CellaVision AB

STO:CEVI

Earnings Call Transcript 2019-Q2

[Operator]

Ladies and gentlemen, welcome to the CellaVision Q2 Report 2019. Today, I am pleased to present CEO, Zlatko Rihter. [Operator Instructions] Please begin your meeting.

[Zlatko Rihter, President & CEO]

Good morning, everybody. My name is Zlatko Rihter, CEO of CellaVision. Today with me, as usually, Maria Morin; and Magnus Blixt here from Lund. Partly cloudy weather, but hopefully, the summer will come sooner because it's close to summer vacations for us here. Anyway, we're not here to discuss the weather. We're here to discuss the quarterly report, and let's move then to Slide 3. As usual, I'll give a little bit of a background and then we'll move into the numbers as we usually do.So again, for those of you that haven't followed us that close, I mean, we are active within the field of blood -- hematology analysis, trying to digitalize case that's been done in the microscope for a long time. And as we usually say, it's that we cannot deliver the Holy Grail within med tech where we can both show improved patient diagnostics at the same time improved efficiency and thereby reduce costs for our customers. So our vision is really to replace traditional microscopes in labs. It's something that's been in there for hundreds of years. And of course, when you come with something new, sometimes, it takes some time to change the mindsets. But we're working really, really hard to do that. And focus right now is primarily in the human and laboratory hematology segments labs. So if we move to Slide 4. So the market, as we usually describe, we have 17,000 large labs, which is the target market for us currently. In that segment, we see approximately 2.5 billion lab samples taken every year. Those are processed in a cell counter. The cell counter will flag for abnormalities, which is roughly 15% of the cases, and that's kind of our market, roughly 380 million samples per year. CellaVision has, by the end of last year, penetrated more than 3,000 of these 17,000 labs with our systems, and the rest is still operating in a traditional microscope environment. So as we usually say is that we try to replace the hand, the brain and the eyes of the med tech or the BMA, which is the more formal title of those that are operating and doing the analysis. Our target is to help the labs to diagnose the, I would say, the roughly 30 different types of blood-related diseases. Those are kind of 3 different clusters. It's, of course, different types of cancers, leukemia, myeloma, lymphoma, 3 examples of that. It's also different types of anemias and also more severe infections. So that's kind of where we are participating in that process. In some markets, like U.S. for example, we are becoming the golden standard of how to do that second step in hematology analysis. And I would say, today, we have more or less 100% penetration or attachment rates there, a lot of penetration. But we also know that the hematology labs, they replace their hematology line every 10 years. So the annual market here in large lab segments for us is around 1,700 labs per year that we can address. So it's still even, if we are very successful, it still takes 10 years to fully penetrate the market. But we have a, I would say, solid and good activities in the marketplace to do that. Just recently, as of quarter 2 I would say, this year, we also launched a new market segment, if we move to Slide 5, and that's the small and medium labs. And we have just launched the DC-1, as we call it, into this segment. And we kind of distinguish for us a small lab is a lab that has less than 130 samples per day, 15% of that is 20 samples per day. So that's why we have defined the market that way. So if it's a lab where there are more than 130 blood samples per day, we define that as a large lab, that's the 17,000. But if it's less than that, it's a small lab. So if you take a city like Malmö that had one main hospital, they have roughly 1,000 samples per day, just to give you some kind of reference. This segment is, of course, slightly smaller in number of samples. We believe it's 1.5 billion samples globally. They are also processing cell counters slightly, I would say, lower technology, but still. And they still look for abnormalities. That's still roughly 15% of all the samples are abnormal, which means that our market in this segment is around 220 million samples per annum. And here, of course, we don't have that type of penetration because we just started our journey, I would say Q2 this year. So we shipped the first DC-1s to customers during that -- the previous quarter, and of course, coming back to that later, but 2019 will be kind of a controlled ramp-up step by step for us to try to get up and going. This market is completely manual and we will give that many options for the customers at this stage. Alternative is, of course, if you have a small lab, you can always ship the sample, the slide, by car or any other type of transport to a large lab, but then you have a big time factor. So of course, this is something we're now step-by-step trying to address more and more. And I'll come back with the status update on where we are a little bit later.Slide 6, and this is related to our business model. I think we've had this approach for a long time now and it's proven to be quite successful. And you'll also see later on when you see our OpEx or investments where we invest, but we see 2 areas being core. One is innovation. We're really investing heavily into our innovation team, adding people. And of course, over time, also we will add projects. So that's core for us. Another core thing, as you can see here, is the market support. We have this geographic expansion strategy where we even -- indirect business model which we operate in. We still have to try to have CellaVision-competent people out in the field, and we have now presence in 17 markets that are step-by-step getting operational. I would say 8 of them, half of them are real operational because we've been in them more than 2 years. The other 8 are under kind of being still established. It takes some time to really build up the network and get everything in place. So it's quite satisfying to see the development we've had there the last few years. In manufacturing, we have a third-party setup, and sales and distribution, we operate for our global partners. That you can see down at the bottom of this slide, Sysmex, Beckman, Mindray, et cetera, and have solid partnerships with these companies since a long time. So that's kind of the setup we have. With this setup, we basically -- we distribute our instrument. They take care of the installation. They take care of the aftersales service. But through this model, we also have access, I would say, to more or less all the labs in the world at the end of the day, which is our goal to deliver our technology to the end customer.So that's the setup we've had and we've had that for many years. And step-by-step, I think we have taken all these partners globally, which is the case right now. So that means that we have a global reach in all markets for all those distributors and partners.Slide #7. This is our strategic agenda. We're just highlighting the areas where we have a lot of activities. We've had the same, I should say now, it's [ 7 ] years we show the same slides, so I don't know if that's good or bad, but at the end of the day, I think it's solid strategy that you stick to. It's not always wrong. And we've been focusing on these 5 areas now for a few years. Geographic expansion, I think we moved from 3 to 17 countries where we are present in the last 4 years. Segment expansion, we used to be only large labs. Now we also have presence in small labs. We also have some, although it's fragmented, presence in the veterinary side. Innovation, coming back to that, but we have really invested a lot the last year and more or less more than doubled up in the team the last few years. Now of course, just as for -- when it comes to geographic expansion, you also need some time to really get all the new resources up and running. It takes a year or 2 before they can fully deliver. And of course, before that, you have a little bit of an investment time.Streamlined supply chain. I think we have been very active here to make sure that we have the latest and greatest technology in our products and that we cannot deliver according to orders, which I think we've showed quarter after quarter. And also, to be competitive and cost efficient, that is very important. And then our partnerships that we have step by step moved into global agreements with all key -- global long-term agreements with all key players in hematology market. And I think we reached quite farther today and we have all key players as partners. And we also -- all these key players are our global partners since the last few -- since the last year or so, which is very satisfying. So our strategy remains and focus is, of course, to keep on targeting a growth more than 15% organic over time. So that's that. If we then move a little bit, just a little bit highlight on the portfolio. I think it's important just to show where we stand there, so Slide 9. We have, I would say, since we launched the DC-1, more or less a complete portfolio now when it comes to at least digital analysis for hematology market. We have kind of the hardware. We have applications. We have connectivity and also competence. That's the 4 areas where we launched the products. And it's really like buying a car. When you buy a BMW or an Audi, you buy the bases and then you add features basically, and we're exactly the same setup. So the base price could be 100 as indexed. If you add a number of applications and connectivity, you can end up with 150 or even more as index. And we, of course, push our applications and connectivity opportunities to our customers and try to educate them with the benefits of that. And when they understand that, we get the larger kind of price per installation. And adding DC-1 to that, of course, we offer them a new opportunity now really to work in there, especially most customers today have more than one lab. They are in a network. And then with DC-1, they can cover their needs, both large and small labs. And of course, this gives us a fantastic opportunity in the coming years to penetrate a segment we basically already are in, if you take the 3,000 installations we have in large labs, most of those labs have satellite labs, 3 or 4 even. And of course, taking 3,000 large labs times 3, 4, that's kind of the opportunity we'll have with DC-1 short term. And then I think, over time, we can explore even more interesting areas. So we have a good plan to penetrate DC-1 we have now in the coming years or so.And that is a little bit, if you move to Slide 10, also how it's shown here, where we have normally a central lab. They've already experienced CellaVision, most of them, at least 3,000 labs in the world for some years, understanding the benefits of our system. They all have different types of satellite labs in the suburbs or a few kilometers because, as you might know, most countries today have a policy where they want to offer all their population the same type of health care services. And nobody should have to travel for 6, 7, 8 hours to get health care. So -- and course, blood sampling is done close to where the people live at the end of the day, and that's why we have all the small and medium labs. And of course, we would -- with DC-1, we give them opportunities which allows us closer to the patient, which increases efficiency. And that, of course, is a good argument for future DC-1 success.So that's a little bit about CellaVision background. I suppose many of you have heard parts of this before. And now we'll take the next step and moving to what's the hot topic of today where we published or released the Q2 reports. If you move to Slide #12, and I'll just kind of give you a little bit update on all the numbers and sales and so on. Starting with sales. We had the best quarter ever, accelerating from SEK 112.4 million, organic growth 18% or 22% if you include FX. Looking at the 3 regions. Americas had a fantastic quarter, growth -- grew by 42% in the quarter. And we continuously see success in U.S. and Canada, which is 2 very important market for us. That's kind of our cornerstones. And we see now that digital microscopy here are considered as the golden standard in these -- both markets. And we will, of course, try to move all other 198 countries in the world over time into the same situation as well, the U.S. and Canada. And as we usually say that U.S., Canada, Sweden and Denmark, that's the 4 markets where we really have high attachment and penetration rates. Many other markets will still have some way to go. Another good case we have in South America -- in Americas is Brazil in South America, where we see step-by-step that they are really picking up. And since we had -- we replaced the market's support organization there 2 years ago, we've seen a very nice development. It's really starting to see. All that together means 42% growth. APAC had a little bit of a weaker quarter. As always, it's very hard to just pick 1 quarter and compare, but we had a good quarter last year. I think this was a little bit slower. But overall, if you look at the long-term APAC growth, it's been very strong. And this quarter, we had a little bit fewer shipments to China and -- than the second quarter last year, and therefore, it's a little bit down. Japan is developing very nicely. And we also now see that both India and Southeast Asia, where Thailand is our base, but it's like a 600 million population area at the end of the day, is developing nicely. And so we have people in place, and they're operational and they're building up the local networks and relationships with key partners and customers. So we have a good faith in the future here. We usually mention the New South Wales tender that we were awarded end of last year. And still, we are like in early days there. We'd shipped a few units. They are now like in trial mode. And then once they book that together, we will start to support Australia. And I think most of shipments will be starting end of this year, but also next year or maybe even the year after, it's another big project and it's not only us involved here. But that's quite normal. It takes usually -- from order to installation, it takes 18 to 24 months. That's 12 to 24 months at least [ execution ]. We're part of big projects. It's like a construction work.EMEA had a solid quarter, 13% growth. France is continuously developing very well. And after U.S. and China, that's our #3 market. And then also, we see now that Italy and Iberia, where we added -- opened up, established ourselves last quarter, are now step-by-step becoming operational. So all that together means that we have a pretty solid quarter all in all. A little bit on operational update. Of course, the key thing here is, of course, the DC-1 that was launched in Q1. In Q2, we had our first shipments to customers. Just to give you a quick highlight. The product now that we'll target, the small and midsized labs, which we believe is, as I said, 100,000 labs roughly, we launched it at a big congress called MEDLAB in Dubai at February this year. The system, it's been commercially available in EU markets. During Q2, we may register -- got registration approval or commercial clearance, if you like to call it, in a number of other markets, among those Australia, Canada, Japan and Singapore. So I would say, today, it's more or less available commercially in all markets except the U.S. and China, going back to that. Right now, the focus for us is to ramp up production in a controlled way to make sure that whatever we ship is of highest quality and also kind of learning ourselves -- get -- making -- this is kind of a learning exercise now for us to ramp up. So we will step-by-step see more and more units being shipped. In parallel, we have to do additional clinical studies, especially in U.S., to get clearance by the FDA because it's under the 510(k). So we will, hopefully by end of this year, submit for approval for sales or clearance, and sales clearance is expected to be, during 2020, something that we communicated a few times before. And the same goes for China and the CFDA, which is their kind of regulatory board. We also need to go through an approval loop there. So 2020 is the date. And of course, as I said, we have now signed all the distributors that we have for large systems, so we'll also support in this segment. It's basically the same clearance to a large degree. We have added a few Boule and Nihon Kohden. And also, they are having a highly active player right now because they need to launch DC-1 through their own sales forces around the world. So it's a lot of activities. And step-by-step, we're getting there, so to speak. But it's kind of according to plan so far. Acceleration of innovation is the next big operational topic. And just to see some of the numbers later on, but what we see here is, of course, that we need more engineers, and that's something that's been on agenda. And I think we've been quite successful the last few months because when you look and compare versus last year's second quarter, we have increased the team in R&D with 27%. And also, we look at the investments or expenses, we've increased by 60%. That usually sounds a lot, and it's not always positive, but in our case it is because we would like to invest more in innovation. So there's been -- despite, I think, pretty good margins and so this quarter, we have invested a lot in our team. And of course, we -- the plan is that this will pay off in a few years' time when we launch all these innovations that we'll operate soon.And if you look at the total number of growth also, I mean the CellaVision team has gone up from 102 to 129 versus the last year. So we've been pretty active on hiring and largening up the team. So that's a little bit about that. If you look at also the sales per product group, you can see that other, which is softwares, applications, spare parts and also components, is increasing its share of the total business. And that has a little bit to do with the installed base increasing. So we have more installed base where we can connect systems, we can add applications, et cetera, et cetera. So it's a good mix and one -- and so 1/3 of our business today is -- 2/3 are instruments and 1/3 is others. And that's increased step by step.So summarizing all that into numbers, moving to Slide 14. The quarter was strong. It was SEK 112.4 million sales, 22% growth. We had a very strong quarter from the gross margin perspective. I would say, partly due to the mix where we had a slightly -- we had very good margins in those product lines. But as of course, the applications, they're slightly higher than the instruments. So that mix kind of give us good margin this quarter. OpEx versus sales is again an efficiency stamp, and I think it's where it is today, it's a good stamp. And then when we summarize everything, we had a strong profit this quarter with the 33.7% or SEK 37.9 million. So all that played out quite well, I would say.Moving to Slide 15. Just to highlight a little bit. We have followed our strategy. And if you look where the expenses are, we grew 32% versus last year overall, if you include capitalized R&D. But it's 2 areas that we have really kind of expanded it within. One is within sales and marketing, which is partly -- part due to the geographic expansion strategy we have, where we like to be more people out in the field. And the other part, I would say, is R&D expenses where we really invest into innovation. And we believe that in the future, we should accelerate our innovation execution. And part of that is, of course, that we have enough people in that team, skilled people. On the admin side, the growth relatively to the other 2 areas is much lower, which also indicates that we have some kind of scalability here in our operations. So that's that. And then, of course, you see that the operating profit also increased. If we then move to Slide #16, which I think is the more relevant slide or metric for us if we look at the long-term development. We have a consistent history of growth increase. I think 2015, we're around 10%. And now we have achieved -- we have kind of achieved the target of being about 15%. And of course, if you look at the rolling 12, it's 34%. It's been a very good last 4 quarters for us. We have step-by-step improved gross margin. We have step-by-step improved OpEx versus sales ratios. And of course, all that plays out in operating margin, but also has improved quite a lot in the last 5 years. So that's a little bit around that. And by that, I think that's kind of the last slide. The rest, it's a little bit around financial calendar. So I will basically open up for questions now.

[Operator]

[Operator Instructions] Ulrik Trattner from Carnegie.

[Ulrik Trattner, Research Analyst]

Great. So I have a few, if I may. And we could just start off with the geographic sales split, and especially the high growth in the U.S. And how much would you say that in the segment, others would contribute from the new RBC application? And where do you see the underlying trend going for the next few quarters for that specific sort of software sales segment?

[Zlatko Rihter, President & CEO]

Yes. I mean, I can give you a little bit historical data. We don't normally provide outlooks for the future more, and we're trying to grow 15% higher organically over time. But if I'll just comment on this quarter versus the same quarter last year, of course, RBC plays a major role here in the growth numbers because I think more or less, all the instruments in U.S. today that are sold also have the Advanced RBC Application included. And we got advanced -- let's see here, FDA clearance 2 years ago. And then it took like a year or 2 to get going because Sysmex, Beckman and the others have to perform internal launches. And once they did that, we step by step ramped up that production -- that sales. But it's not only that. I think it's also instruments. I think we have step by step increased our attachment rates in the U.S. And again, as I said, it's every -- replacement every 10 years. And also, in the U.S. and Canada, we are now entering replacements likely also because 10 years ago, we started to get some volumes there. So it's a number of things that played out well for us. And then I think also if I don't remember wrong, Q2 2018 was okay, but not fantastic. So no -- as, always, very, very hard to comment on one -- single out one quarter in one region and then make too many conclusions out of that.

[Ulrik Trattner, Research Analyst]

Great. And just moving on to APAC. And you mentioned in your report some inventory changes among distributors. And looking back the last few quarters, it's been sort of slightly slower growth. Is this something that you think will be resolved within the next few quarters?

[Zlatko Rihter, President & CEO]

Yes. Again, not saying -- talking too much about the future. But looking at -- I think the last 2 quarters, I think that growth in Q1 also slightly growth and now we have slightly declined. But last year, I think we had 28% growth in Asia Pacific if I remember the numbers right. All that being said, I mean it's really hard to single out 1 quarter in that sense. I think the underlying activities we see in APAC are great. Then there are a few quarters where suddenly, somebody has a little bit too much in inventory and then they cannot delay an order a few months or so. And then suddenly, they discover they have nothing installed and they have to order much more and that's -- we've experienced that before and that's part of life for us.

[Ulrik Trattner, Research Analyst]

Okay. And just one question on the gross margin. If you could just please break down the -- it was stellar numbers, 77% gross margin. But could you guys sort of break it down what could be attributed to FX, positive tailwind, product mix? And of course, is there any evidence for a depreciation from the capitalized R&D from the DC-1 which should go into the gross margin in this quarter? Or is that sort of moved into Q3 instead?

[Zlatko Rihter, President & CEO]

I can't comment again on the Q2 numbers. Of course, if you just -- again, we are kind of selling a complete system. I think to single out the components, of course, the software part or the applications part have slightly higher margins. I think the both have high -- they are slightly higher. So that's one comment. The FX, of course, had a small effect. But at the same time, we also struggle, I can tell you, on the cost of goods side because there, all the benefits we have on top line becomes negative when you produce because most components are sourced in dollars and euro at the end of the day. But there are some slight effect, but it's extremely hard to give an exact number on that. And then on the capitalized side, we -- until Q2, we did not capitalize the DC-1 yet. That was stopped as of now. We just wanted to have some stable volumes before doing that.

[Ulrik Trattner, Research Analyst]

Okay. So just sort of any conclusion one can draw from not starting to depreciate capitalized R&D is that you saw quite low volumes of sales in the DC-1 during this quarter?

[Zlatko Rihter, President & CEO]

Yes. We started up. I mean we shipped the first units, so to speak. So Q2 is still -- it's a very, very large degree or large labs business. And then as I said, I think it will take some time before the DC-1 will be shown in numbers because we will ramp it up in a controlled way.

[Operator]

And our next question is from Felix Wienen from SFO.

[Unknown]

Thanks again for another really strong quarter. Let me start with a couple of questions and then I'll move back in the queue and come back later again. The first one, on DC-1. Again, as you highlighted during the last conference calls and so on, 2019 is a ramp-up year and you are delivering on that again. But I just wanted to check again the focus on educating the distributors on customers and really having a good production ramp-up stable then. How are these plans working? Are they all going as you hoped to? Are they -- and probably you can also share some feedback from the smaller labs. Are they excited to have some trialing the product, et cetera?

[Zlatko Rihter, President & CEO]

Yes. Absolutely. So let's see here, so answer the questions in the right order. I think, as always, you have kind of a wish or vision -- a wish that everything goes extremely smoothly. And then you have like the reality. And we planned according to reality. So we're following kind of reality, so to speak. What I wished, everything goes very smoothly just push the on button and everything goes perfect that would be the ideal growth. It doesn't look like that, so -- but we're fully -- but we planned for some initial kind of -- that's why we call it a controlled ramp-up. We knew that there's always a learning curve in the beginning. So we are following our plan. I think that's the most important. And the feedback from first customers has been really, really good. And for those of you that are interested in hearing some of the feedback, there are some presentations that were made in Canada a month ago from 2 of our kind of market study -- if you remember the Canada case. So I think if you just hit DC-1 or something like that, there are 2 YouTube presentations that are public and there you can hear the feedback. And they're quite excited about the DC-1 and how it fits into their -- that network. One was in Calgary and the other one was in the Vancouver Island. So those have been published. And so I think we have a great hope for the future. But as said, we would like to do this in a controlled way so that we win the customers' trust all the way through.

[Unknown]

Sure. Understood. And then let's jump in the service business or the software business, that part. Now you've provided the full split, also splitting that by region. We can see that the revenue contribution from software in Asia is still fairly low. And I just wanted to know your thoughts around that because my personal thinking would have been that if they buy new equipment, they usually buy the high end, the very high end, and that should then come with the software part attached to it. Or how do you see that?

[Zlatko Rihter, President & CEO]

Yes. I can comment on that. I think it's probably the other way around because what happens is that the markets we have been for the longest time, especially the U.S. I would say, customer initially acquired the systems and then over time to see the benefits of all the application. And also, U.S. has come -- if you look at the U.S. lab market, it's not a private big change. And they want to connect things. They need a lot of Remote Review and server solutions, et cetera. So that's why you see more of that. If you look at China, for example, the majority of labs are still stand-alone and they have not kind of come to the situation where there is a network. And therefore, they can't buy motor-based luggage. So that's why you see that other is lower in Asia versus America. And then Europe is somewhere in between. I think Europe is still fragmented, but we see step-by-step chairs like Unilabs, et cetera, growing their share of the total. And that's kind of a -- I say sometimes, that's our best customers because they need everything to connect and reach the second stage of efficiency where they start to connect big or small labs. So hopefully also, the DC-1 could drive a little bit of this because that will be 50-minute work environment in many of the DC-1's the coming years. So that's the explanation. So U.S. has a higher share of others. EMEA are somewhere in between, and then APAC, we still have some way to go.

[Unknown]

Okay. Very clear. And then another one, on China. In various other sectors of the economy, we see significantly weaker investment spending due to the overall macro uncertainty. And I asked the same question in the Q1 call and you have told that you didn't see any weakness there. But has anything changed in the second quarter? Or is it just -- I mean you highlighted the distribution destocking, which makes 12%, but anything there more profound than that?

[Zlatko Rihter, President & CEO]

No. I think we have a strong momentum in Asia, so we have not been affected by that.

[Unknown]

Perfect. That's good to hear. And then last one before I go back in the queue and the Carnegie colleague ask other question is on the vet side of the business. I've -- as you know, I've done more work on that in the U.S. And it's very, very obvious that you see a lot of consolidation that's going on, a lot of private equity players exit there. Have any other opportunities popped up for you for your bigger bet offering?

[Zlatko Rihter, President & CEO]

I mean we are screening the market. I think we have step by step added distributors. We've had a direct sales strategy there and now we'll change that to indirect. So we have a few more of our distributors also offering, our best offering so to speak. So far, a little bit, the consolidation has started, but it's not gone that far so that they are there to buy our big systems in large volumes. They're still too expensive. They see the benefits, but they don't pay EUR 100,000 plus for a system. There are a few labs. I mean that's kind of the labs, but that's very fragmented thought. I mean we are -- we will develop and launch DC-1 vet version early next year. And we'll see if that one fits better. It's a very fragmented segment. It's hard to -- I do understand it's a lot of interest in it, which will come, but a little bit lower in the queue, so to speak, there. Or in the priorities.

[Unknown]

Sure. Let me sit back and let the other guys come back.

[Zlatko Rihter, President & CEO]

Yes.

[Operator]

[Operator Instructions] [ Victor Forssell ] from ABG Sundal Collier.

[Unknown Analyst]

Just wanted to get an update from you. Just want to get an update from you, please, regarding competition, with particular reference to new players as well as Roche and Bloodhound, please.

[Zlatko Rihter, President & CEO]

Yes. Starting with Roche. I mean I think I mentioned in the last quarter, our understanding is that they abandoned this part of their business, so they stopped commercial activities in Q1. And we're not seeing anything since it's completely quiet. I know that they had a big team in Boston that they have let go basically. So that's -- so they're not active. And I think in the last 20 years since I've been, I've not seen their Bloodhound offering. So they have pulled it out of the market basically. When it comes to other competitors, I think that there is one that pops up here and there, called -- company called West Medica offering a solution called HemaVision or branded HemaVision, that we see. Otherwise, I don't see that much activities. You have like -- you can find a small player here and there, but we never see them running the market. And then if you go to Congress, sometimes, you see small companies offering similar things. But again, you don't see them out in the marketplace. So that's kind of the only one that we were seeing in kind of a regional/international basis today. It's HemaVision. But we're, of course, monitoring this all the time. So if something pops up, we'll come back. Then there are some investment made. I mean this is hyped business not only hematology, also our digital pathology, et cetera. So it's of course, we believe that our investments made, and we'll see what comes out of that in the future. But it's very hard to see into company's R&D portfolios.

[Unknown Analyst]

Okay. And maybe just a question please regarding the group. And you split kind of your presence in 17 markets. You mentioned roughly 8 are established and the other are still being established. So can you just maybe talk at a high level? I presume, as you're launching in these new markets and establishing a cost base, these country divisions are probably not generating returns equivalent to the group. Can you just talk a little bit about the difference there and kind of the expectation? What's -- you're launching to a new market, what's the expectation regarding sales and maybe a certain market achieving kind of group operating margin levels over a certain period of time, please?

[Zlatko Rihter, President & CEO]

Yes. Since we have an indirect business model, I mean it's pretty scalable. So with very few resources, once we get going in the market, we get a bonus leverage. And it's very hard to kind of an ROI market for market because it's virtually working like that. But what we see is that it usually takes, let's say, 2 years in average from the day we establish ourselves with the marketing, our market support resource or team, until we see a kind of a positive return on investment, if you like to close like that. In some markets like France, it took a year. In other markets, like Korea, for example, we think it took 3 years. In Japan, it even took a little bit longer. So average is 2. So that means that if you go back, 2 years, then you're in mid-2017, and we had market support organizations I think in around 10 countries or so. So we've added 7 or 8 since then. So half of the market support organizations, I would say, are fully operational and there we kind of has started to harvest the investment. The other half is still ramping up their activities, building, learning to know the market, building relationships with key opinion leaders, training distributors locally and they're kind of creating environments around our technology locally. So that's a little bit, I would say, the split.

[Unknown Analyst]

Okay. And is it possible maybe to elaborate then? You mentioned some of the key markets, unlike the U.S., Canada, Sweden and Denmark. What type -- is it possible to maybe just ballpark what type of operating margins you are achieving in some of those established markets, please?

[Zlatko Rihter, President & CEO]

I think operating margins are -- at least if you look -- talking about the gross margins, they are same everywhere because we have global contracts with our distributors. So whenever some customers has to buy a CellaVision, at the end of the day for us, it's the same price, more or less because we have the same price globally with each distributor. So -- and then, as I said, I mean we don't -- everything is invoiced from Sweden basically since we have an indirect model. We ship it to our distributors and then they install and sell it to the local labs. So we are more like -- our people out there are more like facilitators, so experts, specialists, making sure that they bring together the customer or distributor and that's somehow to make sure that whenever a lab decides to replace the hematology line, we make sure that -- or try to make sure that digital microscopy is the solution and not traditional microscopy.

[Unknown Analyst]

Okay. So is that...

[Zlatko Rihter, President & CEO]

Not allowed to give you numbers on margins. I cannot do that.

[Unknown Analyst]

All right. I mean, I guess if you are suggesting that it takes about 2 years for a country business model to ramp up to positive returns, I mean it wouldn't be imprudent to assume some of the better countries are generating margins considerably higher than the group level, right?

[Zlatko Rihter, President & CEO]

Yes. I mean since we have high sales in Americas, U.S. and Canada, of course, that could probably...

[Unknown Analyst]

Okay. Okay. Maybe one final question for me, please, Zlatko. And that is just wanted to understand your thinking in terms of profitable growth. As you continue to expand beyond -- into new markets and new countries, how relevant is this operating margin of 20% over the long term with current margins above 30%? I mean are you prepared to see that level drop to a certain level in expense for greater top line growth? I mean, how should we understand this? Is that irrelevant now this 20%, or how should we understand that, please?

[Zlatko Rihter, President & CEO]

I mean, it's -- I think we are downplaying it a little bit, of course, since we have been above it for a long time. I think what we try to say is that we want -- we need space for investing into resources, and of course -- so that's part of the game. At the same time, we try to run an efficient operations, which we've also done. So we need some flexibility to be able to invest into our business. And as you see, I mean we have invested a lot the last year in both R&D and geographical expansion, and we will continue to do that. So that's why, again, we have 20% of, what we call, an economic life cycle. I can fully agree that we've been above that for a certain period of time and then that's what's still left, so I cannot say much more than that I think.

[Operator]

[Operator Instructions] Our next question is from Felix Wienen from SFO.

[Unknown]

Again, 2 last questions to round it off for me. The first one would be on the innovation pipeline. I think you highlighted it in this call, and we touched on it in past calls and we discussed things like bone marrow analysis and other fluids of the body. So just if you can just touch on that topic again. Anything on -- in terms of progress that you've made in the quarter? Anything in terms of pipeline or timing, or just anything that you can share around that would be great.

[Zlatko Rihter, President & CEO]

Yes. And I think one thing I've learned throughout the years is you should be able -- when you move into R&D and innovation, you should be a little careful while committing when you have not even launched things. So we'll be careful with that. I think, in general, I mean, what we've done, we've spent quite a lot of time understanding our customers' needs the last 3 years. And we see that there are still a lot of -- even we kind of covered the routine analysis today with white and red blood cell analysis, we see that -- I mean, there are much more analysis done in a lab. There are platelets. There are malaria, bone marrow, et cetera, et cetera, et cetera. And of course, what we now will invest into is to try to address all these step by step so that we can kind of completely remove the microscope from the lab. So that's that. And then with the DC-1, we can attack both segments and both platforms, if you want to call them like that can be equipped with different types of applications. So that's I mean the key part of our strategy moving forward. Then we have to understand that getting an application fully approved, that is usually -- I mean, that's the most critical part of our system. So at the end of the day, that has to go through extensive clinical studies. And also, at the end of the day, being approved by or cleared by FDA since it's that type of device or application. And that also means, automatically, that all this kind of projects takes a few years from start to launch. So we're like in the middle of that process and that's kind of what I can say. So we'll try to cover all the key aspects of hematology at the end of the day, and we are planning on trying to see in what order we do that without any exact time commitments.

[Unknown]

Absolutely. But hearing that you're in the middle of processes is probably good enough. And then on -- the last one on artificial intelligence, deep learning and so on. I think I've seen that you hired quite a number of data analysts and other more technical people to the team over the last 6 to 12 months. So in terms of if you compare what you can do today and your database today versus probably 12 months ago, have you done major advancements there as well? Or how do you see that?

[Zlatko Rihter, President & CEO]

No. I think we have done a lot in the past also. I think what we are doing is that we are trying step by step accelerate that. Of course, in our world, artificial intelligence or deep learning, the more data you have, the better it is basically. The more blood cells we have in our database, the better analysis we can do at the end of the day. Since we have all this and still continue to do that, to try to gather more and more data. I feel still -- already today, we have very strong solutions, and of course, sharpening those will mean even more. But I think what -- where we are unique in the market, which also is a challenge for any competitor, is not only the deep learning, it's kind of we deliver the complete system. We deliver a system that ends up particular use by 2 people and so on in the lab in average. And that's because we automatize something that's been done manually. So part of it, it's, of course, image analysis and all that. But the real thing where we'll be adding value is that we combine 4, 5, 6 different technical skills into one product that automatize something that's been done manually. And that's where the customers see the big benefit. Usually, in DC-1, they always talk about, well, it's fantastic to see the good image quality of the DC-1, but we also see that we reduced our turnaround times when it comes to how long it takes for the patients to get an answer with 95%, it goes from 24 to 1 hour basically in average in those cases that we run. So many different aspects, and that's why I think we have such a attractive offering. But also, hard to copy because you have to have managed skills to be able to produce something similar.

[Operator]

And as there are no further questions, I will hand over back to the speakers for any final comments.

[Zlatko Rihter, President & CEO]

Okay. Thank you. Thank you for all the questions. Thank you for listening in and all that. So with this, I would say thank you and I wish you all a good summer.

[Operator]

This now concludes our conference call. Thank you all for attending. You may now disconnect your line.