Photocure ASA

OSE:PHO

Earnings Call Transcript 2022-Q3

[Daniel Schneider, executive]

Well, good afternoon, all those in Europe, and good morning to those in the United States. Welcome to Photocure ASA's Third Quarter 2022 Results. I'm Dan Schneider, President and CEO. Joining me today will be Erik Dahl, CFO. Just a reminder, the usual disclaimers are in place for today's presentation.

So let's talk about the third quarter 2022 highlights. There has been some recent developments. We'll get into those today, some exciting positive things happening to the business. We got positive momentum on the Saphira launch, which launched late third quarter. And as we said in the presentation and in the report, we already placed 6 of those towers.

We've also recently announced through the quarterly the improved Medicare access and reimbursement. This is something the organization has been working on for years, getting access to not only the hospital outpatient, but the ambulatory surgery centers, which are an important growing segment of business in cystoscopy specifically and we see a tremendous opportunity.

But reviewing the quarter, we had a 12% revenue growth, partially driven off of FX and unit growth, 3% unit growth on Hexvix and Cysview. The launch is underway with Karl Storz after some initial delays throughout the summer. We still are dealing with staffing shortages. I think that's common for all companies in the medi-tech space, where OR time is being rationed out due to reduced staff supporting the various operating procedures.

We had 7% market growth in unit for Photocure, aided by the German and that's minus the German buy-in that took place in Q2, Q3. We also had a positive EBITDA. Commercial investment continues to support the Cysview/Hexvix growth.

We had a $1 million milestone paid by Asieris that was tied to the survivor progress to date. The program continues forward. As everyone knows, the last patient in was back in late August. This is a 6-month follow-up. And then they'll package the data and hopefully submit or make the next decisions.

Q3 OpEx is relatively in line with Q4 2021, no significant growth there. As I mentioned, CMS improved the Cysview reimbursement, and we are now receiving and will receive on January 1, a higher payment for outpatient procedures in ASC and HOPD settings.

Incidentally, on the ASC, and we'll get into this a little bit more, we were the only company as far as we can tell out of the 1,800 pages that are in the registry that was actually given a complexity adjustment or an additional reimbursement in the ambulatory surgery center, which I think is quite an accomplishment after years of working on this, both on the legislative side and the regulatory side.

We also had positive results on the LASER III study. It's an outpatient laser-mediated destruction of the bladder tumor. Why this is important, as we know the operating rooms are continuing to have pressure on them with staffing shortages and physicians are trying to move more and more of those procedures to the patient -- to the clinic side, to ambulatory surgery centers, et cetera.

And having the ability to prove that this type of procedure can be done effectively and essentially get the same results as a TURBT in the hospital setting without the general anesthesia is actually a very positive development. So we see this sort of as a way of Blue Light continuing to enhance and support the trends in cystoscopy used in bladder cancer.

Looking into some of the segment trends. Quick comment on COVID-19 impact and update. Staffing shortages are remnant of COVID. But the good news is, is in third quarter, we finally had complete and unadulterated access to clinics throughout Europe and the U.S. We don't know what the future holds as we head into the winter months here in the northern hemisphere, but we suspect that most hospitals and physician offices have found a way to deal with COVID as a sort of it's here to stay kind of situation.

However, the staffing shortages remain. It remains a challenge. It is causing operating room rationing and disruption in general about any procedures, not just cystoscopies, but all kinds of procedures done in the operating rooms at hospitals. And we don't see that resolving until into 2023.

All right. So quarterly trends. U.S. highest quarter ever in units. The global trend is continuing to grow. Germany, we specifically circled to the right that impact, you have to consider quarter 3 and quarter 2 together. If you take out the impact of the inventory build between quarter 2 and quarter 3, there's actually a positive 6% growth in the European market sales and we had a 10% growth in North America. And we continue to see an upward trend in the quarter over prior year's quarters.

So trends in the U.S., we hit the highest quarterly unit sales in U.S. Photocure history. We continue to grow the existing base of business. The Saphira launch is off and running a very strong pipeline. OPP, which is the Obsolescence Protection Plan, which are accounts that bought the old system, but bought into the rights to get the new system as soon as it's available are currently being swapped out.

In addition, new accounts are already being installed with the Saphira system. And as I mentioned, we were able to get 6 new accounts, including Moffitt, which is a large major cancer center in the United States down in Tampa, Florida, outfitted with the new Saphira system. And it's exciting development as the pipeline behind this and the excitement when physicians try the equipment and they see this remarkable difference between the old Blue Light system and the new Blue Light system is quite good.

We pressure the systems to -- we pressured the hospital systems to use the system a lot, especially after installation to build out that repetitive behavior and familiarity with the new device. So again, it remains very, very strong.

On the Flex side, we had 4 installations. A lot of Karl Storz's focus was on getting Saphira out the door, in all honesty. We had a couple of machines on the Flex side. We were very strict in what we consider an installation. It's not that it's just on site. It has to actually have treated a patient. So we have a good pipeline of Flex also as we move into Q4.

We have improved access on Medicare reimbursement. I can't underscore how important this is for the organization. We've been working on this for years. This will go out the tech on January 1. We'll come out with more specifics around what this reimbursement looks like as the Federal Registry unveils itself, but at least first blush, this looks very, very good for Blue Light cystoscopy in both the HOPD, hospital outpatient setting and also the ASC, the ambulatory surgery center as it will become effective on January 1.

Contracting remains an important part of this. And especially with these new reimbursements coming in, there will be growing interest not only on the clinical side, which we've always had in Blue Light, but now the economic interest in Blue Light cystoscopy and what it could mean to a facility who adopts Blue Light technology. So we expect that that will also increase the demand for installations and ultimately, with volume-based contract and we can accelerate the growth rates.

And then, of course, the staffing storage in the U.S. do remain a challenge. I don't want to back off of that, it still remains a challenge. We've had multiple situations where procedures have been canceled due to staffing shortages or they've been postponed. So we continue to deal with that, but we're dealing with it as effectively as possible.

All right. And next slide. On the U.S. Blue Light cystoscope placements, we're at 28 for the year. We had 6 rigid all brand new Saphira and then 4 Flex, which I said there were a couple that were -- we did not count because they didn't treat patients. The cumulative base looks good. We continue to grow it.

There is an important announcement to make for everyone on this call. We just found out, public announced -- this is public information that Karl Storz has finally filed a Citizens petition to begin the down classification in Blue Light cystoscopy. What this means for us is that this will open the door for competitive Blue Light systems to come into the U.S. under a Class II designation. Now this process is going to take time. There's no guaranteed time lines by the FDA.

Typically, the Citizens petition, which is a point in time in the registry in the host company has the right to petition the FDA to ask for a down classification. This is the quickest way to down classification. And for those that have been following the organization for quite some time, you do know that the FDA had listed Blue Light cystoscopes several years ago as a device that would -- they would consider worthy of a down classification.

What expedites that is when that originating company like Karl Storz begins that process. Now the Citizens petition will be out there for 210 days, possibly less. They will entertain anyone writing in, so this could be facilities, physicians, even competitors as to why Blue Light cystoscopy, the scope should be down classed to Class II from a Class III.

The question comes up, why would Karl Storz do this. I think those that have been following for a while can see the challenges they've had under a Class III PMA to get product -- new products upgraded and out into the market. This has been a tremendous drag on their organization. It's also been a very tough situation from a reputation standpoint because the old standard definition Blue Light system had been out there for well over a decade and they weren't keeping up with the latest technology. So this is going to allow them to do that.

In addition, they've got some advantages to doing this in terms of future upgrades. And for us, most importantly, is an upgrade to the Flex system in the future is what we're hoping for. So very, very encouraging news, again, it's out into the distance. It's not something that's going to happen in the next 6 or 9 months. It's going to take time, but this is very, very positive news. And if the FDA buys into it, this could change the market for us.

All right. Moving on to Europe. Third quarter sales were plus 6%, 1% was reported due to the German hospital inventory sell-through. So this is very healthy growth out of Europe everyone's been waiting for. The price increase in Germany did not impact in-market usage. There was no response out of the market other than business as usual and a continued interest in Blue Light Cystoscopy with Hexvix.

We ran the Bladder Cancer Bus to DGU, the National Urology Congress, and you can see the picture in the lower right corner, conjured up a lot of interest. We continued to grow interest throughout all of Europe. There's strong interest in the new Saphira system throughout Europe.

Now one thing about the European upgrade, it is incrementally better than what they have. They have a good system out there today, but this new -- this incremental improvement to the Karl Storz's system is expected mid first half next year is the expectation at this point and they will bring on some additional features that are on the current system. And the faculty of Europe continue to be very, very supportive of our progress throughout Europe.

Speaking of progress in Europe, I thought this would be a very good slide to share with everyone that we often get asked the question, how is your going and it's often difficult because Germany is 80-some-odd percent of the total business with very high penetration rates. And even though we have been a positive growth rate of 6% or 7%, it sometimes gets kind of lost in some of these very high priority growth markets like France, U.K. and Italy, don't make -- aren't as visible. But I think this slide actually says it all.

And to the right, we talk about the last 2 years of Ipsen and the cumulative aggregate growth rate was minus 8.3%. In the first 2 years that we've had the product, and keep in mind, this is through COVID with limited or no access to centers, us doing whatever we can to regenerate and rejuvenate the Blue Light Cystoscopy with Hexvix marketplace, we have a positive 8.6% growth rate. That is a 17-point change upward trending. We can see that trend continuing into the future.

A lot of positive things in terms of interest in Blue Light, both in terms of converting old machines, which, again, if you've been following us for some quite some time, there were well over 700, 800 systems throughout all of Europe. A good majority of those are older systems and the users of those systems and/or the systems themselves were not keeping up to the latest trends.

So in this case, we have the opportunity to switch out a lot of the old machines with the newest technology and regenerate sales and rejuvenate the sales throughout Europe. So we see positive momentum moving forward through Europe.

So with that and positive forward momentum, I'm going to forward over to Erik. Erik?

[Erik Dahl, executive]

Thank you, Dan. Well, as usual, I will start with a financial review of our 2 main segments, North America and Europe and will then follow on with the consolidated income statement and headlines from the cash flow and balance sheet. So before we go into the numbers, foreign exchange has had also this quarter a significant impact on our results. In short, the FX impact for Q3 was for revenue positive, approximately NOK 4 million and for EBITDA, negative NOK 1 million. Year-to-date revenue impact was positive, approximately NOK 7 million and for EBITDA, negative NOK 4 million.

I always state this, but it's important to note that as we review the financials, please keep in mind that unless other currencies specified, all amounts mentioned in this presentation are in Norwegian krone.

So looking at the segments, and we'll start with North America. And the North America segment includes Canada from the first quarter of '22. In January of this year, we launched our own commercial operations in Canada for the direct sales of Cysview, and this sale was previously partnered to BioSyent. We have not stated 2021 financial segment numbers to include BioSyent in North America as these were deemed not significant.

Total revenue for the year 2021 was less than 1% of U.S. sales the same year, so we dropped that. We did, however, restate the in-market unit sales. And the in-market unit sales for North America in the third quarter increased year-over-year with 10% and U.S. unit sales alone also increased 10% year-over-year.

Revenue increased 34% in the third quarter, of which U.S. had a growth of 32%. The revenue growth was mainly driven by volume growth, a significantly stronger U.S. dollar and a price increase. The year-to-date volume in North America increased 6% and revenue increased 24% year-to-date. And the revenue growth was as for the quarter, driven mainly by volume growth, foreign exchange and the U.S. price increase.

Direct costs in the third quarter increased year-over-year with NOK 5.9 million or 18%. And this increase reflects, first of all, the strengthening of U.S. dollars, but also operational items such as the investment and the launch in Canada, the preparation for the launch of the new scope from Karl Storz, medical programs and initiatives to develop relevant data and finally, a high activity level in the quarter resulting in the year-over-year volume growth of 10%.

The contribution was NOK 2.7 million in Q3 compared to negative NOK 2 million in Q3 last year and year-to-date contribution was negative NOK 8.5 million. And EBITDA was negative NOK 7.1 million in Q3, an improvement of NOK 2.7 million from Q3 last year. The improvement was driven by revenue growth, partly offset by higher activity level resulting in cost increases, including the Canada launch.

Dan, would you please move the slide back? I'm still working on the segments.

[Daniel Schneider, executive]

Sorry. It takes time.

[Erik Dahl, executive]

And now it's the European business, had also a strong development in the quarter. Reported volume growth in Q3 was only 1%. However, if you adjust for the impact of the inventory sell-through in Germany, the estimated growth of in-market unit sales in the European segment would have been approximately 6% in the third quarter and year-to-date volume growth was 5%. The inventory sell-through was driven by an announced price increase from the 1st of August, which resulted in customers building inventory in the second quarter. And in Q3, we saw a net reduction of inventory of customers.

Revenue declined year-over-year 1% in Q3 and were level year-to-date. Difference between volume growth and revenue in Q3 is explained by a 3% negative impact from FX in the quarter. Direct costs increased year-over-year of 13% in Q3 and the increase is driven by the investments in the local European commercial structure.

We ended Q3 with a contribution of NOK 24.3 million compared to NOK 28 million in Q3 prior year and EBITDA for Q3 was NOK 7.2 million or 13% of revenue, year-to-date contribution NOK 79.5 million and EBITDA of NOK 31.3 million.

And now we can move to the consolidated. Next slide, please. Total revenue, NOK 106.8 million for the third quarter, an increase of 22% from last year. Main drivers were milestone revenues related to Saphira. It was volume growth as well as foreign exchange impact. And we also had a change or an increase of average selling price for the company. Year-to-date revenue increased 9% and was impacted by the same drivers.

In addition, the comparison with prior year was impacted by the upfront payment from Asieris of NOK 6.4 million in the first quarter of 2021. This payment was for the partnership agreement with Asieris for Hexvix in China and Taiwan.

Operating expenses increased 17% in Q3 compared to Q3 last year. And year-to-date, the year-over-year growth was 24%. Contributing to this increase was investment in Photocure's European commercial organization, which is required to support and grow the European sales as well as commercial investments in U.S. and the launch of the Canadian business.

Furthermore, operating expenses, both for the quarter and year-to-date, were impacted by the strengthening of the U.S. dollars. Sequentially, from the fourth quarter of 2021, the third quarter operating expenses increased 4%, which is driven solely by foreign exchange.

EBITDA in Q3, NOK 4.7 million compared to last year negative NOK 0.2 million. The development from last year EBITDA was mainly due to increased revenues, including the milestone revenue from Asieris related to Saphira, which is partly offset by investments in Photocure's commercial organizations, including the launch of the Canadian business.

And year-to-date EBITDA was negative NOK 7.8 million. Looking at depreciation and amortization, NOK 6.1 million in Q3 and NOK 18.1 million year-to-date. And main cost item is the amortization of the intangible assets related to the return of the European business from Ipsen.

Net financial items, net cost of NOK 4.8 million in the quarter and year-to-date, a net cost of NOK 16.7 million. And year-to-date net financial items are mainly driven by incurred interest costs totaling NOK 18 million for the deferred consideration to Ipsen. Year-to-date 2021 net financial items were also driven by a net currency gain, which explains the difference between 2021 and '22 year-to-date.

Tax expenses, NOK 3.7 million in Q3 and year-to-date NOK 7.8 million and tax income and expenses relate mostly to our tax asset and tax loss carry forward in the parent company. In other words, it's not tax payable. The net tax expense for 2022 is driven by currency fluctuation for intercompany item.

And then after net financial items and tax, we have year-to-date net loss of NOK 50.4 million compared to net loss last year of NOK 2.7 million.

Let's look at the next slide, cash flow and balance sheet. Perfect. Net cash flow from operations, NOK 21.3 million positive in Q3, a negative NOK 2.7 million year-to-date. The improvement from Q3 last year is mainly driven by EBITDA, including the milestone payment from Asieris in addition to positive working capital development. The year-to-date working capital is mainly driven by reduced short-term liabilities, meaning changes in working capital.

Cash flow from investments, only NOK 0.3 million negative and cash flow from financing in Q3 negative NOK 10.2 million, which is driven by repayment of the long-term loan to Nordea and also the Ipsen earn-out payment. So this gives a net cash flow in Q3 positive NOK 10.8 million and year-to-date, negative NOK 39 million. And with this net cash flow, we ended the third quarter with a cash balance of NOK 284 million.

Looking at the balance sheet. We end the quarter with total assets of NOK 732 million. Noncurrent assets was NOK 355 million at quarter end, which included customer relationship with NOK 133 million. And the customer relationship is the intangible asset 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.

Customer relationship is amortized in a straight-line basis over 10 years, while the goodwill is subject to impairment testing. Inventory and receivables, NOK 93 million at quarter end, an increase from year-end 2021 of NOK 2.8 million. This is mainly driven by increased revenue. And long-term liabilities of NOK 169 million include the earn-out liability of NOK 136 million. And the earn-out liability represents a capitalized value of estimated future earn-out payments to Ipsen. The liability is subject to a 10-year annuity.

And finally, equity at the end of the quarter, NOK 480 million or 65% of total assets. This concludes the financial section. Thank you. Dan, back to you.

[Daniel Schneider, executive]

Thank you, Erik. Am I fired from my slide job? Not so good. All right. We'll bring it home here with some results. So 12% growth in Hexvix/Cysview revenue growth despite ongoing staffing shortages and lack of rigid towers for most of the quarter. Again, Saphira launched the back end of third quarter, last week or 2.

However, we still had 10 towers placed, 6 of them in the new Saphira system. Pipeline still remains extremely strong. OPP swap-outs are happening as we speak and we're looking forward to not only the Q4, but going into 2023 and beyond with the pipeline.

We have improved the Medicare reimbursement for Blue Light Cystoscopy in both the surveillance and hospital HOPD setting and ASC. And I've mentioned earlier, this is quite an accomplishment given that this is a rarity from a government standpoint to give this sort of complexity adjustment in the ASC setting.

In fact, from what I understand of all the companies that petitioned for it, we were the only one who was able to receive at this time and we'll verify that. But it's a lot of work through many years an effort that went into this. So we're excited about what's going to transpire on January 1 going forward and giving us access to some of the market parts that we did not have access in the past and complement it with the contracting strategies that we've employed throughout the last year or so.

Europe will get the benefit of the access and the Saphira system as we move through into 2023. We'll continue to drive initiatives, both commercial regions and through our licensing partners, there will be more updates on Asieris in future and we're well-positioned for growth.

So anticipated milestones, we want to regain the sales momentum that we had prior to COVID-19. We continue to inch up, again, largest quarter ever in the history of Photocure for U.S. and we showed the growth underlying in the European markets and these all on the eaves of the launches of the new equipment.

The execute and launch on the upgraded Blue system, but the improved Medicare reimbursement for both the ASC and HOPD is going to be a significant inflection point for us, we believe and we continue expanding the Blue Light Cystoscopy in North America.

The recent announcement publicly by Karl Storz that they've begun the Citizens petition for the down class will have a big impact on the U.S. market. If you think about the U.S. market, Karl Storz has roughly 35%, 40% of market in terms of access into hospitals. This -- having other competitive products out there will obviously have an impact on price and also access to a lot more of the hospitals in a much more easier way.

So this process is going to take time. The Citizens petition period is at least 210 days. There is no guarantee by the FDA at this point, but it's very encouraging that the originating organization Karl Storz has started the process on the device that the FDA had already identified as eligible and should someone initiate the down classification.

We'll continue to execute on contracting, especially with the ASCs now that we have access to them through the new Medicare reimbursement scenario starting on January 1. We'll continue geographic expansion. We didn't talk a whole lot about Canada. But Canada had a very strong third quarter. It gets sort of lost in the North American numbers, but again, it just shows good growth underlying these decisions we've made to take back geographies throughout the globe.

We'll continue to publish additional data from the patient registries. EAU, AUA, have multiple papers submitted already getting acceptances, so again, supporting it. And a lot of our strategy with the ongoing data and studies is to support the trends that are going on in cystoscopy, whether it's moving patients from TURBTs under general anesthesia to the physician's offices and/or ASC settings.

Is it for emerging therapies that are coming on that are BCG nonresistant, nonresponsive, how can Blue Light Cystoscopy play a part in it, is it in the biomarker spaces where Blue Light Cystoscopy could complement and augment its purposes as well? So more and more data coming out in addition to reoccurrence and progression data.

We'll continue to talk about the partner companies and license agreements, particularly Asieris. And we are evaluating and will continue to evaluate product or business opportunities that leverage the uro-oncology organizational commercial footprint and strengths that we have in the global setting.

So with that, I'm going to turn it over to David for Q&A.

[David Moskowitz, executive]

All right. Thanks, Dan. [Operator Instructions] We can start right off with the Karl Storz Citizens petition. So since you gave that background, there was a question about background, but you've sort of talked about the process and the time line. What kind of pushback might you expect on the Citizens petition from the public or from FDA?

[Daniel Schneider, executive]

I don't know that you're going to find a whole lot of pushback, in all honesty. When you think about access to care and access to care in the U.S. has become a very hot political agenda as well. You talk about parts of the country that don't have access to the latest technologies to help them fight bladder cancer because of the way this device was originally approved by the FDA, limiting access by hospitals who either choose a different vendor as a prime vendor.

So they might be in Olympus shop or a Richard Wolf shop or whoever, they are less [Technical Difficulty] switch over to Karl Storz. Although we've been pretty lucky with that and we've tried not to make that a barrier. It still becomes another hurdle we fight through. So I think the momentum and the positioning on this is such that I don't see that there's going to be any necessary pushback.

Had this been something done outside of Karl Storz's purview or their abilities, then it would have been Karl Storz that might have pushed back. But they're not, they're pushing forward. So I don't see any necessary pushback on this. The big thing for them is to coming up with the controls and the engineering measures so that they're set so that anybody coming in has a 510(k) using them as a predicate has the right blueprint and can be measured against the standard that's on the market today.

[David Moskowitz, executive]

Okay. And as a follow-on to that, from the FDA perspective, what sort of parameters do you think FDA is going to need or be looking at with regard to the Citizens petition and perhaps down classifying the device? Is it patient safety?

[Daniel Schneider, executive]

It is safety. Safety is #1 always. And then is it doing what it's supposed to do. So those control -- those engineering controls, making sure it's equivalent equipment, that it looks, smells and tastes like the Karl Storz predicate is what it's going to have to do. But patient safety is always #1 for these things.

[David Moskowitz, executive]

Yes. And I might add this is an early part of the process. So more to come as we find out more about the process and what the FDA is looking for.

We have a series of questions about the Karl Storz's new equipment launch. First question is what do we think the impact of the new equipment in Europe, what kind of impact will that have?

[Daniel Schneider, executive]

It will have -- in the markets where Karl Storz is dominant to get another upgrade to the existing will be a positive. Again, this isn't the same as the U.S. It's not going from Stone Age standard definition to now state-of-the-art high def. But on the other hand, it is an upgrade. And I think anytime you have an upgrade in devices that improve the experience of the physicians doing these procedures and surgeries is always a positive.

But if you look across the map in Europe, there are certain countries, there are regions in certain countries where Karl Storz is extremely strong and there's other parts of the countries where Olympus or Wolf very strong. I don't know that's going to change that dynamic as much as it's just going to improve the experience for the Karl Storz users that are out there.

[David Moskowitz, executive]

And in the U.S., how is the launch going so far? And can you talk or give a little bit more color about the pipeline for new capital equipment?

[Daniel Schneider, executive]

Yes. It's going very, very well. Karl Storz had its challenges early this year with its recall of a separate type of machinery that was out there that really distracted the organization, some challenges with getting the Blue Light system up and out into the marketplace. But we've crossed that finish line. Now the new finish line is how do you get to a growth rate for us that places these so we can get Hexvix and Cysview used in the marketplace.

I will say that we expect placements of systems to outpace or high mark -- or high watermark from 2019, which was 61, I believe, 64. So we expect to do better than that. And the pipeline would tell us that that is exactly the case. And then in addition to that, on the OPP side, in any systems that we put in that are replacing old systems, we expect a better user experience, so better leverage of those machines and more patients being used and treated with Blue Light Cystoscopy.

And then keep -- and then don't lose sight of the fact that with the CMS change, there is not only the clinical reasons to use Blue Light Cystoscopy, which we've always had, but now you have an economic story that could back it up as well.

[David Moskowitz, executive]

Okay. Actually, you walked right into that one because that's another question in the roster is, can you give a little bit more detail on the Medicare reimbursement change and what it means to Photocure's business?

[Daniel Schneider, executive]

Yes, I think the big thing, we have been -- in certain settings of care, we have been -- the White Light Cystoscopy has had an advantage in terms of economics. We weren't negative economics, but we weren't as positive economics. What we're seeing now in the change is that we've more than made up that difference. That's -- and so let us decipher this 1,800-page registry and we'll come back to you with more of the specifics.

But at least the first blush on this looks very positive in the HOPD, ASC setting with the complexity adjustments attached, that we will have a very good position versus White Light and gives them one more reason to use our product.

[David Moskowitz, executive]

Yes. And part of the language in the earnings materials do talk about expanding business into the ASC setting. Can you review that a little bit more?

[Daniel Schneider, executive]

Yes. Yes. Well, it's roughly 10% -- a growing segment of business, growing more than 10% -- it's 10%, roughly 10%, 11% currently. We think it will continue to grow. With the pressure on the hospital systems, there's been more push to get things into the ambulatory surgery centers. The challenge with ambulatory surgery centers is that the reimbursements were approximately 60% of a hospital reimbursement.

And when you took that reimbursement down that low, it didn't really cover the Blue Light Cystoscopy. This has changed. So we've got the trend of more patients being pushed to ASCs. We got the positive developments of a positive and serve improved reimbursement on Blue Light Cystoscopy that puts us in the driver seat when it comes to choosing either White Light or Blue Light, so yes.

[David Moskowitz, executive]

Here's one for Erik. When can we expect steady positive EBIT? You're muted, Erik.

[Daniel Schneider, executive]

You're muted.

[David Moskowitz, executive]

Erik, the pandemic has been going on for a while.

[Erik Dahl, executive]

Now you better be kind with me. No, I'm not going to leave behind a guidance or a forecast going forward. But maybe I can leave behind a little bit of hope because if you look at the development on the EBIT during 2022, I mean, the first quarter was very bad. It was NOK 20 million negative EBIT. And then it improved NOK 4.5 million in the second quarter. Both numbers are negative. And the third quarter, we have a negative NOK 1.4 million.

So we do have a positive development. I believe that with the current development in U.S., what we're seeing with Karl Storz, when we finally get the nursing situation or the -- yes, the situation with labor shortage in the health care system under control, then this will improve gradually. I believe we have things in place to develop this into being a profitable business definitely. But you will get no guidance, but it's moving in the right direction.

[David Moskowitz, executive]

Okay. And probably another question for Erik. Can you talk about the status of the inventory in Germany? What proportion has been sold through? And when will this issue be resolved?

[Erik Dahl, executive]

Approximately 85% to 90% of the inventory has been sold after the third quarter. So there is a little bit left going into the fourth quarter. How much of that is going to be as a percentage of the unit sales in the fourth quarter, I'm not sure, but it's definitely not going to be quite far what we saw in the third quarter.

[David Moskowitz, executive]

Okay. Another question back to the CMS is, currently, what proportion of your U.S. sales comes from Blue Light Cystoscopy in the ASC setting?

[Daniel Schneider, executive]

Nearly 0 today. There is some and it comes from the hard-core believers in Blue Light and they use it sparingly on patients they feel is going to make the most dramatic impact in their care. But they all would like to use it a lot more and it's probably been the #1 area that you hear from large urology group practices, wanting an ASC, a positive ASC reimbursement scenario for Blue Light.

So it's not even -- in the case of prior to the CMS decision, it wasn't even a case of White Light having a better reimbursement. We actually had -- when you did Blue Light, you actually lost money at the facility. That is not going to be the case on January 1, 2023.

[David Moskowitz, executive]

Yes. And I would add that in the private insurance setting, that's where we've gotten some -- a little bit of traction in the ASC, but very little. Now with this new reimbursement change, Medicare can become a significant payer in that segment of the market and that can really help us penetrate. I know the commercial teams are very excited for this.

Okay. And I guess, really, it seems like the last question. So Dan, in your quote, you mentioned that the company is at an inflection point. Can you elaborate a little more on that?

[Daniel Schneider, executive]

Well, I think when you take all the recent developments that have taken place, I think we -- this is something we've been waiting for and working towards. It's the launch of a new high def system by Karl Storz in the U.S. and on a global stage. It's seeing the inflection in the European market being accessed to those markets now and starting to see the growth rates that we expected out of Europe and returning it to it's -- to a growth rate that GE many, many years ago had.

It's looking at the CMS reimbursement that we just received late last night and what we think that's going to do to impact the business. It's now filed Citizen petition by Karl Storz and what that could mean to the U.S. market in terms of access to Blue Light Cystoscopy with multiple manufacturers in market. And think about, it's not just the equipment coming in, it's their sales forces is also selling Blue Light Cystoscopy.

So it's not just the 30 or so sales reps of Photocure selling it with part-time Karl Storz's attention. It is an army of Olympus and Richard Wolf and anybody else who wants to come out with Blue Light which I've said in prior calls, there -- we know of at least 10 others that have shown interest in Blue Light Cystoscopy.

So it's exciting time and I think we're right on the precipice of that. It's all coming in time. I think 2023 is going to be an exciting year as it develops. It doesn't happen overnight. Everything requires effort, but I think we're headed in the right direction.

[David Moskowitz, executive]

Yes, we've had a couple more drop in. So on the cost for the U.S. business, how many more heads do you need to fully support the Saphira rollout, higher volumes and this new CMS reimbursement change?

[Daniel Schneider, executive]

I'll start it and Erik, you want to jump in or you want it, Erik?

[Erik Dahl, executive]

No, please.

[Daniel Schneider, executive]

Well, I'll start it and then let him talk. From a commercial standpoint, we have the right footprint. We did, and we've been honest about this. Throughout COVID and awaiting the Saphira launch, there were a few vacant territories that we covered from other territories in the U.S. We're now going to fill those positions. So that's a handful, a few people, minor, to be honest with you.

But when you look at the overall productivity of the U.S. sales force versus the European sales force in terms of workload and productivity, we've got room and capacity to handle what we have in front of us. Now having said that, if this thing explodes and gets to be too much, of course, we're going to invest and we're going to reap the rewards of that investment.

Erik, do you want to add more to that?

[Erik Dahl, executive]

Yes, what I expect to see is an improved productivity and an improved contribution in EBITDA. That's what I expect to see. I also expect us to fill the open positions. But the impact of getting a new equipment in there is going to be far larger than the number they contributed.

[David Moskowitz, executive]

Excellent. And I'll just remind the audience if there are any more questions, please send them in. We do have one question right now remaining.

So do you focus only on bladder cancer for external growth or also on other indications?

[Daniel Schneider, executive]

Bladder cancer. For our current product, it's bladder cancer. We do support Cevira with Asieris in the background. We're the sponsor of the trial, so we -- there's a lot of work behind the scenes just to make sure in helping them get through their trial. We also are supporting -- I should say, I back up, we do not sponsor that trial. We do support it.

We sponsor the trial for Hexvix in China. And in that case, we do have a lot of work in the background, but that's for the current indication. Outside of that, we do not have any other active programs for Blue Light technology outside of bladder cancer.

[David Moskowitz, executive]

Okay. Very good. It looks like that's all the questions we have in the queue. So I'll turn it back over to you, Dan.

[Daniel Schneider, executive]

All right. Well, I want to thank everyone. Exciting point in time for Photocure. Looking forward to fourth quarter 2023 and beyond. So thank you for staying with us, and we'll see you at the Q4 update. Thank you. Bye-bye.