Xvivo Perfusion AB

STO:XVIVO

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, welcome to XVIVO Perfusion Q1 Report 2019. Today, I'm pleased to present CEO, Magnus Nilsson; and CFO, Christoffer Rosenblad. [Operator Instructions] Please go ahead with your meeting.

[Magnus Nilsson, Chief Executive Officer & Managing Director]

Thank you very much, and welcome to the XVIVO Perfusion Q1 report. I'm Magnus Nilsson, and again, I have Christoffer Rosenblad on my side. You have to excuse me, I caught a cold on my way here the other day from the United States. So I hope that you can hear my voice good. Let's go to Slide #2, highlights from '19 Q1. Reimbursement process for EVLP approved in France. We see very encouraging results from the first 6 patients in the lung study with the heart preservation device. It was presented at the yearly -- the annual heart and lung transplant congress with great interest. We also have presented this device for thought-leading heart transplant surgeons worldwide, and they've shown a great interest in starting clinical trials with the machine. And we have continued strong EBITDA, up 18% even though we have had the high investments in research and capacity during the quarter. Let's go to Slide 3. We have growth numbers. Very proud to present that still we have a good growth, especially the warm non-durable growth, which is 52% in Swedish currency and 40% in local currency. And that's, of course, the most important. The cold Perfadex is growing also at a steady pace. But obviously, the part that's growing more is the 55% or so of the warm perfusion products. Next slide, #4, please. Here, we have the profit and loss statement. The key things to look at here, I think, is the gross margin of non-durable goods. It's 77%. You can see that the selling expenses is stable, about 25%, and same with the admin expenses and a little bit more put into research. One which is definitely an odd thing here affecting this is the stock option program. I mean we are happy with the stock option growth of this year -- the price of this year, but that results in a -- but we have to appreciate the possible payout at the end of the first quarter. And that's the 12% affecting the EBITDA. But yes, without that, it's 18%, which was a very good number. Move us to Page #5. As I mentioned, we have now introduced the machine for potential customers -- the heart preservation device, I should say, with potential customers at a big annual congress for heart and lung transplantation. We had 2 different workshops around lungs and around hearts with great interest. The lung EVLP, there's still a lot of interest in the development, and there was excitement for the new heart technology. Professor Steen was there presenting his groundbreaking research. And Professor Johan Nilsson presented good results from the first 6 heart transplants with the machine in the clinical trial in Lund, which had very encouraging results, which is the basis for us to go ahead with the planning of the multicenter trial that we hope to start soon. More about that a bit later. Slide #7. To enable future growth within lung transplant, we continue to develop the EVLP procedure. We support clinical trials to use more of the organs, especially the non-heart beating donors, so-called DCD lungs. We also support trials with infected lungs. That was presented at ISHLT with very good results. We also look at EVLP protocol development and continue development of the XPS machine to enable more online parameters for better decision-making in order to facilitate better decisions made by the surgeons at the time of the EVLP and continue ourselves to research the possibility of effecting the immunological response to EVLP in order to maybe better the short-term organ function and the long-term survival. So great area, still creating a lot of interest, which we can -- we could note at the annual congress, but also in the number of questions we get and the interest from more and more clinics over the world for EVLP. Next slide. If you look at the R&D pipeline priorities here. What we obviously prio first is the heart transplant project. Secondary is the priming solution with PrimECC. The third and fourth priority -- the third is the liver and kidney transplant; and fourth, the isolated organ, which is more a future -- distant future thing but very interesting. I'll come back to each of these. The next slide is #9. So the heart transplant, a lot of progress in the project during the last 3 to 6 months. We've done a number of large animal studies now. And as before, Professor Steen showed that with the avoidance of non-oxygenated time, you could get a much better organ quality. You can have much longer preservation time. It also was shown in the Nature article, pig to monkey transplant, which showed very good results with the machine. And as I said, the first -- safety part of the clinical study at Lund University Hospital on 6 patients show that hearts could be safely preserved with this non-ischemic heart preservation method, resulting in successful transplantations and avoiding ischemia. Ischemia which means -- ischemia means non-oxygenation. Avoiding that reduced the risk for what's called reperfusion injury, which is once the organ is put into the recipient, it's to avoid the immediate reactions to the organ. And we can see that this method has very good solid proof in preclinical large animals, and now we get the first results in humans, which is encouraging and are encouraging us to go ahead and plan the multicenter trial, which is very much on its way. Page #10. And there has been, as I said, great interest from all over the world from Australia and United States and Europe to use this device in trials. And we are planning multicenter trials in all of these major markets. Now we are involved in ramping up production of the machine, the disposables and the solution, and we are awaiting regulatory approval to start the clinical trial in Europe. Next slide, # 11. That's PrimECC which is a little bit different from the other products in that it's a product that is used on several hundred thousand operations per year when using the heart-lung machine, so open-heart surgeries. And then the product is primed into this heart-lung machine before it can be used. And that solution then comes into the body of the patients. And to avoid the very well-known side effects with these previous PrimECC solutions, this was constructed by Professor Steen on the basis of what's been -- he learned from the organ preservations. And the product is patented in all major markets. It's CE marked already. We've done the 40+40 patients in Gothenburg. So it's safe to use, and it improves fluid balance and reduction of side effects. So we are -- we have to move production to fulfill the new regulatory demands on the bags that the solution is filled in. And that is now coming to a run -- the first production run with full scale. It's planned end of Q2, which means that we can go into more intense preparation for the multicenter trial, and there's big interest in Europe to start this trial. The difference here is that from the other products is it's already CE marked, so we do this to get more clinical documentation in order to show the benefit of the product in this huge population of patients. Next slide, #12. We are looking for the rest of the year. We can say we prioritize the thoracic transplantation surgery, which is our primary focus. In lungs, we'll continue to develop EVLP technology. We'll continue to build and support clinics, new clinics that start up their EVLP and also old clinics where we retrain crews. We go out and help them in problem-solving and retrain them for using the technology. In the heart, we prepare, as I said, for several multi study -- multicenter studies, first in Europe. We prepare, and we hope we can get the regulatory approval soon. And then, with PrimECC, we prepare for multicenter study again in Europe for increasing the clinical documentation. On the abdominal side, the organs liver and kidney, which is the secondary focus, we continue to support clinical development in liver transplantation and kidney transplantation with the STEEN Solution technology, so far with good results. So the long-term goals: solidify the position in -- as a leader in thoracic surgery. For us, it's lung transplantation, heart transplantation and PrimECC; and build a new business -- a new area of business, you can say, on the abdominal organs, which you've seen the same STEEN Solution technology in these organs. Thank you. That was the presentation for today. And we are ready for questions.

[Operator]

[Operator Instructions] And our first question is from Daniel Albin from Danske Bank.

[Daniel Albin, Research Analyst]

So I have a couple of questions. And the first one is really on the working capital during the quarter, where you tie up some more capital. And your stated argument is durable goods. I'm just wondering if you are building on the back of demand, for example, the XPS. Could you give us some more granularity on that?

[Christoffer Rosenblad, CFO & Executive VP]

Yes, yes. It's Christoffer speaking. Yes, that is correct. The durable goods are the XPS. So we are building up stock of the XPS in order to be able meet the demand of the product.

[Daniel Albin, Research Analyst]

Okay. So should we expect to see some further or some stronger sales of durable goods in Q2 then?

[Christoffer Rosenblad, CFO & Executive VP]

I would say the interest for the XPS is quite constant. Then when it comes to closing the contracts, that could -- as we saw in Q4, for example, we more or less depleted the stock end of Q4 when we had 4 delivered XPS. So I would like to say that the demand is quite constant. However, when we ship them and deliver them has to do with a lot of administration side of the hospital. So it's hard to pinpoint an exact quarter. But yes, there is still a high interest for the XPS. And especially, we saw that during ISHLT now, but there is an increasing interest for EVLP and an increasing interest for the XPS and to use it.

[Daniel Albin, Research Analyst]

Okay. All right. And to my second question on the heart preservation project. If you -- could you just give us some time frame both regarding when you think that patient recruitment could be finalized and when initiated and also, if I may, on the total cost for the whole study and thirdly then the potential market launch?

[Magnus Nilsson, Chief Executive Officer & Managing Director]

Yes. That's good questions but maybe a little bit hard to answer. We expect to take about a year for the inclusion depending on when we start. We're hoping to start this summer, hopefully before vacation time. But it depends on the regulatory authorities. We are planned and we are ready, but we need some -- they've got some questions, and there's still a good possibility we can start before vacation. Otherwise, we'll start directly after. And then we plan the inclusion time to be about a year. That's always hard to say, but that's what we plan for. This is a pivotal trial. So we hope with good results that, that will be the trial we need to make a CE mark. But again, inclusion time is 1 year, and the follow-up time is 1 year. So by that calculation, between 2 and 2.5 years, something like that would be reasonable guess. But that is, again, only a guess because we all know things can take longer or sometimes shorter time to perform.

[Daniel Albin, Research Analyst]

And also, on the cost for the whole study?

[Christoffer Rosenblad, CFO & Executive VP]

For the cost side, there are 2, let's say, main buckets. First one is Europe, where we know it's a lot cheaper than the U.S. And the cost there we will estimate around half of the U.S. And what we learned from earlier EVLP studies in the U.S is that PMA study cost now between 50 million to 100 million, and we estimate that the cost would be around that as well for U.S. heart study and then around half of that for European study.

[Daniel Albin, Research Analyst]

Okay. Got it. And to my last question. I guess you already noted that TransMedics recently filed for an IPO. I'm just wondering how you think we should view it in terms of their technology versus yours, both the pros and cons. And then also, if -- should we expect to see some more competition at attractive clinics?

[Magnus Nilsson, Chief Executive Officer & Managing Director]

Yes. Their -- if you could take up the question with transparencies, it's important to point out the difference. So TransMedics has a transportation device for lungs approved, for normal lungs. But it's not approved for evaluation for marginal lungs. So the machine is made for transportation. They have a similar device for warm -- transportation of warm beating hearts. Our structure is different. We believe, and I should say most of the clinicians believe, that during transport having a beating warm heart is very difficult. It's a very risky procedure while having a cold, blood perfused and oxygenated heart and non beating is much more safe. And as shown in preclinical, that works very well. So it's a big difference in the technology in that sense. They also do not have proprietary solutions. They use blood from donors for their heart machine. And they use Perfadex -- a kind of Perfadex, very close to Perfadex for their lungs. So it's big differences in technology, I would say. That is -- will it be competition? Yes, I think it's a little bit of competition. But I think we welcome competition because we can show then, hopefully, as we've shown so far that we can very well match all competitions, which is always good when it comes to pricing and everything. So there is a little bit of competition, but you have to remember that XVIVO comes from having proprietary solutions, which were -- which is physiological [indiscernible] and more science-driven, which our competitors do not have. So you can look at other competitors also. There are a few others. And I think almost everyone have no proprietary solution. They use nonproprietary solutions in their machines. So I think that's the major difference between us and the competing -- or at least the others on the market.

[Operator]

[Operator Instructions] And our next question is from Arvid Necander from Redeye.

[Arvid Necander, Analyst]

Yes. Can you guys hear me?

[Magnus Nilsson, Chief Executive Officer & Managing Director]

Yes, we hear you.

[Arvid Necander, Analyst]

Okay. Perfect. So a couple of things. I wanted to begin with what you said about achieving reimbursement coverage for the full EVLP procedure in France. I was wondering if you could elaborate a little bit on how that will look? Will it be a similar model as in the U.S.? And/or is it added to the total transplant budget? And what kind of coverage are we talking with the new coverage?

[Christoffer Rosenblad, CFO & Executive VP]

Yes. It's Christoffer. It will be same type as in the U.S. So it can cover the material and the process of the EVLP as well, which is similar to the CPT codes in the U.S. It's a slightly different structure in France obviously, but the essence of it is similar, yes.

[Arvid Necander, Analyst]

Okay. And will it be covered at a similar level in terms of monetary value?

[Christoffer Rosenblad, CFO & Executive VP]

Yes. In terms of amount, it's obviously cheaper in France. It's not the same amount, but it would cover the same costs.

[Magnus Nilsson, Chief Executive Officer & Managing Director]

Yes. It's -- I would just say I talked to the surgeons there in Paris, and they were very happy with it because it will cover all their cost for EVLP, they told me.

[Arvid Necander, Analyst]

Okay. All right. Yes, that's what I wanted to hear. And then I also wanted to take you guys on -- up on something that was mentioned in the annual report, where you guys compared the utilization rate today when it comes to lungs of about 22% of the donated lungs being used and the potential was mentioned as 40%. I was just a bit curious on what you based that on. Is that a sort of a realized potential that you see? Because I know that some trials have indicated a higher utilization rate. So I just wanted to ask what that was based on.

[Magnus Nilsson, Chief Executive Officer & Managing Director]

We can say utilization of lungs differs with -- around the globe. It's in the United States a little bit above 20%. I know that in other countries, a bit higher. I think in some countries 30% or so or even some place -- a few places, more than that. What we're seeing in the clinical trials is that the -- we looked at marginal lungs, so that is lungs that would not have been used otherwise. And we see that between 50% and 75% or even higher, 80% of those lungs were actually used. So it's an estimation that we have picked up from different directions really, and we're talking to clinicians about what's the lungs they use today and which lungs they do not use today. So this is just an estimation, but it's not very far-fetched in the sense that in the trials we've seen that a lot of the lungs that were picked up could actually be used.

[Arvid Necander, Analyst]

Sure. But do you see that 40% as a sort of realistic realized scenario? Or would you say that, that's a conservative estimate from your side when you estimate the market?

[Magnus Nilsson, Chief Executive Officer & Managing Director]

Yes. I think -- I mean, obviously, it's hard to say, but I think it's a very fair estimation. And then I think we'd still be conservative. A lot of people have -- other people -- a lot of other people make much bolder estimations of the number of lungs actually that actually can be used. And you can see that also that -- as an example, if you go to a large center that just make, let's say, 100 or more, they are more prone to take not-so-good lungs and transplant them whilst a smaller center would be more conservative. And I think the EVLP machine is helping a lot of the centers to take away some of the risks of using these organs. But you can see that big difference between the clinics, what kind of lungs they use. So I think 20 -- I mean double that number from today is quite reachable, I would say.

[Operator]

And our next question is from Daniel Albin from Danske Bank.

[Daniel Albin, Research Analyst]

One more. So just looking at the cold preservation segment and trying to understand the organic growth year-on-year. Excluding the FX, that segment is basically flat in the Q1. I wonder if you could just -- the volume aspect of this business, are you flat? Or is it price reductions? Or can you say something about the development?

[Christoffer Rosenblad, CFO & Executive VP]

Yes. Basically, we develop over time in line with the lung transplant markets in number of lung transplants made, since it's used in, more or less, all lung transplants. Then again, a quarter could shift from one quarter to another. So there's no, let's say, big issues if one quarter is a little bit lower than the other one. It could be onetime effect.

[Magnus Nilsson, Chief Executive Officer & Managing Director]

But there's no price reductions. We have not lowered the price anywhere, no.

[Christoffer Rosenblad, CFO & Executive VP]

No price reductions.

[Daniel Albin, Research Analyst]

And you -- to get your grip on really the market growth, are you still expecting it to grow at around 6%? And really your...

[Christoffer Rosenblad, CFO & Executive VP]

Yes, something like that. It's historically been between 5% and 7%, and we think it will continue.

[Operator]

And as there are no further question at this time, I will hand over back to the speakers for any final comments.

[Magnus Nilsson, Chief Executive Officer & Managing Director]

Yes. Thank you. Good to have several questions this time about this. We are very proud of the Q1, continue keeping up the very good growth in the warm area and seeing progress in our development projects. And I hope you will be back when we present the Q2 in July. And meanwhile, I thank you very much for the interest.

[Christoffer Rosenblad, CFO & Executive VP]

Thank you so much, and talk to you 12th of July next time.

[Operator]

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.