification?

[Daniel Schneider, executive]

No. The only thing I'd say is what I've said already, which is we believe we have the FDA's interest and ear. They are having a communication with Karl Storz. The fact that 16 people showed up at a Q-Sub on a late Friday holiday weekend to hear the story of Blue Light cystoscopy, Class III, discontinuation of Flex, the safety of Cysview and the procedure itself, I think, is a good sign that it's got their attention.And I can tell you that we're not the only product out there that -- Blue Light cystoscopes are not the only product out there petitioning for reclassification. There's many, many of them out there. The FDA only has so much bandwidth and the fact that they put 16 people times an hour each, 16 hours of effort just to meet with us. And now they're going and having conversations with Karl Storz, I think -- and they -- admittedly, we did ask a question around the CP systems petition, and they said that is between them and Karl Storz.So you got to appreciate we're like the third party here, the little annoying kid who keeps pushing mom and dad. We're going to continue down it. We're not going to give up. We're going to -- the unorthodox approach of going to the Q-Sub, I think it's testament to the grit that this company continues to push through with many challenges.

[David Moskowitz, executive]

Excellent. All right. Well, we'll wrap up the Q&A session right here. Thanks, everyone, for your contributions to that.

[Daniel Schneider, executive]

Thank you. That's it. I look forward to speaking to everybody. I think it's in early November for the Q3. Have a great day.