Devyser Diagnostics AB

STO:DVYSR

Earnings Call Transcript 2023-Q2

[Operator]

Welcome to the Devyser Diagnostics Q2 Report 2023. [Operator Instructions]Now, I will hand the conference over to the speakers, CEO, Fredrik Alpsten and CFO, Sabina Berlin. Please go ahead.

[Fredrik Alpsten, executive]

Thank you, and welcome to the Devyser Q2 2023 Earnings Call. It's a great pleasure to have you all here. Today, you will listen to me, Fredrik Alpsten, the Devyser's CEO; and to Sabina Berlin, our CFO.Before we go into the Q2 figures and talk about the nice development we are seeing, I want to repeat for our new and potential shareholders what Devyser is. We are well known among laboratories, especially in Europe, but we are less known among investors and the public. We are a very value-driven company. Of course, we want to build a successful company with high growth and good profitability. Still, the foundation for everything we do is to ensure every patient has a correct diagnosis in the shortest possible time.Many patients have to wait a long time before receiving a diagnosis. It can take months before important blood tests are taken and even longer before they get the results. However, early detection saves lives thematically from many diseases and symptoms are detected early. With our fast diagnosis, we have to save lives. More than 100,000 people were actually tested with our products during the second quarter. That is something that I and my colleagues are very proud of.We at Devyser -- we are on a journey. As you may know, we had a very nice development over the last years, including average revenue growth of 36% per year, gross margin well above 80%, launches of many very innovative products and commercial expansion in both by setting up direct sales organization and entering into collaboration with some of the most successful global companies.However, we are confident that we are at just beginning of a fantastic journey. Over the last 9 months to 12 months, we have taken some very important steps to build a global force, growing highly profitable diagnostic company. Our mission is to be the pioneering leader of diagnostic solutions to provide fast, accurate, and easy-to-use solutions to labs worldwide. Our mission is a world where personalized medicine is universally available, thanks to simplified and reliable genetic tests.So what do we do? We develop and market genetic test solutions to guide targeted cancer therapies, fast diagnosis of hereditary diseases and post-transplant follow-up. All development and all manufacturing are taking place in-house in our facility in Stockholm. We sell our products, laboratory prep kits and software to clinical diagnostic labs via our own sales reps or via distributors. We also provide test services to labs and pharmaceutical companies. Since the company was founded, we have developed and launched more than 30 IVD and IVDR-related products. We are based in Stockholm, but we have subsidiaries, sales offices in 8 countries. We are today around 110 employees.The reason why we have been so successful, strong growth with good margins since the company was founded, is because we put the customer at the routine diagnostic laboratories,. We develop and provide solutions that are easy to implement, maintain, and use. This results in time savings for the lab and by time savings, they get cost savings. And [ more than overall ], it provides faster treatment for the patients.Now let's talk about the second quarter now. The second quarter was another fantastic quarter with many amazing things that have laid the foundation for our continued growth and way to becoming a highly profitable diagnostic company, even though the revenue for April was unusually weak, which recovered substantially during May and June. Maybe most importantly, we are showing a better operating result, EBIT results for the quarter compared to Q1 2023 and with Q4 2022. Although there will certainly be occasional quarters when the EBIT is weaker than the previous quarter, we are confident that we will now see a strengthened operating result -- EBIT result over time.In the quarter, we signed an exclusive collaboration agreement with Thermo Fisher Scientific. And the agreement gives Thermo exclusive rights to commercialize under combined brand, Devyser's post-transplant portfolio of NGS products in North America and Europe. Devyser's current transplant patient portfolio includes Devyser Chimerism for screening and follow-up post stem cell transplant patient and Devyser Accept cfDNA, a novel test for detecting donor-derived cell-free DNA in blood samples from kidney transplant patients.Additional products for post-transplant monitoring are currently under development at Devyser. Thermo is a very well established and very well positioned in both US and in the European market [ as such ]. And [Technical Difficulty] infrastructure and resources that can cover our both US and Europe very well. Sorry, I'm a bit too fast here. But going back to Thermo here, I would also like to say that quite much work has been ongoing during the quarter, both during the quarter and after the quarter to prepare the launch of the products, not least preparation for the IVDR approvals of these 2 products. We got the IVDR approval on July 17, and Thermo Fisher launched the products in North America and Europe on July 21st.At the end of June, we opened our CLIA-certified laboratory in Atlanta, Georgia. And at the end of June, we also processed its first commercial test at the lab. The laboratory will now offer clinical test services for hereditary diseases, oncology and post-transplant monitoring. The laboratory will scale as demand grows. It will initially focus on providing clinical testing services for health care providers and patients in the U.S.We are currently working on reimbursement for these tests, and we expect to have the first reimbursement cleared beginning of 2024. However, we are very hopeful that we can also use the lab towards pharmaceutical companies and clinical research organizations, and they are not dependent on reimbursement. During the summer, we have signed a first such an agreement for a pilot test with one of the biggest global pharmaceutical companies. If successful, we will have a good revenue contribution in 2024. The US IVD market is the biggest market in the world and also the market with the highest prices. It is very important for us to work towards this market, both with our commercial transplant patient partner, Thermo Fisher, but also with our US subsidiary.As previously announced, we have strengthened Devyser's development organization quite much during the year. It has meant increased costs, but it now starts to pay off. It means that during the second quarter, we have launched no less than 7 new products, including Devyser Accept cfDNA, Devyser LynchFAP, a product for diagnosing hereditary bowel cancer, BRCA PALB2, a test that diagnoses more gene mutations than our current BRCA test for breast cancer.In addition to these assay launches, we have launched 4 new software products. This is by far a new record for Devyser, 7 new products during the quarter. During the quarter, we have also got regulatory approval for our Devyser RHD in Canada and maybe most important of everything, IVDR approvals of our transplant patient products.And by that, I'll leave over to Sabina to talk a bit more about the numbers for the second quarter.

[Sabina Berlin, executive]

Thank you, Fredrik.So, I can start by highlighting our net sales in Q2, which was SEK 37.7 million compared to the SEK 30.9 million in the same period in 2022. This gives a sales growth quarter-to-quarter of 22%. Adjusted for currency effect, the growth was 13%. Sales were weaker than average in April due to mainly purchasing patterns, but May and June have presented very strong sales.Gross margin was 83% for the month of April to June, and both Q1 and Q2 represented very high gross margins. And even if we do expect to stay above our target of 80%, these levels are not long-term standards. EBIT was minus SEK 13.5 million. Highlights included the previously mentioned agreement with Thermo Fisher, Devyser receiving Swecare Export Award, opening of our U.S. lab facility, regulatory approval in Canada of RHD and the launch of our new products.January to June, net sales was SEK 77.2 million, 26% above 2022 sales. Gross margin showed a total of 84%, and EBIT came in at minus SEK 32.6 million. During the first quarter of 2023, we were proud to present that we launched Swecare as our first IVDR-approved product.Looking at the last 12 months, that is July 2022 to June 2023, Devyser represents a sales growth of 29% and gross margin of 83%, and an EBIT of minus SEK 66 million. The trend over the historical quarters for both net revenue and gross margin continued nicely upwards. We see this trend continuing over the coming periods with, of course, possible deviations for occasional quarters.Direct sales in Q2 2023 amounted to SEK 29.2 million, an increase of 25% compared with the same quarter in '22. Last year we saw the initial growth of new direct sales markets and direct sales growth will be more in line with our overall sales growth going forward. Direct sales now make up close to 80% of total sales. The distributor sales were SEK 8.5 million, an increase compared to last year, showing continued growth outside the market we converted to direct sales. The growth within the direct sales geographies is a combination of very high growth in newly converted markets, with US contributing to a steadily growing part of our total sales. Going forward, our sale to Thermo Fisher will be included in distributor sales.The second quarter of 2023 saw a slight reduction in growth in the EMEA region due to the weaker April sales than planned. Our EMEA markets, together with the DACH region and Italy region are still doing well and has delivered according to plan over the months since. The APAC region is continuing to recover, but still from small numbers. We do see several interesting opportunities in both Central and Eastern Asia and in Australia going forward, and those will continue to strengthen this region.We do also continue to see traction in our North American sales, with revenue now also from the CLIA lab in Q2 and over 200% growth from the same quarter in 2022 -- year-to-date in 2022. The Devyser sales organization, including the CLIA lab, has continued to grow, and the sales activities and regulatory work to reach new markets and customers, including work towards reimbursement in the US is carrying a large part of company expenses at this time. These investments are driving a steady sales growth and they will pay off within a short timeframe. Administrative cost is keeping quite steady while adapting to the needs of the growing company and expanding markets. The reduction in R&D expenses compared to last quarter is mainly related to how much was capitalized in each period to 2023 compared with 2022.We closed the quarter with a cash position of just about SEK 300 million. It is worth noting that our new facility has been signed and the new 7-year rental agreement for SEK 62 million is recognized in right-of-use assets and the related liability in lease liabilities. And this has an impact on net debt. Investments made during the quarter mainly concern the finalization of our US lab and the new Stockholm office. On average, we had 98 full-time employees during the quarter, and several of our teams are now fully staffed for some time to come.And I would now like to hand back to Fredrik.

[Fredrik Alpsten, executive]

Thank you.I would like to say a couple of words about what's happening going forward. And we will continue focusing on our direct sales markets in Europe. Many of our new direct sales markets, they have actually increases of more than 100% a year, even though if there are coming from small numbers. We will continue working towards US, both via our newly established CLIA lab, but also via our new commercial partner, Thermo Fisher. And most important of everything, we will continue our way to profitability. We have now seen the second quarter that we are increasing the EBIT. So, we hope that we soon can be profitable and we are more than ever [Technical Difficulty] reach our financial target to have an EBIT margin about 20% in 2024 to 2026.And with that, I'll leave over to the operator and open up for questions.

[Operator]

[Operator Instructions] The next question comes from Ulrik Trattner from Carnegie.

[Ulrik Trattner, analyst]

Great. And hopefully, you can hear me all right.

[Fredrik Alpsten, executive]

Yes.

[Ulrik Trattner, analyst]

A few questions on my end. Starting off with the organic growth here in Q2, it's a step down from what you presented previous quarters. If you can just give us some highlight here on, on what's the main reasons behind this? And should we view this as just temporary effect? Or how should we view this?

[Fredrik Alpsten, executive]

Yes. A good question, of course. We had a very bad month in April, and that's the reason why we got a bad growth in Q2 compared with the same quarter last year. We have seen very good sales in both May and June. So, we are not worried at all about this bad month, even though I fully understand it looks a bit strange that we suddenly had a lower growth than we have had for maybe 8 months, 10 months before. But we are optimistic going forward that we will go back to the previous growth rates.

[Ulrik Trattner, analyst]

Fredrik, could you give us some more color on what happened in April? Is there anything in particular that happened that caused sort of April to be a bad month? Or is it just the sort of the purchasing pattern of your customers that have changed or anything?

[Fredrik Alpsten, executive]

No. It's actually -- they placed orders in March and placed orders in May. So nothing special actually, nothing special.

[Ulrik Trattner, analyst]

Okay. Great. And it's great to see that the CLIA lab now commercial and operational and look forward to your guys, both getting reimbursement in '24, as well as the CRO projects looks like an interesting option on your end. But a question more related to when the CLIA lab will cover its own costs, where are we at currently in terms of your internal budget for the CLIA lab?

[Fredrik Alpsten, executive]

Yes. Good question, of course. It's still quite a small lab, 3 to 4 employees plus, of course, the rent and all of that. We don't have that high expenses for the lab. We will now starting -- we will now get revenue with non-reimbursed products. In addition to that, we will also hopefully see revenue coming in now from collaboration with pharmaceutical companies, as we mentioned in the CEO report. We have -- we have such a first collaboration and we're doing a pilot with that company. So, we think that we will rather soon be on breakeven for the lab. Yes, it's a great thing here with this lab for sure.

[Ulrik Trattner, analyst]

Perfect. Next question would be regarding IVDR for the transplant patient portfolio. I'm sorry if I missed this during the call, but when do you expect this to happen? And I'm guessing here that, that will trigger orders from your commercial agreement with Thermo Fisher or One Lambda.

[Fredrik Alpsten, executive]

Maybe I understood your question wrong, but we got IVDR approval for our both transplant patient products on July 17. And that meant that Thermo launched in Europe on July 21. So there -- the launch is now both in Europe. But you will see orders -- and we have started to get orders from Thermo, but we don't see that much in the Q2 numbers.

[Ulrik Trattner, analyst]

Great. And on -- I also note that you received approval in Canada for your RHD products. Does that mean that you can start delivering on the tender? And if you can provide us with some clarification on timing of delivery of that tender that would be helpful.

[Fredrik Alpsten, executive]

Yes. And here, it's not up to us to decide when they start implementing this. We have all the tenders, as you know, and now we have all the documentation in place. I don't want to say too much about when they start to buy. But as all of you know, it's quite a big tender that we won 1.5 years ago. And then one of the conditions was that we can get the regulatory approval, and we have now got it and now they are preparing to start running this. But I don't want to give a definite timeline. But of course, it will be -- they have an interest to start as soon as possible and we can deliver when they're ready. And as we have said on one of the previous calls, there are a couple of more tenders coming up in Canada regarding RHD that we are very optimistic about.

[Ulrik Trattner, analyst]

That would be my follow up question. What is happening with -- and are we to continue to expect these tenders to happen any time soon do one sort of larger tenders in Canada?

[Fredrik Alpsten, executive]

Yes. We can expect that. I'm a bit hesitant to give it because I'm not quite sure about that timing, but it is end of this year, beginning of next year, something like that. That's my -- what I think it is right now actually.

[Operator]

The next question comes from Klas Palin from Eric Penza Bank.

[Klas Palin, analyst]

I would like to stick to the Thermo Fisher deal. I have a question. I mean, they have launched now your products and so on. Is it possible to share a little bit more about what this means, if you are satisfied with their commitment so far?

[Fredrik Alpsten, executive]

Definitely. If we start with Thermo, it's a very professional organization and we have spent quite much work helping them and providing information about the products here in both Q2 and beginning of Q3. Correct. We have also seen a very high interest from customers, but more than expected actually. So we're, as of now, very pleased with the collaboration. For competitive reasons, we cannot share any future forecasts, et cetera. But we're optimistic about this collaboration for sure.

[Klas Palin, analyst]

Great. And then a question about your direct sales in Europe. You mentioned in the report that this has developed very strong outside of Italy. Is it -- I mean, is it same thing what that means in sales numbers or at least an indication?

[Fredrik Alpsten, executive]

Yes. We're selling in some 7, 8 countries direct in Europe. And of course, they are ordering differently here, some directly [Technical Difficulty] but still okay. Of all countries, what we see is growth of more than 1% per year compared with others. Very good [ track record ] like in Benelux, Germany and a couple of more countries. Very good growth in [Technical Difficulty]. And as you may remember, we are doing it very successfully [Technical Difficulty] and we took a decision [Technical Difficulty] and do the same thing in Europe and we [Technical Difficulty]. It's a good decision.

[Klas Palin, analyst]

Perfect. And lastly about this pharma collaboration that has been initiated a pilot. What could be the timeline when we could perhaps hear more from this and if this actually goes a step further to commercialization?

[Fredrik Alpsten, executive]

Yes. And when we took the decision to start a CLIA lab, this was one of the reasons. We saw that we can use it for tests for pharmaceutical companies and for clinical research organizations. And this is actually the first company that we're discussing with. And we will start [ higher ] and hopeful, the pilot will be ready by the end of the year. If this works well and then we start to generate revenue during 2024, of course, we will pay for the pilots as well. But the revenue is not coming from -- if you actually, beyond the pilots and [Technical Difficulty].

[Operator]

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

[Fredrik Alpsten, executive]

Thank you all for participating in this earnings call. I hope that you have got some information about us and about the company. And I'm looking forward to meet you all in a quarter from now. Thank you.