Devyser Diagnostics AB

STO:DVYSR

Earnings Call Analysis

Strong Sales, Record Margins, and a Path to Profitability

This quarter, the company reported robust sales amounting to SEK 45 million, backed by a significant organic growth of 33% year over year. Notably, Asia and the Americas regions experienced explosive sales growth of 121% and 174%, respectively. A new record was set for gross margins, reaching a high of 88%, revealing the company's profitable business model of selling consumables and equipment. Despite this, nonrecurring expenses related to new system implementations resulted in a quarterly loss, yet the company is confident in its earnings trajectory and commits to an operating margin (EBIT) of over 20% during the 2024 to 2026 period.

Overview of Devyser Diagnostics' Q4 2023 Earnings Call

Devyser Diagnostics recently concluded their Q4 2023 Earnings Call with CEO Fredrik Alpsten, CFO Sabina Berlin, and CCO Theis Kipling presenting to stakeholders. The company, renowned for its advanced sequencing reagent provisions, emphasized its ongoing commitment to swift and correct diagnostic solutions, crucial for patient well-being.

The Evolution of Devyser Diagnostic: Strides in Innovation and Market Expansion

The company has been on a growth trajectory, showcasing impressive organic revenue growth averaging 36% since its inception. Devyser prides itself on sustaining high gross margins above 80% and has introduced numerous innovative products. They comprehensively serve three diagnostic areas: hereditary diseases, oncology, and post-transplantation, operating through their Stockholm base and subsidiaries in eight countries with around 120 employees.

Geographical Revenue Breakdown and Organic Growth

Europe remains the stronghold for Devyser's market, accounting for 88% of their total revenue. In a noteworthy shift, the Americas showed a significant leap, contributing 8% to the total revenue in 2023 from a previous 2%. Although the Asia-Pacific region only contributes 4%, the region displayed robust sales growth. Overall, the company achieved SEK 169 million in full-year revenue for 2023.

Q4 Sales Performance and Strategic Investments

Q4 saw organic sales ascension by 33%, mounting to SEK 45 million despite traditionally lower sales around Christmas time. Devyser saw heightened growth across most markets, with North and South America recording a 174% increase and Asia growing by 121%. Notably, the quarter also yielded record gross margins of 88%, up from 80% in Q4 2022. Investments to expand production capacity and market support were significant, albeit resulting in a quarterly loss of SEK 80.5 million due to one-off costs associated with their relocation plan and new systems implementations.

Financial Stability and Future Outlook

Devyser maintains a strong financial base, with EUR 263 million in cash and no debt, a testament to their sustainable business model. Future sales look promising due to unique products and growing market presence. The collaborations with prominent partners like Thermo Fisher Scientific point toward potential for lucrative contracts and tenders in the transferring field and other opportunities, bolstering their prospects for 2024 and beyond.

Earnings Call Transcript 2023-Q4

[Operator]

Welcome to the Devyser Diagnostics Q4 2023 Report. [Operator Instructions] Now I will hand the conference over to the speakers CEO, Fredrik Alpsten; CFO, Sabina Berlin; and CCO, Theis Kipling. Please go ahead.

[Fredrik Alpsten, executive]

And again, welcome to the Devyser Q4 2023 earnings call. It's really a pleasure to have you all here. Today, you will listen to me, I'm Fredrik Alpsten, the Devyser's CEO; and our Chief Commercial Officer, Theis Kipling. I have also asked Sabina Berlin, our CFO, to join us during the Q&A session.

Before we go into the Q4 figures and talk about the nice development we are seeing, I want to take 4 minutes of your time to repeat for our new potential shareholders what Devyser is. Devyser is becoming increasingly well-known as a reliable, high-quality, next-generation sequencing reagent provider. Through our collaboration with Thermo Fisher, our name and brand are getting a lot of additional recognition.

Devyser was founded and driven by the value of first and accurate diagnosis. It's the foundation for everything we do to ensure every patient has access to a correct diagnosis in the shortest possible time. Genetic tests can still require a very long time for patients before they get their results, causing worry and potential harm to patients.

We want to enable faster response times for genetic tests and early detection to diseases to ultimately help people live healthier and longer. More than 400,000 people were tested with our products in 2023. That's something I and my colleagues are very proud of.

We are on a journey -- or Devyser is on a journey. As you may know, we have had a very nice development over the last years, including average organic revenue growth of 36%, gross margins well above 80%, launches of many very innovative products and commercial expansions, both by setting up our own direct sales organizations. But also entering into collaboration with some of the most successful global companies.

However, I am confident that we are just at the beginning of a fantastic journey. Over the last 9 to 12 months, we have taken several steps, several very important steps to build a global, fast-growing, highly profitable diagnostic company.

Our mission is to be the pioneer leader of diagnostic solutions and provides fast, accurate and ease-of-use solutions to labs worldwide. Our vision is a world of 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 here in Stockholm.

We sell our products, LIBOR and prep kits and software to clinical diagnostic labs via our own sales organization or we add distributors. We also provide test services to labs and pharmaceutical companies. We have since the foundation of the company almost 20 years ago, developed and launched more than 30 IVD and IVDR registered products.

We are active in 3 diagnostic areas: hereditary diseases, oncology and post transplantation. We're based in Stockholm, but we have subsidiaries, sales offices in 8 countries. We're around 120 employees.

Our customers select Devyser because we provide simple, accurate and efficient genetic testing solutions. Our kits and software are easy to implement, maintain and use for the laboratories. This has been the foundation for our successful growth because we design our products with a deep understanding of the clinical laboratory workflow and put a genetic laboratory routine and source. We're currently selling more than 65 countries. And we are certainly in sensing direct in some 15 countries.

Europe is still our dominating market with 88% of total revenue. Americas, however, excluding fast [indiscernible] 8% of total revenue in 2023 compared to 2% in 2022. The APAC region is still rather small with only 4% of total revenue.

The growth is high, I would say, even very high in the company. Organic growth has been in average 36% since 2015, and that's despite a big hiccup in 2020 due to COVID. We have reached SEK 169 million in revenue for the full year 2023.

But let's go over and talk about the fourth quarter. Sales developed well during the quarter and amounted to SEK 45 million. Sales growth, consisting entirely of organic growth was 33% compared to the same quarter last year. And if you look at the local currency, the sales growth was 28%.

For us, the revenue in the fourth quarter is always a challenge as we see it as just 2.5 months as there are not that much sales around Christmas. Sales growth is high in most geographic markets. Our direct sales markets in Europe continued to develop well during the quarter, but we expect higher growth in 2024.

Italy is still our biggest market, representing approximately 45% of total revenue. Despite a very high market share in Italy, it grows by more than 20% in 2023. Very strong growth, plus 174% was recorded for North and South America, even still from rather low levels.

Sales growth in North and South America is being driven by both our direct sales organization and by distributor sales. Sales growth in Asia was also high, plus 121%, despite the fact we have not been focusing on this area so much in 2023.

All our product areas are growing strongly, particularly transplantation products, which continued to develop very well. During the quarter, fourth quarter, we saw a new record in gross margins. 88% for the quarter compared with 80% same quarter 2022 and 85% in the third quarter.

As we have said earlier, we have a very nice business model, only selling consumables and new equipment. It gives very high gross margins. And the nice thing is that it's vary at scale. Higher volumes will give higher gross margins. Even though we may have single quarter with lower gross margins, I'm confident that the trend with higher even very high gross margins will continue.

Our expected future high growth means that during the fourth quarter, we have invested according to plan further in both production capacity and in market and sales support. To enable significantly higher production volumes, we will move our operations to new premises in 2024.

As we announced already in the report for the third quarter, the move entails one-off costs that burn the fourth quarter and, to some extent, also the current quarter. This, together with nonrecurring costs for the implementation of a new ERP system and a new CRM system means that we are reporting a loss of SEK 80.5 million for the quarter compared with a loss of SEK 25.9 million same quarter last year.

The result is lower than both Q2 and Q3 2023, but it's in line with our internal prioritizations. And we are very confident that the positive earnings to them that we have seen earlier during the year will continue and that we will meet our financial target of an operating margin, an EBIT margin of more than 20% during the 2024 to 2026 period.

Devyser has a very strong financial position, EUR 263 million in cash at the end of the year -- or end of the quarter and no interest-bearing debt. With innovative products, high market growth and a better 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 don't see anything that can change this. Of course, we may have single quarters will -- that will not perform that well. But the trend is crystal clear. Sales are increasing much and those quarters will be record quarters. We also believe that high volumes will give higher gross margins.

The yellow bars show quarterly sales and the orange line, the quarterly gross margins. So with that, I leave over to Theis Kipling, our Chief Commercial Officer, and he will give you a commercial outlook.

[Theis Kipling, executive]

Thank you, Fredrik. Before going into the details, I'm happy to confirm that we continue to deliver on our commercial strategy during the year 2023 with several significant milestones achieved. And I'm very excited to share the commercial outlook for 2024 and onwards in the coming slides.

We signed the agreement with Thermo Fisher Scientific in April 2023. Thermo Fisher is one of the largest health care companies in the world. And as an example, a clear market leader within the field of transplantation. The collaboration develops better than expected and the customer feedback has been overwhelming.

We have worked diligently to position us well for some very large tenders and contracts that are coming up during the initial months of 2024, which we look forward to be sharing more about as we are going to see the outcome.

During 2023, we also expanded this agreement to cover both Saudi Arabia and Brazil, both very significant markets within the field of transplantation. In addition, we are seeing a very strong interest from some of the most prominent institutions in both Europe and North America when it comes to conducting more research using the Devyser transplantation assays.

This speaks well for branching into new indications, as we have already planned as well as setting new standards for how patients are taken care of post transplantation. Lastly, we made an agreement also with Thermo Fisher to co-promote our laboratory services towards potential pharma customers, which also is moving along with initial and very promising interest.

In continuation of our U.S. strategy, we recently signed an agreement with Illumina that enables us to develop end-to-end solutions on their MiSeqDx platforms in both United States as well as in Europe. Illumina is by far the largest NGS instrument provider in the world. And all of our current NGS products are already validated on their research use-only platform.

This agreement opens the door for Devyser to have FDA-approved tests in the U.S., which significantly reduces the time for our customers to be up and running in clinical routine and is a great opportunity for growth in the years to come.

Our state-of-the-art NGS laboratory in Atlanta in the U.S. received its clear certification during 2023 and already today have 2 validated products with more products underway as well. Right now, we're actively working on securing reimbursement for these products, which once obtained will significantly accelerate the commercial momentum that we have within the United States.

Recently, we announced our first commercial agreement with a U.K.-based oncology company, Cyted. This agreement is expected to generate around SEK 25 million over 2 years. And let me underline that this is the first of its kind, but we do expect more and similar agreements to be followed.

Running tests for partners is one of the main purposes of the laboratory. The other main purpose of the laboratory is to offer test to both hospitals and laboratories as a service. And I'm happy to report today that both purposes are being delivered on as planned.

Our direct sales momentum has accelerated during 2023. And I'm pleased to see the revenues in the United States has doubled over the year of 2022 and that's excluding revenues from Thermo Fisher. If you're then adding in the revenues from Thermo Fisher in the country of United States, we will -- we doubled once again.

Recently, in 2023, the American College of Medical Genetics and Genomics updated their recommendations regarding the number of variants to be tested for when screening for cystic fibrosis. While the formal recommendations included 23 [indiscernible] variants, the updated recommendations now specify 100 variants, which Devyser is currently one in only a few companies who actually can do.

Due to this, we have seen and still seeing a very significant increase in demand for our cystic fibrosis NDS test within the U.S. And I'm confident that we soon will see some very interesting news from this. And to give you a little bit of perspective of the size in the market, we anticipate about 1.4 million test annually being run for CFTR screening within the United States.

In Canada, we won a tender for RHD testing with [indiscernible]Hive, who will start the testing during 2024. And we are now working to position our R&D test within the remaining part of Canada. And we will be able to know more about the success of that later on in 2024.

The distributor business is particularly important to Devyser that distributor revenues increased by astonishing 102% in Q4 and 31% across the full year of 2023. We have accelerated the onboarding of new distributors with an additional 15 joining us during 2023 as part of our process to open up new territories.

In total, we now have more than 50 distributors globally, and we are well poised to build up new growth markets in the years ahead of us. while still dropping down in the markets where we are already going with direct business. And with that, I'll hand back to you, Fredrik.

[Fredrik Alpsten, executive]

Thank you, Theis. And as you have heard, we are optimistic about our future and also about 2023. The most important for us going forward is to continue our way to profitability and we are very optimistic about that. So with that, I leave it over to the operator and open up for questions.

[Operator]

[Operator Instructions] The next question comes from Erik Hultgård from Carnegie.

[Erik Hultgård, analyst]

You sound fairly upbeat regarding sales growth heading into 2024, and you mentioned the numerous factors. But if we were to switch focus on profitability and yes, you had a lot of one-offs related here in Q4 related to moving offices, ERP systems, CRM systems. But how should we view your tracking towards profitability for 2024, given what we're seeing right now?

[Fredrik Alpsten, executive]

Yes. As we have our financial targets to show an EBIT margin in excess of 20%, sometimes between 2024 and 2026. And we are very optimistic that we will do that. Maybe I cannot shed more than that, that's the guidance, but we are confident. And as you saw, we had 3 improving quarters during 2023. We improved the EBIT every quarter, except for the last one, where we had quite many extraordinary expenses coming from the move and some IT things. So yes, I think you should continue to look at the same view as you had earlier, not look at a single quarter.

[Erik Hultgård, analyst]

And are you able to provide us with some rough estimation on how much these one-offs were in the Q4 and as well as -- what -- sorry.

[Fredrik Alpsten, executive]

I think you should look at the nice development we have seen when it comes to EBIT during 2023. And as we have always communicated, we may have one single quarter that is not in the line, but the trend is rather clear. So we are optimistic, continue the same trend we have seen in 2023, but that will continue in 2024.

[Erik Hultgård, analyst]

Okay. Great. And throughout '23, you made a lot of investments, MDR, CLIA lab, moving offices, ERP, CRM or what's left to be invested in in '24 in order to capture the growth potential that you are foreseeing and are very optimistic about.

[Fredrik Alpsten, executive]

Yes. You are totally right. We have made a lot of investments both in 2022 and first half of 2023, I would say, and maybe something in the Q4 2023. But we don't have that much remaining investments left. We are moving actually today to the new facility where we have a complete new production and R&D place. So after that, we don't expect amount of investments going further. I mean the lab in the U.S. is up and running, so we don't have any remaining investments there either.

[Erik Hultgård, analyst]

And just to what extent does this sort of external collaboration that you have in your CLIA lab, how does that cover the cost -- the fixed cost of the CLIA lab?

[Fredrik Alpsten, executive]

Yes. As we have communicated, we think it's a really good agreement. And we've seen also a first agreement, then we will see more of them coming. And as we said in the press release and also in the real [indiscernible], we expect revenue of SEK 25 million during the first 2 years, which is -- we cover expenses for not only the -- we will bring profit value in the lab during the second part of 2020.

[Erik Hultgård, analyst]

And a few questions regarding to Thermo Fisher and you sound really upbeat and you mentioned that the collaboration is going better than expected. Can you give us some more granularity on what that actually entails? And you also mentioned tenders upcoming, are these Europe? Americas? How big are these in terms of number has provided?

And third question on Thermo Fisher being exciting to see that you're now entering Brazil. And if I'm not mistaken, it's the second largest market for kidney transplantation. But can you give us some more information on what this expansion into Brazil will actually entail and when that can be operational? And will you establish a lab in Brazil or just -- or are these to be sold directly into labs? And if you can give us some more information on that, that would be very helpful.

[Fredrik Alpsten, executive]

Yes. We can share some information, but we cannot share that much information because this is a collaboration with Thermo Fisher and I don't think that would appreciate it which too much, and we have promised not to share too much about numbers, et cetera. So we cannot do that. But maybe you can comment on Brazil, how we see that, Theis.

[Theis Kipling, executive]

Yes. I mean I can do that. So I should say it's a very significant market, right? And there will be some run rate before we're fully in the air in Brazil. We're conducting registrations to the trainings with the partner, onboarding all the sites that have expressed quite some interest already. So Brazil, we foresee that we'll slow transition during 2024 and then we really will ramp in 2025. That's our expectation. And maybe just a quick comment to your question on tenders. Predominantly, those are seen when look at tenders within Europe, but we also see some very sizable upcoming contracts within the North American market. So it covers both regions, and that's why we are particularly very excited with the traction that we are having currently with Thermo Fisher.

[Erik Hultgård, analyst]

Great. And how does the newly established collaboration with Illumina play into that being that now your test will be reset on the Illumina MiSeq machines. And in addition to that, are you exclusive with Illumina now and certain tests? Or how does that work?

[Theis Kipling, executive]

I can put a few words on that. As we commented on, this enables us to actually have FDA-approved products available in the U.S. market. And if we hadn't had an agreement with Illumina, that would not be possible to do. So in that sense, this is the 1 to the very significant market in the U.S. And that's why we are particularly very excited. It's nonexclusive in event. So we are free to operate with whoever. But like with Thermo Fisher, we define and identify our partners with the August carefulness. And we only go with the best. And here, Illumina, like Thermo Fisher, as far as the market leader of having the most instrument footprints and for that, it was a very easy decision to make investments into that direction, which also can be quite promising when we, hopefully, in the future, will have strong pharma collaborations where instrument footprint will be of utmost importance.

[Erik Hultgård, analyst]

Okay. Just a follow-up question. And if you can help us decide for the dynamic here. I'm guessing, and correct me if I'm wrong, the Illumina collaboration is something that's been feeding in from Thermo Fisher. But on the flip side, Thermo Fisher and Illumina are competitors on the NGS side. So how does a collaboration between you, Thermo Fisher and Illumina work?

[Theis Kipling, executive]

We can speak on behalf of Devyser. And let me start by addressing that we don't necessarily look at alumina and the agreement we have with them just for transportation I mean there are a number of opportunities where having, for example, other tests within hereditary. We mentioned cystic fibrosis could be potentially that would be lending itself very nicely to be FDA cleared. On the competitive situation, I think that is not a question for us to answer. No.

[Erik Hultgård, analyst]

Okay, that's fine. One last question on my end. I know you cleared all the parts on your end to deliver on the Hema-Quebec already awarded tender for 2024. Are they ready to start their screening right now or what's left there? And as well as you sound fairly confident that there will be a decision on a larger tender for the Canada market during 2024. Of course, it's uncertainty in terms of the outcome, but how can you be the confidence that, that will be resolved throughout 2024.

[Theis Kipling, executive]

On the first one, with regards to the tender we already won, we do project and foresee that they will start testing during the later part of 2024 second half. And then there will be a ramp to volume. But we're very excited and confident that, that looks promising. With regards to the remaining part of Canada, what we can do is look at who else are there. We see currently no one else having a Health Canada registered RHD test. We know about the performance of our test. We know that other countries, regions have also embarked on our RHD test for their screening programs, and that leaves us with the confidence that I'm expressing today also for the remainder of Canada.

[Erik Hultgård, analyst]

Yes. And I fully understand that. And -- but just to clarify, you sound confident that we will be getting more information on a finalized tender in 2024. Is that the current plan for this tender or -- do you have any more specifics in regards to why we should expect this tender to be finalized in 2024 regardless of -- I know your positioning, and I know your registration -- but just from a government point of view, how can you be so certain?

[Fredrik Alpsten, executive]

We -- I don't think we can share more now. But hopefully, we can share more at the next earnings call in May.

[Operator]

The next question comes from Oliver Usatalo from Aptisperana.

[Unknown Analyst]

I just had a question regarding -- you mentioned the deal with Illumina and only having a couple of test pre-installed today, how do you estimate that OpEx will develop going forward as more tests are installed on Illumina platform?

[Fredrik Alpsten, executive]

Sorry, can you please repeat the question, how our OpEx will develop? What's that?

[Unknown Analyst]

Yes, exactly.

[Fredrik Alpsten, executive]

Yes, it will not affect -- I would say, it will not affect at all actually because Illumina is developing what's needed for the instruments. So it will not affect our OpEx.

[Unknown Analyst]

Okay. I understand. And also, we expect fairly strong growth going forward, and I hear that you are quite optimistic as well. Given our recent partner deals with -- well, both Illumina as well as Thermo Fisher and established CLIA lab primarily where do you expect the strongest growth going forward?

[Fredrik Alpsten, executive]

We are quite active in -- we are actively in many markets and in many areas. But I would say that the most promising is the U.S. market. We are here active together with our partner, Thermo Fisher. We have also our SPL lab in the U.S., and we have also our kit sales in the U.S. So if I should give you one answer on that one, that's the U.S. market.

[Unknown Analyst]

Okay, I see. And well, you've entered 3 rather small contracts in Europe, but yet the market is growing by 25% year-over-year. Can we expect you to keep up at this growth rate?

[Fredrik Alpsten, executive]

Yes. And I think I also -- I think I said that to one of my slide, we expect higher growth in Europe during 2024 than we have had in 2023. You must remember that we have taken several steps during 2022 and 2023 to lay the ground for our future growth.

[Unknown Analyst]

Yes, I understand. And also looking in the long term, given the new partnerships with both aluminum and Turbo Fisher, how does this affect devices will say, long-term potential in terms of pricing power and competitive advantage and so on. Can you elaborate a bit on that part?

[Theis Kipling, executive]

Yes, I can put a few words. I think pricing power, I mean we are in full control of how we price our products. To a certain extent, obviously, not being able to control how Thermo Fisher would price their parts of the products. But in general, we have been successfully implementing high single-digit price increases annually in the past couple of years, and that will -- is going to continue. And then you can have the layer of 1 getting FDA-approved test and be reimbursed test which is only going to double down on pricing power.

[Operator]

Please state your name and company.

[Oscar Bergman, analyst]

It's Oscar Bergman from Redeye. I just have a few short questions. First, on the price increases, are you doing this across all markets, then roughly by how much? And have you noticed any customer setback? And does this setback vary between private customers and public customers, who I expect are less price sensitive?

[Theis Kipling, executive]

I can quickly comment on the first part there. We do general price uplifts annually. And then we obviously, in full respect of current existing contracts we adhere to what is stated within those specific contracts. There are limitations on how much we potentially can increase prices within the tenders of Europe as just an example. In general, I think we have been well appreciated and understood on behalf of the rationale behind why we are increasing the prices. So we have not seen heavy pushback in that respect, more than what is usually expected.

[Oscar Bergman, analyst]

Okay. And has there been any scenario in which you have been subject to price pressure, mainly from private customers?

[Theis Kipling, executive]

It's a very competitive field and we have a broad portfolio. So there are pockets of our portfolio that are more exposed to price pressure. We typically don't engage in negative price virals. We reside with the quality and the brand that we have, which is more of a premium brand. So we don't compete on negative price [indiscernible]?

[Oscar Bergman, analyst]

And maybe you already touched upon this. But just wondering if you can elaborate on the sales funnel, how it looks like today. You said that more contracts are coming. But should these be expected to be in similar sizes to Cyted? And how close are they to finalization?

[Fredrik Alpsten, executive]

I think it's difficult for us to say, and we don't want to promise anything and it can be big corners and then be more contracts than we can get and maybe we can lose them. So let's come back on where we can show the numbers in the income statement. It's a bit too early to actually to disclose it before the contracts are signed.

[Oscar Bergman, analyst]

Okay. All right. I guess I only have one more question then. Just wanted to know about the reimbursement status for the CLIA lab.

[Theis Kipling, executive]

Could you specify status?

[Oscar Bergman, analyst]

Has reimbursement been -- is it close to being in place?

[Fredrik Alpsten, executive]

We do not yet have reimbursement for the first products in the CLIA app, but we're working on it, and we expect to have a curing in 2024.

[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 today. I hope we will hear you coming back in our earnings call for the Q1. And thank you again. Bye-bye.