Devyser Diagnostics AB

STO:DVYSR

Earnings Call Transcript 2023-Q3

[Operator]

Welcome to the Devyser Diagnostics Q3 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 again, welcome to the Devyser Q3 2023 Earnings Call. It's a great pleasure to have you all here. Today, you will listen to me, Fredrik Alpsten, the Devyser CEO. And I have also asked our CFO, Sabina Berlin to join me during the Q&A session.

But before we go into the Q3 figures and talk about the nice development we are seeing at the moment. And actually, the third quarter was the best quarter ever. Before talking about that, I want to repeat for our new and potential shareholders what Devyser is. We are well known among laboratories, especially in Europe, but 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. Survival rates increased dramatically for many diseases when symptoms are detected earlier. With our fast diagnosis, we help to save lives. More than 100,000 people were tested with our products during the third quarter. And that's something I and my colleagues are very proud of. Devyser is on a journey. As you may know, we've had a very nice development over the last years, including average revenue growth of 36% in average, gross margins well above 80%, launches of many very innovative products, and commercial expansion, both by setting up direct sales organization and entering into collaboration with some of the most successful global companies.

However, I'm confident that we are just beginning a fantastic journey. Over the last 9 to 12 months, we have taken some very important steps to build a global, fast-growing, highly profitable diagnostic company. Our mission is to be the pioneering leader in diagnostic solutions and provide fast, accurate, and easy-to-use solutions to labs worldwide. Our vision is a world of personalized medicines 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 products, laboratory prep kits and software to clinical diagnostic labs either via our own sales organization or, yes, distributors. We also provide test services to labs and pharmaceutical companies. We have developed and launched more than 30 IVD and IVDR-registered products. We are based in Stockholm, but we have subsidiaries, sales offices in 8 countries. We are today around 120 employees. We have been so successful, strong growth with good margins since the company was founded more or less because we put the customer focus. We develop and provide solutions that are easy to implement, maintain, and use. We offer very streamlined and simplified test protocols that reduces time for the lab, which leads to substantial cost savings for the lab. We currently sell in more than 50 countries. We are today selling direct in 14 countries, the orange countries on the map. In the blue countries, we are selling via distributors. In 2023, 78% of our revenue came from direct sales and 22% from distributor sales. Europe is still our dominating market with almost 90% of total sales. Americas, North and South Americas, however, is growing fast at 8% of total sales in 2023 compared with 2% same last year 2022. APAC is still rather small with only 3% of sales. The growth is very high, in average, 36% since 2015. And that's despite a big hiccup in 2020 due to COVID. And we reached SEK 158 million for the last 12 months.

Let's move over to the third quarter. As I said, it is the best quarter ever. Sales developed well and reached SEK 47 million, which is a new record for a single quarter. Sales growth, only organic growth, is also a new record. We reached actually 50% in growth for the quarter. Sales growth is good in most geographic markets. Our direct sales markets in Europe continued to develop well during the quarter. Strong growth was also recorded in North and South America, even though rather low levels. Sales growth in North and South America is driven both by direct sales and distributor sales. Sales in Asia was slightly lower during the quarter due to temporarily irregular purchasing ways. And as you may recall, we sell -- we are distributors in Asia. All our product areas are growing strongly, particularly transplant prices, which are continuing to develop well. EBIT continued to improve during the quarter. We reached minus SEK 7.8 million, and that should be compared with the last quarter, second quarter 2023, when we had minus SEK 13.5 million and minus SEK 19.1 million for the first quarter this year. And last year, fourth quarter, 2022, we had minus SEK 25.9 million. We see another quarter with improved EBIT.

During the quarter, we continued to see high gross margins, 85% for the quarter, not the highest ever but still very high. We have a very strong financial position, SEK 288 million in liquidity at the end of the quarter, and no interest-bearing debts. With innovative products, high market growth, and a very professional commercial organization and some of the best commercial partners, we are confident that we will see a very nice future sales development. At the moment, we do not see anything that can change this. Of course, we may have a single quarter that will not perform that well, but the trend is crystal clear. Sales are increasing much, and most quarters will be new record quarters. We also believe that high volumes will give higher gross margins. The yellow tables show quarterly sales, and the orange line on the slide shows the quarterly gross margin. Maybe most importantly, we are showing a better operating result for the quarter compared with the -- as I said earlier, the previous quarters. 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 EBIT over time. The collaboration with Thermo Fisher Scientific has progressed well during the quarter, better than we expected actually. During the third quarter, we worked intensively to support their preparations for the launching of the transplant products which were launched in North America and Europe in July. And Thermo Fisher Scientific has now also started to buy products from us.

Thermo Fisher is very well established and positioned in the U.S. and European markets, and with their commercial infrastructure and resources, they can both cover the U.S. and Europe very well. Given that the collaboration developed well, during the quarter, we decided to grant Thermo Fisher exclusive distribution rights for Brazil. Brazil is the country with the second highest number of kidney transplants in the world, and we expect the sales starting during the first half of 2024. At the end of June, we had the opening of the Devyser Genomic Laboratories, our CLIA-certified laboratory in Atlanta. At the same time, the laboratory launched the first test for RHD-typing of pregnant women. We continue to work on the validation of several products during the quarter, and we remain very optimistic about the prospects for the laboratory using it for hereditary disease testing, oncology, and post-transplant follow-up and for tests intended for use by pharmaceutical companies in the drug development.

Our efforts to reach out to pharmaceutical companies are continuing, and we stepped up during the quarter. However, the cycles are rather long for this type of activities. Through the expanded partnership with Thermo Fisher, we are also working with them to market our lab services toward pharmaceutical companies. The total growth, as said, amounted to 50% for the quarter and to 34% for the period January to September. Growth in Europe was 36% for the quarter and 25% for the period. And as I said, sales in Asia were lower during the quarter due to temporary irregular behaviors. And we don't -- we are still very optimistic about Asia going forward. Our increased focus and investments in Americas started to pay off. The growth was actually 760% for the quarter and more than 400% for the period. For the quarter, America represented 30% (sic) [ 8% ] of our total sales, compared with 2% same quarter last year. And for the period, Americas represented 8% this year compared with 3% last year. And we are continued very optimistic about the Americas with our products. Going forward, Q3 2023 was another quarter where we continued to deliver on the strategic plan we presented in connection with the IPO end of 2021. We have managed to deliver better than the plan we actually promised. And we believe that the end of 2023 and 2024 will be good periods for Devyser. We will continue our focus on direct markets in Europe. We see a very good sales development from countries where we have converted from distributor sales to direct sales. The U.S. is very important. It's a very important market. We are targeting the U.S. in 3 ways, via our CLIA lab together with Thermo Fisher with our transplantation products and via kit sales for our other products outside the transplantation. We strongly believe that the nice development we have seen will continue and maybe even improve. And last, going forward, we are also continuing our work to become a highly profitable diagnostic company.

With that, I open up for questions.

[Operator]

[Operator Instructions] The next question comes from [indiscernible] from Carnegie.

[Unknown Analyst]

Great to see sales accelerating here in the third quarter. And I note Americas taking -- although as you stated, it's on low levels, but it takes a major jump in Q3. And it would be helpful if you can help us provide some split between distributor sales and direct sales for that region. Because I note that you mentioned in the report that it's both due to distributors and the CLIA lab to get some sense on the quantities of each of these.

[Fredrik Alpsten, executive]

Yes. It's a good question. But we don't disclose the split in specific regions, and that's for competitive reasons and also because we have a collaboration with Thermo Fisher here. So we don't want to say too much about that. But as I said in my presentation, and I've also said in the interim report, it's a combination. It's increased both in the direct sales in the Americas and in distributor sales.

[Unknown Analyst]

And if I were to rephrase my question then, are you happy with the inflow and sales development of your own CLIA lab in the U.S.? And you have mentioned previously taking on CRO capabilities in your CLIA lab. Is that present here in Q3 or something that we perhaps should see more of in 2024?

And building upon the distributor and Thermo Fisher agreement, are you expecting to see a gradual ramp-up from that side of the deal, in general, both for Europe and the U.S.? What's your current expectation? And what's your current feedback given that this is the first commercial quarter from that collaboration? A few questions. I hope you got them all.

[Fredrik Alpsten, executive]

I hope I got them all, but if not, you can repeat that. I think we will start with the CLIA lab. We opened up the CLIA lab end of June. And of course, as I said also, I think earlier, it's quite long cycles to getting pharmaceutical companies onboard and when we also in parallel were working with getting the reimbursement in place.

So for Q3, we did not have any sales from the CLIA lab at all. We expect that to start to come up during 2024. When it comes to the collaboration with Thermo, I think that's what's your second question, they launched mid of the quarter end of July. And as always with medtech companies or diagnostic companies, it's gradually increasing.

It's not like launching an FDA-approved drug when you have get out very high numbers already first quarter. But it goes better than expected, and they're doing well. We get a lot of good -- we hear a lot of good feedbacks from customers. So we are more than pleased with that, and that was actually the reason why we expanded it to include also Brazil in the collaboration. Also both U.S. -- sorry, to North America and Europe.

[Unknown Analyst]

Yes. And if we continue to focus on the region, Americas, and you mentioned you're working on getting reimbursement for a test, how long do you expect that process to take roughly? And in addition, I know that your RHD product is approved in Canada and you have been awarded the tender in Quebec. When are you expected, and in the communication with Hema-Quebec, when are you expected to deliver on that tender?

[Fredrik Alpsten, executive]

Yes. Two questions. The reimbursement -- yes, so people understand, they're talking about reimbursement for the CLIA lab, those are talks what I'm answering. So we expect that during 2024. It's too early to say exactly when, but we will not have it this year. When it comes to RHD in Canada, we know that they are preparing to start, but we have not seen the -- we have not started to sell to them yet because they are preparing a couple of things, but that will come during 2024. And as also earlier communicated, there may be some other big tenders coming up in Canada just for RHD soon.

[Unknown Analyst]

Yes, that would be my follow-up question. And if you have any additional updates on the larger tenders up for grabs in Canada and if the competitive situation have changed in any way versus what you saw in your tender for Hema-Quebec.

[Fredrik Alpsten, executive]

No. We have a very strong product here, I must say, and we have seen that for some other thing -- for some other business in Europe. So RHD is doing great, but I do not have any more information to share about the other tenders because it's not yet public, so we don't know either. But we know that they are coming, but we don't know the time schedule for them.

[Unknown Analyst]

Okay. Great. And perhaps on -- if you continue on North America and the CLIA lab, you have taken a lot of investments on building up the CLIA lab throughout 2023. Are we to consider these investments done for now and perhaps just some additional OpEx on that side? Or where are we at in the investment cycle of the CLIA lab?

[Fredrik Alpsten, executive]

Good question. Yes. We have taken all the investments, and we are already done end of Q2, actually. Of course, we have some running expenses for the lab and for personnel, yes, rent, et cetera. But that's -- we are not talking about huge expenses.

[Unknown Analyst]

So once you get reimbursement in the U.S., we should expect that to be margin accretive and positive on EBIT, so potentially...

[Fredrik Alpsten, executive]

Yes, absolutely. But yes, so you understand, for agreements with pharmaceutical companies, when they use our lab in their development work, we do not need any reimbursement. So we think that -- actually before we get reimbursement.

[Unknown Analyst]

Absolutely, absolutely. And last question on my end, given that you have launched a wide array of new products here lately in the last 12, 24 months, transplantation products looks to be the main growth driver.

But can you help provide us with, for starters, how much of this accelerated growth is on direct sales now you are talking are due to your expanding direct sales presence versus your expanded product portfolio? And follow-up question on that being how much of your revenue right now is generated by new products launched in the last 12 to 24 months?

[Fredrik Alpsten, executive]

Yes, a lot of numbers here. But I think I can say like this, we launched a couple of new products during the second quarter. I think we -- and we have not -- we have just got some sales from them. It takes some time with this kind of products. If you go back, as we said, 18 to 24 months, that we launched the transplantation products, and then, of course, they have started to generate some good sales. So it depends on when -- I think it always takes some time to get -- to generate sales because, yes, you need to get it out in our -- in some approvals, et cetera. But -- so it takes some time to get revenue from new products, but that's...

[Unknown Analyst]

Yes, so what I'm aiming at here is that you're -- it wouldn't be fair to call them old product, but your old product portfolio is growing still at a high pace and you're adding new products that are growing faster, but from a lower revenue base. Is that a fair assumption?

[Fredrik Alpsten, executive]

Yes. And I can also say that if you looked at our older products, older technologies, and compare that with the NGS products, the NGS growth is much, much higher. So for the new products, growth is much higher, both for the ones that were launched 12, 18 months ago, but also for the newly launched products.

[Operator]

The next question comes from Oscar Bergman from Redeye.

[Oscar Bergman, analyst]

Congratulations on a very strong report. I have a few questions that -- well, the first one relates to the Thermo Fisher deal. And I know that -- I mean, you said that sales are expected to go up gradually. But you -- do you expect to see more significant increase in sales during the second half of 2024 or the first half of 2024? Give some more flavor to where we can expect more sales in absolute terms from that deal.

[Fredrik Alpsten, executive]

Unfortunately, I cannot share. Of course, we have some numbers about what we can expect because we need to have for our production, et cetera, but it will increase gradually, I would say, like with all IVD products.

[Oscar Bergman, analyst]

Yes. And then in other terms of the deal then, are you happy so far? Have there been any obstacles or positive surprises from the deal?

[Fredrik Alpsten, executive]

Well, we have been more positively surprised, actually, I would say. So it goes better than expected. We are sort of being a rather small company going together with a big global company, and there is such huge resources that they can put launching this product.

[Oscar Bergman, analyst]

It went quite fast from the signing of the deal to the broadening of the collaboration towards Brazil. Are there any other potential broadening areas that could come during next year?

[Fredrik Alpsten, executive]

Nothing that I can comment on right now.

[Oscar Bergman, analyst]

Okay. And then in the U.S., how things progressed so far with the direct sales and the distributors? Are you happy with the progress or hasn't gone according to your expectations?

[Fredrik Alpsten, executive]

Yes, we -- it's progressing according to plan, I would say. If we're not, we're talking about outside transplantation, so yes.

[Oscar Bergman, analyst]

Okay. And just a question also on the OpEx, specifically, the admin expenses. There have been roughly SEK 10 million to SEK 12 million in the quarter since Q4 up until Q2, and now, that I suspect that you will slow down on the new hiring of new personnel, so is this SEK 8 million, is that sort of a baseline going forward? Or do you expect to increase that more?

[Fredrik Alpsten, executive]

No, we don't see any big increases. Of course, we have always some increases in expenses because sellers go up or whatever, but no huge increases.

[Oscar Bergman, analyst]

Okay. I think just my last question. Can you just give some color to how Q4 has developed so far, if there were any special tailwinds in Q3 that we should not expect in Q4 or so on?

[Fredrik Alpsten, executive]

We are very hesitant to give guidance for the quarter that's coming. But we -- as I said here, I think in my speech earlier today, we're optimistic about those remaining of 2023 and 2024.

[Operator]

The next question comes from Klas Palin from Erik Penser Bank.

[Klas Palin, analyst]

Another question referring to the Thermo Fisher deal, where maybe you are getting tired of this question. But I mean, as you mentioned, you are very satisfied with the collaboration and so forth. Is that -- do you refer to their commitment on marketing? Or is it what you see in customer intake?

[Fredrik Alpsten, executive]

Both, I would say. It is both.

[Klas Palin, analyst]

Okay. Perfect. And the customers, is there anyone that has implemented your products in their procedures or in the evaluation mode?

[Fredrik Alpsten, executive]

I cannot comment on that because that's more of a Thermo Fisher question. As always, with genetic products, it takes some time with first customer contact, 1, 2, 3, 5 customers. As we said earlier, we will be used to say it takes 12 to 18 months -- that's for Devyser, but maybe it's faster with a big company like Thermo Fisher, but for us, it's new stuff...

[Klas Palin, analyst]

Okay. Perfect. And my last question is then related to the European business and if you see opportunities to increase prices next year.

[Fredrik Alpsten, executive]

Absolutely, we do. And I will not share that here, but we are increasing prices for next year, yes.

[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]

Yes. Thank you for participating in this earnings call. I hope that you will continue joining us for the Devyser journey. I think, yes, we have started it, as I said earlier. So please stay in touch and do not hesitate to reach out if you have any additional questions. Thank you.