CellaVision AB

STO:CEVI

Earnings Call Transcript 2018-Q3

[Operator]

Ladies and gentlemen, welcome to the CellaVision AB Q3 Report for 2018. Today, I'm pleased to present the CEO, Zlatko Rihter. [Operator Instructions] Speaker, please begin.

[Zlatko Rihter, President & CEO]

Good morning, everybody. Zlatko Rihter here from Lund. I'm here together with Maria Morin, who is Head of our HR and Corporate Communications; and also CFO, Magnus Blixt. So we will -- the 3 of us will lead you through this session this morning. Hope you're all doing well. So I suggest that we immediately jump to Slide #4 and start there. As always, I will kind of give you an overview of who and what CellaVision is, and then, of course, we'll later go into the numbers and updates on what's happening in Q3 of 2018. And then afterwards, we'll of course have Q&A session, as always. So basically, I think we are here to create value in health care. I usually say that CellaVision is one of those companies that have a little bit of the holy grail in its hands, where we can address both better patient outcome with -- by digitalizing something that's been done manually for a long time and do that better than a human being can do. At the same time, when doing that, we see that we can save costs for our customers and then make their lives -- their workflow more efficient. So both saving costs and improving the outcome is usually a quite good combination. I think, also, if we put that in other words, I mean, our mission and objective at the end of the day is to replace traditional microscopes and laboratories with our solution. And I think also, step-by-step, we're getting there, but this is, of course, as I should say, a marathon race and not a sprint race. So that's kind of why we're here and what we're trying to do. If we move to Slide 5. I know you've all seen this before, but I think it's important to reiterate that our market is the 4 billion samples per year that are analyzed, that all of us now and then go to the hospital and we leave blood for sampling and analyzing. First step in the process, the hematology process, is a cell counter. Big players there are companies like Sysmex, Beckman Coulter, Sysmex -- Siemens, Abbott, Mindray, which is Chinese player. And we also know that roughly 15% of all the samples that are tested and analyzed are flagged out by the cell counters. And for those, there is a need to do, what we call, differential, which is basically, they take a drop of blood, put it on a glass slide and then you end up analyzing that either/or in a traditional microscope, which has been the case and the main process or the main way to do it for more than 100 years; or what kind of recently popped up, a company called CellaVision, that also offers the same analysis in a digital way. And that's also where the savings come. 15% of all blood samples, in other words, 600 million samples are analyzed this way every year, and of course, this is our premier market at this stage. And we try now to kind of, step-by-step, define and create a new global standard for how we do these differentials. And we strongly believe that we have a good case against the traditional microscope. And by end of last year, 18% of all labs, more than 2,700 labs are using CellaVision as the way to do their differentials. And this has been increasing step-by-step over the last 2 years. Moving to Slide 6. And this is of course, for us, a very important slide. And then I think there is a number of trends that are increasingly pointing towards our benefit. We have the demographic situation with an aging population, increased prosperity, and we see that for every year, there are -- is an increased number of blood samples. I think, in Asia Pacific, which is a little bit of a hidden opportunity here, with that many people moving into kind of in the middle-class environments where they start to acquire and get health care, is very interesting to see how that will develop the coming years. We see an increasingly labor shortage of biomedical scientists. Young people that go through an academic degree and get an exam in a university environment, they seldom want to end up spending the rest of their life today to look into microscope, at least, a microscope. They want to have new and modern tools. And on top of that, you have the reduced health care spending, which is another important part for our success down the road. And then, also, and this is coming more and more obvious is the consolidation or standardization of labs, where we have lab chains, where they want to connect and thereby get scale of economics, standardize, make it more efficient. It's also a very important sector for us. And coming back to that later with the new DC-1, the small unit, I think what we can do as of that one is launched is that we can completely connect a lab chains, old, new and smaller launched labs into one very efficient network. And that of course helps us, that there are more and more lab chains arising, emerging around the world. We have usually, what we say, 11 USPs. If we count all the dots on the lower half of that slide, I won't go through all of them, but there is a patient value aspect, with faster treatment, starts through a -- for shorter turnover times. We have the whole digitalization, where you can look at it wherever you sit because you put it in -- you download it from a database, and you can sync, basically it has to connect. Our systems has been approved by all regulatory bodies for a long time. That also means that we've done proper clinical studies, I'm coming back to that later. Right now, the DC-1 unit is in that stage, basically, to also get that kind of quality standard, that it's passed through the key clinical studies showing that it works. And of course, cost efficiency, we know that usually -- if we have to remember one number: it saves 2 jobs in each lab, once the lab introduces CellaVision. And that also means that the payoffs for CellaVision installation is around 1 year for a lab. And of course, I have good data on that as well. So again, it looks a little bit different in different markets, but totally, we have 11 USPs that we push for out there in the fields to have commercial success. Moving to the next slide, #7. Again, the markets, pretty simple. There are more than 15,000 large labs that we are addressing currently and have done for 10 years or more than 10 years, and step-by-step, gained a penetration of 18%. And then we have the future market coming up now, when we will -- soon, we'll launch the DC-1, with around 100,000 labs in total, in which we define 30,000 as medium labs. These labs are -- the definition of a size of a lab is all based on the number of samples that lab would have over a day or over a year. So that's kind of it. If we look at the penetration, I think, I would say, now that North America, we have more or less created that standard that we're aiming for, for the rest of the world. And as you all know, U.S., for good and for bad, sometimes is the first mover in the world. And we believe and hope that the rest of the world will end up in the same situation. But today, I would say, very few labs in the U.S. would choose traditional microscopy when they decide to replace their hematology line, which they do every 10 years. So we have reached the high penetration there. In Americas, as such, we have 24%; EMEA, 19%; and APAC, which is, I would say, gaining speed quickly, especially the few last years has been China and Japan. I'll come back[Audio Gap] A market that's opened up for us now in a real way. We have gained -- we're up to 10% penetration now. So I think we have a good and global business set up, which is nice. CellaVision is also very, I would say, dedicated to what we call our indirect business model. We strongly believe that you have to have efficient operations, and the way we do that is that we rely on our partners. And we try to have all major hematology players as our partners. So all the companies you see on Slide #8, if you could move to that, are partners of ours and are dominating or important players in the field, Sysmex being the market leader since several years. How we also go about to really make sure that we have presence out there is that we have this market support organization that we are rolling out. And for those of you that has followed us for a few years, you've seen that we have become present in more and more markets over the years. And also, this year, we have a few newcomers like Mexico and India. And at this stage, we have presence in 14 different countries and covering -- markets, and we'll cover 26 countries with local people that speaks the language and understand the health care environment in respective market. And I can tell you that India and Sweden are very different in that perspective. So we have to understand the differences. We also have a manufacturing outsourced to a third party, Kitron, which we have for a long time. And also, the new DC-1 will be produced in that environment. And we have the HQ here in Lund, and we have passed now I think a little bit more than 110 employees worldwide. And we're continuing to try to strengthen the team in those areas where we believe it's important, and that's mainly out in the field and in innovations, which I'll come back to. Then just to emphasize a little bit more on how we see what's core and noncore, on Slide 9, is that we have defined innovation as key. We want to deliver new, innovative hardware and software and application solutions for the labs. And we do that with our own team, basically. So we have in-house development, which is key and core for us. And manufacturing, especially the assembly part, we see as noncore. So that's kind of something that we allow or have outsourced to Kitron. And then the market support, again, CellaVision core, which means that we want to be present in markets. But the commercial and transactional part and logistics parts, the sales and distribution, we have again outsourced. We have a partnership, for example, Sysmex. [ I'll come back to that once again. ] And then at the end of the day, of course, the end customer is extremely important. I mean, we try, with our means, to learn so much and much as possible about our end customer to be able to deliver new solutions. And we try to figure out, step-by-step, exactly what type of analysis they still do on microscopes, and then over time, we will try to replace that with the applications that we deliver and utilize our hardware, of course, as a strong base. So that's kind of the short version of the strategy. So that's a little bit of what it looks like. If we just look at the key elements of our strategy. Before -- and we've kind of communicated this for a few years, and I think we will continue on this path, geographic expansion. Today, we are present in 14 markets, so this is Slide 10, and over time, we will try to expand into further markets. And India is the recent market that we added, and we are present there now since a month back. And as always, we said it many times and we'll say it again, it takes a year or 2 before we see a payoff. And coming back to few of the markets where we invested earlier and where we see it pay off now, I will give you a little bit later. Segment expansion. We are staging out and then preparing ourselves for launching the DC-1 into new markets, which is the small and mid-sized labs, which we believe is a very attractive market. And probably, it's twice the size of the SEK 1 billion market where we are present right now. Innovation, key and will continue to be key. And we are heavily investing into building up a top-notch innovation team with even more resources than we had in the past. Because we believe -- we have a lot of ideas that we would like to realize, basically, to support our long-term strategy of replacing traditional microscopes. Partnerships. As said, we have targets to be able to access all our end customers or all labs. And to be able to do that in an indirect model means that you need to sign up all the companies that are delivering into hematology labs. And we have defined those as the major hematology cell companies that you've seen on the previous slides. And then, finally, as -- [ also you could say ] is that we are a very high-tech company working in a very conservative environment. Health care is conservative. Health care is challenging in many ways. But to have a top-notch and the latest technology and the product supply chain and sourcing is key for us to make sure that we have the latest and best components in our system, so we focus a lot on at that, and also to make sure that we are cost-competitive over time. And I think one sign of that is, if you look at our gross margins throughout the years, it's been improving step-by-step, shows that, I think, we've done a pretty good job there as well in the last few years. So that being said, and that's been kind of the fast introduction to CellaVision and who we are and what we want, it's now time to move over to the Q3 highlights. And I suggest that we move to Slide 12. And just to kind of open up with a few numbers here. We had organic growth of 33% in the quarter versus last quarter in -- versus the same quarter last year. If you take -- exclude FX -- or if we include FX, it was 37%. So you'll see that number in some other slides. And what's very nice to see this time is that we have stable growth in all 3 regions. Again, Americas, 28% growth versus same quarter last year. We continue to see a strong underlying demand both in U.S. and Canada, 2 markets that are really well penetrated. And it shows that we can continue to find new opportunities also on those markets. And then, of course, we established ourselves into new markets recently: end of last year, in Brazil; and early this year, in Mexico. And of course, the key thing there is, as always, early days is to create awareness around CellaVision, and that's kind of what the team there is doing. I think, in Brazil, we now start to see some traction in the first success cases. But again, it takes 2 years for us there before we see the full kind of market opening up. Asia Pacific, another good quarter, I would say. Continuous, strong, steady development in China and Japan. I think for those of you that have followed us for a few years, China is becoming quite good success case for us. It's the #2 country in sales revenue after the U.S. And also, Japan has, step-by-step, improved and is now a very -- yes, one of our top markets. I think another thing that's happened this quarter, which is great for us to see, is that we have a third market now in Asia Pacific that is really opening up for us, and that's Australia. It says Autralia here, so it's misspelled, my fault. That's a new country. We were awarded a New South Wales tender. New South Wales is the region where Sydney is the main capital or main city. And it's a regional -- it's a public kind of segment in Australia, where they decided to move from traditional microscopy to digital morphology in one step, and there has been a big tender out there for some time. It's more than 60 labs included, and of course, here, again, they chose CellaVision as partner in digital morphology. Here, we have both large and small labs, so this will also be a few treatment of the DC-1 units that will go in there. And this shows a little bit how we now can kind of support the whole lab chain, in this case, the public, but still in another way that maybe we could do in the past. Again, installation will take some time, so this is probably over more than a year or 2, but it shows again the opportunity. And just so you understand, Australia, for us, was like a market where we had a handful of installations until this case. So again, it shows that when we do our work -- we had a market support person or organization in place here for the last 1.5 years, our colleague has worked hard, and now suddenly we see the market opening up. And it's a lot of hard work behind this. Since we strongly believe in this approach, we will continue our journey. As said, we have, since end of September or mid-September, operations in India with Mumbai as base. We believe that India -- many people always say that this is the fastest-growing economy in the world in the coming years, so I think it's important to be there. Again, it will take some time, but we are present now. And we also decided that we will move into Southeast Asia with a market support organization based in Thailand, or more precisely, in Bangkok. So we'll be operational there end of this year to cover that region.And then of course another, I would say, good region this quarter was EMEA with 73% growth. Now we have to remember that quarter 3 2018 maybe wasn't the strongest ever for EMEA, but I think a good sign is that we had a flat development, sales-wise, in EMEA for many years. And it's -- again, we kind of completely -- in EMEA, we, for long time, completely relied on our distribution partners. And now since maybe 2 years, also including Middle East, we have now teams in the Middle East. We have teams in place in U.K.; DACH, which is the German-speaking part of Europe; and France, and we see that in all these markets where we have teams in place and they are really present and supporting our distributors and end customers, suddenly things start to happen. And suddenly, now, we have a growth in EMEA 6 out of the 7 last several quarters, I think, which is a good sign. And hopefully, we'll continue that journey down the road. And also to continue to invest into the future, we also believe that Italy and Iberia, Spain, Portugal, are 2 key regions where we would like to be present. So we had started up activities to move in there as well. So that's kind of the geographic expansion. I think 3, 4 years ago, we were present in 2, 3 markets. We're now close to 20 markets. And this is, I think, a substantial challenge -- it's been a big challenge for our team to take this journey and do this in a quality way, so to speak. And we're still a small company, so to be present in that many market has been a great opportunity, and we're there.Moving to Slide #13. Moving away from the geographic expansion and discuss more around the upcoming DC-1 launch. As you all know, we have, for the last 3 years or more than 3 years, spent a lot of efforts and energy to develop a new unit from scratch, basically, that will address the small and mid-sized labs. And for those of you that remember, basically, the -- one of the inputs that -- when we ask customer, "What will it take for you to buy a digital morphology instrument for such a lab," was "make sure it's 1/3 of the cost basically for us," so price. And that was kind of the challenge we took on, and that's, again, why we couldn't just modify what we had. We had to look into something completely different. And that's kind of what we've been working for the last few years. And we are now approaching launch. The project is progressing according to plan, and we are currently running external clinical studies in 5 European labs. This is partly to get the CE registration at the end of this year, but we're also running those studies to prepare for an FDA submission that should take place mid next year. So we are running like the global approach, but of course, the CE mark will be the first kind of commercial step for us outside CellaVision. We have signed global distribution agreements with all partners. I think last time we spoke, after Q2, we had signed everybody but Sysmex. Now also Sysmex has signed. So that means that we have all the distributors onboard that we would like to have at this stage. And we also spent a lot of time right now to prepare our distributors. There are lot of training, preparation work and launch meetings to make sure that when we have the CE mark, they are more or less ready to start to sell that because that is our sales force at the end of the day. And at the same time, we are preparing our manufacturing team, Kitron and others, and planning ramp-up of the CellaVision DC-1 so that they're also ready once we have a CE mark to make sure that we fulfill the potential orders that will come in. So that being said, I think it's -- normally, you shouldn't put all your eggs in one basket, but that's kind of a little bit what we did with the DC-1. So it's a very important project, of course, for us. And ultimately, into the future, it's very important that we, step-by-step, penetrate the market with this instrument. Still, a great opportunity, I think, with the -- for the CellaVision R&D team to get this far. And then we have more ideas. As said, removing the traditional microscope from labs is a gigantic challenge, even for a company like us. And that also means that we, step-by-step, need to hire even more, I would say, highly skilled engineers. And we have an increased investment and vision into innovation here, especially in Lund, where we have our head office, to be able to take on even more exciting innovation products -- projects that we'll continue to develop and add to the lab market over the years. And I think that's also important for me to comment on. If we move to Slide 14. Just shortly, this is how the DC-1 will fit into the whole portfolio. So we have hardware, applications, the connectivity software and competency software, and of course, the DC-1 will then be part of that network. So if you have 5 core labs from 20 satellite labs, we will be able to kind of create an ecosystem for all of those 20 in a seamless way, so to speak, and kind of where the DC-1 comes in. Slide 15 just shows -- if you go to Slide 15, it just shows kind of a high-level specification of DC-1. And I won't go through that because I think I've done that 50 times before, but the key thing, the throughput is a little bit lower than for large systems. So the analysis is the same, but the capacity is a little bit lower and automatization is a little bit lower. So that being said about that. So let's move in then to the final stage here today, Slide 17 and the financials. The quarter ended up, 37%; or organic, 33%. Then the gross margins, I think around 74%, better than the same last quarter. We continuously measure our OpEx versus sales, and that's also lower versus same quarter last year. And then operating profit, that was a little bit more than 100% up versus same quarter last year, with an EBIT of around 25%. I'll come back a little bit more on the OpEx side and comment on that. As you know, if you go to Slide 18, over time, our target is to grow the business by 15% annually or what we call an economic life cycle. And again, that's kind of what we continuously target against. And I think, in average, we're being close to that. If you look at the last 5 years, and then a few times, we would be above, a few times, we will be a little bit below. But that's -- we're trying, again, to step up the company and the operations to meet that target. And I think that is, of course, a challenge for us, to continuously grow organically at 15%. And I think, so far, we've managed to get quite well over time. Moving to Slide #19 and a few more comments, more details coming from finance. We had a currency effect of 4% this quarter. Gross profit was 74. I think there's not much to comment on that. As you see, we have increased expenses over time, and of course, the key part of that is that we are spending a lot of efforts to continuously develop the marketing activities and sales activities out in the field, and we're continuously investing into product development. We had a quarter, and this is a little bit important to remember, that we're a little bit -- right now, since the DC-1 is very close to launch and we haven't fully started up other projects, so a little bit this quarter is a little bit in between, I would say, kind of 2 areas, where you're kind of -- you're down a little bit on a key project and you haven't fully -- you're kind of in a feasibility stage of another project. So that means that you capitalize a little bit less on the DC-1, and we haven't fully started capitalizations on the future projects. So as you can see, the capitalized R&D are a few million below last year, same quarter. And when you see the comments below, that this where we want, so capitalized R&D expenses are lower due to DC-1, close to finalization, which is probably a good sign because the development part of that is close to the end. And of course, we spend a lot of focus on that. We had a very good cash flow in the quarter, SEK 22.2 million, much higher than comparison with last quarter. And also, cash flow from our operations were pretty high and very strong, I would say. If we then look at Slide 20. And this is the KPI for us to make sure that we are becoming more and more global. And as you see over time is that Americas as region is still very important, but it's the first time, I think, since I joined that it has been around 50s. It's been much higher before. And we see now that the other regions are kind of getting closer to Americas, and we have this balance that we [ maybe think ] forecast 30% in each -- or so in each region. And that's -- thereby, basically, I think we have come through the materials. And I suggest that we open up for questions.

[Operator]

[Operator Instructions] And our first question comes from the line of [ Philip Sweinen ] of [ SFO ].

[Unknown Analyst]

Zlatko, it's [ Philip Sweinen ] calling from German Family Office. And then just 2 questions, please. As always, you covered everything extensively, and it's been another strong quarter, I think. On Australia, that 60-lab tender, is that -- I assume that's an order, right? Or is it a framework order? Or is it -- that reflected in the revenues of the third quarter already?

[Zlatko Rihter, President & CEO]

No, no. Just to be clear, this is a tender that was announced a few weeks ago. And it's been a tender -- it took a very long time to stage. First, we have to understand, it's a public tender. And we were awarded as the digital morphology provider for that tender. There are no orders yet because now, I think, everything has to be set place. It's a big activity for our New South Wales region, and it will take some time before they get -- and we will -- kind of they will install it step-by-step. So I think it will -- there will be very few orders this year. So with next year and maybe 1, 2 years after that, that's kind of the main part of when the order will go up because every unit has to be installed and then all that. So it's a long process, but the decision has been made that they will have CellaVision in all 60-plus labs. And some of them will also have DC-1.

[Unknown Analyst]

Excellent. And then on the DC-1 launch, I mean, overall, you sound like you're still satisfied with everything. It's going -- you've been preparing the launch now for a good time. When are you expecting to see the first financial impact? Is that towards -- would that be in the next quarter already? Or would that be in 2019?

[Zlatko Rihter, President & CEO]

It will be in 2019 because we need to get the CE mark first. Before that, nothing will be invoiced. The CE mark will be, at best, in December this year. And then we will need to -- again, since we have an indirect business model, our partners need to stage and set up their kind of launch process. So I think we'll see that gradually popping up -- sales popping up next year, step-by-step.

[Unknown Analyst]

Perfect. And then just a last question. You mentioned other project outside the DC-1 launch. Can you -- I think in the last conference call, you talked about other areas that you would find exciting, like whether, I think, it's on malaria and stuff like that. But also, could you probably just comment on that? And also, on the vet market, have you seen any more activity there recently? Or is there -- because I think you've not been that active in vet at the moment, right?

[Zlatko Rihter, President & CEO]

No, I think -- I mean, that's -- what we've done in last few years is just 2 steps. We've gone more indirect, so we have partnered up with, for example, Sysmex in Americas. And that's one part of it. The other part, as I said many times, I think the vet market is still quite fragmented and it will take some time before it matures. And that time is maybe longer than we expected a few years ago. We see one-off deals here and there on vet. And then of course, one important step to, from our side, to support the long-term healthy vet market is to also develop -- there will be a DC-1 vet version, of course, coming out late next year, once we have stabilized the product and addressed the human market. And that could be a little bit more affordable for the vet segment, I think, versus the current system that is extremely expensive for a normal veterinary clinic -- or lab, sorry. So that's the vet. Then when it comes to human, of course, to be able to replace traditional microscopy over time in a lab, we need to address those analysis that are made in a traditional microscope. And it is, as you said, it's malaria. It's bone marrow analysis. It's advanced platelets or platelets analysis. We have some other tests that are still made manually or -- yes, traditionally, so to speak, in a microscope. And of course, that's kind of the key areas for us to try to address. This is usually applications that have go through an FDA application, basically. We have to go through a 510(k) from a regulatory perspective, which is -- it means that you have to consult. Sounds strange to say that, but then we really have to take this project seriously and that has been the case. So that's kind of what we're aiming for over time.

[Operator]

[Operator Instructions] And there are no further questions. Please go ahead.

[Zlatko Rihter, President & CEO]

Okay. So probably, I was crystal clear today since there were fewer questions than it normally is. Anyway, thank you, everybody, for calling in and have a great day.

[Operator]

This now concludes our call. Thank you for attending. Participants, you may disconnect your lines.