Ambu A/S (AMBUB) Earnings Call Transcript & Summary

Good afternoon. Good morning, everybody. This is David Adlington from the JPMorgan medtech team in Europe. It's my pleasure to introduce Juan Jose Gonzalez from Ambu in a second. [Operator Instructions] Jose, thanks for joining us today, and over to you for the presentation.

Thank you very much, David, and it's a pleasure to be with all of you. Let me just spend a few minutes talking about the market, who we are as a company, our performance last year and our outlook. And at the end, I think you are all going to be as excited as we are with the potential of Ambu. So if we all go to Slide 3, let's start with the market. The single-use endoscopy market is considered one of the fastest-growing new markets in medtech. And just to give you a bit of context for the ones who are not familiar, endoscopy has been built on the back of a business model around reusable endoscopy. You basically have a very large and expensive tower. You buy reusable scopes. The reusable scopes are washed and cleaned and dried. From time to time, they break, so there is service and repairs. And at the end, sometimes there are issues around contamination. That's how the model works right now. And basically, there are 3 main drivers, which are moving the market from reusable to single use. First of all, there is a much higher level of awareness regarding the real levels of contamination. There is more focus in infection control, not only from health care systems but also from authorities. If you look at the FDA, for example, issuing 2 safety recommendations to U.S. hospital for duodenoscopy, asking them to move from reusable duodenoscopy to innovative technologies like single use. Or if you look at CMS, granting special reimbursement for any hospital that use single-use duodenoscopy for outpatient procedures. All that is actually making the focus of looking at a safer way to do endoscopy. The second thing is technology advancements, and the technologies powering single-use endoscopy, sensors, image enhancement software, monitor technology, lining is actually developing very rapidly, and that's basically making the performance -- the clinical performance of single-use endoscopy to continue to rise to the point that we are sure that we will be able to outperform reusable endoscopy in a few years. And finally, if you price it correctly, when you compare all the costs, all the resources required to run reusable and you compare that with how much will it cost you to use single-use endoscopy, you find it that it's economically more advantageous, but also give you significant operational efficiencies. If you have set up to only have 5 reusable endoscopies and you have 7 patients, you cannot take care of them. If you have a large waiting list, you don't have the ability to go up and down. If you want to do it over the weekend, sometimes you don't have the resources to do all the cleaning. If they break, you cannot do it. If you want to move the tower because you want to do an endoscopy in another area of the hospital, you cannot do it. This -- reusable endoscopy is a very constrained system for a hospital, and single-use endoscopy gives you a lot of flexibility. So between the increased focus on contamination, the technology advancements and the economic offering and convenience, that's actually what is driving the creation of the single-use endoscopy market. And this is a market that is going to go from about $500 million to $2.5 billion by 2024. That's going to be a very rare case of a new market being created so rapidly. Now with that as a market opportunity, let's talk about where is Ambu. And if you go to the next slide, you will see that Ambu has transformed itself into the leading single-use endoscopy player. And there are 3 main competitive advantages that Ambu has. First of all, we are the world's largest single-use endoscopy player. We created a category about 10 years ago. And if you look at the last 5 years, it has been growing at 50% compound annual growth rate. And today, it's about half of the total company sales. We have modular innovation engine, which combined with high scale, low-cost manufacturing allow us to bring technologically advanced single-use products at prices that facilitate hospitals to do the migration away from reusables. And finally, we have a dedicated commercial infrastructure. And this is very important because the process of getting a hospital to adopt single use is a complex one. You need to align with several stakeholders within a hospital, and it requires time and dedication. And we believe that being -- having a commercial organization that is only focused on doing that is a competitive advantage. Now if you look at what is at the core of the value of Ambu, if we go to the next slide, we basically have a unique R&D engine. And this R&D engine have leverage, the modular expertise from automotive, the platforms where you can share parts. And on the back of that, launch more models than what was a normal development within automotive. We have combined that with the aggressive cadence of consumer electronics with our experience of our 10-year developing single-use endoscopy products. And through that, we have created an R&D engine that basically has the ability of developing multiple single-use endoscopy products in parallel with a very short time to market and then moving into the next generation as new sensors come in very rapidly, more rapidly than a normal medical device company. We have what is today the largest single-use R&D organization. Last year, it grew by 80%, and we have specific capabilities around image resolution, mechanics and low-cost design. And basically, what we are doing is we are taking this unique R&D engine and we are maximizing our first-mover advantage. And that's basically our strategy. If we go to the next slide, to Slide 6, what we are doing is rapidly expanding across all the major endoscopy segments. Three years ago, we were basically only in pulmonology, which was a 3 million-procedure market globally. Then we moved into ENT, which is an 11 million-procedure market. Last year, we entered into GI and urology with the launch of our cystoscope and our Duo. And this year, we are going to enter into colon and gastro. And by the end of next year, we are going to have an addressable market, we're going to have products in a market of about 100 million procedures. So we will be going from 3 million to 100 million in 5 years. The penetration today is about 1% to 2%, so you do not need to assume very high levels of penetration to understand the significant financial impact that executing this strategy is going to happen in the company. Now let's look at how this strategy has played out last year. And if we all go to Slide 8, let me just start by saying that the COVID-19 pandemic have accelerated the development of single-use endoscopy market. The market on the back of Ambu was already growing very rapidly, but COVID-19 pandemic has actually brought 3 main benefits for Ambu. Number one, when the pandemic started, we engaged with pulmonology associations around the world, and they issued guidelines that if you need to do a bronchoscopy on a COVID-19 patient, you should use single-use. And on the back of that, the demand for our aScope Broncho significantly increased. We were able to rapidly penetrate existing accounts and expand our customer base. And it was not only that. What we actually have seen is that beyond pulmonology, there is also a benefit as hospitals are looking to safely start elective procedures. So the receptiveness to our new products actually have been increased on the back of this pandemic. That's what we saw when it started, and that's actually more clear now that we're having another wave of COVID-19. Now when you look at what does it mean in terms of performance. If you go to the next slide, 2019/'20 was a record year for Ambu. We grew as a total company 26% on the back of our Visualization business growing 81%. And as you look at it, that growth is across all the regions around the world. It's a good signal that this concept actually travels very well across geographies, across different health care systems with different sites of care. And we hit the 1 million unit mark, which basically means that we have around 5x more volume than our next competitor, which gives us a significant scale advantage that then we can translate it into a pricing that again enables the creation of a market and ensure that we remain very competitive. Now it was not just about the financial performance. Last year was very important for us to test the viability of our strategy. And if you go to the next slide, we can see what has been the performance as we enter into ENT and cystoscope, and those 2 segments are very important not just because combined they are 17 million procedures, 6x more than the market we were in pulmonology, but because in this type of endoscopy procedures, there is no concern around contamination, which basically means that the adoption will only be driven by the performance of the product, by the convenience and the economic offering. And as you can see on the right-hand side, this is a comparison of the first 8 months of launch when we entered into pulmonology with our aScope 3 versus the performance of our ENT product versus the performance of our cystoscope product. And basically, we are penetrating these segments at a much faster rate. It reflects the fact that now we have better technology than back then. It reflects that we have a much larger commercial infrastructure. And it reflects the fact that the concept of single-use is well-known now. And as hospitals, again, are looking to address waiting lists or have concerns around the infection or the health of a patient or convenience that the large, high-volume centers are actually embracing our technology. And finally, we also place a very important bet as we are entering into Duo. And duodenoscopy, we consider that in 2024, when you look at this 2.5 billion market, that is going to be one of the largest single-use markets. And that's because of the high concerns around contamination because of the push from the FDA and CMS and because of all the efforts that we are also putting to create this market. In 2 weeks, we are going to have our first quarter earnings call, and I will be able to share a little bit more details regarding our progress. But let me just say this, our aScope Duo is going to be one of the most important growth engines for Ambu this year. We have our commercial organization in place. We are engaging with a high-volume ERCP hospitals. We are confident in terms of the technical performance of our product, and we believe it's going to be, again, another very important growth engine. And this is something which is important to know regarding Ambu. We still have significant runway in pulmonology. And I just talked about our early performance in ENT and cysto, which are going to be very important growth engines. And we also have to -- the success of Ambu does not really depend on having 1 platform doing very well. We have multiple bets and enough growth for us to be able to fulfill our financial aspirations. Now why don't we move to look at the outlook for the company. And if we go to Slide 13, this is our portfolio in single-use endoscopy and our pipeline. And this year is going to be very important because we are going to enter into gastro and colon. These 2 procedures are 70 million of the 100 million procedures in the market, represent also significant growth opportunity for us. We just finished showcasing the prototypes to the KOLs. We have done some research. We have built a much deeper understanding regarding the GI market. And what we are seeing is that the same issues, the same opportunities that we saw in pulmonology, in ENT, in urology that we are seeing in Duo are also applicable in gastro and colon. And that's why we are confident in terms of our ability to penetrate. Now if we go to the next slide, you will see what is our agenda for the next 3 years. And basically, if you look at the number of launches that we are going to have. In the previous 3 years, we introduced 5 new products. In the next 3 years, on the back of scaling up our [indiscernible] R&D organization, we are going to launch 4x more products. We are going to have 20 launches. That will allow us to have the most complete portfolio across all the endoscopy segments and to move very rapidly again into the next generations of sensors and new technology. More importantly, by the end of year 3, our R&D organization is going to be more than twice the size than what it is today. And that basically means that we will be looking at a pipeline that is going to be even much larger. It will allow us to have the most attractive value proposition in the market. And basically, if we go to the next slide, you can get a sense of what we are building. And what we are building is a very attractive ecosystem for all health care systems that want to adopt single-use endoscopy. We are going to be a company that will offer the most complete portfolio. This portfolio will be able to work with all of our monitors and processors and that will have very advanced diagnostic capabilities, which basically means that if I'm a hospital, I can actually switch from doing a pulmonology procedure to a cystoscope one to an ENT one very rapidly. I can start doing endoscopy across all areas in the hospital or in other sites of care or clinics or doctors' offices is going to be a significant source of flexibility. And that's why when you look at the recent announcements we made, for example, where major GPOs are making Ambu the partner of choice is why we are confident in terms of the power of this strategy. So this is what I wanted to share with you in terms of highlights about the company. And David, why don't we move to the Q&A.

Thanks, Gonzalez. So maybe I'll just kick off here with -- obviously, you saw a pretty nice tailwind from COVID through last year on the bronchoscope side. Obviously, I think clinical practices changed a long way since sort of this time last year, 10 months ago. And as we go through into this kind of second, third wave, whatever you want to call it, how are you feeling about the use of the single-use bronchoscope through this latest wave?

Yes. I mean, I would say we are seeing similar dynamics to what we observed before, maybe [indiscernible] initial panic buying that created all these spikes. But in general, it continues to be very beneficial for Ambu. We continue to expand our penetration, continue to expand our customer base. And more importantly, what we are seeing is that as hospitals are trying to do elective procedure while managing the pandemic, the value and attractiveness of single use is becoming more evident. And that is actually accelerating our penetration on things like ENT or cysto and why there is such a positive reception as we bring our single-use duodenoscope.

Perfect. And I mean, do you expect to grow your -- I know we've got -- you're not going to disclose by individual scope, but do you expect to increase your broncho sales this year versus last year?

Yes. I mean, we -- again, we don't provide a specific growth target for each of our platforms, but we have a guidance which is around growing 17% to 20% after growing 26% as a company. And that basically means that, overall, our visualization business is expected to continue to be the main growth engine of the company. That's as far as I can go.

Okay. Fair enough. I'm going to focus a lot obviously on the visualization side, but just to square away, obviously, the rest of your business is fairly exposed to elective procedures. And that's been obviously a focus for -- through this conference this week. Just wondering, in terms of what you're seeing on the ground with respect to your portfolio into that elective procedures impact?

Yes. I think it's very similar to what the rest of the company have shared. And in our case, our anesthesia and patient monitoring business is showing the same relative performance to what we saw before. In anesthesia, some products which are used in the treatment of COVID-19 patients like our resuscitators go up significantly, the ones related to elective procedures come down. Overall, it's a more neutral effect. And then our patient monitoring, our electrode business, which is directly correlated with elective procedure, basically move with the up and downs every month on the back of the impact of the pandemic. In terms of our visualization business, which is the main growth engine, although the elective market is being reduced, especially, I would say, in December, because of the desire of hospitals to conduct elective procedures because of the pent-up demand, we are actually seeing a very positive perception to our launches. So we are less concerned regarding the effect.

Perfect. And if we get back to visualization, obviously, a strong pipeline of products coming through. Has the pandemic impacted your ability to bring those products through? I know that companies have talked about delays in clinical trials, ability to actually get into hospitals to talk to doctors about any new products launching? Any thoughts on that?

Yes. I mean, it's a very volatile environment. It varies a lot depending on geography. It varies a lot depending on the month even within a market. If you look at the U.S., you have different states in very different situations. So the access is more difficult. I guess, the only thing which is different for Ambu is that we are part of the solution. At the end of the day, hospitals need and want to restart elective procedures. And for them, the key challenge is, they don't know if a patient has COVID-19 or not. They don't know if a reusable scope had been used with a patient, which is infected and might not be fully sterilized. So when they understand our offering and look at what we can do to help them to manage this situation, the reception is very positive. And that's actually our experience. We are penetrating the customer base faster in what is still a constrained environment. But when the situation go back to normal, I think we are going to see the benefit of all of that.

Perfect. Okay. And maybe in terms of the Duodeno, obviously, you've got that clinical trial. You have just started or about to start. Expectations on timing of recruitment on that and how important that is for adoption?

Yes. I mean, again, we have our quarterly earnings in a couple of weeks. We're in a silent period now. So let me just say what I stated before. We believe based on everything we know today, based on the performance of our controlled market release, based on our discussion with high-volume ERCP centers, based on our product demonstrations that our aScope Duo is going to be a main growth engine for the company. And we believe that the product is going to perform and is going to show that actually, single-use endoscopy can penetrate [indiscernible] GI. And again, in a couple of weeks, I'll provide a little bit more color regarding that, but we are very satisfied in terms of where we are.

Okay. And -- so that's the market where you are going to be going head-to-head with Boston. They were a little bit quicker out of the gates. Do you think that -- I think they've highlighted that COVID has been -- have stopped making as much progress as they expected. So I suppose what I'm asking is, has COVID kind of narrowed that window for them and helped you out?

Yes. I mean, first of all, for Ambu to be successful, we need competition. And we are glad that we have both Boston Scientific and Olympus announcing that they are moving into single-use endoscopy. They help to validate the concept. They bring credibility. They help with reimbursement, with access, with awareness. So we are glad to see them participating in the creation of this market. I would agree with that statement. I think they launched first. And with the whole COVID-19 pandemic, I would say we narrowed the difference in time. And now we are pretty much executing our commercial launch nearly at the same time, and I think that's a very good opportunity for us to showcase the relative technical performance of our product and relative attractiveness in terms of economic offering.

And In terms of -- on the broncho side because they're looking to launch their broncho product later this year, the boots on the other foot there. I mean, how do you look to sort of protect what you've got with them coming in?

Yes. So just to maybe clarify that. We have built our bronchoscopy business in pulmonology, which is about 3 million procedures, and we have about 30% of global market. And they are entering into the Broncho suite, which is another segment. It's about 3 million procedures where we are not today. But we are also launching our aScope 5 at the end of this year, and we will also enter into the Broncho suite. So this is less about cannibalizing what we have, and it is more about creating together with them a new single-use endoscopy market in a segment that doesn't exist, which is the Broncho suite. And again, we compete based on innovation, on our ability to rapidly bring advanced technology into the market, and I think that's going to be a very good test for us as well.

If we just look about the sales force that you've recruited over the last 12 months, 18 months or so, I suppose. Have you got to where you wanted to get? Have there been any barriers to recruiting people? What are the type of sales guys you've been able to recruit?

Yes. I mean, first of all, I don't think pandemics help to do recruitment. But with that as a consideration, I have been surprised in terms of our ability to bring endoscopy talent into Ambu. Ambu is still a relatively small company. And we put as a requirement that our sales force had to have deep endoscopy experience to make sure that we could leverage our relationships, that we have people that really understand the market and can help us with the launch of our products. If you look at our GI sales force in the U.S., over 90% of the sales force come from endoscopy. And it comes from all the major endoscopy companies. So we are very pleased in terms of where we are. And let me just say this, the penetration of single-use endoscopy is 1% to 2% of the total endoscopy market. This is a market-creation game. It's not really a share competition. There is room for more than 1 player to do very well. What we are focusing in Ambu is to make sure that we have a value proposition that justify a leading share within that market. Certainly, there is space for more than 1 company.

Perfect. And then maybe sort of last few questions from my side. I mean, you've mentioned the -- you got in with some of the GPO companies. How important is that for the expansion of the rest of the portfolio?

I mean, first of all, we consider it very important. GPOs varies in terms of their ability to drive the contracts within the health care systems. Some are more effective than others. But for us, first of all, getting GPOs to decide to create single-use endoscopy categories was absolutely crucial for us. Otherwise, we had to compete in categories where we were a very, very small player. We had to go into a urology tender. We had to go into a GI tender, where some of the other companies were clearly the partner of choice. But the moment, these GPOs decided to create a single-use endoscopy category, within that category, we actually are the most attractive partner. We have the broadest portfolio. We have the best economic offering. We can showcase our pipeline and our ability to satisfy all the clinic needs of the hospital. So getting these GPOs giving us preferential contracts and securing access not just for our existing portfolio but also for our innovation, we consider as a very good seal of approval in terms of the value of the strategy and where we are.

Okay. And then, obviously, you've got very strong growth plans over the next few years. In terms of your capacity to deliver on that, particularly on the manufacturing side, but any other bottlenecks, anything we should be thinking about in terms of capital expenditure to be able to deliver on that?

I mean the 2 main capital expenditures are going to be R&D and manufacturing. And in the case of R&D, as we have an aspiration to be the world's most innovative single-use endoscopy company, you will continue to see us very committed to invest in innovation. That is absolutely critical for us. And in terms of manufacturing, in the previous earnings call, we announced that we are going to build a single-use endoscopy plant in Mexico. And that just reflects how we see the volume projections for Ambu and the need to have a second site. But overall, we have a strategy that should drive not just significant top line growth, but also profitability. These are products with very high margin. Once you do the major investments in terms of commercial infrastructure and back office, you should be able to get the leverage from the top line being translated into higher levels of EBIT. And that's basically our plan.

Okay. I want to get to the bunch of questions coming on the line. So maybe first up, how cheap is your product versus a reusable products? And how the doctors balance/compromise over the inferior quality of finding [indiscernible] versus reusables?

Yes. I mean, basically, our pricing is grounded on healthcare economics. So we look at what is the real cost for a health care system to use reusable endoscopy, and we price our products to make sure they are in parity to that, which basically means that they move from reusable to single use, that it doesn't have an incremental cost to the hospital. And then on top of that, they benefit in terms of the 100% sterilization, no risk of contamination and the convenience to be able to do endoscopy in a more flexible way. Now in terms of that, the performance of the product itself, it varies depending on the procedure. The most important thing is, similar to what we did in pulmonology, where we had our aScope 1, 2, 3, 4, now we're going to launch aScope 5, that's the plan across the board. And our strategy is to make sure that our single-use product perform better than any other reusable product in the market. And just to give you an example, one of the reasons why we are so successful with our cystoscope launch is because every time you take a reusable cystoscope to be washed, cleaned and dried, it actually lose image resolution. And now when you compare our product with a reusable cystoscope that has been in the market for about a year, we already have a much better resolution. And that's actually one of the first times where we are having a product that have -- can offer doctors a superior clinical performance, and that's why we have so much pool to penetrate the market.

Great. A question around pricing. So as more companies enter the market in scopes, do you expect pricing to erode?

I mean we actually set the pricing and because of our modularity and because of our scale, it's very unlikely that another company can actually come and offer a product of the same quality at a much lower price. We haven't seen that yet, and we don't expect that to be the case. And actually, our scale advantage is increasing rather than decreasing relative to competition. We were at 1 million and now we have a guidance of 1.3 million, 1.4 million. It's going to be very difficult to catch up with us also because of our strategy of entering all these large volume segments where most competitors are not entering, and we believe that for the next few years, that's going to still be a competitive advantage for us.

Okay. And a sort of follow-up on that. So post-COVID, the demand increase for pulmonology and ENT scopes looks to make sense. But for the colonoscope, is there a real need for single use?

Yes. I mean, if you -- so 2 things. One is, in ENT and cystoscope, there is no risk of contamination, and we are entering the market on the basis of convenience and flexibility and the attractive economic offering. And we believe that all of those arguments are still valid in colonoscopy. Now having said that, there are many situations where I can see that surgeons will actually prefer to use a single-use product. Patients that have an immunocompromised disease or are going through chemotherapy as part of cancer treatment or have diabetes, you don't need to assume many either occasions or patient profiles to realize that single use actually can penetrate colonoscopy and can actually be a main source of growth for a company like Ambu.

Okay. And then just circling back on the aScope Duo, will you be able to give us any feedback on how that product stacks up against EXALT D from Boston, taking into account the fact that your product is, what, 30% to 50% cheaper?

Yes. I mean the only thing I can say is that we do have an attractive offering because our strategy is around market creation, not maximizing the margin. For us, success is not to sell a few thousand units. For us, success is to sell hundreds of thousands of units. But putting that aside, we compete based on innovation, based on technical performance. We know EXALT D very well. We understand the product. And of course, we know where we are and what we have. And the only thing I can say is that we are confident in terms of our ability to enter the market and for our aScope Duo to be a main growth engine. And again, there will be room for more than 1 company. This is an opportunity where Boston can be very successful and Ambu can be very successful as well. And that's basically the plan.

Great. Well, that takes us to the end of the session. Thanks very much for joining us today. We look forward to catching up with you through the years and an exciting year for you guys. And yes, we look forward to the next results in a couple of weeks.

Thank you very much, David. See you in a couple of weeks.

Yes.

Bye.