Vitrolife AB

STO:VITR

Earnings Call Transcript 2023-Q2

[Operator]

Hello, and welcome to interim report Q2 2023. My name is Ben, and I will be the coordinator for today's event. Please note, this call is being recorded. [Operator Instructions]

I will now hand over to the host, Mr. Jon Sigurdsson, CEO, to begin today's conference..

[Jon Sigurdsson, executive]

Yes. Thank you. Good morning, and welcome to the conference call for the interim report second quarter 2023 for Vitrolife Group. Today, July 14, and the time now is 10 o'clock. My name is, as said before, Jon Sigurdsson, and I'm the Interim CEO here. I am here together with our CFO, Patrik Tolf, and we will talk you through the investor presentation and thereafter open up for questions. You will find the presentation on our new website vitrolifegroup.com. Let's go to Page #2.

The APAC has been exceptionally good for this quarter as well as for the whole 2023. For the Vitrolife Group, we increased our sales with 9% to SEK 905 million. Excluding discontinued business, our sales growth was 10% in SEK and 4% in local currencies. The growth in the market regions as well as our business areas are different a bit during this quarter. We -- with exemption of the COVID recovery in China, we see that the number of IVF cycles is returning to more normalized level, although there is still big differences between and within regions.

We also see that several countries have introduced or about to introduce reimbursement programs, and this will increase the underlying growth in the future, both the medium and long term. During the quarter, we have -- we had a moderate growth in EMEA, a decrease in Americas and a solid growth in APAC. Our business area level, technologies and genetic services declined slightly, while our growth in consumables was particularly strong during the quarter. We believe that the cycle -- the high cycle growth has put a [indiscernible] effect on technology investment as many of our customers delay their investment to keep an interrupted workflow in the post-COVID period.

Now let's move into performance. Net of nonrecurring warranty provisions, the gross margin run rate was 56.5%. The margin was driven and impacted by growth and the product and the market mix. EBITDA adjusted for the nonrecurring costs increased to SEK 299 million or 33% EBITDA margin. Vitrolife continued to generate a very healthy operating cash flow, and we increased the operating cash flow to SEK 211 million for the quarter. And for the year, to SEK 372 million for the first half year.

Now Patrik, over to you.

[Patrik Tolf, executive]

Thank you. And let's move on then to Page #3. And as Jon said, I mean, the growth in the market regions differed a bit throughout the quarter and also to repeat that the markets and in terms of IVF cycles are returning to some kind of more normalized level with the exception of China that also has a big impact on APAC, although there are still differences between the regions as we see and also within the regions.

Looking then on our sales performance per market region. In local currencies, the growth was then summarized to 4%, and that is excluding the discontinued business for the quarter. So I will start then with Americas where we decreased our sales with 6% for this quarter. We continue then to grow our consumables business and the client in technologies.

Technologies in Americas is from a small base and has normal quarterly fluctuations. Genetic Services was impacted both on customer and product mix. Americas then market-wise, we continue to grow in South America, although again from a lower base, and during the quarter, we also then was impacted by new customer gains that we have in U.S. that was offset then by a large clinic chain that decided to in-source the basic PdtA testing. And throughout the year, we have seen several changes in the genetic testing market in the U.S. where some players within Genetics, now focused on other genetic testing areas. This gives opportunity for us, which we have taken and we grew in specific areas like carrier screening testing as one example. And we will continue to strengthen our capabilities in U.S.

The growth in EMEA was 3%, and that again shifts a bit within the region as well and the growth regional-wise is driven then from North and Central Europe as well as Middle East, strong and robust growth of our consumables products across the line. Genetic Services grew -- continued to grow strongly in Middle East. This quarter, offset a bit by a decline in the northern part of Europe.

Technologies made some major gains and major accounts in the North and Central Europe during the quarter, but also offset them by large installations that was done during the last year. Growth in APAC, 19%, and we grew within all business areas. Growth was strong in several markets, particularly Japan, Southeast Asia and also China. And we have seen that the activities in China has continued to increase during this quarter, but is still impacted by COVID.

So moving on to the next slide, Page #4, where we look a bit into business area consumables. So all in all, growth of 24% in Swedish Krona and 17% in organic growth in local currencies with a solid growth in all product areas, media, disposable devices and also the genomic kits that we sell through the business consumables.

Our focus is on scalability and the investments that we have done previously to increase the production capacity of disposable devices. [indiscernible] has enabled growth in all market regions. We have, of course, very high-quality standards. And during this quarter, we have scaled and ramped up our production on media, particularly to meet the increased demand, particularly that comes from APAC and China, more specifically.

So moving on to Slide #5 on Business Area Technologies. And as we know, there are continuously some volatility over the quarter for our installations depending on the clinic's ability to take on the installations of our systems. The growth within technologies is continuously driven by standardization within the consolidation of the clinic change, focus on improving the workflow in addition then to use the EmbryoScope as an embryo selection tool.

We have strong pipelines and strong interest from customers to use our EmbryoScope, supported then by our iDA capabilities -- AI capabilities of iDAScore. That becomes continuously more standard of care in several markets in APAC and EMEA.

For the quarter, we declined the sales of 2% in SEK, 7% in local currencies. Americas dropped 38%, but is impacted by some installations to customers in South America, primarily last year. And in U.S., we continuously see opportunity for the EmbryoScope as we are focusing on workflow and efficiency gain for clinics using biopsies that can gain additional workflow improvements on using our equipment.

In EMEA, we did some major installations to customers this year, but also last year, and hence, we see a decrease on that side. And APAC continued to grow, and we see it continue to grow in primarily Japan. And as we have seen in other markets when it comes to recovery from COVID to see that the consumables product normally comes first and thereafter investment into technologies. And that is what we now expect in China going forward as well where the recovery has started then on the consumable products.

Investments into technologies is another budget and will probably come later on during this year and into next year.

Moving on to Page #6 on Genetic Services. Starting then where we then declined 1% in Swedish Krona and 4% in local currencies for the quarter. And that is, of course, then excluding the discontinued business on that side. Starting then with the largest market for Genetic testing, which is Americas, where we, during this quarter, declined with 10%. We increased by 10% during the first quarter. We continue to grow solidly then in South America, but the base is lower than compared to North America.

A couple of things have impacted during this quarter. Firstly, if we're then starting with the customers, we have done some changes there as well. We have a strong position continuously amongst large clinic change. One of them has decided to in-source their basic testing. And we have also been able to gain new customers that offset the majority of that lost sales, which is really good. And as I said initially, we have also now started to strengthen our products and services portfolio and will now also then start to sell the newly launched SmartPdtA plus, that will continue to be competitive when it comes to the embryo testing on that side.

Secondly, there has been some changes then within the genetic testing market. Some players working within Genetics has decided to focus on other things, which is an opportunity that we have taken and grown into areas like carrier screening testing as one example. We have also then seen a bit of a change when it comes to the product mix, where we are gaining again on the embryo testing. Not only in PdtA, but also on PdtM but we have declined in our Endometrium testing ERA on that side. So that is one of the big drivers for the decline that we've had in Americas throughout the quarter.

Moving on to EMEA, where we had a moderate growth, continuously then a strong position on EMA, but has been in Middle East, but it has been a bit offset by moderate growth in northern part of Europe. In APAC, we continue to grow. We grew with 9%, and that is driven then by growth in key markets like Japan, Taiwan, with Endometrium testing and embryo testing PdtA and ERA on that.

Moving on to Page #7, where we then summarize the financial highlights. And let me repeat then. We have then a growth of 9% in Swedish krona for the quarter, and that is then equivalent to 10% in Swedish krona for if we then exclude the discontinued business. And the growth in local currencies organically is then 4% if we then exclude the discontinued business.

Gross margin for the quarter was impacted by a nonrecurring cost that excluding that one, gives us a run rate of 56.5%. Margin was impacted positively then by the growth that we have particularly consumables, but negatively impacted by the market and product mix that we have, particularly then in Americas. But with a lower recurring cost base that we have for Genetic Services that is also continuing to be a positive driver for the gross profit.

EBITDA level, we increased that one to SEK 299 million is then the like-for-like then giving us an EBITDA margin of 33%.

Moving to the next slide on operating expenses. That increased with 7% to SEK 317 million for the quarter, and that was driven then by investments into sales and marketing activities, such as ESHRE, the big conference here that was done in the end of the quarter. and also relating to personnel costs on that side. We have a -- since the majority of our operations and staff are located outside of Sweden, of course, we have a negative impact on currencies, which is approximately half of the increase on that side.

Exploratory research focus, R&D cost is then slightly lower compared to last year, and that is primarily dependent on that. We have done the agreement on the foundation that was signed in the beginning of the third quarter last year. So that is an impact that you see on the positive side throughout this quarter.

Yes. So moving on to the next slide, which is then again a summary on the key financials. To highlight a few things here. Sales SEK 905 million, and then we have the adjusted gross margin, which is 58.1%, and that's where we adjust then for the amortization of acquisition-related intangible assets. EBITDA margin, 33%, and we continue then to strengthen the operating cash flow on that side. So that increased by 17% for the quarter, giving us then a strong cash flow both for the quarter and then obviously for the first 6 months of this year. And this gives us then a lower net debt to EBITDA on a rolling 12-month basis. That now is 1.3x compared to last year, 2.4. Then I'll leave it back to you, Jon for some final comments.

[Jon Sigurdsson, executive]

Yes. Thank you, Patrik. The takeaway for this quarter is that the fertility market is returning to pre-COVID competition with admittedly some post COVID challenges for both us and our customers. Cycle growth are returning to the normal, reflecting our solid growth in our consumable business and our ability to deliver on our new global sales and marketing setup where -- which we have previously communicated. And makes us able to extend our market reach, both geographically and with extended product reach. This gives us excellent possibility to benefit from healthy underlying cycle growth and structural changes in the market, where we will benefit from our extended product portfolio and our broad [ portfolio ] slab services range.

And that was very apparent of ESHRE as Patrik mentioned, the main trade show for the industry that was held in the last of the quarter -- the last quarter in [ Coppeen ] 2 weeks ago, where we introduced a host of new products and services, cementing our position in the forefront of the development of the IVF industry. This includes new and better Genetic texting, upgrade of our media product reins and devices that will not only promote clinical outcome, but also help with workflow in the clinics.

All our technological platforms are well suited for the new AI development and is integrated part of development going forward. Although we are well positioned to benefit from a healthy line market growth, expand the product portfolio and long and well this position in the market. Thank you. And now we can open up for questions.

[Operator]

[Operator Instructions] The first question comes from the line of [indiscernible].

[Unknown Analyst]

I have a few questions, and I'll take them 1 by one. If we start with genetic services, so I would like to hear your assessment of the balance of loss and gain customized here? And also when we look into the second half of the year?

[Jon Sigurdsson, executive]

I can start here, the genetic services. I mean we also mix out, of course, as you see, we have a growth in APAC, we have a considerable decline in U.S. The reason for the decline there is kind of let's call it, a very critical article that was published on our ERA testing claiming that the ERA testing was not beneficial for the patient of IV -- our patients. Partly this is true. As we have never promoted ERA testing for the general patient group. We have -- but it's very, very valuable for the recurrent patient coming in and couples having problems with conceiving.

Now those have -- we have about 15% of couples -- recurring couples. And we have a very solid very solid proof that this is very beneficial for them. And -- but it has to be said that some of our customers have been very aggressive describing it to the general public. And that is the battle we are facing now. We believe that in the future, this will stabilize, and it will be used in the recurrent couples, which is about 15%.

Only 2% of those are being held by ERA testing. So there is a lot to gain there. And in our view, this is the main reason why this development is happening in U.S. Do you have anything to add, Pat?

[Patrik Tolf, executive]

No, I think you covered it well. And going back then to the mix of PdtA and as we see, I mean, there are some clinic change that have decided to in-source their basic PdtA on that side and genetic services has, in U.S., particularly been focusing on big IVF clinic chains. But of course, there are more clinic chains and more clinics that we are also working with now as well. So I mean, we've been managing to offset the loss, call it, from some clinic chain, to new customers on that side as well.

So that we have an opportunity to do, which we have captured during the second quarter as well.

[Unknown Analyst]

Okay. It's a short follow-up on the ERA test. Do you have any sense of when this sort of pressure on that will reverse? Or have you seen any changes recently?

[Jon Sigurdsson, executive]

No. I mean this article came out in the beginning of the year, and it created a lot of kind of disturbance in the market. And it was harshly written concluding with a far reach conclusion. And some of the claims there are right. I mean we have never recommend ERA testing to be used in the general public and general patient groups. But this is one of those things that have to flow over and stabilize. There are some customers that are kind of hesitant to use it now. There are others that have never wavered and those -- and we believe that this will just stabilize, it will take some time, but it will stabilize. And we believe there's a -- there's still potential in ERA testing.

[Patrik Tolf, executive]

And maybe to add to that one. I mean we have -- we are the pioneers within this area, but we are not alone. I mean, we have one of our big competitors also offering similar products on this one. So that also, of course, gives us a bit of comfort on that side that there are additional opportunities. We, of course, have the biggest market share within this field today. And we'll continue to work together with our customers to get this really successful continuously going forward as well.

[Jon Sigurdsson, executive]

And it's very important to understand that this is not something that somebody else is taking market share from us. This is some customers that are wary of describing ERA testing cost of this discussions within the industry.

[Operator]

The next question comes from the line of Ulrik Trattner calling from Carnegie.

[Ulrik Trattner, analyst]

Great. And I have a ton of questions and we can start off with the ERA testing and your statement there that's 2 out of 15% of patients having more sort of being more problematic are currently using ERA tests. But just how big is the current penetration in the U.S. out of the sort of overall population?

[Jon Sigurdsson, executive]

I believe it isn't that 3% plus/minus -- so there is a 15% of recurring couples and the penetration is, we believe it's 3% plus/minus.

[Ulrik Trattner, analyst]

Okay. So if you were to switch to patients that have been overly subscribed to the ones that actually need as you would still have a considerable growth opportunity?

[Jon Sigurdsson, executive]

That's correct. Absolutely. So Yes.

[Patrik Tolf, executive]

And we talk about the risk patients and reextend and recurring implantation phase on the -- and that is seemed to be something in like 15% of the patients.

[Ulrik Trattner, analyst]

And perhaps going back to Jacob's question here earlier on the call, when you're expecting to see this trend abating. I know the article was out earlier this year. Are you doing anything on your own in terms of clinical studies. You also talked about new products being launched and out base being under market, PdtA or Pdt plus also being on the market. So when should we balance this and see that generic services are back on track and actually growing?

[Patrik Tolf, executive]

I mean, of course, we are doing a lot of things on the side on the Endometrium test specifically, I mean, again, we are upgrading SSA, EMA and [indiscernible], who are also that testing done when it comes to the timing of the implantation on that side, supporting then the transfer of the embryo. That is one thing.

We are also speeding up a bit on additional clinical studies on this one. Of course, we have a lot of experience. This is one article -- there are several other articles that talks in favor of ERA. So of course, that will continue. But we will, of course, work on additional clinical studies to our conviction that this is really value adding on that side. So what we do on the endometrium side.

When it comes to other testing that we are improving here as well is what you said here, it's the smart PdtA plus as we call it, which is then an upgrade on the existing PdtA test on that side that contains additional features that will be launched during end of this quarter, beginning of the next quarter, throughout the year as well. That will continuously then strengthen our position within PdtA. And for us, of course, it's important to be competitive on that area. So that we are taking a lot of actions on as well.

[Ulrik Trattner, analyst]

Okay. Great. And as well as on genetic testing, looking at the rest of geographies and your comments, it sounds like the price pressure you have experienced throughout the last few years is abating the trend from Q1, looks to be consistent here in Q2. Is that what you're currently seeing as well as I know that you're talking about taking market share in Embryo mapping, which is bread and butter type of genetic test -- so you're grabbing market share, I'm guessing, in those areas as well?

[Patrik Tolf, executive]

We continued, I mean, to, well, expand that business, so absolutely so. And also, I mean, when you think about then the next generation of PdtA of course, that will since that increases more features as well, there will be additional activities on the pricing for that time as well. So those kind of things will also be positive for us going forward as well.

[Ulrik Trattner, analyst]

Okay. Question on consumables. One being on China, but we can perhaps start off with Europe and U.S., they are growing fast. Looking at your organic growth here in Q2. Is it that you're taking market share? Or are you experiencing that Europe and U.S. are accelerating in terms of its underlying cycle growth?

[Jon Sigurdsson, executive]

We believe that there is an underlying cycle growth. We -- at this stage, we are not prepared to tell you -- I mean, we don't know whether we are taking market share or not. And when that happens, it's probably a mixture of all. But it is a very favorable situation. And we believe that there is, as Patrik mentioned, there is a time -- the time lag in the investment decision on time loss specifically that, I mean, because of the cycle growth the capital investment have been delayed in some customers. We see that in both the U.S. and Europe. And and maybe specifically in China, where we have 2 different budgets. And they are refraining for making investment decisions while there is such a demand on the workflow and the IVF team.

[Ulrik Trattner, analyst]

Okay. Good. And on China, can you give us some more granularity on the current development and trend in China?

[Patrik Tolf, executive]

I mean, again, it's recovering. I mean we saw the, call it, start of the big recovery then at the end of the first quarter on that side, and it was just a month on that side. But of course, it continues. But COVID is not over, right? So I mean it's -- underlying growth is there, but I mean, there comes additional COVID domains in China, as we all know. On that side, that has an impact or has had an impact as well. But going forward, I mean...

[Jon Sigurdsson, executive]

And it has to be said as well that -- I mean, all suppliers are scrambling to meet the demand from China. And we can probably have sold more if we have been able to deliver. And -- and the word we are getting from others, that's the case as well. And so this is a post-COVID headache. It's still been lingering.

[Ulrik Trattner, analyst]

Is most likely linger for beyond 2023 as well, I'm guessing.

[Jon Sigurdsson, executive]

It's probably true.

[Ulrik Trattner, analyst]

A question on the margin side. are you happy with the development? I'm seeing sure some minor improvement on the adjusted EBITDA margin, but I recall you had GPDX in the portfolio back in the second half of 2022, which had a negative impact. You were quite confident in gaining margins in genetic services? And also when I look at the Q2 isolated, consumable was the outperforming part here, and it's a margin driver of your business. So -- are you happy with the margin development currently? And what should we expect going forward? And what should drive margins higher than we're seeing currently?

[Jon Sigurdsson, executive]

Well, it's probably not appropriate to say whether we are happy or unhappy on the margins. And of course, I mean, the margins are going sideways and of course, we shouldn't be happy about it. But on the other hand, I mean, we have a tremendous price pressure out there. So we believe that we've been able to keep the gross profit margin and EBITDA margin that's something. But believe very strongly that there are synergies still in the business. There are some scalability, and that's the most important thing.

And I think that there is an underlying scalability in the business and the like-for-like margins should improve going forward. And I would, of course, know CFO and CEO would be happy for constant margins that should improve and there should be a scalability. I know that it's not a very concise answer, but that's how far we can go.

[Ulrik Trattner, analyst]

Fair enough. Last question on my end. Cooper & Cook merger, they look to be terminating that -- and I know that you don't want to talk specifics about that specific event. But where do you see opportunities here like looking at your balance sheet, looking at your cash flow, are you seeing opportunities to buy products from Cook from sort of that situation? And would it be any product in specific that you would be more interested in?

[Jon Sigurdsson, executive]

Well, I mean we -- I think it's the best not to speculate on it. I mean, we you can read the balance sheet as well as we can. And we have the ability, financial ability to do it, but -- but I don't think we should -- we are prepared to speculate anything on it at the moment. But there is no question that we will benefit from this. And just from the industrial dynamics, we are one of the major players -- we are a very stable player. We have been able to deliver products where a lot of others have not.

And I think long term, all this will benefit the bigger ones. And we are in that and we are in position. Other than that, I think -- I don't think it's appropriate to speculate on and inappropriate to comment on what the competition is to go.

[Ulrik Trattner, analyst]

Okay. That's fair enough. Thanks, Jon and Patrik and I will get back into the queue.

[Operator]

The next question comes from the line of Patrik Ling calling from DNB.

[Patrik Ling, analyst]

Yes. I also have a few questions. Maybe we can start in the U.S. with the genetic service business. I mean we talked a lot about the ERA now. But could you just give us a sense for how much -- the net impact was of losing a large client and gaining a few new. I got the sense that it was still a few percentage points negative on growth.

[Patrik Tolf, executive]

Yes, but not much. It was basically -- I mean, the gains that we have with new customers has more or less offset the drop that we've had throughout the quarter on that side. So it's more or less flat on that side, slightly negative, but not material.

[Jon Sigurdsson, executive]

And it's worth to note Patrik that -- I mean, what -- how I look at it is that the big chains are taking the commodity testing in-house because those are very, very -- those are easy. It's easy to do. It doesn't require much service around it. It's the lowest profit margin from us. But there are 2 things there. First of all, there's a huge vote of confidence in genetic testing that they are doing it. That's the first one.

I mean they are not going out of genetic,testing at all. They are even investing in it. And that means that our further development in our the carrier screening, smart PdtA the in all the new product new services are then -- and we have a very good chance of casting those, which are more profitable and not so easy for our customers to take in-house. So midterm, I don't think it's necessarily a bad development.

[Patrik Ling, analyst]

Okay. So if you think about the large chain that you lost now, did you lose everything? Or did it just in-source certain parts of the operation. Can you already say that you're keeping the high tech high-margin project?

[Jon Sigurdsson, executive]

Yes. That's very typical. Yes, they don't take the more specific testing. I mean what they're doing is that they're taking the -- let's call it -- I don't know whether you can use the commodity testing or more simple ones. Yes, that's the case.

[Patrik Ling, analyst]

And when you're gaining new clients, are they typically less profitable in the beginning. So there is -- even if there might not be such a huge impact on growth, might there be a larger impact on profitability from losing big established customer and -- but at the same time, gaining some new customers?

[Jon Sigurdsson, executive]

Unfortunately, I don't think that is a good point, but I don't think that's the case. I don't think we are -- no, I don't think so. I mean, we gain them at the same price. It's a good point, look, but I don't think so.

[Patrik Ling, analyst]

Great. Great. Then I also had the question. I mean, you talked about China and technology and indicated that there's been a big growth in IVF cycles and technology investments held back a little bit, and it's expected to start growing in the second half of this year and the beginning of next year. But my question when it comes to that is, I mean, we're moving into year of the drug, which has historically been a year where cycle activity in China actually picks up, which -- I mean, it's a little bit contradictory, I mean, because you should expect the underlying cycle growth in China to actually accelerate during latter part of this year and into the beginning of next year. So maybe you can comment a little bit on expectations there.

[Patrik Tolf, executive]

I mean year of the dragon, yes, of course, as you say, I mean, that's happening next year. So that might also potentially continue to boost the growth in IVF cycles in China, absolutely. So on that side. We see, of course, the consumables product coming out first. And of course, there is a big demand of replacing and make new installments of time lapse equipment on that side. The point here is that those kind of installations takes a bit longer time.

First of all, it's different budgets that it needs to go through on that side, but it also needs to have time then to make those installations as well. So normally, in the recovery phase, those comes a bit later on here as well. But of course, capacity needs to increase in China to meet the increased demand here, as I say.

[Jon Sigurdsson, executive]

But there's 1 thing that's very important to come across. And that is we -- I mean, APAC is a very successful and the growth in APAC is not only China. It is actually a very positive trend that there are countries in APAC that are coming in very, very strongly. So the very healthy growth in APAC is not only China. It's across the line.

[Patrik Ling, analyst]

Okay. Great. Got it.

[Operator]

The next question comes from the line of Johan Unnerus from Redeye.

[Johan Unnerus, analyst]

Yes. I have a few. Of course, there are many moving parts, especially in genetic services in the U.S. So this is a bit of a follow-up. What should we expect reasonably short term during this situation will you be able or expecting to protect margins or stabilize margins already this year -- towards the end of this year? Or is this something we should expect more see next year?

[Jon Sigurdsson, executive]

Well, it's Jon, it's really difficult to tell. And when we say it's difficult to tell, it's strong that we don't know. And -- it is -- the issue is very simple. The issue is that there's an article that cut out on the effectiveness of the ERA in with patients -- we believe that the conclusion is not right. We are countering that. We need to calculate customer by customer, and we believe we have indeed evidence on the contrary. How fast that will then rectify the true answer is we don't know.

[Patrik Tolf, executive]

But just to comment, I mean, it's not all about ERA as well. That is one important thing as well. But I mean, all the other actions that we have done, I mean, we launched, as we call it, then the operational excellence program, which is focusing on getting down the cost when it comes to the PdtA testing cost per [indiscernible] well and those kind of test continues to make progress on that side as well. So there are 2 sides of it as well. I mean, as we know, I mean, the fixed cost portion of genetic services compared to consumables, as an example, is slightly higher on that side as it is today.

So the margin will be, call it, more on the volume compared to the other business areas. So we are working on both ends, of course, on the cost and the efficiency on that side and a lot of other activities when it comes to the sales side, as we mentioned.

[Johan Unnerus, analyst]

Yes. And 2 additional on that side. The studies you are undertaking to support or validate the core part of the ERA testing when can that be expected to hit the market?

[Jon Sigurdsson, executive]

Okay, are you referring to the test or the study that we are doing now.

[Johan Unnerus, analyst]

Yes, the core 15% support.

[Jon Sigurdsson, executive]

Okay. Do we know...

[Patrik Tolf, executive]

No. I mean that yes. I mean it will be -- I mean, first of all, to get the whole, call it, market potential penetration up to -- from those, say, to 3 percentage where we could possibly be today up to 15%. That will take some time, of course, for the market to get back to those levels to get to those levels as well. When it comes to our studies on that side, we are working on that side and probably will have something ready by the next year.

[Jon Sigurdsson, executive]

But I mean, it's not like we are -- we don't have anything. I mean we have a lot of material already supporting our claim that for patients ERA is very beneficial. But -- but we are, of course, there is an ongoing study now, but focusing only on risk patients and I'm not familiar -- it's not until next year, we will have a resource there. I don't know exactly when.

[Johan Unnerus, analyst]

Support from Smart PdtA plus is no launch sort of towards the end of this quarter, I suppose. And then what can we expect on the initial take up? It's a bit of a -- perhaps at least part of the market is probably on the tougher side to launch it?

[Patrik Tolf, executive]

I mean the main focus for the launch of Smart PdtA will be initially U.S. on that side. So that we will launch and start selling here a full effect during the fourth quarter for this year as well.

[Johan Unnerus, analyst]

Yes, I think that was most on my part. I mean, overall, of course, the ambition is to improve the capital efficiency, but that's that will come as a result of stabilization and efficiencies and to support the volume as that.

[Jon Sigurdsson, executive]

That's correct, yes.

[Johan Unnerus, analyst]

And maybe also finally, in this situation, of course, the support from the consumables and APAC is -- it is obviously very solid and good period continues and what's the outlook on that side because that's, of course, very important in this situation.

[Jon Sigurdsson, executive]

Yes, correct.

[Patrik Tolf, executive]

Correct.

[Jon Sigurdsson, executive]

Absolutely.

[Johan Unnerus, analyst]

And the outlook is anything to be said on consumables and consumables in APAC.

[Jon Sigurdsson, executive]

Well barring another COVID wave, I mean there is nothing in the cards that should change the trajectory now, but it's -- your guess is as good as ours, of course, yes, I mean, it's -- it should be a post trend going forward.

[Operator]

The next question is coming from Suzanna Queckbörner calling from Handelsbanken.

[Suzanna Queckbörner, analyst]

I'm also going to come back to genetic services. So first of all, you mentioned losing a clinic chain in the U.S. due to insourcing. Do you expect this trend to continue into the second half of 2023. And -- and if so, is this just the beginning? Or have you seen this affect your sales, specifically in the U.S., but also in Europe and APAC already?

And then also -- in terms of these things and the in-sourcing of genetic testing, you mentioned PdtA but is this trend really just PdtA or is it for all genetic testing? So that would be question one.

Then on 2, in terms of the ERA, again, we mentioned the impact on the U.S., but there, as far as I understand, the sales has been declining for a while because of this publication you mentioned. But now at ESHRE, in June, we actually saw the European Society for Reproductive Health announced that they also released guidelines that were somewhat critical of -- and in Europe, particularly in Spain, you see high yields of ERA. So are we to expect that, that is also going -- this decline in ERA sales is also going to be seen in the European market. And then finally, in 2018, you made this exclusive global deal with Illumina for PGT kits excluding China. And we noticed that this is up for a review in 2023. Now Illumina is the most common sequencing platform, but genomic uses Thermofisher scientific. So perhaps you could tell us how we should think about this within your portfolio.

[Patrik Tolf, executive]

Okay. Will you start with the first 1 on the PdtA.

[Jon Sigurdsson, executive]

Okay. So the impact of PGT is I mean what we've seen is that whether this will continue is that there is a trend that the change, the consolidation of the business means that there are bigger change than there is trend of those big chains to take PdtA in-house for in-house testing. And it's a numbers game, of course, and they in-source what they can do cheaper than outsource it. Now we've not seen -- we've not seen other than PdtA because of the cost associated with more specialized testing, and we have not seen seeing those chains take all their testing in than PdtA.

Now whether that will continue -- it's fair to assume, I guess, that consolidation means more in-sourcing of PdtA. However, I mean, we've been able to gain customers as fast as we are losing them. So the net-net in U.S. is pretty much similar than last year in PdtA, so I hope that answered my question. So it's really a question of whether the consolidation will continue or not.

[Patrik Tolf, executive]

And on the second note here, Suzanna , on the ERA. I mean, as I said, yes, the -- the biggest impact has been in U.S. and -- but of course, we do some sales of ERA in Europe as well. And -- we haven't seen such an impact in Europe that might happen, of course, going forward. But of course, then you referred to the guidelines here that comes out of, which is, of course, also 1 thing of the debate backwards and forwards that is going on now within the professions as well here. So we are discussing and debating that 1 backwards and forwards without customers on that side as well. And there are a lot of opinions on this one as always when guidance comes out from ESHRE on that side. On the third bullet here,..

[Jon Sigurdsson, executive]

And it is actually worth mentioning. As you know, Suzanna are probably better than us, is that there is quite a difference of opinion between Europe and U.S. where it comes to genetic testing overall. And there are even a big part of Europe doesn't use it at all. And that is a debate that is going on and part of that debate is, of course, that I mean there is no question that ERA has been over scrapped in U.S. as a typical -- I'm not going to include our customers, but a typical U.S. health care, it's a profit-driven and probably were described more aggressively than it should. And by the way, I mean, our guidelines have never ever recommended ERA to be in the overall population of patients. It is risk patients. And that's what we've always said.

[Patrik Tolf, executive]

And going back to your last question Suzanna about the kits that we then sell, and we continue to do that. We have extended the agreement on that side. And we continue then to do that one. And during ESHRE also did an upgrade version of the carrier map on that side. So we will continue to do that one. But again, it's based on the -- on the Illumina platform. once we -- within next services are also currently using a bit of both on Illumina, but also on Thermo Fisher on that side. So -- that is a question to come back to as time goes on here going forward as well on the platform and the various platforms.

[Suzanna Queckbörner, analyst]

Can I just quickly follow up on 2 things here. So the first question, when you talk about consolidation and in-sourcing impacting largely PdtA would that also embrace?

[Patrik Tolf, executive]

No, that is not on the scope, not.

[Suzanna Queckbörner, analyst]

And then for the final question, if you have kids that are suitable for Thermo Scientific -- well, with sequencing platform for Illumina and Thermo Scientific, -- do you have any issue marketing in both simultaneously?

[Patrik Tolf, executive]

I mean, today, we -- the platforms that we have then within genomics as we called, those are related then to Illumina on that side. So that's what we currently have today.

[Operator]

And the last question is from [indiscernible].

[Unknown Analyst]

I was cut off before, but I have 2 more questions, if I may. So first on Japan. Now it's more than a year since the reimbursement was implemented. I'm just wondering if you're continuing to see higher growth now also when the sort of 1 year in the number?

[Jon Sigurdsson, executive]

The question of -- the answer is yes.

[Unknown Analyst]

Okay. Very clear. And then just lastly on high level on consumer but it's very strong across the board, in my opinion. So I'm just wondering if it's just a reflection of where the market is or if it's anything in particular.

[Patrik Tolf, executive]

Well, I mean it's both, right? I mean it's -- market is recovering here as we have said on that side. And obviously, in particular parts of Asia and China, then it's also that we are benefiting on competition situation in the media product as well. So that certainly helps our position particularly in media in China and Asia, Southeast Asia, particularly.

[Jon Sigurdsson, executive]

And it is probably, as always, there is a mixture of some things. And as Patrik mentioned it a healthy growth in the market and our ability to support to support our customers and [indiscernible] we -- with the supply, both from yes, probably you should not comment on it.

[Operator]

There are no further questions, so I will hand you back to your host to conclude today's conference.

[Jon Sigurdsson, executive]

Okay. So thank you for your participation and a very lively question-and-answer session here. Thanks for that. And I want to thank you for a very short good cooperation as the -- we are all looking forward to welcome [indiscernible] in her role as a CEO as of August 1, and I will step back to my role [indiscernible]. Thank you very much for a short and good cooperation. Thank you.

[Patrik Tolf, executive]

Thank you.

[Operator]

Thank you for joining today's call. You may now disconnect. Hosts, please stay connected.