CellaVision AB

STO:CEVI

Earnings Call Transcript 2024-Q3

[Simon Østergaard, executive]

Thank you very much, and thank you to everybody dialing in to listen in on our comments and presentation of the Q1 Report here in our Fiscal Year 2024.

I have our CFO, Magnus Blixt with me, and we're happy to share all the insights that we just published this morning.

So we can go to the first slide where we talk about the quarter in brief. So Q3, we have designated the title to the report as strong sales in EMEA amid market uncertainties. So I would say the quarter has been characterized by a reasonable Q3. Also historically, it's not our strongest quarter. However, the fluctuations amongst the different regions are distinct. So we have seen EMEA really benefited from very strong growth across multiple markets, but also across essentially all product groups. And then we are up against a weak compare, a favorable compare, if you like, from last year. Sales have declined in Americas. We've seen uncertainties play out in the clinical settings in the hospital environment. So delays of both tendering, but also order placement given the political situation with the election. That has been the main driver for the uncertainty and not getting sufficient orders all the way out there. This is what we see as a temporary thing in the market and not a sign of the competitive changes.

In APAC, we see fluctuations during quarters. And here, we would say here, we've had 3 strong quarters shipping to China and this time around, no shipments out there, but actually strong shipments elsewhere. So in our book, it's purely fluctuations amongst quarters when we comment on APAC specifically. That gives us an organic growth of 9% this quarter, so almost double-digit, and it translates into an EBITDA of 27 percentage points. In terms of -- yes, I could highlight that the actual revenue is SEK 179 million versus the SEK 168 million last year.

In terms of progress on our strategic direction, then we've been in the -- you can say, in transitioning into a strategic partnership alliance with Sysmex earlier in the year. So we've been working with multiple markets and really getting to know them and the market specifics. And I'm proud to say that we are continuing that journey also on a tactical level and at really an educational level. So here we've made some really paved the way for joint training and marketing activities and how we share and conduct e-learning across all countries in a global setting. So I think we've accomplished quite a bit together there, and this will be the fruit going forward of educating the community in digital cell morphology via some of these tools.

Furthermore, on the development side, we have started our clinical validation. We completed the preclinical validation of our bone marrow prior this year. And now we are actually in the midst of executing our regulatory or our clinical validation leading to regulatory process in 2025. So we are active in 2 European sites and soon in a U.S. site with our bone marrow validation. So we are still aiming at launching the bone marrow with the CE Mark for Europe in 2025. So that's according to the plan.

If we proceed and try to unfold the P&L that we reported, as said on this slide, you see -- I know it's a little bit busy. We have the quarter we are just reporting on the very left-hand side, and then we have the comparable quarter followed by the year-to-date and the full year last year. So in the first column here, SEK 179 million, giving us a 9% growth organically. When we correct for the FX, we had 3 negative percentage points in FX that we absorbed under the gross margin. And furthermore, we are seeing an increase from 66% to 68% in the gross margin, and that is what we have alluded to previously that the kick-in of the majority of the price increases takes place right now, and this is what we've been able to demonstrate by the increase here of a couple of percentage points. So that has been according to our expectations.

On the operating expense side, we are seeing a slight decline on the sales despite, of course, the normal annual adjustments, et cetera, that is referred to the restructuring we did last year. And then we are spending a little bit more on the admin side in terms of consultants to get ready for regulatory requirements coming up in the upcoming years. And then according to plan, we are investing a little bit more in R&D, given the maturity of our pipeline and our development programs. That brings us to an EBITDA of SEK 47 million sorry, SEK 49 million, equivalent to 27%. So in essence, it's 22% of R&D of sales this quarter, and then we are capitalizing SEK 14 million in this quarter.

Cash flow-wise, still a strong cash flow, but obviously, on paper here, it looks much weaker than the comparable quarter. That is really working capital. There are 2 drivers for this since we have a difference between the comparable quarter of SEK 40 million. It's account receivable. We have not changed any terms. We have unchanged aging profile, et cetera. So it's really when we receive the actual monies, which were outside of the quarter. So that's kind of like -- that's really phasing, if you like. And then inventory, we're up against last year where we have had some weak quarters and then we really gained on clearing our inventory or cutting down on the inventory level, which was really cash flow positive. We have not done that to the same extent this quarter. This is also part of the story when we unfold the difference here. Having said that, we have continued to decrease the inventory level quarter-by-quarter. So we're on a good track there. And that gives us a total cash flow of SEK 16 million during this quarter.

All right. So let's go to the regional highlights. Yes. So negative growth of 20% in Q3. So this is really the big hit. And we do really prescribe this to the uncertainties surrounding the political climate around the election. This is something we have also exploited at seminars and elsewhere and of course, in dialogue with our customers. So we are really seeing a hesitation at the hospitals to actually place the investment in capital equipment. So the uncertainty around the interest rate potential budget, that is the underlying driver for that pattern, which apparently was also part of the equation 4 years ago, even though we also were deserted by the pandemic at the time.

EMEA, as I said, very favorable growth across different markets, across the product lines. We also disclosed that we had a couple of orders on top in September, and that was really to preempt logistical disruptions later in the year for one of our partners. However, we felt that there is a need to be super transparent around it because, yes, that brings us a little bit higher up. But if we even reduce with our estimate of that, then we would still be an all-time high sales in EMEA. So I think we can faithfully say that we have good momentum across multiple markets. And I think the -- yes, I'll get back to the reagents.

APAC, as I said, we have seen fluctuations across quarters. And lately, we've actually had momentum. The tricky thing when I highlight China is that sometimes when we serve China, it's really a lot of orders we ship at once. So whether they are in the quarter or not, that really influences our numbers. Now we have had 3 quarters with shipments going to China, and this time around, this did not take place. That's really a function of all the distributors that are serving the hospital market in China, whether our partner is placing an order or not. And that was not the case. However, we are seeing a lot of very great activities across APAC, both in Japan this time around Singapore, and we have a lot of good attention and fruitful dialogue around Australia and New Zealand as well. So we would prescribe the soft quarter of SEK 12 million versus SEK 22 million as a phasing component. If we cut the numbers by product group, instrument sales were 6%. And obviously, 6% is a little bit on the low side, also given the fact that it's large instruments that drives the majority of our revenue. So we're a little bit impacted, especially from the U.S. piece. But again, both large instrument and strong instruments were actually significant across Europe. So we like to see that trend is continuing because we've actually had quite a number of quarters where that took place in EMEA.

Reagent-wise, here, I would highlight that we had 11% growth. We have 12% in EMEA, and that is a combination of both hematology reagents and the non-hematology reagents. So we are continuing a steady double-digit growth in the reagent market. Software-wise, it's a little bit soft, and that is also a function since it follows the instrument sales. However, we are -- just like I said, across EMEA, we are also seeing software as a positive contributor to the revenue growth.

Let's just jump into the key takeaways. Yes. So the short version here is that we do see strong growth. We're continuing to see the growth across multiple markets and product groups in EMEA. We have seen this delay, which takes place as we speak in the U.S. So we are trying to follow that as close as we can and assess what is the implication from other companies, but this is really our conclusion that we did see the political uncertainty as a wait-and-see component. As mentioned, fluctuation in APAC, we have a good belief that we have traction in multiple markets out there. And then we have really found a way to deploy our training modules in a digital fashion and share that across multiple markets, in fact, globally. So that has been a major milestone on the internal lines, which will hit and serve the customers in how they deploy digital cell morphology, how they understand the digital cell morphology and how they deploy our solutions to serve that need.

Great progress according to plan on the clinical validations, executing 2 sites, soon 3. So we are driving the plan accordingly there.

So with that, I think we should invite the audience to pose any questions you may have. We would be happy to answer those. So thank you very much for your attention.

[Operator]

[Operator Instructions] The next question comes from Ludvig Lundgren from Nordea.

[Ludvig Lundgren, analyst]

A few questions on my end. First, looking here at the instrument sales, it was quite a mixed quarter, as you mentioned here, with EMEA really sticking out on the positive side with, I think, 50% sequential growth. Maybe if you can unpack a bit what is driving the strength here in this region?

[Simon Østergaard, executive]

Yes. So we've seen sort of -- we've gradually over the quarters, we've seen growth both in the Eastern part of Europe, but also some of the more mature European markets. But I think this time around also Middle East is really a place where we are starting to take share. So that would be the highlight, Ludvig.

[Ludvig Lundgren, analyst]

All right. Great. And then thinking about APAC here for us trying to model this, it's -- yes, really has been quite lumpy here, but also we have seen this before as well. But would you say there is some seasonality going into the Q3 numbers specifically or is this fully phasing related?

[Simon Østergaard, executive]

Actually, for APAC, I would argue it's fully phasing. Typically, where we've had weak quarters is also in Europe due to the vacation season, et cetera, that typically Q3 is not a really strong quarter. But obviously, this time around, we are actually seeing growth there. But for APAC, it's really -- it's the timing of placing of these, especially the large orders, which are shipped to -- in particular to China.

[Ludvig Lundgren, analyst]

All right. Great. And then looking on R&D expenses, thinking about the gross number, it was up a bit from Q2, I think. I suppose this is related to bone marrow and the bone marrow application, but could you elaborate like what specific activities this is driving?

[Simon Østergaard, executive]

Yes. No, you're absolutely right. Part of the sort of -- if you compare with other quarters, we are executing on these clinical trials, and they do take additional costs. So that is really part of the equation. Then I'd also say we've been relatively successful in executing the road map we laid out a couple of years back. So in general, we are seeing traction on multiple programs. And that is also part of the ramp-up as we mature these programs. That is also contributing to the extra SEK 3 million when we compare with last year.

[Ludvig Lundgren, analyst]

All right. And then final one then also on the bone marrow you say '25 for the CE Mark potentially. Like could you specify if this is H1 or H2 event?

[Simon Østergaard, executive]

Yes. So as we are saying in the report, we have traction and we executed on the clinical trials. So in rough terms, this is something we will complete by the end of the year. And then given the journey with the notified body, that will take us into next year. And a good estimate would be at least the first half of the year would be a regulatory path. So sometime in H2, that's probably more specific. That would be when we expect to launch, on the prerequisites that the validation and the approval goes smoothly. But we've done everything we can from here.

[Operator]

The next question comes from Ulrik Trattner from Carnegie.

[Ulrik Trattner, analyst]

A few questions on my end as well, if I may. I will potentially start. And if we can start-off with how the visibility on your end have changed since you expanded the collaboration with Sysmex. I know you talked about you gaining some higher insight to end customer behaviors. If you can just allude to how that have changed and how that played into Q3 and managing your own operations into '25?

[Simon Østergaard, executive]

Yes. So I think from being very sort of selling in an indirect model and being relatively blindfolded, we've moved the needle in a very good direction. where we've started to share insights on the internal lines as to also last year when we had the challenges around sort of explaining our inventory level and so forth, we have much more visibility into that and a much better understanding, also getting the insights on what goes on in the end user market. So what we report here is obviously based also in conversations with our partner organizations, I should say. So that has improved significantly. And then we're also getting better insights on the whole arena as to how digital cell morphology is adopted when a blood line is getting exchanged. And then finally, I think I also want to emphasize as we do in this report on the sales and marketing side because it is so important to demonstrate the value of digital cell morphology versus manual microscopy, doing it manually. And the way to do that is to train the end users, but it's also obviously to train a large global organization like Sysmex. And this is where I think we've gained a lot of insights mutually and we are also providing all our material in a digital format, e-learning modules globally. So I think we are making the right -- we're paving the way for really continuing to lead this space. So it goes both ways. I think that's important for us to emphasize that we really want to support our key partner, but also, of course, embrace this in a global setting with our small organization, and that is by going digital. So we're also providing data and insights and modules, et cetera.

[Ulrik Trattner, analyst]

Okay. Great. And a follow-up question, and I apologize if you already talked about this, but could you give us some insight on the ramp-up of reagents, mainly the methanol-free ones and how to expect that to track over the next year? And what is the sort of current commercial plan?

[Simon Østergaard, executive]

No. I mean I think we've previously mentioned that, of course, the methanol-free stain on top of -- which we are offering on top of the classic stains hematology agent, the methanol-free is really a strong value prop. And of course, it is our plan, as we also mentioned back at our Capital Market Day to bring this out to as many labs and globalize the reagent business from Europe to the U.S. and Asia. With that, what we can say at this point in time is that we are progressing on how to make a suitable protocol for the methanol-free also to be working on the smearing device of Sysmex and we are making pretty good progress on that. And then the time line for launches and so forth, that's something we will communicate as we take the next couple of steps. But it's coming pretty close, I would say. So there is still focus on rolling out the classic stains across APAC and then finishing the, let's say, the prerequisites to launch the MCDh on the staining platform Sysmex, that would endorse our way into the U.S.

[Ulrik Trattner, analyst]

Okay. Great. And a question on APAC market, given that sort of both reagents are expected to expand there and you had slightly of a soft -- or you had a soft Q3 in APAC. To what extent do you feel hospitals and laboratories waiting for the stimulus package out of China to be put in place? I know that sort of expectation is for this to start in early '25, which then could entail that a slightly weaker Q4 is expected before stepping up again. But what's your take? And what are you hearing from.

[Simon Østergaard, executive]

So sorry. Are you specifically commenting on the reagent or is it more the --

[Ulrik Trattner, analyst]

No, on the entire business, the entire operation business in China.

[Simon Østergaard, executive]

On the entire business, we are pretty confident that we have a lot of things moving in the large markets, the large market being China and Japan, but we are also seeing really pockets of growth sort of in Southeast Asia, but not the least opportunities across Australia and New Zealand and we're actually getting relatively confident that the total offering we have is attractive. And this is where I think also we have opportunities on the reagent side. It may not be the the biggest revenue driver as opposed to the instruments. However, the fact that we have stains that really improve the uptime of the entire blood line, that is a value proposition, which is becoming clearer across the markets. For China, I think the reagent business is a little bit -- there are some logistic elements that we need to solve in order to really target China. But I think in general, we are aiming at continuing our -- and protecting our big position in China by differentiating our offerings, both on the software, the instrument and ultimately also the reagent side. That is our response to the competitive situation we see in China.

[Ulrik Trattner, analyst]

Great. And the last question on my end and alluding to Ludwig's questions before as well, we're seeing ramp-up in R&D expenses, so just 2 questions there. And what's left in order for you to obtain sort of the CE Mark, CE MDR mark for the bone marrow system? Have you submitted the technical file yet? I know you're talking about it sort of being launched in sort of expected to be in the sort of launch in the midyear next year. But what's left in terms of the sort of validation?

And secondly, can you provide us with some more information on the progression of the FPM technology, please?

[Simon Østergaard, executive]

Yes. So in terms of bone marrow, what's left there, when we do the clinical validation at the hospitals, we are really comparing our classification of white blood cells coming from the bone marrow and how AI is classifying these particular cell intermediates, if you like. And that is benchmarked or it's compared with a manual opinion on what the specific samples are showing. So that is what we are doing, let's say, this year, let's call it, lab work. And then in terms of compiling the file, that is what we will do early next year, and then we will submit. And then the file will undergo review by our notified body. And this is what we estimate to be a 6-month journey. So this is what brings us into -- yes, to mid next year, let's put it that way. That's our super transparent plan. So that's bone marrow.

On the FPM, so what I really can say there is that, again, when we launched the Power of Focus, we flagged FPM as an opportunity to sort of explore new areas we have to be super -- we are very confident now that the FPM has really demonstrated its worth. It will be part of our next-generation platform, and we will revolutionize the space in hematology on multiple fronts. So we've matured the technology within hematology. And now we have also convinced ourselves that there are opportunities to exploit other areas like cytology and pathology. So that is actually where we are also considering the investment profile into this area because it is a super important sort of and very, very exciting time for CellaVision that we are getting our feet wet for the time being. Yes, that's what you see on the P&L that we are investing a little bit more as well. But on the other hand, we're a company with hardly any debt and a strong balance sheet with cash. We think this is the way to invest so that we deploy the capabilities we already have, and we are able to potentially make solutions that can revolutionize other spaces. So we are in partnering dialogs at the same time as we are discussing how much we actually fuel the maturation journey here. So that's the short version on FPM.

[Ulrik Trattner, analyst]

Yes. Great. And just a quick follow-up, given that your plan is to integrate this into the next-generation platform, would that on your end also provide some opportunity to change your pricing model from going from perpetual licenses to a more time-based license?

[Simon Østergaard, executive]

Yes. We have already demonstrated a change in pricing model when we launched the bone marrow module. So the philosophy is that we will place DC-1s in large labs, not just the small labs, but the large labs. And then we will -- our software module, the algorithm that recognizes the different cell types, that will be a non-perpetual license that the labs will need to acquire for some years and then renew it over-time. That architecture will also be part of the next gen. So this is the direction we take, which means that we are looking into increasing the software revenues over-time in the company, just along the lines of expanding the recurring revenue profile from reagents. So that follows hand-in-hand.

[Operator]

The next question comes from Christian Lee from Pareto Securities.

[Christian Lee, analyst]

I have 3, please. Would it be possible to quantify the magnitude of the pull-forward order from your distribution partner in EMEA?

[Simon Østergaard, executive]

Yes, a little bit sensitive. But I'd say -- and it's a little bit subjective on what is the actual number of units. But I would say it's up to SEK 10 million, which means that if you deduct that from our revenue, you will end up at an all-time high revenue anyway. That would be my best guess.

[Christian Lee, analyst]

Great. And I have a follow-up question regarding your R&D expenses. The total increased in absolute and as a share of sales up to 22% and given your product road map, how should we think about these costs over 2025? Would it be more relevant to look at the rolling 12 months level rather than the level in Q3?

[Simon Østergaard, executive]

I think you should look at it as the math and the road map we really stipulated and wanted to commit to when we communicated our Power of Focus strategy a couple of years back. That plan is coming to maturity, which means that it does require a little bit more investments, but it also means that the programs are getting more and more mature, just like we have talked about with the bone marrow. So we are kind of following our plan, but going back in time and saying that this is a temporary beat it's probably -- this is probably the level where we are for the time being. Then you can discuss if you propel ourselves into the very future, where -- what our level should be. But we do have -- in this present time, we are driving our next-generation platform. As I just alluded to, we are lifting FPM in to the platform. So we are taking a lot of costs on the internal side. So you should -- Christian, you should also see this as a point in time where the road map is pretty mature, pretty dense with multiple programs. I think that's how you should look at it.

[Christian Lee, analyst]

So I take it as the level as a percentage of sales will increase from around 20%.

[Simon Østergaard, executive]

Yes. No, it's around that level, I would say. I think today, we report 22%, didn't we?

[Christian Lee, analyst]

Yes.

[Simon Østergaard, executive]

We're around the 2022 mark. I think that's a fair level to model.

[Christian Lee, analyst]

Okay. One final question regarding your inventory levels. You have been trimming it down during this year. Do you expect to continue in 2025?

[Simon Østergaard, executive]

Magnus, maybe I can invite you in here because I know we have our slope that is going pretty sort of smoothly down. But maybe you can comment on it also from very historical levels.

[Magnus Blixt, executive]

Yes, absolutely. If we look at -- if we go back to 2021 and look at the levels that we had then, then we can see that we did an increase all the way up until 2023 midyear on our inventories. And we did build some inventory on purpose there as well due to logistical problems and things like that. Now that things have normalized, we're reducing the inventory back to normal levels, and we're basically back to the same levels as we were. Part of the increase was also that we added some lost time buy components to our inventories and now the downsizing of the inventories, both reduced need for security inventory and also that we're actually eating a little bit of this lost time buy that we had on stock. So we'll see some gradual polishing of the inventories. We always keep an eye and monitor. And I think we can trim a little bit more, but the ratio and the speed is slower and slower here because we are approaching the correct levels.

[Operator]

The next question comes from Ludvig Lundgren from Nordea.

[Ludvig Lundgren, analyst]

Just a quick one on just thinking here about -- so you say the U.S. election is affecting instrument sales in the U.S. Like looking here in October, we still have a few weeks left until the election. Is it looking the same way as it did in Q3 or how has this changed?

[Simon Østergaard, executive]

No, I think the insights that we have gained is that given the fact that the election is early November, then the uncertainty remains. So it's a little bit up in the air how long will this take? That's obviously something we are considering. And I guess -- so currently, the same. There's not a change from Q3 to where we are here in October from the situation. When we discuss this also with industry experts who are seeing the -- who are specialized in the U.S. market in general, they really talk about the clinical space where they see this hesitation or uncertainty, whereas there is less of an impact on the more research side of things. So companies selling into the research space is probably according to these individuals, they are less affected. And then the obvious question is, is it influenced by whatever happens with the outcome of the election? And there, I shouldn't be the voice of having an opinion around it. But what I gather is that by the end of the day, I think the conclusion out there, there's consensus that this is a somewhat short-term, and then we can discuss what short-term is, back to your question. But it's probably -- it's going to come back despite who is in office, basically. That's the conclusion that we've drawn from our conversations, just to share those insights.

[Operator]

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Simon Østergaard, executive]

All right. Thank you, everybody, for taking the time to listen-in and getting the verbal presentation of our Q3 report. I think now we've discussed actually both the quarterly characteristics, but I think it's also time, as we've also alluded to by the good questions, but actually to elevate our view a little bit and look at -- now we're 2 years down the line from the Power of Focus. We are starting on the internal lines to see output, and I really want to send a special thanks to our entire team here on the inside because I think we are coming to a point where I really see a lot of progress coming out of our investments. We've talked about bone marrow today. So where we have had great feedback, but of course, we need to get the documentation in place to launch. But I think we're also looking into years ahead here where we will -- and we are very confident that we will demonstrate a step-change in digital microscopy. And here, I'm really basing and pointing at the FPM as we also talked about today, both for the core business, but also for -- as a vehicle to be deployed in other areas like cytology.

So it's a super exciting time. And that is the reason why I bring this up is also that in December, we're actually having our 30 years of anniversary here at CellaVision. So we've built digital cell morphology within this century basically. We launched it in 2001. And we have a clear mission to sort of dominate our field for the next 30 years and beyond. And I think we are on a good traction for that, despite, let's say, quarterly fluctuations, and I'm super proud of the team. So this time around, I want to extend a heartfelt and very, very large piece of appreciation to the team.

So with that, thanks for following us. We are very much looking forward to update you on the year-end and the annual report in early February. Thank you very much.