Devyser Diagnostics AB

STO:DVYSR

Earnings Call Transcript 2024-Q3

[Fredrik Alpsten, executive]

Thank you, and again, welcome to the Devyser Q3 2024 Earnings Call. It's a real pleasure to have you all here. Today, you will listen to me, Fredrik Alpsten, the Devyser SEO; and Theis Kipling, our chief commercial officer and responsible for business development. I have also asked our CFO, Sabina Berlin, to join us during the Q&A session.

It's very gratifying to see the impact we are having in the field of diagnostics at the moment. We have just returned from the ASHI event, a major transportation conference in the U.S., and it's clear that many things are going our way at the moment. This applies not only to transportation, but also to our other areas of operation.

Several milestones were reached during the quarter. We moved all our production and development to our new approved premises. A number of product registrations were granted around the world, while the development of new products is continuing unabated. The positive signals that we are seeing mean that we invested significantly more during the quarter and the period than last year.

Today, we embark on a journey through our Q3 results. The second part of the presentation will be dedicated to the highlights and the key achievements from the quarter, and we will also discuss the commercial outlook.

Organic growth for the quarter was low. Revenue amounted to SEK 48.7 million, which is an organic growth compared to same quarter of last year of 4% in SEK and 7% in local currency. This is lower than we would have liked, but as we have explained, I think, in more or less, all our quarterly presentation during the recent years, the figures for some individual quarters may be better or worse than others. The most important thing is that we are expecting the strong growth trend that we have seen in recent years to continue.

I would also like to comment, Q3 is a holiday quarter for Southern Europe. And as you know, we have quite much sales in the southern part of Europe. However, last year, suddenly, we had the best quarter ever during Q3. And that's one reason is the inventory built up by Thermo Fisher during that quarter.

With our innovative products, high market growth, well suited commercial organization that we heavily invested in over the last quarters and some of the best commercial partners, we are confident that the positive sales trend we have seen over the last years will not only continue but also strengthen. As said, we may face individual quarters that do not perform as well, but the overall trend is crystal clear. Our sales are still on a significant upward trajectory with most quarters expected to be record-breaking.

During the quarter, we performed well in our direct markets in Europe, and we can see continued opportunities to grow even further here. Our performance in our distributor markets in Europe, the Middle East, Africa and Asia remains strong. The collaboration with Thermo Fisher is developing very well, and we are very satisfied with the collaboration. The low sales during the quarter should not be interpreted as a reduced commitment on Thermos's part, but rather as irregular purchasing patterns.

We see a continued strong focus from Thermo Fisher on our products and our collaboration. Europe grew by 27% compared with the previous 12 months. Asia Pacific grew by 43% compared with the previous 12 months. During the last 12 to 18 months, we have signed up quite a few new distributors in Asia and some of them have now started to generate revenue.

The sales in North and South America were low compared with last year. However, we are very optimistic about North America and we invest, at the moment, a lot in this market. The potential in North America is massive, and we have just started to penetrate this market. North America will be one of our top priorities for the near, mid and long term.

Our direct sales represented about 75% and our distributor sales represented 25% of total revenue for the quarter and for the last 12 months. However, as sales through Thermo Fisher are increasing and new distributors in the regions like Asia and the Middle East are added, we may see an increased distributor share of revenue going forward. Talking about Thermo, I'm glad to report today also that we, in October, got our best order ever and that will be reported as revenue in Q4.

One of Devyser's strengths is its business model. We have very high gross margins because we only sell consumables and software, not equipment. Over the last years, we have increased the gross margin from around 75% to about 80%. The reason is a scalable production process and our ability to increase prices. As early communicated, we decided in spring 2023 to move to a bigger facility to enable higher product volumes and automate the production processes. The move to our new great facility has taken place mainly during the second and third quarter 2024.

We have worked extensively to build up the production and R&D part of the facility. As with all certified and regulated industries, this must be done by the book, documented, validated and verified. It must be approved by the regulatory authorities and notified by others when ready. Everything is now ready, and we will have the inauguration of the new facility on November 6. All work to finalize the new facility has been costly. Cost was negatively impacted both on the second and third quarter. That's the reason why the gross margin has decreased from 85% to 72%.

The investment in our new facility will help us to drive down production costs in the future even further and help us to continue automating the production processes and accordingly increase our gross margins in the long run. It should also be mentioned that to minimize risk, we decided to rent both facilities, both the old one and the new one during the full year of 2024. This means that we go into 2025, we will not pay rent for the old facility.

The quarter's EBIT was more or less in line with our expectations. It amounted to minus SEK 24 million compared with minus SEK 8 million same quarter last year. The lower result is, among other things, caused by costs associated with the moving to the new premises. The lower result can also be derived from increased costs for our expansion in North America and costs for incentive programs resulting from the favorable share price development.

However, we are not totally happy with the overall expense development. As a rapidly growing company, it's sometimes difficult to maintain total cost control to speed up the route to profitability. We have reviewed the cost base in the company during the third quarter and carried out some certain organizational changes. Costs for this have been charged to the quarter's result.

We are convinced that the positive earnings development that we saw in 2023 will continue and that we will reach our financial goal of an EBIT margin exceeding 20% sometimes in 2024 to 2026. Devyser has a very strong financial position, SEK 171 million in cash at the end of the quarter and no interest-bearing debts.

With that, I leave over to Theis.

[Theis Kipling, executive]

Thank you, Fredrik. Q3 was another quarter with a lot of progress across the organization and especially within the U.S., which I have been looking forward to be sharing with you today.

Devyser attended the annual ASHI meeting last week, which is a pivotal event within the transplantation field. This was our third time attending the event. And beyond the many data presentations featuring our products, it was great to hear from customers and not least, to see how Devyser's transplantation products is now a cornerstone of Thermo Fisher's transplantation business.

We had an impressive number of posters and scientific presentations featuring our products, and we're now starting to see large institutions publish their own and independent research. One highlight was a study done by the University Hospital of Copenhagen, which compared the performance of Devyser's and CareDx's NGS-based assays for monitoring donor-derived cell-free DNA in kidney allografted patients, which, amongst other things, concluded that the Devyser kit has a slightly lower limit of detection and overall is a robust assay on par with the established CareDx assay for monitoring donor-derived cell-free DNA as an adjunct biomarker in organ transplanted patients.

And concluding that our product is non-inferior compared to the current market standard, I can tell you, is not to be underestimated. Beyond our currently available products, we also presented posters, including some new product launches within transplantation, planned to come out during 2025, and we expect these products will significantly boost our growth and also cement our position as a clear leader within the transplantation field.

This week, you may have seen that we have announced a very instrumental agreement with Thermo Fisher, as we now will team up to bring our solid organ monitoring test through for FDA approval. And hence, Devyser now will benefit from Thermo's highly successful track record of working with the FDA.

We will collaborate around the preclinical and clinical data developments and share the costs associated. We initially will pursue the kidney indication, but this has the potential to expand across multiple indications over the years. This is probably one of the most important agreements made in the history of our company as it enables this alliance between Devyser and Thermo Fisher to disrupt the current market in the U.S.

Hundreds of millions of dollars are spent every year in the United States just on post-transplantation monitoring, led by a few send-out testing service providers simply due to the fact that there today is no available FDA-approved product for post-transplantation monitoring of solid organs.

The vision behind developing the Devyser transplantation products is to democratize testing, which will shorten turnaround times and lower the general expenses to society related to running these tests compared to today's standard. Enabling hospitals to bring back testing into their own laboratories not only improves turnaround times, but also enables hospitals to benefit from these significant revenue streams that today is sent out to external companies. We believe that this approach is the recipe for long-term revenue success for us in the United States and will become a leading revenue driver for Devyser.

While it will take some years before we realistically can obtain FDA approval, we have worked diligently on finalizing the validation process for our solid organ transplantation test in our U.S. CLIA-certified laboratory, including preparing for reimbursement in accordance with our go-to-market strategy. We anticipate to obtain reimbursement during Q3 or -- Q2 to Q3 of 2025, and we'll provide more guidance on how we will commercialize the product during our Capital Markets Day planned for November.

We are gradually increasing our test menu in the lab while expanding our commercial engagements, which came a long way during Q3 of this year. The past months, I can tell you, have been hectic but exciting as several very large U.S. companies have noticed that Devyser now open for business in the U.S. and thus, I expect that I can share news about new large wins during the months ahead of us.



Our fastest-growing products globally beyond our transplantation products are our tests for cystic fibrosis, Rhesus-T and thalassemia, which all are poised for success in the U.S. We're on track to secure reimbursement for our RHD test in the lab, and we'll continue our work to secure reimbursement for all these products. 



RHD continues to take market share. And beyond HEMA Quebec in Canada, which we have already announced, we are now today also working together with Canadian Blood Services and hence, have a solid future growth platform in Canada once these accounts is expected to reach clinical routine testing during second half of 2025. I have early on been bullish on behalf of the potential that our RHD test has also in the U.S., which remains unchanged. During Q3, we made significant headway in the commercialization within the U.S., and I'm confident that you'll see RHD will be one of our best-selling products in the U.S.



We do see consistent demand and potential for both our cystic fibrosis and thalassemia test within the U.S. We are actively pursuing a number of opportunities, including securing regulatory access and reimbursement. With the IVD agreement signed together with Illumina during Q3, we now have a pathway also towards getting these products through for FDA approval, which we will be guiding on in more detail later on.



On Monday this week, we received the good news about regulatory approval of Devyser Compacts in China, which has been a very long process together with our local distributor in China. We have now taken a lot of learnings with us that we will be using to gain an increased number of product approvals in China, which is a great market, as you all know, and equally much represents a great opportunity for Devyser.



Based on the complexity in the market, the language barriers and so forth, we have been cautious up until now not focusing too much on China. However, on the back of this approval, we accelerate our focus here, including hiring a second headcount to help the distributor in China to penetrate the market while getting more products through for approval.



While today has been focused on our growth developments in mostly North America, I'm happy to share that business is following plan in all our territories, with the exception, as Fredrik mentioned, with the phasing of Thermo Fisher orders. We continue to add more talent to our European business in response to the consistent growth we are seeing. In several of these markets, excluding Italy, we've had only 1 employee on the ground. But today, we are at 3 to 4 salespersons knocking on doors with customers and growing fast in alignment with our revenue expansion in these markets.



We continue to also see double-digit growth in Italy across our product portfolio and even within segments where we in Italy already are the clear market leader. Across the other large European markets, we expand our market share and post high double-digit growth on a year-to-date basis. Lastly, we covered a lot of ground during Q3, which positions us well for Q4, as Fredrik already alluded to, and 2025. And I'm excited about the potential that we have and to be sharing the wins as they come in during the coming months ahead of us.



And with that, Fredrik, I'll pass it back to you.

[Fredrik Alpsten, executive]

Thank you, Theis. As you know, over the last 2 years, we have taken some very important steps to build a global, fast-growing, highly profitable diagnostic company. As you also have heard, we are optimistic about the future growth. With our innovative products, a high market growth, a well-suited commercial organization that we have heavily invested in over the last quarters and some of the best commercial partners, we are confident that the historical development we have seen can continue and even enhance. However, as important as high growth, it is to continue our way to profitability, our main focus. As announced last week, we will, for the first time ever, have a Capital Market Day on November 25. See our homepage for more information, and welcome to that day.



With that, I open up for questions. I'll leave over to the operator.

[Operator]

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

[Ludvig Lundgren, analyst]

A few questions from my side. First of all, you mentioned here that you had received the largest order ever from One Lambda, if I heard you correctly. Would it be possible to quantify this or at least maybe quantify the historical order values from them?

[Fredrik Alpsten, executive]

No. We respect our collaboration with Thermo, and we cannot disclose numbers. Sorry for that.

[Ludvig Lundgren, analyst]

No worries. But then maybe on the visibility then in the distributor channel, how would you say that this typically like do you know in advance of an order here like looking into Q4 and maybe into '25, how this will develop moving forward?

[Fredrik Alpsten, executive]

Maybe it's a question for you, Theis.

[Theis Kipling, executive]

Yes, absolutely. And Look, just to clarify, you refer to distributors, are you also including Thermo Fisher or the distributors excluding?

[Ludvig Lundgren, analyst]

Yes. I was thinking specifically about Thermo Fisher.

[Theis Kipling, executive]

Yes. No, we have -- with Thermo Fisher, as we're building up the market, it will be a little bit lumpy, right, as we're seeing. So as they have a building inventory on their side, that means that it will be lumpy. And you should expect it to be lumpy. That said, I also -- as expected, though, but I'm very pleased to see that we are now receiving the largest order ever from Thermo Fisher, and One Lambda, right? And that is a trend that will continue. But you should expect that it will be lumpy month-to-month, quarter-to-quarter as they are building stock, selling more. And until we get a few years in, we won't see easily projectable revenue streams in this respect aside a rapid growth. I hope that answers.

[Fredrik Alpsten, executive]

Maybe I can add, they have also channel partners. So they have also an irregular sales from them. They have their direct organization in Europe and especially in U.S. But outside there, they have working with the channel partners.

[Ludvig Lundgren, analyst]

Got it. And then maybe on the gross margins, you stated here that it was negatively affected by the move here to new premises. Could you quantify the moving costs in Q3? And also looking ahead, if you expect any further costs in relation to this in Q4?

[Fredrik Alpsten, executive]

We are very careful giving forecasts, but we are confident that we soon will be back above 80%, which is our financial target. Maybe we can stay with that.

[Ludvig Lundgren, analyst]

Okay. Great. And then final one, just here on yesterday's news with the One Lambda collaboration on FDA approval. If you could maybe walk us through the time line? And also, can we expect an approval already in late '25? Or is this more a '26 event?

[Fredrik Alpsten, executive]

We have decided not yet communicate the time line. We would like to have come a bit further before we disclose that. My experience is that if you then get a delay, so we would like to be firm about the time line before we communicate it. So we will be a bit hesitant for the time being. I don't think we will communicate anything this year. We will communicate earliest beginning next year about the time line.

[Ludvig Lundgren, analyst]

Okay. And with this new collaboration, will it come with additional costs to what you previously had expected?

[Fredrik Alpsten, executive]

No, it's the opposite. Now we don't need to take all costs ourselves. We will share the cost.

[Operator]

The next question comes from Ulrik Trattner from Carnegie.

[Ulrik Trattner, analyst]

And I have a ton of questions. So I'll just fire them off. Again, if we can talk a bit about -- well, first of all, you sound extremely optimistic about this Canadian blood service beyond sort of what's already been awarded in your tenders. Can you give us some more information on your optimism here and your expansion on RHD in Canada? And what that would entail in terms of volumes roughly versus the tender you already have been awarded?

[Theis Kipling, executive]

I can take that question, Fredrik.

[Fredrik Alpsten, executive]

Yes.

[Theis Kipling, executive]

Yes, you're right. I mean between HEMA Quebec and Canadian Blood Services, we should be able to cover most of the nation of Canada and their IST testing. I will be a little bit hesitant giving you more firm guidance because we are waiting. There's a pretty large tender that yet is to be clarified in the largest region of Ontario. And the latest news we have is that, that will be confirmed by late November, has already been delayed and should have been communicated late October. And that will be changing the outlook.



So I'll keep the forward-looking guidance to myself for the time being, but I'm very optimistic between HEMA Quebec and Canadian Blood Services, we will have most of the market in Canada. And I think that is a fantastic position beyond the other nations that we are the clear market leader for RSD screening also in Europe. And as I mentioned, that's part of why I remain being bullish on the potential in the U.S.

[Ulrik Trattner, analyst]

And just a follow-up. Are you still doing the product in the market for RHD screening in Canada that would fulfill the mandatory requirements of tenders as well as still the only product that is validated by Blood Canada?

[Theis Kipling, executive]

That's the intelligence that we have at least.

[Ulrik Trattner, analyst]

Okay. Great. And then a follow-up on phasing of revenues into Q4. You have been awarded large tenders in Italy, a record tender on your end. The awarded tendering for RHD screening in Canada, that remains to be delivered on. The Cyted CLIA lab agreement and then, of course, you talked about the sort of largest order ever from One Lambda into Q4. So how should we think about phasing of revenues? Obviously, you had a stellar Q2. Now we're looking at a soft Q3. But how should we view phasing into Q4?

[Fredrik Alpsten, executive]

Yes. We are a bit hesitant to give guidance. So of course, we are more positive about Q4 than we were about Q3, if that happens.

[Ulrik Trattner, analyst]

If I were to rephrase my question then...

[Fredrik Alpsten, executive]

Yes, sure, Ulrik.

[Ulrik Trattner, analyst]

And if I were just to rephrase my question and going back to sort of previous comments on your end where you were expecting to see H2 showing acceleration in growth versus H2 of last year. Now we have seen this sort of weaker Q3. Does that sort of comment still stand that you're expecting to see growth acceleration in the second half of the year?

[Fredrik Alpsten, executive]

Yes, we have not changed our outlook. I didn't follow what you said. But what we have said earlier, it remains. It indicates a good Q4 because Q3 was bad.

[Theis Kipling, executive]

And maybe I can just add a supporting comment, Ulrik. I mean, the good thing with Devyser is that we don't honestly lose customers. And it's -- so all the customers we had last year, we have today and then some. So that's why as Fredrik mentioned in the Q2 call that we firmly believe that H2 will continue that strong growth we have posted also in H1. So that you're not seeing in Q3, and I think that should answer what we're also aiming to be posting for Q4 and beyond.

[Ulrik Trattner, analyst]

But could you give some clarification on deliverance on the Cyted CLIA lab agreement for Q4 as well as the RSV tender that's already been awarded on your end and then validated will that have -- did that have an impact in Q3? And how should we view that into Q4?

[Theis Kipling, executive]

Yes. Let's start with the Cyted agreement in the CLIA lab. So there, we had lots of traction in Q2, less in Q3, expecting that to go back in Q4 and also expecting that I will be coming out with more updates and news on that whole collaboration. So that's absolutely still there doing well. HEMA Quebec, as we have mentioned also during the Q2 call and previously, that has been delayed, right? And we're expecting that to be really kicking off during second half of 2025, as I also mentioned during my update today.

[Ulrik Trattner, analyst]

Okay. Great. And strategically here, you talked about a lot of focus, both near term, midterm and long term on expanding your commercial operations in the U.S. I just want to get your sort of mindset here on where we're moving given yesterday's news on you aiming to obtain FDA approval for the kidney monitoring kits.



And as you mentioned on the call, and I think it's fair to assume that you would pursue that for your RHD and cystic fibrosis tests as well. But once you entered into the FDA-approved space, you're going against a very large market like all hospitals, all generalized labs. Would that, in turn, position you more towards going for a distribution partner rather than going yourself. And I guess this overall would increase your attractiveness to find a big distribution partner versus previously.

[Fredrik Alpsten, executive]

You can take that, Theis.

[Theis Kipling, executive]

Yes. I mean let's start with what we have done with Thermo Fisher. I think that -- I can only encourage you, obviously, to attend some of these conferences within transplantation field. And had you been there a couple of years back, you have noticed that we're absolutely known by everybody now. And that's given and due to the fact of the partnership with Thermo Fisher, which has accelerated the penetration much, much beyond what we could have done ourselves and at a much lower cost. So, I think that is a proven success model for Devyser. Whether that's going to be the same model we will pursue for cystic fibrosis or [indiscernible] will remain unanswered. For the time being, I think you will see more guidance on that. But I will leave you with the conclusion that we are really happy with what we're doing together with Thermo Fisher in the transplantation space. And I think that is a confirmation of how we, as a company, are commercializing and the strategy behind.

[Ulrik Trattner, analyst]

Okay. Great. And just on the news coming out of ASHI, I read a few application notes published by One Lambda and Thermo Fisher on both upstream workflow as well as downstream workflow on DNA extraction as well as on results on different types of sequencers. How important are these application notes I know that they did examples of QIAGEN and Promega. And I guess that would help achieve a higher penetration or user rate compared to not having these applications. So just sort of your take on how important this is.

[Theis Kipling, executive]

Yes, absolutely. You're correct in that conclusion, Ulrik, that's exactly -- the easier -- what they also -- they should be speaking on their behalf. But what I am pleased to see is that they are obviously lowering the barriers to take on Thermo Fisher as a provider. So -- and they think holistically end-to-end throughout the workflow and both pre- and post-transplantation including in that workflow. So, from my side, I can only salute what they're doing.

[Fredrik Alpsten, executive]

Yes.

[Ulrik Trattner, analyst]

Great. And last question on my end, and I'll get back into the queue and stop bothering you guys. But on FDA approval, again, and sort of I guess this plays a lot into your recent collaboration with Illumina given that MiSeqDx is the only FDA-approved sequencer on the market today. Just how does that play into creating barrier of entry as well as since you mentioned going into potentially approving cystic fibrosis, in my view or at least what I know is that one of the main competitors to your test kit for cystic fibrosis is a test kit from Illumina. So how would this complicate things?

[Theis Kipling, executive]

It could, and it could not. Let's come back on that one. I can leave you with the teaser that whenever we are up against Illumina on a head-to-head, I usually come back with an order.

[Operator]

The next question comes from Filip Wiberg from Pareto Securities.

[Filip Wiberg, analyst]

I've got 2 additional questions. Most of them have been answered. But just one on what makes you so confident returning to the growth trend that we have seen in the past. So you mentioned that you had the Thermo order now in Q4. But my question is then if you have seen any positive indicators in this Southern Europe now post the holidays as well or for that reason in other regions in Europe that makes you confident that those geographies will perform well in addition to this Thermo order?

[Fredrik Alpsten, executive]

Maybe you can answer that, Theis.

[Theis Kipling, executive]

Yes. I mean I'm full of confidence that we are -- as I said, if you exclude this lumpiness in building up this market together with Thermo Fisher, year-to-date, we're on track across the channels. We got no reason to believe that, that should in any way change.

[Filip Wiberg, analyst]

Okay. But if you then look at the Southern Europe as well, have you seen any positive indicators now post the holidays in those regions?

[Theis Kipling, executive]

Yes. I mean, especially our largest market of Italy, right? That's usually the leading indicator that I refer to when I want to see how the business is overall tracking. And those guys are still on fire. They're doing fantastic. They did well also Q3. They have closed additional tenders. And the Q2, I'd say, success that we also communicated will now -- it takes some time before it really kicks in and those tenders are coming into full effect. And I think the more we get into Q4 and Q1 of next year, the more we will see that increased traction to happen in Italy. And that is a leading indicator of how the general market in our large European territories are also developing.

[Filip Wiberg, analyst]

Okay. And the other question I had was on the gross margin. And you did not want to answer any specifics regarding the breakdown of this extra cost regarding to the move to new premises. But just if I could phrase the question like this, I suppose that the gross margin would have been above this 80% target that you have without these additional costs. Would that be fair to assume?

[Fredrik Alpsten, executive]

Yes. That's correct.

[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 for calling in and listening into our earnings call. Please be aware that we have a Capital Market Day on November 25. So if you are interested to participate, go to our home page and send us a message about that. So with that, thank you. Bye-bye.