CellaVision AB

STO:CEVI

Earnings Call Transcript 2021-Q3

[Operator]

Ladies and gentlemen, welcome to the CellaVision Audiocast with Teleconference Q3 2021. [Operator Instructions]Today, I am pleased to present CEO, Simon Østergaard. Please begin your meeting.

[Simon Østergaard, CEO & President]

Thank you very much. And good morning, good afternoon, everybody on the call. I'm Simon Østergaard, CEO of CellaVision. I have my CFO, Magnus Blixt, with me. I'm pleased to present our interim Q3 report today. I'll briefly give a short company/market introduction leading into our Q3 financials and a bit how we interpret the current market situation. And then as said, we are very happy to take any questions.Next slide, please. In fact, 2 slides forward. Yes, Slide #3. I will continue as we get the technology sorted.So just a brief introduction on CellaVision. CellaVision is operating within the field of hematology, so blood-based analysis. We are -- our vision is to be a leader in global digitalization of automated blood analysis, and not just a leader. In fact, our mission and our ambition is to be the leader.We've built the market over some 20 years. And we've based our business now also on staining cells, as you see on the picture here, blood cells. We are using digital imaging, combined with artificial intelligence and algorithms, to allow us to see the actual blood cells, and that enables us to classify and characterize blood cells. So that leads into diagnosis.So we -- our vision is to replace traditional microscopes in blood labs. So that superior workflow solutions. It's about standardization and providing high-quality results that can lead to diagnostic certainty.Next slide, please. The market is kind of composed of large labs. This is the market that we have been working on for quite a number of years. So we see the market as approximately 17,000 large labs. And the large labs are characterized by doing more than 130 samples blood samples per day.The workflow is really we are aligned with the hematology players providing instruments that sits upstream to the actual digital cell morphology. So we estimate that approximately 2.5 billion blood samples are managed throughout the cell counters per year. And about 1 out of 7 will lead into morphology analysis to analyze the patients in depth.This is really -- the cell counter is evaluating the distribution of the red, white blood cells and the platelets. And any abnormalities is then examined by microscopy and the morphology. So this is where the diagnosis around anemia, infections, could be cancers like different types of leukemia or myeloma are diagnosed.So this is what you see on the right-hand side, this is our instruments. We believe we've penetrated just over 20% or 22% in this segment with our large systems that you see depicted here. So there's still a large portion of labs where it's done manually, and that is the addressable market that we are tapping into.On the next slide, please. You will see that we also characterize the labs as small to medium labs. Here, the sample size for small labs is kind of characterized by less than 30 samples, and then you have the medium hospitals. It's a gray area is what is what, but that's where you have the number of blood samples ranging between 30 and 130.There's a somewhat smaller blood volume going to these labs. However, there are many more labs. So in this -- the best estimate is around 100,000 labs globally.Same story in terms of what we're looking at and the symbiotic relationship between the cell counter and also the microscopic analysis. The difference in this workflow is that we actually also [ process ] after our acquisition of RAL Diagnostics, where we have a staining reagent portfolio. We also have smaller nonautomated devices that can assist in the pre-analytical steps of the staining process here. And that leads into a recent instrument, the DC-1, on the right-hand side, that we launched in 2019 in Europe. And in 2020, we launched it in the U.S.So that brings me into the overview of the hematology workflow on the next slide, please. And here, we have outlined the large labs and the small labs, the different stages. What you see -- I will talk a little bit about our channel on the next slide, but our distribution partners, they are managing or they are selling the cell counters and the stainers for the large labs, and here we -- and here with them, providing our stains and also our digital cell morphology solutions, whereas in the smaller labs, we -- as said on the previous slide, we also take a larger share since we can actually also contribute in the pre-analytical phase.So I'd say the reagents that we recently acquired really allows us to differentiate with the solution that builds a total solution around reagents, software, hardware, so we can really provide diagnostic certainty by having control of all parameters and by then eliminate human errors.Also, I'd say for this slide, when we talk about large labs and small labs, I think what we are looking into, also as we have launched DC-1, we're really looking into the lab structure, so whether it's integrated labs, so labs -- large labs that are associated with smaller labs in a network, that's typically the small labs in this setting is what we call satellite labs. And then we also have what we call stand-alone labs in the small segment. So labs that operate with a somewhat lower blood sample volume, and they're not necessarily -- they're not associated with the larger labs.This leads me into our channel and our business model, both upstream and downstream. On the next slide, please.Here, you will see that we execute and partner with our -- with the hematology players in an indirect business model. So we work closely with them. We transact via them, our partners. However, we work closely with the actual labs, the end users using our solutions. So we have a global market support organization where we are personally in 40 countries. And so we have a symbiotic relationship where we work both and understand the market at first hand, but we take part in the tenders that includes both the cell counters and the digital cell morphology units.On the manufacturing side, we have a mixed setup. We have -- we own the design of all our solutions, that being reagents, instruments, software. However, on the assembly side, we have outsourced assembly here in Sweden, and we have in-house manufacturing of our reagents in Martillac, France.We are now around 200 employees. So it's a relatively slim setup where we manage the entire value chain. And on the slide, you will also see some of our partners from the channel.Brings me into the next slide, which is the generic strategic agenda slide that speaks a bit about the areas of focus. I say, for number one, geographic expansion. Sort of on the -- I'd say, on the outside -- or coming out of the pandemic period, we're certainly considering where to expand and really try and accelerate our sales and marketing efforts now that we can do more and we can have more in the growing number of interactions. So that's very exciting for our company and our team and our customers.On the segment expansion, so this is really seen from the fact that we went from only catering or servicing the large labs and now having the DC-1 solution gradually being adopted. We are getting increasing amount of market understanding as we sell multi C1s. So we have, in Q3, spent quite a lot of calories on really understanding the customers that we have, that have successfully acquired our solution and the reasons behind. So I'll speak a bit more about that later.On the innovation side, we are ramping up some of our investments, and that's -- the OpEx increase is primarily in R&D. So projects that have been on hold during COVID, they are now ramping up in line with our long-term product development goals. We have a pretty rich agenda, and we want to improve and sustain our position as the leader within digital cell morphology. So we're also having long-term initiatives that we've spoken about in prior -- in this year when we acquired the SPM technology. So we're still working on that at the feasibility stage.For the number four, streamlined supply chain, I'd say, this quarter, we have been hit by global supply chain shortages of the semiconductor chips. So some of our products or subcomponents were affected. So we -- at some point, we thought we had some headwinds here. However, we have mitigated it also in Q3. So we are mitigating by using some of our engineers to actually validate alternative key components and, of course, inventory management, proactive inventory management is part of the equation here. So we're working really to manage the crisis, which is probably not a short-term crisis. But we have our eyes on the ball and we managed not to be affected in the quarter.On the partnership side, well, we really focus to strengthen our partnerships and our relationships with our distribution partners. And especially now that sort of -- that we're getting after the COVID season, momentum is evolving, we can start seeing each other face-to-face. So we are really looking forward to that, especially in 2022.I would say, on the partnering side, we've also -- we formally in Q3 -- beginning of Q3, we terminated our distributionship with Mindray. It's effective in February '22. We reported that in the Q2 report, but it actually belongs to the Q3 report. So there are no change to that relationship. We keep servicing our customers and we'll do so.So that's pretty much -- it's -- we know that there's been a -- we've seen a launch in Q3, marketing launch, but we will keep on monitoring the situation with Mindray. And as soon as we're actually able to acquire an instrument or get hold of an instrument, we will assess the solution they are offering. However, it's not available for the time being.Essentially, we actually welcome competition. We've been leading this field for years. But we strongly welcome competition because it actually helps us adopt digital cell morphology, which we really think is a true benefit for the patients out there.That brings me into the financials. So I will fast forward to Slide #10. The third quarter 2021, we had revenues of SEK 132 million, which is equivalent to an organic growth of 50% -- 52% organic and then a 2% headwind from FX. It's important to say that the growth rates are obviously up against Q3 '20, which was indeed not a good quarter for us. There, we did SEK 88 million a year ago. So it was what's called an easy compare. However, generally, I'd say Q3 is kind of the lowest quarter, it's a low quarter. Typically, we take a dip as a result of seasonality. This year around, we were able to almost maintain our Q1, Q2 level of revenue.If we dig into the different regions and put a bit more color on the situation, we -- in America, we ended at SEK 48 million. So we've been on an upward trajectory in Americas. And this, sort of since COVID, really hit us back in Q2 last year, then we've gradually improved. This year around, we are pretty flat in Americas in Q3 of this year, this quarter, obviously.We were -- we are seeing increased market activity as a general rule of thumb here. We were able to attend the AACC exhibition in Atlanta, which is a big annual show for our industry. However, there were no international attendees. So generally, on the American side, as said, it's moving along. We're not quite back to the level pre-COVID. We see less symposiums and there is less virtual attendance to the symposiums running. Generally, we hear that it can be more difficult to access accounts that are new. However, you can service existing accounts. And large tenders -- it's more characterized by a lot of smaller deals and not that many large tenders from the IDNs.Then I'd also highlight that we still see a traction for our DC-1 or interest -- a lot of interest on the activity level. I will speak about that on the next slide. So I'll park that for now.And actually, also emphasize on the reagent side that for the Americas, we are getting reviews of our MCDh and there is an interest in our methanol-free MCDh reagent due to its sustaining quality and the environmental benefits. So certainly, that's an addressable market for us that we would be talking in our -- as part of our strategy.APAC, we went up by 14%. So we ended at SEK 18 million. So that's equivalent to 14% growth. This is the reason where we feel we are mostly affected by COVID. So there are still restrictions going on. We see -- we had stable sales in China, and we have some of the smaller countries around Southeast Asia, we're actually relatively strong. And then we had low contribution from Japan, which was also due to a spillover effect into the coming quarter. That was more about phasing.Good news is that we have previously reported that we failed the EMC test for -- to get the DC-1 instruments approved in China. So we've now successfully repeated that. And now we are up to doing performance testing and electricity safety testing. So that is pending and ahead of us, but our outlook is that we expect to launch the DC-1 in China during 2022.In EMEA, we had a very strong quarter in EMEA. I should almost say again, 63% growth. So we also see travel and access is becoming easier. It's obviously against a very low compare of SEK 40 million, which was the lowest quarter in a long time for EMEA growth-wise. But we see traction, and we also see DC-1 is kind of really getting out there. And that is not unusual since we launched it in 2019. However, we had ramp-up during -- manufacturing ramp-up during '19 and then COVID came. So I'll talk a little bit more about the sales cycle, some of our observations on the next slide. But we are pleased to see that there is acceptance for -- and the underlying value proposition appears to be rich for the DC-1.In reagent-wise, we did recoup the SEK 3 million that we reported that we were missing in Q2. So that supply issue was solved. We see growing demand, though from a small base in smaller countries, but we highly appreciate it. The reagent market is characterized by the many accounts. It takes quite some time to get acceptance by the different labs. And -- however, once you are getting the adoption, you're ending up with recurring revenue, which is really the beauty in addition to the ability to control the pre-analytical steps in our diagnostic solution.We want to share that we -- when we look at our reagent revenue, we are seeing a healthy growth, and year-to-date, we split our reagent revenue into -- at the high level into reagents that supports the hematology market versus non-hematology. So we have some other reagents for microbiology, et cetera. And we have had 18% growth year-to-date in our hematology reagents and single digit for other reagents. We think that is a healthy state. It kind of emphasizes the quality of our reagents and how they are appreciated out there. And it accounts for more than half of our reagent business. So we are very pleased with that.Taking the next slide, there's a few highlights. I'd say just -- I think I've outlined the situation on the COVID. On the supply chain, we will certainly continue to monitor the situation and do investments in inventory management, if needed. And we may also have to validate other critical components. But as said, we are very pleased to get through the quarter with no implications.On the DC-1, I think it's -- obviously, it has been challenging to promote a new solution. It's easier for network labs because they already -- they have adopted digital cell morphology. For the smaller labs, not associated with hospitals, it's not only the DC-1, it's also the adoption, the understanding, the appreciation for digital cell morphology. So now that we are coming out of the COVID, the -- activity level is really seeing -- having more positive traits. Then we're pleased to see some data points that we have analyzed throughout the quarter.When we look at our Q3 -- Q2, Q3 sales of DC-1, we can see that there is an appreciation for the DC-1 in network labs in the U.S., in particular, the majority of the DC-1s associated with network labs. And this is probably also the early adopters since we've only been around for less than a year or about a year. Whereas in Europe, there is -- this is actually where we sell 50% of our DC-1s, also a bit earlier launch, obviously. But here, we actually see majority in stand-alone labs. And so the value proposition around standardization and the quality, the consistency, is highly appreciated and expressed by our current customers.The other point I want to emphasize is that we also analyze -- we tend to emphasize that there's a long sales cycle. So we wanted to understand that and continuously will do so. We've analyzed also kind of the sales pattern of our large systems. And if we look at that, there's a long sales cycle. It's influenced by sort of both equipping our distribution partners with the knowledge and understanding our solution. We work together with them, but there's still actions to be taken there and a continued training going on. There's the phase of really conveying the message towards lab personnel as well as timing it with the budgeting cycle. So that means when we analyze our cells, it can be 2 to 4 years for a large system to take place. So that's what we see when we look historically.For the DC-1, we expect that the cycle will be somewhat less because we've already created a market for digital cell morphology, especially around the network labs, but also because it's a smaller investment. So after the first year, we are pretty pleased with what we've seen, and we will continue to drive and push for building these digital cell morphology ecosystems where we have our current large solutions combined with the DC-1.On the reagent distribution, I will emphasize that we are obviously having our sales coming out of EMEA. That's the sales number I alluded to. And then we are looking at APAC. We are working hard to expand into APAC. So we are doing evaluations. There are different drivers to get the reagents up. There are drivers around evaluation of the stains, registration, promotions to partners, but also adoption of these things by partners. And it also comes with the timing of when new installations take place. That's when you can validate new reagents.So there are a number of variables to actually drive reagent adoption. But we're on it, and we have successfully -- we're already in South Korea and Hong Kong. There are other countries coming up throughout the coming year, New Zealand and Australia and then -- and China, and then we'll continue to do evaluation in some of the other countries.So that is probably my key point that I want to emphasize on the reagent side. Let's scope for the P&L here. So just a few comments on -- then on the next slide, please. Let's see. Here we go. Thanks.So as said, net sales of SEK 132 million up against SEK 88 million year-over-year. It translates into -- we had a pretty reasonable growth in margin. And as said, we increased our operating expenses. So we spent SEK 55 million -- sorry, SEK 57 million, equivalent to 43%. And then that translated into an EBITDA of around SEK 42.4 million, so an EBITDA margin of 32 percentage points.So the increase on the operating was really the internal ramp-up on the R&D side. We also capitalized R&D expenses a bit more, like SEK 9 million versus SEK 5 million a year ago. And I think on the EBITDA side, I think it's important to kind of emphasize the demonstration of a scalable business model. That's also what you see on the following slide. But the fact that when we have revenue growth in this business model here, combined with our business operations, it leads into increasing profit margin. So we went from 28% up to 32% given the lift on the top line.Cash flow was healthy. We had an operating cash flow of SEK 49 million, which was -- gave us a total cash flow of around SEK 20 million. I'd say what I'd highlight here is that we had a one-off where we terminated our factoring services in -- out of RAL Diagnostics. So that's where we decided to finance with SEK 9 million this quarter that I'd just emphasized. Taken together, what we believe was a relatively strong quarter.So on the next slide, I think I will -- I've already alluded to it. But here, you actually see the dynamic in the way we -- throughout the COVID period on the lower chart. You see the ability to ramp down once there is a global pandemic crisis. And the top line was missing out. We had 2% growth last year. And now as we're starting to really see where we are heading throughout 2021, our ability to ramp up and pull it down on the bottom line is demonstrated on this chart.With that, I think we should open up for questions. So thanks for your attention throughout the presentation.

[Operator]

[Operator Instructions] We have a question from Ulrik Trattner from Carnegie.

[Ulrik Trattner, Research Analyst]

I have a few questions, if I may. Starting off with a fundamental one, and I do understand that the market data is not perfect, however, listening to your presentation for the last couple of years. The question is, you report the same number of samples that you are addressing each and every year. Is the market in terms of samples performed not growing? Or is it just that the data is not perfect?

[Simon Østergaard, CEO & President]

It's -- thanks for your question. I'd say it's more to the latter, the data, there's a lot of insecurity around the data. The market in hematology would grow with, I'd say, low single digits. And you will probably expect the same amount of growth on the number of blood samples. But adjusting 2.5 billion or 4 billion blood samples with that percentage point, there's so much uncertainties around how many labs are there, how many samples are there for real. So it doesn't really change the way we look at the market.

[Ulrik Trattner, Research Analyst]

Okay. Great. And onto semiconductor shortage and effects during the third quarter. It looks like you have sort of mitigated these effects and -- especially based on your comments. Were there any sort of negative effects on sales in Q3 that is in transitory? Or would you say that you handle that in a way that it didn't have any negative effects?

[Simon Østergaard, CEO & President]

Again, I'd go for the latter here. I think the team did an excellent job in actually mitigating -- we were hit by issues early in the quarter. It's meant that we were able to mitigate it throughout the quarter. So it had no impact. And we'll obviously -- we will obviously sort of monitor and work closely with our suppliers on how to mitigate any potential future issues.

[Ulrik Trattner, Research Analyst]

Next question is on RAL or reagent sales. And as you mentioned, SEK 3 million pushed from Q2 into Q3. And adjusting for that, it looks like we have 2 quarters in a row now with quite stable sales of around SEK 20 million to SEK 21 million. And these should be rather stable, right, as quite a lot of these revenues are recurring. Is this a new normalized level, which seems to be a bit lower when just comparing to the pre-COVID levels? And what's the reason behind that?

[Simon Østergaard, CEO & President]

I'd say, the level here is probably signaling that -- I think this is recurring revenue. So for the portion of our sales in the reagent business going to the hematology labs, that's -- that we expect that to be relatively stable and growing double digit. I think that's also why we report the year-to-date number here after Q3, and we expect that to remain.

[Ulrik Trattner, Research Analyst]

Okay. And high capitalized R&D, it's been quite high in the last few quarters, so you believe it's around 7% of sales. And in Q3, it made up 20% of EBIT. Is these ongoing projects related to the China register study for the DC-1? And should we assume that capitalized R&D is going down? Or how should we view capitalized R&D going forward here over the next few quarters?

[Simon Østergaard, CEO & President]

It's not related to the China registration. It's -- I'd say it's a relatively -- we're looking into a relatively stable or going up as we project ourselves into the future.

[Ulrik Trattner, Research Analyst]

And onto Mindray and this being a 2-part question, your predecessor made a big number on Mindray enabling your penetration into China. And what's your plan on approaching China now? And do you share his view that Mindray was an important partner going into China? As well as second question relates to Mindray as well. As mentioned, Mindray is developing their own system? Any news on how far along they are in reaching the market?

[Simon Østergaard, CEO & President]

So the first question, I'd say Mindray was not the only partner we have in China. And I think in the last quarterly report, we shared kind of that we had around 40 systems with Mindray. And so they were not a significant partner as is. We think we can still -- we certainly still have a play in China, obviously, not with Mindray. However, the fact that they -- that we now have another player, of course, it's a competitor head to head to head within digital cell morphology, but we see more -- we see us being part of a total solution to deliver customer value across the hematology lab. So we see us as competing together with our partners. And that's where we actually welcome the competition because it means that we may be able to deliver more customer value by adding digital cell morphology to more cell counters out there. So we certainly still see China as an important market, even though it's not going to be in -- together with Mindray, but in competition with Mindray.

[Ulrik Trattner, Research Analyst]

And do you know how far along they are in reaching the market with their own system?

[Simon Østergaard, CEO & President]

What we know -- what we've seen here in Q3 is that they, late September, launched marketing campaign. And we -- from -- to our best knowledge, we don't think there -- we can transact and actually place an order as an end customer. So we don't quite know where they are. What we've seen out there is purely prototypes that has been tested at hospitals. So that's kind of the knowledge we have.

[Ulrik Trattner, Research Analyst]

Great. And last question on my end before I go back into the queue, and once again, a 2-part question. On the DC-1, what would you consider to be the risk of that instrument cannibalizing on your large lab segment in emerging markets? My interpretation is that it looks like large labs rather would have a DC-1 in emerging markets, China, India, than buying your large lab instruments. Do you see any risk there? As well as if you can provide us with some more information on how many DC-1s have been placed to date.

[Simon Østergaard, CEO & President]

Yes. I'd say you can look at the coin in 2 ways. I'd say -- I put it this way, that the DC-1 is an opportunity in markets where the large systems may be price prohibitive. So we see an opportunity in delivering the DC-1 to labs where maybe manpower is not limiting, which means that the workflow advantage you gain from the large systems can be compensated by staff. But you can still get this diagnostic certainty that comes out of the DC-1. So we see that as an opportunity in those markets with having the DC-1 as part of the equation here.You had a second question? Sorry, can you...

[Ulrik Trattner, Research Analyst]

Yes, yes. it was on how many DC-1s you have placed to date.

[Simon Østergaard, CEO & President]

Okay. Got it. Yes. There are, I'd say -- as said, we have traction, and we are now in the triple-digit arena of number of systems.

[Operator]

The next question comes from Felix Wienen from SFO.

[Felix Wienen]

Thank you very much for the presentation so far, and obviously, the strong numbers gets you going back on track and [indiscernible] on semi shortage, obviously. My first question would relate to software. I see that it's another strong quarter for software sales in Europe. Can you briefly reflect probably on what is driving this and whether that kind of revenue run rate can be maintained going forward?

[Simon Østergaard, CEO & President]

Yes. I think the uptick in software is especially around our remote review. It's also a function of our adoption of DC-1. And I think that's probably the main point, Felix, that I would emphasize. And as we continue to build these, we tend to call them ecosystems where we have both large and big instruments across the hospital networks. We see an opportunity to continue with some substantial growth in the software.

[Felix Wienen]

Perfect. The other area I'm always interested to hear about is that Australian tender that you won a couple of years ago. And where we stand with that? I know that they suffered heavily from COVID lockdowns. So probably there's not been any progress, but I just want to be sure that this tender remains one and that they don't change their mind and try to cancel or probably you've also delivered some equipment. Just an update would be great.

[Simon Østergaard, CEO & President]

That's great. Thanks, Felix. Yes, so the tender in New South Wales -- so the Sydney area has certainly been impacted by COVID. In general, I think we understand the situation in Sydney. Even though they have opened up for more traffic across Australia and also in Sydney, it's a challenge getting into hospital still.So digital cell morphology is not considered critical. That's the news we have, which means that it is somewhat hard to progress. I think the other prerequisite for that tender is around the laboratory information system. So there's a prerequisite to get this running and get this network up and running around the LIS systems. And so there's an IT program as an enabler for this that comes prior to really implementing the systems -- the digital cell morphology systems. So I think it's not going to be a quick fix. So it's probably a tender that we will work upon in the years to come.

[Felix Wienen]

Very good. And then just 2 more questions. The first one on -- I remember in the past, the stain protocols have been an area that you've been working on and then trying to develop since the merger with RAL. So any progress that you did made there in developing and probably gaining feedback from distribution customers or from the market overall, from the end users will be interesting.

[Simon Østergaard, CEO & President]

So this is the staining protocol for MCDh. I believe that is being alluded to here.

[Felix Wienen]

Yes.

[Simon Østergaard, CEO & President]

So -- yes, wonderful. So we've launched MCDh and it's launched in Europe. As said, we see a potential also to bring it into Americas with -- by our partners. So we're working on getting it to work on the SMS devices of our partners. And we are also registering the MCDh in the U.S. as a 510(k) Class II device.I think in terms of APAC, we are launching not MCDh, but it's what's called classic stains. And there, protocol-wise, we are done. So it's more about evaluation, registration and actually driving the launch of the reagents over the -- in the different -- across the different countries, as I alluded to. Therefore, the short answer is yes, there is.

[Felix Wienen]

Perfect. Very interesting, as always. And last question is my view of the business, and I think you always alluded to that as well is that it's really sales and education in the market is all about physical interaction, so as we emerge from COVID. And I think in the world, typically, you always use your own perspective and anchor to what you experienced in your region. But if I talk a little in Korea, there, social distancing is very much -- very high on the agenda. So it's really difficult to judge the picture globally.So you could give us some -- a bit of your views about physical interactions, in which market it's possible, what you've done so far and also what you expect going forward, probably in Q4, but more interesting even in '22 as we talk about educating about DC-1, as we talk about launching new protocols, et cetera, just to get a bit more flavor and feel about the different markets and areas that you're planning, what we should be expecting going forward.

[Simon Østergaard, CEO & President]

Yes. But you're absolutely spot on that physical interactions in this type of business is super critical. You can do a lot virtually and you can explain so much, but actually getting the lab personnel to a situation where they will able to adopt and change their working procedures from manual to automate it, it takes trust and understanding of the solution. So that's really endorsed by physical interactions, and in particular, in hospitals that are not running digital cell morphology. So I think that's key.The other key, I'd say, around physical interactions is with our partners. Of course, we want to strengthen our relationships and our strategic agendas together with them, both medium -- small, medium but also long term, and meeting in person is pivotal in this context. So that's something we will also focus on, getting the alignment of our innovation charts together. I think that's the key. And their physical interactions are key.Then my last point would be on top of physical interactions, I think what we've seen in COVID is also the whole hospital system across the -- on the global arena has been challenged, which means that also budgeting cycles have been up for grabs, funding and finance has been refunded to more, let's say, critical areas. So that's another -- it's not just that we cannot come through the front door and be together with the stakeholders and the customers, it's also financial drivers that has been a challenge and which we believe will normalize as we enter the new year.

[Felix Wienen]

Okay. And as always, I'm very excited to see the progress from here. Best of luck.

[Operator]

[Operator Instructions] We have a question from Hans Bostrom from Trinity Delta.

[Hans Bjorn Eskil Bostrom, Analyst]

I just had one question. And if it would be kind to clarify what the mitigation actions have been as regards to your semiconductor shortage. I wasn't really quite clear on that. And just to be able to assess the durability of this should this component shortage continue, which is likely in the coming quarters.

[Simon Østergaard, CEO & President]

Sure. Thanks a lot for the question. Yes, the mitigating action has been to identify alternative components or stock components and test them. So test them on performance but also validate them to make sure that we could repeat the results of the alternative components and subsequently secure supply of those alternative components.That has required some engineering hours. So we have been -- we found the necessity to pause a few things, to get the right people to actually validate these alternative components. But as said, we have that capability in-house, so we've been able to execute relatively fast. That has been the main driver for mitigating the shortage from our side.

[Hans Bjorn Eskil Bostrom, Analyst]

And what's your level of comfort that those alternative components will remain available in the foreseeable future?

[Simon Østergaard, CEO & President]

Yes. I'd say it's primarily been 2 different components. And for those particular components, I'm starting to build confidence that we have those components under control and can build sufficient inventory. But we will also be looking -- we are looking broad at our portfolio of components and actually are ready to also tie up a bit more working capital should that be needed to mitigate any future crises that may arise.

[Operator]

We have a follow-up question from Felix Wienen from SFO.

[Felix Wienen]

Yes. Sorry, Simon, Magnus, just one follow-up and a number that I saw with the number of employees, if I'm right, increased quite substantially to 201. So quite a bit of hiring going on in the third quarter. But probably that also comes from the acquisition, the small acquisition that you had announced, just to clarify where that comes from.

[Simon Østergaard, CEO & President]

Yes, it's primarily a ramp-up across the board, primarily R&D, primarily R&D. So -- and then maybe in previous reports, the numbers should have said 185. I think it said 180. So I think we -- it's more an updated number here.

[Felix Wienen]

Right. Good to hear about that. And then as we speak, anything on the VET or veterinary segment?

[Simon Østergaard, CEO & President]

We are continuing our efforts to serve existing customers. We're kind of getting the feedback that our solution is -- amongst our largest network is really value adding. So we are continuing to and are super committed to serve that segment. That's kind of the new -- we are focusing more on the human side. We consider that to be a large -- much larger and attractive market. But since we actually feel our solution can support the VET and we have the offering, then we are continuing to grow the business as good as possible in that arena. So -- yes. So that's probably the situation, primarily in Americas.

[Operator]

We have no further questions, so I will pass back to the speakers.

[Simon Østergaard, CEO & President]

Yes, I would just use the opportunity to thank you all for listening in. We are pleased to announce the Q3 report, where we -- as we say, we have what we believe is strong sales and earnings growth with improving market conditions. Of course, as you've learned this morning or afternoon, there's a bit of sort of -- it varies a bit across the region as to where we are, but the bottom line is that we see a positive outlook and we are continuing our efforts to invest also in -- on the R&D side to keep on driving the -- our position and our leadership within digital cell morphology and to keep up with any competitors who may enter the field.So thank you a lot for your time. Wish you a good day from here.

[Operator]

Thank you. You may now disconnect your lines.