CellaVision AB

STO:CEVI

Earnings Call Transcript 2019-Q3

[Operator]

Hello and welcome to the CellaVision AB Q3 Report 2019. [Operator Instructions] Today, I am pleased to present CEO, Zlatko Rihter. Please begin your meeting.

[Zlatko Rihter, President & CEO]

Hello, and good morning, everybody. Zlatko Rihter here from Lund. I'm here together with Maria Morin, who is heading our Corporate Communications and HR; and also Magnus Blixt, who is the CFO of CellaVision. So I hope you're all doing well, and I'll take you through the quarter 3 report that we've released this morning.So my suggestion is that now we to move to Page 3 in the presentation. And a lot -- many of you have seen this before, but just to kind of repeat the most important components of -- of our living. We see ourselves being a company that can contribute both when it comes to outcome and keywords include diagnostics and also reduced inefficiency, which eventually means reduced health care costs and thereby CellaVision, at least in the metric space or in hematology where we are present mostly today, delivers a lot of value to the customer. And as you all know, I mean our vision is to replace traditional microscopes in labs and, of course, this remains absolutely crucial for us.And if we now move to Slide 4 and moving a bit to large labs, the large lab segment, which is the large hematology labs segment that we operate in. As you all know, we closed the transaction with RAL Diagnostics in October 1., so it's only a few weeks ago. And as of now, of course, we have a slightly different or enlarged expanded scope when it comes to what we deliver in hematology workflow.So just to repeat a little bit, for those of you that haven't seen this before, I mean we define the large labs segments as being labs that have more than 130 samples per day. And the workflow is that there is a blood sampling taking place. I think there are roughly 4 billion lab samples globally every year, 2.5 billion of those are in the large labs segment. And when you give blood, of course, there is some kind of suspicion of some blood-related disease. And you can cluster those into 3 main categories: one is different types of cancers, leukemia, lymphoma, myeloma; it could be different types of anemias, especially the red blood cells are affected; or a more critical infection or so. So that's kind of what you would like to discover when you sample and analyze a blood sample.So first step in the blood hematology workflow is the cell counters, which is also distributed by our distributors, partners. And what you look for there is, of course, abnormalities. If there's something strange with the red blood cells pathway or distribution of those, that will be indicated in the cell counter. And the cell counter will flag out and say that this has to be further analyzed, which happens somewhere around 15% of the cases. And that is also kind of our market. So the large labs market for us is around 380 million samples per year. Now since we acquired the RAL, we do have a slide preparation offering. So prepare the slide that would be put in the microscope later, you need to stain it -- you need to smear it, you need to stain it and also need to use different types of stains to have the right color scheme when it's put under -- in the microscope.And once that comes, the customer has 2 -- or the lab has 2 opportunities or solutions or choices, either they go for traditional microscopes or they use the microscope and BMA or they go with the CellaVision way, which is digital morphology. And we have, in the last year, around 18% market penetration here. So that means that a little bit more than 3,000 labs worldwide are using CellaVision at this stage.Now, of course, having the RAL portfolio as part of that, we can, of course -- and we'll try to aim to develop a staining protocols here together with our partners because the stainers -- the staining equipment itself is provided by them in the large labs segment, Sysmex, Beckman, et cetera. And together with them, we try to develop strong staining protocols that takes advantage of the high-quality RAL stains and also make sure that the digital morphology analysis is of the highest quality, basically. So that's what we have in front of us now, the coming year or so to develop together with RAL.If we then move to Slide 5, and here it becomes maybe even more interesting from a RAL perspective. They have 100,000 small and medium labs, as we all know. We entered this market earlier this year by launching the DC-1. It's the same procedure as the large labs. They have a cell counter. They have the abnormal slide samples that needs to be further analyzed. And this market is probably around 220 million samples per year. And basically, what RAL offers here from a slide preparation is that they offer the equipment and the stains. So basically have a device that does the smearing of the slide that they recently launched, they call it the RAL SmearBox. It's upper left in this slide preparation picture. They have a StainBox, which is the staining device. And they also have stains that they offer, so they have a complete offering here. So this is, of course -- as now CellaVision acquired RAL, we have the complete offering here in slide preparation. Once the slide is stained and then there are 2 options for the customer, either to go traditional microscopy, which, until very recently, before we launched the DC-1, was the case. And now -- the alternative as of now, basically, is that they can also go digital morphology way and utilize the CellaVision DC-1. And of course, we have very low penetration as we just launched, but I'll come back a little bit later on the details as well on the ramp-up of DC-1. All that being said, I mean these 2 segments together would represent a potential market of up to SEK 6 billion for us at the moment if will go completely digitalized -- the digital microscopy and if all customers choose -- should choose RAL stains.And if we go to the next slide, our business model. I think you've all seen that. We and RAL have the same distributors to launch these since we both address the same markets, at least in the hematology area, and where CellaVision has been historically, while RAL have both hematology and other applications. Coming back to those later. But if we stay with hematology for a while, this is how it looks. And of course, now combined, RAL and CellaVision, we're close to 200 employees worldwide. Headquarters is Sweden, and then we have a manufacturing site in Bordeaux in France. So that's [ as far as we look ]. If we look at our business model, that's developed throughout the years and the focus on.Slide 7, please, next slide. We continuously try to kind of optimize this, and I think we spent a lot of time to make sure we have a very kind of streamlined business model. I think with RAL, of course, since RAL have manufacturing, also manufacturing becomes core. So with the strong partnership to partnership and core, I think the rest of the business model remains as before. Innovation is still key, both for RAL and CellaVision. We still build the indirect way with partnership when it comes to the sales and distribution. Of course, market support is something that we will invest for both RAL and CellaVision. And of course, at the end of the day, we'll both address the hematology segment, so blood analysis and understanding the end customer is key. So we offer the tools, the components, the products and then, of course, our partners, which is Sysmex, Beckman and et cetera, they take care of the installation and delivery to the customers at the end of the day.Together, our partner covers 100% of the large labs and, I would say, 80%, 90% of the small- and medium-sized labs, which basically means that we have access to all these 100,000 small- and medium-sized labs and also 17,000 large labs. The total global hematology market size where we operate in is around SEK 40 billion, with an annual growth of 5% to 6%. I think the market space as such is quite attractive. Now we have an issue there. But together with RAL, we can address roughly 15% of that, which is SEK 6 billion. So that's a little bit the kind of the business side of that.If then move to the next slide, our strategic agenda. I think we go through that before. Historically, I mean the last 4, 5 years, we focused a lot on geographic expansion since we're now in approximately 17 markets. And we'll continue to expand that step by step and, of course, to open up new segments. We used to have only large lab offerings, now we have the small- and mid-sized labs. We have staining offerings. And of course, we will continue to look into new opportunities to [ own growth ].Innovation is key. You'll see that one of the big increased investments the last -- this quarter versus the last quarter, same year -- last year is in R&D, basically. And we'll go back to that later, but innovation is key. We are really investing hard there to stay on top of things.And then streamlined supply chain and also partnership model is key. And what we've added to that the last year, basically, is business development. And then, of course, a very concrete proof of that we're active in that area is of course the acquisition of RAL. And we will continue to investigate and assess that part of our markets, so to speak, down the road.We also said that the financial target that we have in the past, which is 15% organic growth over an economic life cycle, will remain. And of course this is stuff we are trying to target to continuously grow 15% per year, which is challenging over time. So that's a little bit about how the new, I would say, operating platform for CellaVision and RAL together looks like. If we then move to Slide #10. Again, for those of you that -- we'll start on what happened the last few weeks for CellaVision, so what is RAL? RAL is a company that was founded more than 100 years ago, was 2 collaborators of the famous Louis Pasteur, and that was in Paris. But in a current form, offering then biologic stains for diagnostic use, it's been operating since 1991, and it's located just outside Bordeaux in France. And they have around 50 employees. So it's 45 here, but it's 50 currently. And of course, their kind of commercial approach and market presence is now much based upon that they offer sample preparation and even on top of slide staining solutions and instruments for microscopy analysis. So without saying too much, I think it has a very good fit with what CellaVision tries to do because we address the same market, and we try to improve kind of the same things.What is really unique by RAL and then what makes them standing out in among all staining companies is their kind of high-quality stains and also the batch control they have. So whenever you buy a RAL stain, you always get the same result. And this is a challenge in the staining business that sometimes it's good, sometimes it's bad. But if you really want that consistent analysis, it's really important that the stains always have the same quality. And this is something that RAL excels in. They are present in hematology, which is half of their business, which is the same as ours. But they also have stains for microbiology, pathology and cytology segments, so they have -- they are more present in more segments than CellaVision. Historically, a lot of the RAL centers in France since it was kind of a local French company not long ago. And the last, I would say, 5, 6, 7 years, RAL has tried to internationalize their business. And France is not -- it's still a very important market, but they're also now spread out more especially around EMEA. And also we see RAL selectively present in APAC and Americas, like in Korea and U.S., for example. So of course, we would like to take that to the next step together with them, and make RAL into a truly global company. Going back to that later.They operate in an indirect business model. They also operate in a partnership model, just as we do. And they have, in hematology, for example, exactly the same distributors as we have so, of course, that's a good fit. And we have, of course, discussions right now with both Sysmex, Siemens and other partners of how we can continue to develop the business together, RAL, CellaVision and the different partners. And have an in-house expertise for system manufacturing in Bordeaux. And you can also see that -- their development in the last 3 years, so it's been around 10% growth per year from a top line perspective, that is until 2018.So if we then move to the next slide. I think another very important part of this is because, at the end of the day, if you really want to be successful with this and if we talk in a few years' time here, what would -- what can make the difference, it's all about all on Slide 11. When we can combine what is RAL's core, which is staining, together what is the CellaVision core, which is optics and precision mechanics, software and deep learning algorithms, into the same offering, at the end of the day, we will bring 3 areas, I would say, to the next level. First of all, image quality, to make sure that the quality of images that we analyze are of the absolute highest-quality level.When you have that, you can improve cell classification. Because white and red blood cells, they look very similar, and the more crisp image quality you have, the better we can -- the classification. And also -- and then, of course, you have to apply deep learning algorithms on that, which we've done for, for many years, and we'll continue to do, but I think we can do that on a higher level.And of course also, in the lab, they have the workflow. The efficiency, which is a very important part, is to make sure that if you standardize all the components, and now we can standardize also the staining down the road, we will enhance and improve the lab workflow. And I think that, together, is something that we need to prove to ourselves and our customers in the coming year and years if we really, really want to be successful. So this is very important for us.If we then move to Slide 12. Again, an update on where we are, I mean we have the CellaVision platform offering. And with hardware applications, connectivity and competence and all the different components of that, now we add the sample preparations to that. And also, of course, this is a recurring business. So we're -- we've been a capital sales company. And now with staining, we will move into a recurring business model as well. And that is, of course, something that we need to learn and develop the skills within down the road.Moving to Slide 13. And this is a little bit the workflow that we will try to address. It's another picture, I think, of Slide 12. But important to remember is there are 2 segments here. We have the large labs segment, where we have a lot of automatized slide smearing and staining. And all the partners we have seen as Sysmex, Beckman, et cetera, they all have offerings. They have an automatic slide smearing and stain -- stainer instrument. So in that segment, where we can add value together with CellaVision and RAL is, of course, on the stains, which is the reagents. And also protocols, to make sure that as we work together with, for example, Sysmex and their protocol, for their slide mix -- slide smearer and stainer equipment, we offer the stainer software protocol and they will link that to the CellaVision digital imaging equipment to make sure that we cover the whole workflow.In small labs, we have another situation. There, we cover the whole kind of the whole slide preparation because there are no automatized slide smearing and stainer instruments, and RAL are offering instruments in this segment. So you see the RAL SmearBox down to the left, which is the smearing device, that's where you take the blood and spread it on to the slide and create this famous monolayer. And then you have stains. And then you have different types of staining equipments that prepares the slide. And then you need to have a protocol so that you always do the same work every time. And then next step is, of course, to anchor that slide into DC-1. And then, of course, we will work as much as we can to develop strong offerings in both these segments and, again, here, we have some work to do.Slide 14 just summarizes a little bit kind of 2018 situation, where CellaVision had a net sales of SEK 365 million and RAL around SEK 87 million. So you can just -- I won't go through that in detail, but this a little bit just indicates how kind of indicative combined P&L could look like for 2018. And of course, one of the actions we have now going forward is both integrate the financial processes between CellaVision and RAL. So that was that about RAL, CellaVision, our operating platform, our strategy and all the activities we have. So what we'll do now is to move into what is kind of the topic today, which is the Q3 report. And now I propose let's now move to Slide 16. We had a stable quarter, with 13% growth, of which 8% was organic. And usually, the third quarter is -- if you want to see some pattern, it's been, at least the last few years, a little bit lower than the other 3 quarters in absolute numbers. And so it's this versus the previous quarters.Anyway, when we look at the different regions. Americas, again, we continue to have a very strong development there. I think it's fantastic to see that end market that we saw being many years ago. I think I got questions, "Isn't Americas mature now?" And the current answer, I suppose, is no because we continue to grow very strong there quarter-over-quarter, year-over-year. And even -- and we definitely see that digital microscopy can be considered as the golden standard, especially in the U.S. and Canada. And also, when it comes with this type of technology, like we do versus traditional microscopy, it's very, very hard to define the market because it develops as you go. And this is kind of an evidence of this that we continue to see new opportunities for every year as we learn the market and become more and more present. So U.S. and Canada are really 2 -- I would say, 2 markets where we have convergence I would say in our efforts. It's also nice to see the Brazil development. We entered Brazil 2 years ago and the team there is doing a great job. And we've seen a step-by-step -- a very good increase in sales. And we have launched DC-1 in Canada. And also, right now, we are running clinical studies for the DC-1 in U.S. as part of our 510(k) clearance process. So plan is to make sure that we have a commercial clearance during next year in U.S. so that we [ can offer that ] and start to promote and commercialize the DC-1. APAC had fantastic quarter after a few weaker quarters this year, so -- but it's nice to see that they're back. Both China and Japan had strong sales in the quarter. And I will also say that several other markets have ramped up sales quite nicely. They come from a very low level, but I think both China and Japan I would consider being 2 of our top 5 markets globally right now, which is -- it's really great to see. And we also see that we are kind of opening up new markets. We go in there with our teams, but we also see that the first -- we always have to have the #1 first few installations to get going. And we see good trend now, like in India and Vietnam and, hopefully, we can come back in a few years and say India is now the next China. We're not there yet, but that's the plan, at least.Then EMEA, after, I don't know, 6, 7 quarters in a row, where we had strong development. Now we had a little bit of backlash this quarter, so it was down 18%. And we have not changed anything. We still have a high level of market activities in the field. We have a high momentum. We have started now to ship DC-1 units. I'll come back on that on the next slide. And of course, the Western European markets is the key target here. And we also initiated our own market support organization establishment in Russia, which will be our next market to go to. And hopefully, early next year or mid next year, we should be fully operational in Russia. So we'll follow the same processes we've done in other markets. If we then go to Slide 17, again, a little bit kind of what will happen and has happened -- or happening right now with RAL. I mean RAL acquisition closing took place October 1. So that's an event, I would say, post quarter 3. But still I think Its' an important thing, so I bring it up here. So the strategic rationale and also the strategic activities we have right now is, of course, to extend -- not extend, expand current addressable hematology market segment. We will already -- you'll see us start to co-promote stains with the CellaVision offering. But I think the big step for us, of course, is when we have these validated staining protocols to take the next step. And then we can start to integrate CellaVision and RAL products in the same offerings to customers and also claim the benefits that we think we can offer. But we have some work to do before we're there.We will, of course, use our global market support organization that we have present in 17 countries right now to promote and push the RAL offering. So we will train our team, and then we'll then go out and start to promote the RAL stains globally. And I think since it's so close to the offerings stage, the same customers, the same labs, the same partners, so it shouldn't be such a big deal. Of course, we need to do the training to get going, but I think that hopefully can start up quite soon. And then, of course, another interesting aspect from our side is what can we do outside hematology, where we can bring in some addition to complement RAL's staining offerings outside hematology.And just to summarize, I think the first integration activities have already been initiated. And of course, we will take this step by step to make sure that -- because we have a pretty strong momentum, RAL had a strong momentum and then, of course, we need to make sure as we together have an even stronger momentum, and that's of course part of the integration activities coming up. Other key events in Q3, and then coming back a little bit. The DC-1, it's being ramped up. As you all know, I mean, we have to repeat that a few times more, so there is no misunderstanding that 2019, it's a ramp-up year, controlled ramp-up year of DC-1. The most important thing for us right now is that every DC-1 we need to ship to customers is well working. And we're really taking extra measures to ensure that, that happens. That being said, we are now starting to ramp-up production and shipments. And there are DC-1s now in several European markets also installed and operating in the field. So of course, we will continue this process step by step but, again, controlled ramp-up is a very important issue here.And then, as I said before, we're right now executing clinical studies to follow up the 3 markets we got last year to also be able to get 510(k) clearance in U.S. in [ late June ] and what we call as the -- for the CFDA now, the terminology is NMPA, they changed name, to submit in China as well. So that we, during 2020, also have access to the #1 and 2 markets for us, which is U.S. and China for DC-1. So that's a lot of activities right now from CellaVision. And hopefully, of course, we would see -- we will see that in the numbers down the road.Moving to Slide 18. Then the hard core financial development, if we would compare that to quarter 3 this year with the quarter 3 last year, we had a 13% growth, 8% organic. We continue to have high level and good gross margin development. One comment on that is that we now have started to depreciate the DC-1 since it's been sold, so that's been a big milestone for us and also a sign that it's now getting more and more out in the field. Sales in Q3, as you can see, it's normally a little bit lower quarter from a net sales perspective. Also the OpEx versus sales is normally a little bit higher. And we have invested into the organization the last year, of course. We see also that we have more flat development on the operating profit versus last year. We still strongly believe that we need to continue to invest into our business. I think we've proven ourselves over and over the last few years that this is the right way to do it. So if we move to Slide 19, you'll get to read more details on that. And then especially on the expense side, you can see that, especially on the R&D expenses, this quarter were extremely high. And you have to understand that 46% up in R&D expenses, most of our expenses are in people. So we have hired a lot of people are now hopefully -- not only hopefully, but will now work on the next-generation innovation that we hope to release to the market down the road. So still, this quarter, we have a low ratio of capitalized R&D because we have been between projects, basically. Our DC-1 has been commercialized. We stopped capitalization on that and started to even depreciate that. And of course, other projects will now follow. So this year, it's been a low ratio of capitalized R&D. That's a comment from my side. I won't comment much more on that. And that basically [ brings us ] on to Slide 20, which is the last slide of today. Just to summarize the development the last 5 years, from a 12 months' perspective, we have 28% growth. We see a solid year-over-year development on gross margins and right now, rolling 12 is 25%. I think OpEx versus sales will stabilize around 45%. A big part of that is, of course, that we are heavily invested into the organization.And with the top line growth and everything else, we have an operating profit of 31 -- or 30.9%, rolling 12, from a percentage perspective.So that's -- I think that's a little bit overview and all the details and the figures. By that, I will hand over. If there are any questions -- or I will open up for questions.

[Operator]

[Operator Instructions] Our first question is from Ulrik Trattner from Carnegie.

[Ulrik Trattner, Research Analyst]

Just going back to what you just mentioned about you're expecting for the OpEx to sales trend of 45%, is it something that you see long term, even given the strong top line growth?

[Zlatko Rihter, President & CEO]

No. I don't think I kind of commented it that way. I just said that if you look at the last few years, that we will be in somewhere between 40% and -- 43%, 45% in OpEx versus sales. I don't think we have any specific targets for that. We will invest into the organization following the strategic agenda we have, the geographic expansion and also with innovation. And then if you look like quarter by quarter or year by year, that could go up and down a little bit because sometimes you have to hire a lot of people and you have to consolidate the organization a little bit. So I would not say that. I mean we try to run an efficient business, but when we have to prioritize, focus is always to try to have activities that drives top line, that drives growth and also having activities to make sure that we have the most innovative offering in the market. That's kind of priorities. And then try to do that as efficient as possible. So that's more -- I will say more [ miles ] on that one.

[Ulrik Trattner, Research Analyst]

Okay. Yes, because sort of the operating expense to sales were quite high this quarter. And of course, I think the margin was quite a disappointment, especially given the positive FX effects of 5%. So just looking for the next few quarters, is there any specific R&D efforts that you're putting into the business?

[Zlatko Rihter, President & CEO]

To be honest, I mean, I cannot comment on a single quarter. It doesn't work like that. It's impossible to run our business quarter by quarter. I mean we need to have, I would say, like 2, 3 years perspective on those things. Because when we invest in R&D now, we might deliver that product in 4 or 5 years' time. So to single out one quarter, it's very hard. And so we will have -- as we said, I mean, we have a volatile business. If you look at individual quarters, it goes up and down. It has done that historically and it will continue to do so. I think over time, with RAL, and have a more recurring business, that could stable out a little bit -- stabilize the volatility a little bit over time. Not now but in the future maybe. So it's extremely hard to single out one quarter and annualize R&D costs from that, from my perspective at least. You're, of course, allowed to do that. But for me, it's very hard to draw any conclusions on that base, to be honest.

[Ulrik Trattner, Research Analyst]

Okay. So just for the DC-1 and the timing of the FDA approval and the Chinese FDA approval, can you give -- shed some more light on that where we are like timing-wise in the next year?

[Zlatko Rihter, President & CEO]

Yes. I mean first of all, I mean the DC-1 has been approved in more -- commercially approved in more or less the larger markets. So it's not only in Europe. It's approved in Canada, Australia, Japan, I think most Asian markets, except for China, and also more or less most American markets, except for U.S. We knew when we were kind of launching that this year that we need to run 2 more studies in U.S. Otherwise, we will not have an FDA clearance for this type of product. So we have to start those up. So we're running 2 more -- it's several clinical trials, but it's in 2 labs. And we need to follow protocol and once that's done, we conclude. Hopefully, we can complement. We will have the results as well in Europe, which will have. And then we'll take the European studies, the American studies, we'll put them together into something called a submission and then we'll send that to FDA. And then they have to respond within 90 days. If it's okay, they will give us clearance to start sales. If not, they might have questions. There is 1, 2 weeks [ deliberations ] and then it goes. So that's why it's a little bit hard to predict exactly when. But with the current plan, we should be able to have it cleared second half, I would say, of 2020. China will take maybe a few months later, so to speak.

[Ulrik Trattner, Research Analyst]

So submission of 510(k) in sort of midyear next year?

[Zlatko Rihter, President & CEO]

No, no. Submission will take place early next year, but then clearance comes later, so to speak, because FDA has to process the submission and then they will come back.

[Ulrik Trattner, Research Analyst]

Okay. Good. And then just sort of one last question before I get back into the queue. Sort of -- can you just sort of elaborate on what type of copromotion activity you're actually -- should be able to see outside of hematology for RAL staining products?

[Zlatko Rihter, President & CEO]

I think copromotion activities outside hematology will be very few short term. Copromotion activities will mostly take place within hematology area because if you take a concrete example, I mean, Sysmex, for example, have launched what they call a Smear workflow and the Smear workflow is the RAL SmearBox, the RAL Stain -- the RAL SmearBox which -- the RAL StainBox, which is the RAL products and a DC-1. So they promote that as one. And they did that before we acquired RAL. So basically, it's already today copromoted in Europe in hematology. And of course, we will do our best now to engage both the RAL and CellaVision team, together with Sysmex, to further develop that. And that will take place in our warehouse as well. So that's more copromotion. And then that will take place within hematology because we -- CellaVision does not have that much experience outside hematology. That's more RAL.

[Operator]

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

[Unknown]

Zlatko, just a couple of questions from me again. The first one, on the financials of the quarter, was there anything in there that is not recurring? For example, for the acquisition of RAL, due diligence costs, lawyers, anything like that, that we should be aware of?

[Zlatko Rihter, President & CEO]

No. I think it was -- no, no. No one-offs in that sense.

[Unknown]

Okay. That's fine. And then on RAL, on the 100-day plans and so on in terms of the integration. Did you already have joint management and strategy meetings and probably some more color that probably real-world examples of what actions you will be taking, for example, in approaching the distributors and so on? Just a bit more color in terms of how or what you've done since the last year...

[Zlatko Rihter, President & CEO]

Absolutely. Now it's only -- closing took place 2, 3 weeks ago. So it's still early days because we manage that very short period between close -- signing and closing. But then of course, as we took over, of course, we'll have announced internally we have one common organization going forward. We have booked meetings and had some meetings with the key partners, where we -- where I and my team in CellaVision and also the RAL teams together with the respective distributor sits down and we try to kind of plan how we could -- how we should work together. We have presence in many, many more markets than RAL. So RAL, I mean, they operate globally from Bordeaux. We operate locally in 17 markets. So that also gives us an opportunity to meet with the local persons in the different markets and distributors and customers. And right now, to start to discuss RAL. We developed of course an integration plan that we're executing already. So that's a few examples. We have also start-up work to develop the sustaining protocols where we closed in Bordeaux and then moved activities to try to find the optimal formal solution down the road. But then whatever come up, we will need to run that in some types of clinical trials before we start to promote it. We need to gather proof, so to speak. So that's kind of what we do right now. So there is a lot of activities. And then of course, both companies also needs to -- both RAL and CellaVision also need to continue to be active in the core business. So that will be my answer to that.

[Unknown]

Okay. Just in terms of morale and integrating the companies, have you joint -- or planned any joint activities like a, I don't know, big Christmas party or anything? For the people to get to know each other.

[Zlatko Rihter, President & CEO]

Yes. We'll have a big meeting in December in Bordeaux. We are flying all our market's top organization -- other parts of the CellaVision organization to meet up with RAL. And there will be a lot of get-together, get to know each other. There will be a lot of training taking place for a few days from both sides. So that basically, the copromotion could more or less start after that. Then there is also always a time factor on this before you see anything. So you need to go out there and start to meet your customers, discuss with the customers, promote, quote, et cetera. So it's step by step. But this kind of the first steps, we have already planned for absolutely. There will be a huge meeting in Bordeaux in December.

[Unknown]

That sounds fantastic. And just on -- earlier in this call, you mentioned in -- to Ulrik's question, you've mentioned that Sysmex already have the Smear workflow where they already combined the RAL products with your machine. So is that -- do they see higher customer take-up for these -- for the integrated lines?

[Zlatko Rihter, President & CEO]

I mean, they -- the challenge with that is, of course, that the DC-1 is newly launched. And also, the RAL SmearBox, which is the smearing device, is also recently launched and recently means like now. So we both -- the RAL SmearBox and the DC-1 just started [ to be shipped ]. And so what Sysmex -- and what we've done together with Sysmex was that we launched it but they also do a controlled ramp-up, of course, because the key components in the Smear workflow is DC-1 and on the smear -- the RAL SmearBox, which are 2 new components, 2 new [ interactive ] components in that offering. So together, I think we can take the whole small labs offering to not only 1 level up, many levels up. But again, it has to be done step by step.

[Unknown]

Okay. So basically, I understand that it's limited data so far that -- given the...

[Zlatko Rihter, President & CEO]

Yes. Yes, absolutely. I mean that's all that is. You need to -- it's not like the iPhone world is where you have like 5 million iPhones going out the day after launch. The Smear tech box is a little bit different than that.

[Unknown]

Absolutely. And then just 2 more questions. One on the DC-1, probably, can you give us some kind of better feeling for the scale of this equipment so far? I don't know, is it a couple of million SEK already? Or is it much lower? I mean just to get somewhat of a ceiling. I understand controlled ramp-up, and I value that very much. But just in terms of trying to really get a better feeling.

[Zlatko Rihter, President & CEO]

If you look at the Q3 numbers, it has no impact. I mean, it's still early days. So that -- it's very low numbers at this stage. But we have shipped a number of units and there are a number of units installed in -- at customers by now. So there is a certain process because once it's approved here in our manufacturing and shipped out, it doesn't mean that it's installed the day after because it ends up in our distributor's warehouse and then that has to match when the customer wants to do the installation. So a month or 2 can possibly really go very fast there. And usually, we see a pattern with our systems. When our distributor gets the customer order, it can take 6 to 12 months before it's installed really in the lab. So that's kind of the time frames we're looking at. I don't think it's that different for this one, no.

[Unknown]

Okay. That's very valuable indeed. And following -- or related to that, your response to Ulrik's question when asked about the OpEx-to-sales ratio, my take would be that once the DC-1 ramp-up really comes through, which probably is in 2020, then that OpEx-to-sales number should revert to more normal levels. Would you agree with that?

[Zlatko Rihter, President & CEO]

Yes, yes, yes. It's very dependent on the top line in that quarter as well. Because we -- if you have a volatile top line in our business model and -- increased OpEx is fairly stable. It's a feature that stands out every year. I think at the end of the day, short-term OpEx versus sales is very much dependent on the top line that quarter. But of course, if we sell a lot of DC-1, that helps by definition mathematically a lot of course.

[Operator]

And our next question is a follow-up from Ulrik Trattner from Carnegie.

[Ulrik Trattner, Research Analyst]

I know that you don't really want to talk about quarters in specific, but can you just address the fact that system sales were quite poor in this quarter and then actually adjusting just for FX, it's supposed to be negative for both North American markets and for EMEA. And even if we go back sort of last 9 months and look at the group as a total, I think growth adjusted for FX is closer to 12%. Is this something that we -- that you see as a general trend for now? Or how do you see this?

[Zlatko Rihter, President & CEO]

No. I mean, as I said we are not -- if you look at our business model, we're not delivering to end customers at the end of the day. we Are Delivering to our partners' stocks, in their warehouses. And we cannot control always -- or we don't control it at all how they then distribute that to the end customers. So we will always have this type of volatility. That's again why I need to look, let's say, over 1-, 2-year period. We'll continue to say that because then all that evens out. Sometimes, they want to have scale of economics, so they order a larger shipment. They put up [indiscernible]. And if we're lucky, that is shipped like the last week of the quarter or if we're unlucky or lucky, whatever you define it, that it could be shipped the first quarter of another -- first week of another quarter, and that has an effect on growth and in percentages. So that's why it's so hard because it doesn't reflect reality. I mean, in reality, you have a customer that places an order, but then you have the supply chain. And we are part of that supply chain because we don't -- we are not delivering to the labs. We're delivering to our distributors' stocks or warehouses. So that effect will be there. That evens out in the years or 2 years' time span because then -- I mean they don't build stock over time. They could do that over a quarter. So that's why what you're then asking, it depends on -- because my view on the end market is that there is a continuing -- continued interest. We see a lot of more and more customer interest, et cetera, et cetera, et cetera. So that remains. But then the effects of the supply chain or logistics between the day that the customer, the lab, wants to have a large system and we -- and how, the way we deliver that through our production, our warehouse, our distributors' warehouse can -- and in many cases, it's even more complex than that because if you go to China and APAC and in other parts of Europe, also Sysmex and Beckman can have subdistributors on top of that. So they stock up as well. So you have another layer in between. And then customers. And that's kind of how the reality looks like when you work in our type of business model. And then they may be stocked up for a while and they don't buy it for a while. So that's kind of why it's extremely hard to give you clear views on a quarter because all of those things can make a big difference at the end of the day. So when you just isolate the quarter, you don't get the full picture. That's at least my view.

[Ulrik Trattner, Research Analyst]

I got that. Just sort of how's your visibility in the order stocking? I'm guessing that you have quite a good relationship with Sysmex. And just how good is your visibility for like the next 2, 3 quarters in terms of order stocking?

[Zlatko Rihter, President & CEO]

We can have some visibility on the movement in the market, especially in the markets where we have our own people because they're on the field. But then a customer order, when we get that, we don't know when it will be delivered. It can be delivered in 3 months or in 6 months or in 12 months or even more, depends on when the lab is ready to do the installation. And we are only one component of that, if they [ need to ] install a full hematology line. So the digital morphology is just 10%, 15% of that installation, but they also want to install everything at the same time. So that also matters. So even if we have any insight that we had like 10 customer orders in January, those could be installed in the coming 12 to 24 months basically. And we don't know where -- when the other shipments will go. And of course, our distributors have surplus safety stock to manage that. But sometimes they stock up more. Sometimes, they forget to order and they are out of stock and so on; and we cannot manage that. So that's part -- not our task to manage that. And that, again, goes back to it's very hard to take one isolated quarter and make any conclusions out of that.

[Ulrik Trattner, Research Analyst]

Okay. So I think it was mentioned sort of in comments that you have sort of produced and distributed 10 DC-1 units. Do you have any sort of insight into how many of those have been installed in small labs?

[Zlatko Rihter, President & CEO]

No. I think we have distributed more than 10, to start with. But no, we don't have the exact number that is up and running. But there are a few, and those, from what we've heard, those are doing well. Some of them, of course, the first units ends up being demo units for the distributors because they will use them to -- because once we start to produce now, I mean, there is a step for our distributors, they have to kind of launch the DC-1 with their distribution networks in the different markets. So all of a sudden steps now that have to take place before we're really up and running. So it's not only production ramp-up. That's the big part, but -- so I don't have 100% detail of how many of those are up and running.

[Ulrik Trattner, Research Analyst]

Is it reasonable to assume that distributors will be sort of stocking up inventory for the DC-1 for the next year?

[Zlatko Rihter, President & CEO]

I don't think we're in that situation right now. We have more orders than we can ship.

[Operator]

And our next question is a follow-up from Felix Wienen from SFO.

[Unknown]

Zlatko, just 2 more follow-up questions. One, on R&D generally and on the initiatives going forward, if you could give some color there. I think historically, for example, discussed like bone marrow and so on. And so if you could just give us anything about how the team is progressing overall and whether you find new opportunities, anything around that will be fantastic.

[Zlatko Rihter, President & CEO]

I think a significant opportunity that we didn't discuss the last quarter report was RAL because that can bring about a lot of new opportunities down the road. I think we just need to sit down now and kind of come together and figure out how to prioritize those. If we back to the CellaVision business, of course, I mean we are not as explicit as we were once with the DC-1, where we tried to have that in the quarter reports for many years before we launched it. So rationale like building up momentum for kind of the next generation of innovation here. Without being too specific, I would say that we will try to understand exactly what is still done manually in labs. So bone marrow is a very good example of that. They have other type of analysis, like malaria, we have gram stain, we have many others. And of course over time, we would like to make sure that we digitalize that part as well. And then we will use both the DC-1 and then the future large labs platform to develop into that. And we would like to create more and more kind of complete offerings over time, which we've been quite good in the last years with not only the [ MDIs ], we added all this connectivity parts a few years ago, which is becoming quite a success now. We added the DC-1, and we'll continue to try to add applications as we go further. So that's where we spend our money, in innovation. And I won't be more explicit than that at this stage, but this is kind of -- of course having 50% more people this year versus last year gives us more opportunities to run more projects in parallel also, of course.

[Unknown]

Absolutely. Fantastic, and I fully agree. And it sounds great that you have a strong pipeline going forward. And I think it's also intriguing that you're not -- you don't put the new projects everywhere like you do with the DC-1 in terms of your reporting. So I'm looking forward to see that in the future.And then, lastly, touching on Europe. Probably, if you could give us a bit more color by country, countries where you do see the biggest upside. I remember I think we talked about France in the past, which proved to be a bit more difficult and then you put in a regional sales office. I think Germany, similar. So just a bit more color broadly please on that topic.

[Zlatko Rihter, President & CEO]

No. I think, in general, I mean we have now -- we're operational in I think it's in 6, 7 European regions and countries. And we will continue to penetrate those. We also decided to move into Russia next year because we see a good market there. So in general, I think activities are fully up to speed. Our team is operational. Our team is working close with our partners. I think they have an exciting year in front of them because not only will they promote large lab systems. I mean RAL's base business today is in Europe. And the DC-1, the number -- my target area is also EMEA. So as we move ahead now, I think we have a very exciting year, especially in EMEA, where all the products are both approved and available, so to speak. In Americas and APAC, we will have to build up both -- yes, the DC-1 still has to be cleared in the U.S. But there, of course, RAL has less presence. We need to build up that a little bit more from scratch. And I don't know how to say it right but basically, where the DC-1 is not yet approved in China. Of course, there are good opportunities in other markets. And also RAL, that is very selective, present in Asia, where we also, of course, will try to build up our business. So I think EMEA has a better stocking point, at least from our perspective here, or to have -- anything is available. And there is also a base to start from that is higher than -- especially for RAL, that is higher than [ off-site ]. But that starts now basically, where we have the products available and, of course, when we have RAL in the portfolio.

[Unknown]

Sure. And then very lastly, I promise, on the Australian frame order that you won -- I don't know when -- I think it was early this year. Just whether you had additional installations this year. I know that this is the longer-running project that I think is meant to extend for 2 or 3 years. But anything around...

[Zlatko Rihter, President & CEO]

I can comment on that. It's the same comment as I think the last quarter. I mean we were awarded the tender, and then it will take several years to install. So what's happened this year is that they did a reference installation basically. So I think we had 3 installations up and running right now. And they will take then -- though it still takes a few months to do that, kind of the studies and functioning those pilot installations. So they're in the middle of that. And once that's done, the plan is to start to roll out the rest. So that will take place as of next year basically. And this is nothing unusual. I mean just to comment, that Australian tender, we've seen these in other big tenders. Usually, it's a 2-, 3-years project to do these big installations.

[Operator]

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

[Zlatko Rihter, President & CEO]

Okay. Thank you for all the questions, for all the interest in CellaVision. We will now go back and continue to work. And I hope that you'll all have a good day. Take care. Bye-bye.

[Operator]

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