Vitrolife AB

STO:VITR

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, ladies and gentlemen, thank you for standing by, and welcome to the Vitrolife Interim Report January to March 2019 [Operator Instructions] I'd now like -- I must advise you, sorry, the conference is being recorded today, Tuesday, the 23rd of April 2019.I would now like to hand the conference over to your first speaker today, Thomas Axelsson. Please, go ahead.

[Thomas Axelsson, Chief Executive Officer]

Thank you very much, and welcome to Vitrolife Interim Report January-March 2019. The speakers today will be Mikael Engblom, CFO of Vitrolife; and myself, Thomas Axelsson, the CEO of Vitrolife.So please go to page number 2 and we'll go through the summary of Q1. The Q1, for us, was a quarter with continuous high profitability and I would also like to comment that we had a new business unit for this quarter. So sales was SEK 312 million and it's a growth of 18%. The sales increase was 12% in local currency, where 4% was organic growth. EBITDA 40% margin and totaled SEK 126 million.During the quarter, we also got a market approval for EmbryoScope+ in China. Together with that, regarding the EmbryoScope and also development, we did an acquisition and have done a collaboration agreement regarding technology for embryo assessment using artificial intelligence and that was done after the period.So please go to page number 3 and I will look into the sales of the different regions then. If I start on page number 3 from the left side then, it is the region of Americas. The sales in Americas is mainly U.S. and we had a very good growth in that territory of 48%. The growth is coming from the Time-lapse that we got approved last year and we can see a continuous interest within Time-lapse in the region. And that combined with our sales of the Genomics business.If we then go to the EMEA, our largest region, there was an unfortunate decline with 1% in organic growth then. We had very good sales in Media and the total sales within EMEA region was SEK 135 million. It goes a little bit up and down regarding the hardware sales on Time-lapse. So the region was good for Media and it wasn't so good for Time-lapse in this period.If we then move into the region that is Asia, China, but without Japan, it was very good growth even there. It was growth of 31%. I would like to say that nothing of that growth is coming from the approval of EmbryoScope+. The growth is coming from the Time-lapse sales in other territories in just China and it was also good growth within the region for Media. In all fairness, last year was not the best period for China, but a growth of 31% is quite good. It was SEK 76 million. It was Time-lapse equipment delays in Thailand, Vietnam and in India together with the growth of the cryo products there.If we are then looking into Japan & Pacific, that was decline of 5%. And it was opposite towards China last year where the territory last year had very, very good growth. If we compare with last year, it was a slight decrease of the hardware products from Time-lapse, the Media most doing well in the region.If we are then combining and looking down to the sales figures, it was 12% in organic growth and 8% of those was acquired from Genomics and 4% was real organic growth from the base business. And 6% was currency effects if we are looking on the total sales increase of 18%.If we then go to page number 4 and then go through the business units and let's start from the top. It is the new business unit that we are calling Genomics and that is for genetic testing for aneuploidy and monogenic disorders for preimplantation use. It was the first quarter and we are very pleased to say that the transaction activities together with Illumina in taking over the customers and doing support for that within the region during the quarter has gone very, very smooth.We have in place a new organization that are dealing with sales and support, technical support and the things that customers are asking for together with development people for the next generations of products that we are doing.Total sales for this quarter was SEK 20 million then. ART Equipment, it -- was the sales of SEK 12 million this compared to SEK 18 million last year. I would like to say that it is negatively impacted as a result of a disruption of some IT systems of around SEK 3 million. Those will instead be in Q2 then.Time-lapse positive 1%, and it is a good momentum. And we can see the customers that have bought the hardware before are using the equipment more and more and that's why we are having a stable growth. And then let's say to have the peak between the quarters depend upon if we are selling more or less of hardware, but it's a growth of 1%.Disposable Devices then. It is -- it was a decline of 4%. And I -- unfortunately, I do have to say that partly of that is that we have had some delivery problem to some larger customers within the [indiscernible] sector.And then the Media, very good growth, 14% of our core business. All businesses within Media was growing. It -- culture and transfer and trio and we can see that and Mikael is probably going to come back to it later on, but we see scalability on the Media products when it's growing so well with 14%.If we are then going to page number 5, I would like to make a few comments regarding the acquisition that we have done. And it goes together with the line of Time-lapse and also genetics going forward. But let's concentrate on why we are doing our own development and why we are doing collaborations agreements, and why we are buying technology for Time-lapse using artificial intelligence. But it's all in line with our overall business goal and that is to provide tools, products, support systems to reduce time to pregnancy. And we have already different [ algorithms ] build on KIDScore, Guided Annotation and -- where there are also changed where we have use artificial intelligence. Those are based upon how embryologist works more or less. But there is a lot of information that we are getting out of, say, the Time-lapse equipment. All the morphology, all the steps, all the cell culturing. And we can see that if we and customers will have a better opportunity to go through all that kind of complex information and we can do it to a more ease-of-use product, then we do believe that we can see a better outcome. You can save time for instance. And with saving time, it's going to go faster. And by that also, we can predict a little bit better clinical outcome.So the collaboration with Virtus Health and Harrison-AI is for the technology. It is for continuous development on [ algorithms ]. It is also for doing an RCT together with Virtus.The current product and how we will work with it is that it is a research use only product. And that's the reason why we will need more RCTs and hopefully, we can be the first one that will have some kind of approved -- regulatory-approved image recognition tool for the fertility business.So that one, going forward -- that was a bit genetics, all of that is regarding the embryo selection because there is -- in most cases, there is 1 or more embryos during a cycle. That is good. The question is asked, which 1 to choose. And by having the opportunity to choose the right one for morphology Time-lapse and also the opportunity of choosing the right one from genetics, we believe and we are working on a road towards successful results then.By that, I would like to go to page number 6 and hand over to Mikael.

[Mikael Engblom, CFO & Investor Relations]

Yes. I will take you through the key financials during the quarter. So if we start off with gross margin, we reported 63%, which was down compared to 65% in the same quarter last year. And the main component for this variation is the product mix of genomics. The Genomics business that entered into Vitrolife from the beginning of this year has lower margin than the average of the group. And that impacted the reported margin for the group. We had a positive currency effect and we had a positive effect of the transition into the new IFRS 16 accounting standard of about 1 percentage point.The EBITDA margin was 40% and that margin was also impacted by the currency and the genomics product mix as well as the IFRS accounting standard.The net debt in relation to EBITDA was minus 1%, so we continue to have a financial position to support our growth ambitions.So with that, move to page number 7 for the outlook. The long-term market growth we expect to continue to be in the range of 5% to 7% in monetary terms and as before, driven by the growing middle class and the trend that people wait until they have children to later in life.We will focus on expansion of sales. We continue to see opportunities in all markets and business units and -- for example in Asia, we are focusing now on the marketing of the EmbryoScope+ in China following the market approval as Thomas mentioned.We will also continue to focus on broadening the product offering, both by in-house product development but by also through acquisitions such as the example of the AI technology acquisition that Thomas mentioned before.So with that, operator, we are ready to take questions.

[Operator]

[Operator Instructions] We just have the 1 question at the moment from Björn Olander of Murgata Equity Research.

[Björn Olander]

I have a couple of questions. First one on genomics. It would be interesting to hear where you are in this stage? I mean, did this collaboration start from 1st of January and you sort of got up to speed directly? Or is it -- has this built up gradually during the quarter? So -- I mean, what I would like to know is how normal is the level of sales? Has there been any pent-up demand? Are there many regions that you haven't sold in and so on? So I have a bit of a feeling for the state of that business right now.

[Thomas Axelsson, Chief Executive Officer]

Okay. Björn, if I should start then regarding the regions. I take it from the end of your questions. We are only right now selling those products that we have, let's say, got the conversation right from Illumina in the territory of EMEA and Americas. So it's only those 2 regions. When the transaction is being taking place, it's kind of normal that the customers are a little bit worried regarding if the new identity can do the support and also fulfill, let's say, their demands from the first day.So yes, of course, there has been some customers that was filling up their inventory at the beginning of the year or actually at the end of last year, so they could have products for January and then a little bit into February. But I do think that we have done that very well together with Illumina and has transferred customers and transferred customers to us. And we have supported them well. As we had guided before, the first quarter is a start up quarter with -- and has had -- and we believe it should be some challenges initially, but it's gone extremely well. And the projection is that, yes, we will have full quarters of sales from Q2 and moving forward.

[Björn Olander]

Okay. So this is not that sort of a normal quarter and you expect a bit higher in the coming quarters, but is this something that will sort of -- will you add these countries and so on during the course of the year? Or is this more of a shift that you just take over and there is more of underlying growth of the market, so to speak?

[Thomas Axelsson, Chief Executive Officer]

Try to answer it. The market, as we currently -- I repeat it, has the right core is EMEA and the Americas. The Asia Pacific market is a market that Illumina will continue to support and supply products to. The agreement is that later on when we have done development is coming out with the next generation that we are in a situation that we could also supply products to those markets, but that is not something that will happen in 2019.The underlying growth in EMEA and Americas for this business is -- I wouldn't say that it is still growing a lot. It is growing like the normal business within this side. There are, however, clinics that are starting to use more and more and it's also a transaction that we can't control. It's more regarding when territories or, let's say, countries are opening up for genetic testing. There are markets, like, for instance, the one that we are sitting in right now, Scandinavia, Sweden, where you are not doing this kind of testing due to the regulatory situation and the law. So it's mainly today the U.S., Spanish, Russian, U.K. market and it's coming in those -- in other territories too.

[Björn Olander]

Okay. What are you doing in terms of organization? As well, I mean, you have developmental organization. Could you mention a bit more about that business area?

[Thomas Axelsson, Chief Executive Officer]

What we have done there is that we have recruited specialists, building up know-how regarding the genomics, also know-how regarding how to work with the counseling side and this. So it is a separate organization for support, sales and also for development because the development of this kind of chemistry, yes, there is some of that development that we have competence within the current Vitrolife or let's say current old Vitrolife. So we have been able to recruit some staff in that side. What we are using strategic, let's say, advantages of what we can share between each other and that's a synergy that is in customer contact and clinics that are using our products, clinics that are interested in as well Time-lapse as genetics. And of course, also all the overhead and warehouse support on that side -- the logistics. So it is an organization only focusing on genetic know-how and development of products that are for the genomics. The rest are shared.

[Björn Olander]

Okay. The second area of interest is of course EmbryoScope+ in China. You announced it 15th of March, if I remember correctly. Has there been any sales in China yet from that?

[Thomas Axelsson, Chief Executive Officer]

No. Not yet. As Mikael said that we are putting a lot of resources right now in utilizing our opportunity to have EmbryoScope+ that partly was made for larger markets like China, like Japan, big clinics in Europe. But from 15th of March up until the end of March, there's not any sales of EmbryoScope+.

[Björn Olander]

How fast will it go you think with -- I mean, clinics waited for this approval and that they are sort of ready to hit the ground running? Or is this more of a gradual thing that will sort of play out in the coming quarters and years?

[Thomas Axelsson, Chief Executive Officer]

I would like to say yes on both of them. Yes, we will see customers that have been waiting on it because it fits quite well into the larger structure. So yes, we will see and I expect good growth of EmbryoScope+ in China. I also believe that the Chinese markets and the openness and how they view upon, let's say, the different kind of tools that they are investing in that Time-lapse is something that Chinese customers are viewing as a very, very good tool. And the competition will increase, but I do expect that more and more clinics will go for Time-lapse. And that will be from us or from the competitor. I'm not going to do any long-term, let's say, guess on that side, but Time-lapse will for sure grow in China.

[Björn Olander]

Could you also remind me how the genomics side is in China? I mean you're not part of that yet at least, but how Time-lapse versus genomics parts in China?

[Thomas Axelsson, Chief Executive Officer]

That's a big question regarding genomics. And I will not go into that because you probably are reading articles about what they do in China. What I can answer is that I don't see any conflict. I mean there could be a conflict that was 5 years ago in U.S., for instance, should they invest in genomics or should they invest in Time-lapse. I don't see the same kind of discussion going on in China. And I don't really believe that genomics will take the kind of part in China that is done in the U.S.

[Operator]

There are no -- we just had another question and it's from Victor [indiscernible] of EBG.

[Unknown Analyst]

I have a follow-up question. I'm not sure if you mentioned it earlier, but do you have or provide any geographical split for genomics? I assume that a majority of sales contribution is derived from the Americas. Is that a correct assumption?

[Mikael Engblom, CFO & Investor Relations]

Yes. That's a correct assumption and -- but we don't provide any detail split of the genomics per region. At the moment, we are only having distribution rights in North, South America and the EMEA region. So all sales are in those 2 regions, but the majority of sales are in the North and South America.

[Unknown Analyst]

All right. Perfect. And also if it's possible to quantify somehow the negative margin impact from genomics as well? If you could sort that out somehow?

[Mikael Engblom, CFO & Investor Relations]

Yes. So what we have guided is that we believe that genomics will contribute to about 10% revenue growth in 2019 compared to 2018. And that EBITDA growth will be 3% to 5% compared to 2018. So that will be margin diluted then, all else equal. So the biggest impact of the reduction of gross margin from 65% to 63% is due to the genomics product. So that is the answer I can provide you with that.

[Unknown Analyst]

Do you see that dilution somehow vanishing during the year or improving towards the end of this year that have largely negative effect in the beginning.

[Mikael Engblom, CFO & Investor Relations]

Well, it will of course be a function of the product mix. But the margin that we will have on these products that we are distributing for Illumina will be pretty stable if you look on the margin on the products. And the opportunity for margin improvement for the genomics business would probably be when we launch a new generation products and how that gross margin for that product will look like when it's a product that we've [ build ] ourselves.

[Unknown Analyst]

Sure. And how should we look at the cost base moving into Q2 and forward? With a perhaps ramp-up in marketing in China for example, how should we look at this?

[Mikael Engblom, CFO & Investor Relations]

Yes. We don't do any forecast when it comes to the cost base. But over time, it has been relatively stable if you look on operating expenses in relation to sales, so I would foresee that going forward. We have guided that we expect already costs in relation to sales to increase somewhat over the coming years. Gross margin -- then this effect that we see in the first quarter, I would expect us to continue to see the effect of the genomics gross margin impact during the rest of the year.

[Operator]

There are no further questions on the line, sir. Oh, we do have 1. They just seem to be coming in last minute. Daniel Albin of Danske Bank.

[Daniel Albin, Research Analyst]

So I wonder if you can update us on the commercial time line regarding the rights of CrossBay Medical? Have you received any greater clarity or how should we view this going forward? You did some write-downs in the Q4 report?

[Thomas Axelsson, Chief Executive Officer]

Yes. We did -- Hi Daniel, this is Thomas. Yes. We were predicting and it's not any change in that business, that delay in product, let's say, a product setting into the production and some of the changes within the product. So it's not any change from before. And what we've said that we are delaying it with -- about a year before the compensation of it.

[Daniel Albin, Research Analyst]

Okay. Got it. And I wonder if you can just update us on your total market share as of today?

[Mikael Engblom, CFO & Investor Relations]

Yes. So it depends on how you view the market. We believe that the sales of disposables and equipment through IVF clinics constitute about SEK 10 billion. And given that our sales are about SEK 1 billion, that would imply that we have a 10% market share if we view the market as the total disposables capital equipment market. If we -- well products that we currently target, which is since we don't target all the products that these clinics purchase, we believe that our market share is in the region of 20%.

[Daniel Albin, Research Analyst]

Okay. Got it. And on the competitive field, are you seeing new competitors or increased competition, for example, within the Time-lapse segment and also the Media business?

[Thomas Axelsson, Chief Executive Officer]

Yes. Competition will always increase and it will always change. The question is just what kind of product development and how are -- what are we doing to compete with those things.On the Time-lapse side, yes, competition is coming in. We had, as you are aware of, different kind of products. We have -- for single -- for -- let's say, just 1 use, the provision we have the version where you can look on 6 embryos and the current [ model ] on 15 embryos. And that's something I do think is important going forward that is going to be first a differentiation on hardware. But personally also, I do believe that the biggest differentiation will be within the software. And if the software support that is going to open up the market. There are maybe around 15% currently of all the cycles being done by Time-lapse. There's a couple of reasons behind it, but I would like to say that 1 of the major reasons is that it is complicated. Even if we don't think it is, even if it isn't for some of the customers, it is still a new tool. So by providing easier software, I do think that market will grow and that's the reason why I personally believe that the artificial intelligence by image recognition is definitely a good way moving forward. If we are then looking into the Media side, yes, the competition will increase domestically in China and also in some of the emerging markets. To some extent, I also think it's going to decrease in other markets due to the regulatory situation. So you need a certain size to be able to afford the regulatory approvals with all the kind of processes. So with the growth of this business and more regulated business, the consolidation and the growth from us, for instance, CooperSurgical and from some other players is going to be a new competitive situation then. So that's about it.

[Operator]

There are no further questions on the line now, sir.

[Thomas Axelsson, Chief Executive Officer]

Okay, if that's the case. Thank you very much for listening in and have a very good day. Thank you.

[Operator]

Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect. Speakers, please stay on the line.