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Good day, and welcome to the Biocartis Half Year 2022 Results Conference Call. Please note that today's conference is being recorded. I would now like to turn the conference over to Herman Verrelst, CEO of Biocartis. Please go ahead.
Thank you, operator. Welcome, everyone, and thank you for dialing into today's conference call. My name is Herman Verrelst. I'm the CEO of Biocartis, and I will be presenting today together with Jean-Marc Roelandt, our CFO. Let me pause a moment for you to read the usual notices and warnings. And then we'll get started. 2022 was a successful year for Biocartis in many respects, both operationally as well as financially. I will run you through the many highlights against the backdrop of a strategy recap. And Jean-Marc will then take you through the 2022 financials, after which, I will comment on our expectations for 2023. We will be using our updated corporate deck today that we made available earlier this morning.
We'll try to be brief to allow for ample opportunity to ask questions, and I will therefore not comment on every single slide in the deck. At Biocartis, we work hard to accomplish our mission of enabling universal access to personalized medicine for patients across the world by making molecular testing convenient, fast and suitable for any lab. We are encouraged by a growing number of customers that have embraced Idylla, superior sensitivity, ease of use, faster turnaround time, fully integrated workflow and multiplexed analysis and that on a wide variety of sample types, including liquid biopsies. Complex diagnostic test results become available in minutes or hours instead of in days or weeks and much closer to the clinical decision-making point, all to the benefit of patients. And we do this both in oncology, our core business and in infectious disease testing. Over the years, we have built an abundant independent evidence that validates our solution, including from customers such as Memorial Sloan Kettering Cancer Center, a world leader in patient care, research and educational programs.
Our customers adopted Idylla for the value it brings over and above other technologies, including the widely claimed next-generation sequencing or NGS. As one of many examples, we'd like to refer to a study, clearly demonstrating how Idylla can be perfectly complementary to NGS and how it results in better outcomes for metastatic lung cancer patients.
In this study, 6% of the patients in the study cohort actually died before the NGS results became available. While Idylla was demonstrated to be 4x faster than NGS and could have delivered a better outcome to 18% of the patients that had an actionable variant in EGFR gene that could have been treated. But that's not the only trump card. There are many other reasons why a lab adopts Idylla. It's not only faster than conventional PCR at NGS. It also requires less lab space, less consumables and simply requires a much lower investment in equipment and infrastructure. We have a proven, stable platform but we're not standing still on core technology.
For a few years now, we have been working on a program to advance our technology with the aim of bringing more tests to the markets faster. In 2022, we developed the first assay on this new Idylla FLEX technology. The FLEX technology allows for rapid customization and ultimately personalization of molecular diagnostic testing in our core oncology business as it separates the generic cartridge components from the assay specific reagents. Beside our ability to develop new assays faster and cheaper, this technology could be a real game changer for us in the fast-growing market of liquid biopsy testing.
With a customized Idylla panel test or a personalized tumor informed test working on liquid biopsies, we can now address the wide spectrum of molecular surveillance applications, including in added such as therapy monitoring, recurrence monitoring or minimal residual disease testing. We recently announced the launch of an IDH1-2 assay. An assay quite a few customers have been asking for. We first made assay available to a selected group of customers only, and they record very enthusiastically.
And we're now getting up to make this first assay developed on the Idylla FLEX technology available globally in the second half of 2023. And this is truly a very exciting and promising milestone for Biocartis. The IDH1-2 assay adds to our broad menu of now 13 tests, including the manual CE-marked IVD kits from our partner, Skyline and Ophiomics that they started to commercialize in Europe ahead of the Idylla versions.
At least 3 other promising partner tests are in development and could come to market as research use only versions in the course of 2023. I'm talking of partners; I have often emphasized their importance to our strategy and I did that many times before. Besides the new novel tests that content partners bring to Idylla, pharma partners as well continue to rely on our solution to enable faster access to their therapies.
In 2022, for example, we expanded the collaboration with AstraZeneca to develop a new compound-diagnostic test for use with their blockbuster Tagrisso drug for non-small cell lung cancer patients. Such as CDx once approved by the U.S. FDA will provide us access to a much larger customer base of smaller labs that will be able to use the test in routine clinical practice. We're awaiting feedback from the FDA as well on our first U.S. submission ever for an oncology test, the 510(k) clearance on the Idylla MSI Test, and we'll also continue to work on the MSI CDx with BMS.
And while we work towards these regulatory approvals, we focus our efforts on the segment of Tier 1 customers, the large hospitals, reference labs and cancer centers and to have a look at some numbers.
From a financial perspective, the main mission at hand is to grow and scale the business of Biocartis towards profitability, and we're well on our way on that front. Over the years, we have consistently grown our global installed base and cartridge volume, and 2022 has been no exception in this regard. That growth also translated into financial performance, with revenues growing at an average of 37% since the start of commercialization in 2016. During the pandemic, we temporarily and partially reverted to COVID testing like many others, and the sales of our SARS-CoV-2 has logically come down in 2022.
The growth in our core oncology business is what really matters. It stands at a solid compound annual growth rate of 35%. Turning growth into profitability has been challenging during the pandemic. And on top of that, in 2021, we had to deal with a fire. But in 2022, we definitely have proven the scalability of our business and doubled the gross profit and the gross margin on our product sales. That is the key to profitability. And all the underlying drivers continue to develop favorably. The ASP continues to increase and the economies of scale will reduce the manufacturing cost so that the 50% to 60% gross margin that we target is well within reach.
We have now reached a stage where we'll reap the benefits of the investments made in our manufacturing. We will soon produce all assays exclusively on our automated ML2 line that can deliver more than 1 million cartridges a year. In 2023, we will be turning a page and decommission the old M1 line that has served us well but became too costly.
Allow me to summarize the year 2022 before I hand over to Jean-Marc. We look back, as I said, on a very successful year, hearing challenging macroeconomic conditions. Firstly, and as already discussed, we continue to grow strongly. 30% revenue growth in oncology is an achievement in a year where partners and customers were very cautious to invest. Secondly, the growth translated in a very steep improvement of the gross margins from 16% to 34% in 1 years' time.
Thirdly, we completed a comprehensive recapitalization that not only brought EUR 66 million of gross cash, but also structurally improved our balance sheet by extending the convertible debt by more than 2 years. And finally, we made sure to continue to build the foundations for future growth. New partnerships and the FLEX technology will ensure new product launches and consolidate our leading position in decentralized PCR testing for oncology. I will now hand over to Jean-Marc for a more detailed review of the financial performance.
Thank you, Herman. I'll start with the top line, and in particular, the product income, which came in on target at EUR 45 million. The increase compared to last year of 11% seems modest, but I do note that the SARS-CoV-2 test sales logically came down from last year and only amounted to EUR 3.5 million. The really important growth figure to look at is the 30% growth of cartridge sales in our core oncology business and which represents EUR 31.3 million or almost 90% of total cartridge sales. Herman already mentioned the increased volume and ASP as drivers for this growth.
Revenues from instrument sales and rentals of EUR 9.2 million may also look flat with 3% growth year-on-year. But there has been quite some impact from decisions made by some of our partners to delay clinical trials that were planned to start in 2022 and that would normally have required the placement of a sizable number of instruments. On the other hand, the R&D services that we deliver to our many partners did substantially increase from EUR 5.9 million to EUR 10.5 million in 2022. The recognition of such services is quite lumpy, but the growth does clearly indicate the increasing level of development activities with our partners. Total operating income amounted to EUR 58 million compared to EUR 54.9 million in 2021. But you'll remember that last year's income included the insurance claim for fire damages of EUR 4.6 million.
The increased product revenue was delivered with a; significantly lower cost of goods sold. The decrease of EUR 4.1 million was mainly attributable to the fact that unlike last year, the vast majority of cartridges was manufactured on the more cost-efficient ML2 manufacturing line. The combination of a lower manufacturing cost and the higher ASP allowed us to more than double the gross margin on product sales to 34% from 16% in 2021. And the improvement in total gross profit on product sales amounted to EUR 8.6 million. Additionally, we carefully managed costs and operating expenses, that excluding the cost of goods sold decreased by EUR 8.4 million to a level of EUR 75.2 million.
The biggest saving related to our investments in research and development that were almost EUR 10 million lower than in 2021. Sales and marketing and general and administrative expenses on the other hand went up. We incurred a more normalized level of expenses in our commercial activities post pandemic and obviously also saw the impact of a first wave of rising inflation.
Nevertheless, we reduced the operating loss by EUR 15 million, a reduction of 24%. Further down the income statement, you'll note a breakeven financial results compared to a loss of EUR 8.4 million a year earlier. That is entirely attributable to the gain we recognized on the convertible bond component of our comprehensive recapitalization.
The mandatory conversion of 10% of the existing bonds, the repurchase at a discount and the exchange of that bond resulted in a EUR 10.4 million gain. The transactions were accounted for as an extinguishment in accordance with IFRS, which meant that the existing bond was derecognized except for the EUR 14.4 million, which were not exchanged for the new convertible bond.
A quick word on the cash flow statement and the cash position to end the financial review. The improved operating profit was complemented by reduced investments in working capital, which admittedly in part benefited from the collection on the insurance claim, but also capital expenditure was lower than last year. Now looking at the combination of EBITDA and CapEx as a proxy for the operating cash burn, we did EUR 18.1 million better than last year.
Some of that benefit was used to continue to fund our Chinese joint venture Wondfo-Cartis and our partner, SkylineDx for EUR 3.5 million in aggregate. Finally, we completed part of our comprehensive recapitalization so that our year-end cash position amounted to EUR 26.1 million. Here, you see an overview of the various components of the recapitalization. The overview shows the principal amount from the convertible debt, but on our balance sheet, in our IFRS financials, the convertible bonds were treated as a compound financial instrument, split between a liability and the embedded value of the derivative, which is recorded in equity.
This is the reason for a total convertible debt on balance sheet of EUR 88 million for a principal amount of EUR 125 million at the end of December 2022. In January, we then completed the recapitalization with the issuance of EUR 25 million of additional 4.5% convertible bonds and the final drawdown on the convertible term loan. This added EUR 37 million of gross proceeds to our cash position and brings the pro forma principal amount of our debt to EUR 191 million.
Thank you, Jean-Marc. Let's now talk about our plans for 2023. We will continue on our path to profitability with continued revenue growth and improved financial results. Product-related revenues, including the growing revenues from instrument servicing, are expected to land somewhere between EUR 55 million to EUR 60 million. The underlying growth is 25% to 35% when taking out SARS-CoV-2 test sales that are again expected to come further down. The gross margin on product sales are expected to grow to 40% to 45% as we bring more volume to [ NLT ] and finally, EBITDA is expected to improve by EUR 7.5 million to EUR 11.5 million and expected to land somewhere between minus EUR 25 million and minus EUR 28 million, despite the high inflationary pressure on our cost structure that largely consists of personnel expenses.
2023 is as expected to be a busy year with several new regulatory approvals and/or new product launches. I do want to emphasize, however, that we're still operating in an uncertain economic environment and that some of our partners are also looking to secure further financing in very difficult circumstances.
So similar to last year and because they are in charge of the ongoing development of the test on Idylla, that may have an impact on some product launches planned for 2023. But we are working towards the launch of the Merlin assay from SkylineDX, the ThyroidPrint test from GeneproDx and a PIK3CA mutation assay in collaboration with LifeArc. All 3 for research use only. And from a regulatory perspective, we are awaiting feedback from the FDA on the 510(k) submission on Idylla MSI Test and an update of the SeptiCyte RAPID on Idylla test should be submitted for 510(k) clearance as well.
And finally, as indicated, we'll make the Idylla IDH1-2 mutation assay kit globally available to all customers. So after a very successful 2022, we are confident that we are set for another year of revenue growth with improved gross margins and reduced cash burn while continuing to invest in the menu expansion to serve an ever-increasing customer base. Before we start the Q&A, I invite you to have a look at the financial calendar. And with that, I'll now hand over back to the operator for the Q&A.
[Operator Instructions] We will now take the first question. The first question from Thomas Vranken from KBC Securities.
3 from my side. And perhaps the first one to jump into the product-related revenue guidance. Taking into account as a difficult macroeconomic environment that you mentioned, how do you look forward to that? And how does that translate into -- and those clinical trials that were planned to start in 2022? Do you anticipate lift-off of these trials in the course of 2023 and to which extent is your guidance dependent on that?
Thomas, thank you for that question. And it's a good question indeed. It's still part of the uncertainties in front of us. Whether they will be initiated or not, that is very much dependent on decisions by our partners. I do want to point out that these clinical studies would only be needed in the context of an ultimate IVD launch of the product, so do not stand in the way of an RUO launch of the products from partners.
So that also needs to be distinguished here. But you [ write a point, either ] it's a component of our product sales forecast for 2023. Hence, you see the bracket of growth that you see the 25% to 35%. That said, the bulk of our revenues is not generated by partners and goes into an ever-increasing customer installed base that are continuing to use our products in a routine setting. So we have a high recurrence of revenues, a floor on which we are able to grow. So we have this mix of a very stable revenue basis on which we can start to grow, but there still is a contribution need from partners, and that generated this 25% to 35% growth bracket.
Okay. And as a second question, perhaps. I was wondering about the 510(k) submission of the MSI Test, I believe it was filed in 2021. Can you perhaps give some more granularity on where you stand and how you currently think about timelines potentially?
We have been -- we indeed submitted the test earlier last year and have been in exchange with the FDA. The FDA works to its space. This has been for quite a while, an impact from the pandemic, quite a backlog of things that the FDA still needs to deal with. So that is causing some of the delay. On the other hand, this is a very classical interaction program we have with the FDA.
They sometimes request some further detail, some additional clinical information that needs to be collated by the company. So we have been in that exchange with the FDA. But we are approaching the latter part of that process, the later part of the process. So we do anticipate that in the near future, we should see a conclusion of that. Again, we cannot foresee what that conclusion would be from the FDA, but all signals are such that this should be somewhere this quarter or early next quarter.
All right. Very clear. And then perhaps a third question from my side is your perspective on how you look at potential business development in 2023. Are you looking to announce more partnerships this year? Or is that not necessarily a focus? How do you think about that's for -- in the current macroeconomic environment?
The first instance, our attention goes out of the existing partners where we are working very hard with them to jointly weather the macroeconomical storm. We are indeed looking into redefining certain projects and timing of these projects, so that is where the main attention is going. That said, we do have a growing business. Last year, we added a number of partners to the roster, all expanded collaborations with existing partners. So we do continue to be in communication with others, both content or diagnostic partners and pharma partners. So where -- as I said, the main attention goes to maintaining and sustaining the ongoing commitments, we do anticipate that we will be able to announce some new collaborations in 2023 as well.
We will now take the next question. The next question from Laura Roba for Degroof Petercam.
A question regarding the OpEx. Could you provide a bit guidance on the OpEx trend you see for 2023? How should we look at R&D and sales and marketing? And also maybe a word on workforce evolution as well.
Thank you, Laura, for that question. We indeed not only work on top line expansion and gross margin expansion but also managing the cash burn of the organization, looking at the OpEx. We have -- you have seen in the numbers, a reduction of R&D spend, a substantial reduction in R&D spend. And we are continuing to scrutinize indeed where we put our investment opportunity.
That is, on the other hand, balanced by inflation that we see, we've seen a substantial wage inflation come through that also needed to be absorbed by the organization. On the sales and marketing side of things, we have expanded our cost base a bit in 2022 after taking it down during the pandemic. In 2021, we have scaled down the organization, especially in the U.S. Wherein 2022, we have basically reestablished full capacity in our commercial enterprise in the U.S. On both fronts, we basically foresee to keep these costs flat in 2023 but we have built in gates and checks throughout the year. If we would not see certain revenues or projects coming through, then there is opportunity for the company to still act and manage that cost.
So bottom line, we have brought organization to the right scale. We've done some headcount reductions, not only on the OpEx side, there's also an impact on the gross margin side, on the cost of goods side because of the transition to manufacturing. So the 16% headcount reduction was not only driven by a drive for direct savings. It was already basically in the plan from evolution to ML2, so -- but we've taken those measures, everything is being implemented. We're now in a new steady state with the right cost structure in accordance with the projections and plan that we have made. But as I said, we continue to closely monitor, and we are ready to take action even where required.
Okay. That's very clear. And then maybe a second question regarding the geographical mix. I think you mentioned that in Europe, you see sustained growth. Could you provide a bit more color on the trends you observed in the U.S.
We do not publish individual growth numbers. So I'm not going to -- so I'm going to perhaps qualitatively comment on that. We have the largest customer base in Europe. And where we're approaching a very decent penetration of the customer base. We continue to place new instruments in new customer accounts but we also expand the installed base in existing customers. That is driven by the menu expansion. So we see very healthy growth still in Europe, low double digits. We see the highest growth in our export markets. And from a relative perspective, percentage-wise, the largest growth in the U.S.
We saw revenue expansion to the tune of 60%, 70% in 2022, a combination of installed base expansion, volume growth but also price discipline. We are now approaching a more mature stage in our go-to-market in the U.S. where we have -- we need to find less free of charge products to customers. We typically do that during onboarding of new customers, during validation process, for example. We now are more in a steady state with that customer base. From that point, we have a bit more price discipline. We're also launching a very attractive new products like the GeneFusion assay that we brought to the market in 2021, 2022. So we see very -- a lot of favorability both from volume as from a price perspective in the U.S. So a 60% to 70% growth rate from a revenue perspective in the U.S., that is what we can quote.
So it's very encouraging for our upside potential for the organization. If you think about what this could mean if we come to our same fair share of the market as we have achieved in Europe, that is definitely the biggest growth opportunity for the company going forward. And the performance in the U.S. 2022 has been very encouraging and makes us believe that we are ready to see this growth come through in the 2023 as well. I do have to qualify this a bit further. Our export markets continue to be quite strong as well. They were also very much impacted by the pandemic. So it's really balanced growth across the 3 main legs of our geographical go-to-market plan. It's Europe, export and U.S., all providers growth, but the biggest upside opportunity still comes from the U.S.
We have another question. And the next question from Thomas Vranken from KBC Securities.
If I can add one more question from my side. I read in the press release that throughout 2022, you've been reclaiming some of the instruments from, let's say, more lower performing rental agreements? Do you expect that exercise to continue into 2023? And also how easily can these reclaimed instruments be reintroduced elsewhere?
I'll answer that last part first. Indeed, we provide instruments to our customers under leasing reagent rental contracts where, indeed, we have the rights to take this back if the customer does not buy a minimum volume of cartridges during a certain reference period. As part of price discipline and as part of cost management, we have a bit more -- we've become a bit more strict in that regard and indeed have taken back a number of instruments under that [indiscernible]
A larger part of that was in the infectious disease area as well because of the decline in infectious disease testing volumes. The SARS-CoV-2 testing has come down. And those instruments that were used for that purpose under reagent rental, we have taken back. And then also across the regions, also in the U.S., we've put in place some price discipline around this and have taken back some instruments. These instruments can be refurbished. So they come back to our offices, are being cleaned, checked for performance, requalified and then can be reinserted in the market.
So that is, for us, working capital optimization as well that we can free up that working capital for new customers that would give us more recurring volume. So that is what we have done. Yes, we can recover the instrument and yes, that is beneficial from a working capital perspective. Will this continue? Yes, of course, we will continue to be diligent on that front in terms of our cost management, but it's going to be a minor traction only in 2023 as we have exited this transition phase of SARS-CoV-2 testing, and as the major cleanups, so to say, of the installed base have happened in 2022.
[Operator Instructions] As there are no further questions in the queue, that will conclude our Q&A session. I would now like to turn the call back to Mr. Verrelst for the closing remarks.
Thank you, operator. And I'll keep it short as always, by just concluding and thanking everyone for their continued trust in Biocartis. Operator, over to you for closing the call.
Thank you.
That will conclude today's conference call. Thank you for participating. You may all disconnect.