Coloplast A/S (COLOB) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining Coloplast Interim Financial Statements for H1 2023/'24 Conference Call. [Operator Instructions] I would now like to turn the conference over to Kristian Villumsen, President and CEO. Please go ahead.

Thank you very much, operator. Good morning, everybody, and welcome to our Half Year '23/'24 conference call. My name is Kristian Villumsen, I'm the CEO of Coloplast and I'm joined by our CFO, Anders Lonning-Skovgaard, and our Investor Relations team. We'll start like we usually do, with a short presentation by Anders and myself, and then we will open up for questions. Please turn to Slide #3. We delivered 8% organic growth and a reported EBIT margin before special items up 27% in the second quarter. Return on invested capital after tax and before special items was 15% reflecting impact from the acquisition of Kerecis. I'm satisfied with our performance. We continue to broadly outgrow the market, and more importantly, we continue to help more people who live with unmet health care needs. At the same time, we also continue with our year of launches. Today, we announced four new launches in our Chronic Care businesses. One of the new products that we're launching is Heylo. This is the world's first digital ostomy leakage notification system and it has now received national reimbursement in the U.K. as of the 1st of July. And while this is a launch in only one market for now, it confirms the need for innovative and clinically relevant solutions in our category. This is how we continue to lead our categories, by raising the bar and bringing differentiated technologies to the market. Before going into our usual half year strategic update and the details of today's results, I'd like to provide our thoughts on the proposed local coverage determination policy for skin substitute grafts that was published on the 25th of April and is relevant for the newest member of the Coloplast Group, Kerecis. Please turn to Slide #4. Let me start with the facts. On the 25th of April, 7 Medicare Administrative Contractors, brought forward a draft Local Coverage Determination policy, in which two coverage qualifications with skin substitute grafts were introduced. The first qualification relates to a technical requirement, which Kerecis meets. The second qualification relates to a clinical requirement, which based on the assessment, Kerecis does not meet and therefore, Kerecis is not included in the draft coverage policy. The draft policy covers the Medicare portion of outpatient sales, which includes both physician offices and hospital outpatient departments, and it affects around 20% of Kerecis' revenue. The majority of the remaining 80% of sales are related to in-hospital sales, covered by DRG codes where the reimbursement environment is stable. The process from here is the following: Until the 8th of June, there's a consultation period in which affected parties can provide their comments to the draft policy as is the norm. After the consultation period, there will be a final policy, typically published at least 45 days before implementation date. The implementation date has not been announced, and we expect that it will be up to half a year after the consultation period ending with the final decision to be published and implemented. My perspective on this draft policy is that this is a quality document. It sets out a sensible set of objectives for the category that are founded in good clinical practice. It explicitly reviews the clinical evidence for every single product in the category as a basis for recommendation to either include or exclude the product from the covered list. The decision to exclude Kerecis from the covered list is rational on the basis of the clinical evidence that is reviewed in the draft policy. Now, and this is important, the clinical evidence on Kerecis, which was reviewed in the draft policy, does not include a randomized controlled clinical study from 2023 by Lantis. We strongly believe that this study fully satisfies the LCD requirement for quality evidence that demonstrates the product safety, effectiveness and positive clinical outcomes in the function as a graft for diabetic foot ulcers. The 2023 Lantis study in chronic diabetic foot ulcers is a randomized control clinical trial with the sample size of 102 patients, and it provides high-quality evidence with a low risk of bias demonstrating the safety, effectiveness and positive clinical outcomes of the Kerecis' fish skin graft compared to standard of care in the treatment of chronic diabetic foot ulcers. The study found significantly higher rates of complete wound closure at 12 weeks with Kerecis compared to standard of care. The study also found a greater mean percent wound care -- or wound area reduction at 12 weeks with Kerecis compared to standard of care. The average number of applications used to achieve closure was 5.9, and the study also had up to 1 year follow-up period. Since its publication, this study has been used to obtain commercial coverage from almost 50 payers, which has resulted in more than 100 million added lives in the U.S. Following the announcement of the draft policy, we have conducted a review of the studies behind products that were included on the covered list, and we found that our 2023 study from Lantis is not only on par, but in many cases, also superior to the clinical evidence that substantiates coverage in the draft policy. The process that I described earlier is designed to rectify potential errors. This is why there's a consultation period, during which we will submit our 2023 clinical study, which has been omitted from the review. Mistakes happen. We will submit evidence to rectify this. Of course, we cannot exclude some level of short-term disruption in the market as a result of the draft policy, but given the feedback that we've received during last week from our customers and our field force, we feel confident that there won't be a significant impact on our sales in the second half of the financial year and therefore, we also maintain our financial assumptions on Kerecis. In summary, we welcome this introduction of clinical qualification for obtaining coverage. We perceive this as a positive development, which will benefit patients, and we also believe in the process outlined by the authorities, both fair and reasonable. And we strongly believe that we have the right clinical evidence to prove the strength of Kerecis' fish skin and to get us back on the covered list. With that, let's turn to our Half Year strategic update. Please turn to Slide #5. First, on growth. With our Strive25 strategy, we set out to actively pursue M&A opportunities to build growth and value creation options for the mid and long term. The two most significant investments we made, Atos Medical and Kerecis, are both performing in line with our expectations with a strong future outlook. Atos Medical has performed consistently in line with our guidance of 8% to 10% gross and an EBITDA margin in the mid 30s level since becoming part of the Coloplast Group, now almost 2 years ago. Integration is also tracking well, and we expect to deliver the up to DKK 100 million in operational synergies. In both categories, in which Atos Medical was present, laryngectomy and tracheostomy, we see significant white space. This, coupled with a strong commercial model and a strong team, gives us confidence that Atos Medical will continue to be a good growth contributor and value creator in the long term. The performance of Kerecis in the first 6 months is in line with our business case. The strategic fit has been confirmed. And despite the short-term noise, which the draft local coverage determination policy has created, we remain convinced about the strength and clinical differentiation of the fish skin technology. With the strong commercial execution from the Kerecis team, we're confident that the business will continue its strong double-digit growth trajectory and become the category leader in biologics over time. Next, let's turn to innovation. This is a big year for us with several significant launches that will support our growth during Strive25, but also beyond the strategic period. With Luja, our new intermittent catheter with a micro-hole Zone Technology, we're setting a new standard in intermittent catheterization with a technology that enables full bladder emptying in one free flow, and it addresses key risk factors related to urinary tract infections. Luja is now available to male users in 13 key markets. And here in May, we've initiated the launch of Luja for women with Denmark and Italy as first launch markets and other key markets will follow over the next 12 months as we obtain investment. In Ostomy Care, we're very pleased with the news on Heylo which, as I mentioned earlier, has been granted national reimbursement in the U.K. as of the 1st of July at the expected investment level. Work to obtain reimbursement in the second focused market, Germany, is ongoing, and we expect to receive a decision from the authorities in the coming months. In May, we've also initiated two launches that strengthened our biggest brand in Ostomy Care, SenSura Mio. The first launch represents a significant expansion of the SenSura Mio portfolio with black bag variance which will provide more choice for people with a stoma. And the second launch is a variant of the SenSura Mio Convex, which strengthens our position in the two-piece and compact segments of the Ostomy Care market. On sustainability, we continue to make good progress across all our initiatives. I'd like to call out the latest results of our employee engagement survey, where we maintain a solid score of 8.1, ahead of industry benchmark of 7.8, which I'm pleased with. Finally, we're off to a good start with our Global Operations Plan 6, the process to establish a new manufacturing site in Portugal, which will be the largest site for Coloplast to date, is on track, and the site is expected to be operational in 2026. In addition, the procurement program we launched as part of the Global Operations Plan 6, is also making good progress and is expected to deliver savings that will support our long-term EBIT margin guidance of more than 30%. Now let's take a closer look at today's results. Please turn to Slide #6. In Ostomy Care, organic growth was 7% for the first 6 months and growth in Danish krone was 4%. In Q2, organic growth was 7% with growth in Danish krone of 4%. Our SenSura Mio portfolio continues to be the main growth driver, followed by the Brava-supporting products, and our SenSura and the Assura alternative portfolios continue to post solid growth in emerging markets. From a geographical perspective, growth in the quarter was driven by broad-based growth in emerging markets, led by China and LATAM. Europe also made a good contribution to growth, driven by the U.K. and Germany. The U.S. had a soft quarter with continued impact from order phasing and the underlying demand in the U.S. Ostomy Care market continues to be strong, and we now expect growth in U.S. Ostomy Care business to be second-half-weighted. In Continence Care, organic growth was 8% for the first 6 months and growth in Danish krone was 5%. In Q2, organic growth was 8% and growth in Danish krone was 5%. Growth in the quarter was driven by soft momentum in intermittent catheters across the SpeediCath portfolio, with good contribution from compact, standard and flexible catheters. Luja, our new male intermittent catheter, also contributed to growth in Q2. Our Bowel Care business also made a solid contribution to growth driven by Peristeen Plus in Europe. From a geographical perspective, growth was broad-based across regions, led by Europe, in particular, the U.K. and France. Markets where reimbursement has been recently established or improved, such as Poland, continue to perform well and grew double digits. Voice & Respiratory Care posted 10% organic growth for the first 6 months with growth in Danish krone up 8%. In Q2, organic growth was 13% and growth in Danish krone was 10%. Reported revenue includes negative impact from product rationalization of 1% in the first 6 months of the year and 2% in Q2. Growth in laryngectomy in Q2 was double-digit, driven by an increase in the number of patients served in existing and new markets as well as an increasing patient value driven by the Provox Life portfolio. Growth in tracheostomy in Q2 was also double digit and driven by continued solid demand and positive impact from forward integration. From a geographical perspective, all regions contributed to growth, led by Europe as well as solid contribution from the U.S. In Advanced Wound Care, organic growth was 8% for the first 6 months and growth in Danish krone was 38%. In Q2, organic growth was 8% and growth in Danish krone was 36%. Reported growth for the period includes impact from the acquisition of Kerecis. The Advanced Wound Dressings business grew 8% organically in the quarter and also 8% in the first 6 months. Our Biatain Silicone portfolio was the main growth contributor from a product perspective, while from a geographical perspective, growth was broad-based across regions. Kerecis' revenue amounted to DKK 461 million in the first 6 months and DKK 232 million in Q2. The underlying revenue growth was around 35% in both H1 and Q2. The in-patient channel and surgical wounds were the main growth contributors. Kerecis' operating profit margin, excluding PPA amortization, was around 10% in both periods. In Interventional Urology, organic growth was 5% for the first 6 months and growth in Danish krone was 4%. In Q2, both organic growth and reported growth in Danish krone was 5%. Growth in both periods was against the high baseline last year. The Men's Health business in the U.S. was the main growth contributor in the quarter, followed by the endourology portfolio, including solid contributions from our first laser equipment, the Thulium Fiber Laser Drive. Our Women's Health business detracted from growth in the quarter, impacted by competitive pressure. We expect continued softer momentum in the Women's Health business, and therefore, we now expect growth in the Interventional Urology business to remain at mid-single digit level in the second half of this year. From a geographical perspective, the U.S. was the main as wealth contributor, in Q2, it was followed by Europe, most notably, France. With this, I'll now hand over to Anders, who will take you through the financials and outlook in more detail. Please turn to Slide 7.

Thank you, Kristian, and good morning, everyone. Reported revenue for the first 6 months increased by DKK 1 billion or 8% compared to last year. Organic growth contributed DKK 950 million or around 8% to reported revenue. Acquired revenue from Kerecis acquisition contributed with DKK 461 million to report revenue in the first half of the year, reflecting 6-month impact. Acquired revenue contributed around 4% to reported revenue the first 6 months. Foreign exchange rates had a negative impact of DKK 341 million on reported revenue or around 3%, mainly due to the depreciation of the U.S. dollar and the Argentinian peso against the Danish krone. Please turn to Slide 8. Gross profit for the first 6 months amounted to DKK 9 billion, corresponding to a gross margin of 68% against 67% last year. The gross margin was positively impacted by the inclusion of Kerecis, which contributed around 100 basis points. In addition, lower freight rates and energy costs, price increases and the benefit -- our baseline benefit of around 40 basis points from the Italian pay-back reform also had a positive impact on the gross margin. The positive development in the above-mentioned factors was partly offset by raw material price increases, double-digit wage inflation in Hungary and ramp-up costs at our manufacturing sites in Costa Rica. The gross margin also included negative impact from currencies of around 90 basis points. Operating expenses for the first 6 months amounted to DKK 5.4 billion. The like-for-like increase in operating expenses, excluding inorganic impact from Kerecis was DKK 194 million or 4% compared to last year. The increase includes impact from company-wide salary increases as of January 1. Kerecis contributed DKK 447 million to operating expenses, of which DKK 51 million were related to the PPA amortization included under distribution costs. The distribution to sales ratio for the first 6 months was 32%, compared to 31% last year and includes impact from Kerecis and related PPA amortization costs as well as increased level of commercial activities. The EBIT to sales ratio for the first 6 months was 5% compared to 4% last year, primarily impacted by the inclusion of Kerecis. The R&D to sales ratio for the first 6 months was 3% of sales, on par with last year. Overall, this resulted in an increase in operating profit before special items of 5% for the first 6 months, corresponding to an EBIT margin before special items of 27% compared to 28% last year. The EBIT margin in the first 6 months included negative impact of around 100 basis points from the inclusion of Kerecis, including PPA amortization costs. Currencies also had a negative impact on reported margin of around 110 basis points, mostly related to the depreciation of the U.S. dollar and the Argentinian peso against the Danish krone as well as appreciation of the Hungarian forint against the Danish krone. Financial items in the first 6 months were a net expense of DKK 418 million compared to a net expense of DKK 524 million last year, driven mostly by interest expenses related to the financing of the Atos Medical acquisition as well as losses on balance sheet items denominated in mostly Argentinian peso. The tax expense in the first 6 months was DKK 697 million with a tax rate of 22% compared to a tax rate of 21% last year. As a result, net profit before special items for the first half of the year increased by 8% compared to last year. Diluted earnings per share before special items increased by 2% to DKK 11.08 and include impact from the equity raise in August '23. Please turn to Slide 9. Operating cash flow for the first 6 months was an outflow of DKK 772 million compared to an inflow of DKK 1.2 billion last year. The development in cash flows was driven by higher income tax paid in the second quarter related to the Atos Medical intellectual property transfer with a negative impact of DKK 2.5 billion. The tax payment will be offset by reduced tax payments in the following years, starting from '23, '24. The tax payment was only partly offset by improvement in changes in working capital and an increase in operating profit of 5%. Cash flow from investing activities was an outflow of DKK 554 million compared to an outflow of DKK 381 million last year. CapEx in the first 6 months amounted to 4% of sales compared to 5% of sales in the same period last year. As a result, the free cash flow for the first 6 months was an outflow of DKK 1.3 billion compared to an inflow of DKK 795 million last year. Excluding impact from the extraordinary tax payment of DKK 2.5 billion, the adjusted free cash flow in the first 6 months of '23, '24 was an inflow of DKK 1.2 billion. The trailing 12-month cash conversion was 87%. Net working capital amounted to around 26% of sales, on par with last year. We continue to expect net working capital to be around 25% in '23, '24 and return to our long-term expectations of around 24% at the end of the strategic period. Lastly, the Board of Directors approved a half year interim dividend of DKK 5 per share corresponding to a total interim dividend payout of approximately DKK 1.1 billion. Before we move to the financial guidance, I want to provide an update on the earnout for Kerecis. The earnout level for Kerecis has been adjusted to 20% of the total earnout potential. The adjustment has been set off against goodwill. I'd like to note, as we did at the time of the acquisition, that the earnout was based on a very aggressive management growth case. The business is delivering in line with expectations to the Coloplast case, which is included in our financial guidance, and we are satisfied with the progress made so far. Now let's look at the financial guidance for the year. Please turn to Slide 10. The financial guidance on organic growth and EBIT margin for '23, '24 are largely unchanged and most assumptions laid out in November still hold. We continue to expect organic revenue growth of around 8% for the full year with the following assumptions: continued good momentum during the year in Chronic Care, our European and emerging markets businesses; China Chronic Care is still expected to grow at a mid-single-digit level; growth in the U.S. Chronic Care business is now expected to be second half-weighted due to order purchasing patterns impacting the U.S. Ostomy Care business in the first half; Advanced Wound Care is still expected to deliver growth above the market; Voice & Respiratory Care is still expected to grow at a level of 8% to 10%. Finally, one change since our guidance in February is our Interventional Urology business, where we now expect growth in the mid single-digit level from previously high single-digit level, impacted by softer momentum in our Women's Health business. We are adjusting our reported revenue growth in Danish krone to 10% to 11% from previously around 11%, impacted by currencies. Kerecis is still expected to contribute around 4 percentage points to reported revenue growth. We continue to expect the reported EBIT margin before special items of 27% to 28%, which assumes a gross margin of around 68%. Prudent management of operating expenses, negative impact from Kerecis of around 100 basis points, including around DKK 100 million in amortization charges and finally, negative impact from currencies of around 50 basis points. For '23, '24, I still expect around DKK 50 million in special items related to the ongoing integration of Atos Medical. The net financial expenses for '23, '24 are still expected to be around minus DKK 750 million, mostly related to interest expenses related to the Atos Medical financing. I would also like to share that we have secured the refinancing of the 2-year bond related to the financing of Atos Medical acquisition expiring 19th of May. The impact of the refinancing is included in net financial expenses mentioned earlier. No changes to our assumptions on effective tax rate and CapEx, it's expected to be around 22% and DKK 1.4 billion, respectively. We're off to a good start. We are significantly outgrowing the market in Chronic Care and in our Advanced Wound Dressings businesses. Our newest members of the family, Atos Medical and Kerecis, are both delivering double-digit growth. We are continuing our year of launches with the introduction of new products in Chronic Care, which will support our long-term growth. And we are looking at inflationary pressure across categories coming down. Overall, we are on track to deliver another solid year with organic growth of around 8% and an EBIT margin of 27% to 28%. And I feel confident about our long-term financial guidance with growth of 8% to 10% and returning to an EBIT margin of 30% by the end of this strategic period, excluding Kerecis, and an EBIT margin of more than 30% long-term. Finally, before we move to Q&A, I would like to remind you that we will host a Meet the Management event here in Denmark on June 6 this year. We look forward to seeing many of you in person in June. Thank you very much. Operator, we are now ready to take questions.

[Operator Instructions] The first question is from the line of Anchal Verma from JPMorgan.

I have two questions, please. One on margins. How should we be thinking about phasing for the full year? You've previously indicated that you expect equal phasing to H1 and H2, and that's despite a more H2-weighted topline growth. So are there any costs in H2 that we should be aware of that would prevent an acceleration in H2 margins? Just trying to understand a bit more on phasing. And the second question is on the LCD draft proposal. You mentioned that 2023 clinical study wasn't included by the MAX. Just trying to understand, was there a reason that the MAX didn't consider or remit the study at the first instance itself while drafting the proposal?

All right. Thanks for your questions. So let me start with the first one around the phasing of our margin. So as we have said since we started the year, we expect to deliver a full year margin between 27% and 28%. We are expecting phasing in the second half to be similar to the first half. I am also optimistic about our input costs. And so raw material costs are starting to come down, and I'm expecting that to continue into second half and specifically into next year. And then I also just would like to call out the FX. We had quite an impact from FX in the first half. And my expectation is that that will ease in the second half. So we, for the full year, will sit with an impact from FX of around 50 basis points. So I would say those are the two main ones I would call out into the second half. Our underlying operating expenses, I still expect those to develop at a lower growth rate than the topline growth.

And to your question on the LCD, we don't fully know. We know that the methodology and the document very clearly states what clinical data has been taken into consideration for every single product that's been reviewed. We are speculating that this may have been related to the time of the publication of our clinical data, even the time of the -- if you will, indexing of the related articles in relevant search engine tools that we've simply not come up in the search that's been done for the people doing the lit review, but we're speculating. But the most important fact is that we have the clinical evidence to support the efficacy of the technology and that we are going to submit it in the hearing period. And we will, of course, be present at the hearing. And I'm also very confident that our customers who're using the product today will make sure that the LCDs understand this.

The next question is from the line of Jack Reynolds-Clark with RBC Capital Markets.

Two from me also, please. The first on Continence Care. I was just wondering could you run us through how you're kind of planning to approach the launch of Luja women, kind of other synergy there with the male version and how quickly are you kind of expecting meaningful growth contributions there? And then on Heylo, again, how you're approaching this launch in the U.K. And can you update us on expectations for reimbursement in Germany and any other geographies that you're in dialogues in the moment?

Thank you, Jack. Good questions. So on Luja, remember, the male version of the product has already been in market now for a good time. The male segment is about 2/3 of the market. So now making the female version available is -- that's been a natural ask from day 1 from every customer. So when are we going to have an offering with the same technology for women, and we have that now. I'm expecting that we're going to be rolled out in the main markets over the course of the next roughly 12 months and that we're going to see an equally positive reception. We've got a lot of clinicians excited about this and a lot of patients on the male product with the stories of improvement in their daily lives that we are also picking up and sharing. Reimbursement goal is to get a premium to the existing product. And so far, so good. We're following the plan, just like we've been doing for the male product. On Heylo, this has been a major milestone for us. It's been a product that's been underway for a long time. And it is quite different than the launch that we have with Luja in that this is not just new to Coloplast, it's new to the world. There's no such category out there today. So we are, in effect, building the segment of the market. And I think that comes with responsibility that we take this technology to market with a lot of discipline. So the focus initially will be engaging with clinicians that they are familiar with the product, that they're familiar with the patient initiation process that patients get initiated in a good manner. We get them rolled on and connected to the service that's related to the product. And I'm expecting it to basically have a type of profile that looks like when we also initiated the Concave category. So this is a slow build over time. So you should not expect that this as a category that "explodes" from one day to the next. And -- but it will contribute both to growth in the category and of course, the significant value upgrade. We have received the reimbursement in the U.K. that we have asked for. I can't comment on the absolute level on that until it's public, but it will be 1st of July. But I'll just say that we're very satisfied with this. Now the process with the Germans are still ongoing. And everything has been submitted. So really, we are not expecting that we're going to have to submit more data. The authorities have gotten everything that they need. We are expecting that we would get a decision from them within the next month or two.

The next question is from the line of Martin Parkhøi from SEB.

Martin Parkhøi from SEB. Two, maybe slash three questions. Firstly, on the Continence Care franchise, 8% organic growth in the first half. Have you assumed accelerating growth in the second half based on the continued rollout of Luja? And then second question, just to be a little bit provocative on the Kerecis deal. Now we have seen a reduction of the earnout. We have seen the risk on the new draft LCD policy. Have you been a little bit naive with respect to the risk in this business that you have acquired? And Anders was very firm on sticking to the long-term targets, but I guess that assumes that you'll be able to reverse the draft policy. In case it will not be reversed, how will it impact your long-term targets?

Thank you, Martin. Two good questions. We're not guiding specifically for Continence on the first and second half. I'm expecting the good momentum to continue as the rollout of Luja takes hold. I'll just reiterate that everything that we're doing in these Chronic Care categories, they're long hauls, so to speak. Getting the product into the hands of clinicians and they start to initiate patients on them. You've seen some element of acceleration on Continence Care, and I'm just -- I'd say, at this stage, I'm expecting the good momentum to hold. On Kerecis and the LCD and whether we're being naive, Martin, I'll just reiterate, 80% of this business is in acute, with very stable reimbursement and very strong performance. Kerecis continues to be, by a significant margin, the fastest-growing biologics player out there. Now there's a hiccup on 20% of the business with the LCD coverage. I'm actually feeling quite confident about this. I have to say with the way that this the clinical data that we have that we can present. If you read the document from the Medicare Administrative Contractor, it is -- like I said in my opening remarks, it's a rational document. It's a document that sets out the clinical evidence that has been reviewed for every single product. And the intent is to, if you will, clean up the category. So it's driven by technology that has clinical evidence. I cannot expect anyone to make decisions based on data that they haven't seen. So the process is structured in a way that you can make your voice heard and you can present the evidence that you have and of course, we're going to do that. I have full confidence that that is going to work and that the people behind this are making rational decisions having produced this rational document. In the event that it's not rational, remember that this is just beginning. So we're nowhere near the full build-out of the Kerecis footprint. So the people that we now have dedicated to work in this part of the market, we have plenty of opportunity of redirecting them to places in the market where there is coverage or in the in-patient setting where there is payment. So yes, there's a hiccup. I don't think we're being naive, Martin. This is a category that we feel strongly about, the technology that we feel strongly about, and we're not changing an iota around our conviction.

The next question is from the line of Christian Ryom from Danske Bank.

I have two questions as well. The first on Kerecis as well. So going back to Q1, where you also reported 35% organic growth for the business, I understood that you were expecting growth to pick up or to accelerate from that level later in the year. Is there any change to that expectation? And how might this uncertainty we have around the LCDs impact that? And then the second question is on the Women's Health franchise within Interventional Urology. If you can shed a bit more light on the dynamics that you're seeing there and the outlook, may be also going into next year for that franchise?

Thank you, Christian. Good questions. So Kerecis is at a stage, and with performance that's in line with our case. And so all the work now is around expansion of sales force that's ongoing. And like I've talked to you guys about, it does take some time to onboard new employees and get them up to become effective. Now the adjustment to the provision is against the very aggressive management case like we also talked to at the time of the acquisition. The Coloplast case is still fully intact, which is also why we're not changing what we think is going to be the contribution around the business. I expect continued strong performance in line with plan in the coming quarters. But of course, now with the change in LCD acceleration beyond the plan, I'll be a little careful. We'll see how it plays out over the next quarter and then we'll probably be smarter around the potential impact in Q3. But we feel very, very good about the outlook for the year. And like I said to the previous question, should this not pan out in our favor, there is plenty of opportunity to redirect this part of the sales force to parts of the market where there is both payment and coverage. Now to Women's Health, we had a negative development here in Q2 and so this is really related to the sling portion of the Women's Health business. You should think of that as it's roughly 50-50, the Women's Health business divided between meshes and slings. We are seeing a new development in the U.S. that the slings procedures are going down and they -- a competitive technology in the market is gaining some share. It's not something that I expect to be resolved short-term. I will need to see how this plays out. But the bulking agent category is gaining traction at the expense of the slings category. Next year, I'd say too early to say, bear in mind that the difference between the slings procedure and the bulking agent procedures, the slings is up. It's a permanent solution. So definitely, there will be clinicians that prefer that, the patients that prefer that versus a bulking agent solution where you have to come back to the doctor with a certain frequency. But this will be a topic when we get here in June. It will be -- will also be wiser in the coming quarters, how this will play out. For now, we're taking a slightly more cautious stand on the outlook for IU for this year that it's going to continue to grow at the current level.

The next question is from the line of Maja Stephanie Pataki from Kepler.

Two questions from my side as well, please. Anders, I was wondering if you could quantify a bit when you say that raw material prices have started to come down. Would you -- could you give us a bit of a reference on what you've seen from Q1 going into Q2 and how you think this is going to develop throughout the rest of the year? And then coming back to your commentary about U.S. Chronic Care and calling out that it's going to be more H2-weighted. Has there been any orders that have been shifted? Or what makes you confident that momentum is going to accelerate in the second half of the year?

Yes. So let me start with the first question, Maja, around the raw materials. So as we have said, since we started the year, we are expecting raw materials to increase around mid single-digit at a higher level here in Q1 and Q2 and then it will start to ease towards Q3 and Q4. Please also remember there is some time lag that is impacting our inventories. So that is also included. But I'm expecting, as I said earlier, that the raw materials are starting to ease further into Q3 and Q4. So for this full year, I'm still expecting around the mid-single digit. So that's how I see it.

And Maja, to your question on ostomy U.S., where we call out an element of order phasing. There's also a bit of inventory reduction in there. I'm looking at a number of different data points to form judgment on this. The first is what does the patient inflow look like? And does -- is it increasing month-on-month? And the answer is yes. I'm looking at what does the volume growth in the acute channel and into home health, what does that look like? And we are growing double-digit in both of those channels. And then finally, I look at the actual sales out so the demand reported by distributors, that's -- products that they're selling, and that continues at high single-digit growth. Had I been looking at different data, I would have been talking to this differently, but the data points around demand and growth are pointing in this direction. And so I'm convinced that we're going to see high single digit in the second half.

The next question is from the line of Shubhangi Gupta from HSBC.

Just a follow-up on the LCD thing. So according to the draft proposed policy statement, most of the clinical trials have been conducted for a period of 12 weeks. There have been no studies beyond the 12 weeks, and application average use was, I guess, 4x. So could you please comment on Kerecis' product? What is the application and have you conducted longer duration studies to see the product efficacy and safety? And second, right now, Kerecis' Omega3 is not covered under the document. So while some of the challenges that peer products are, so what do you think differentiates Kerecis' product from the others that are already covered? And also, right now, you say 20% of your revenues would be impacted by this. So do you expect this -- the conclusion of this policy would extend to other -- like the 80% of your business as well?

Thank you for the question. I may need some help on just restating the second part of your question, so I'm not sure I got all of that. So the review is -- it's a quite -- it's a technical review. So there's some technical reviews -- technical requirements around the product where the -- there's an assessment and that it's quite binary, whether you meet them or not, and we meet them. And equally, there is a binary view on clinical evidence. It's not clearly specified exactly what criteria to assess clinical performance are necessary. But when we look at the products that have been included, we look at their study size, we look at their treatment results, we look at their risk of bias, Kerecis compares favorably to many of them. So either on par or better with most of the products that are already on that list. And we also have, of course, a 1-year follow-up on the patients that were included in the 2023 study. The risk of spillover from this type of review to the acute setting is zero. So this part of the -- the hospital part of the market works on DRG codes, it's very stable. And so this review here pertains to Medicare, and it's the outpatient setting. And like I said earlier, if contrary to our expectations that we were not included on this, we have opportunities to redirect our resources to parts of the market where there is both coverage and payment. But I am absolutely convinced that given the process and the documents that's been laid out that we have a study that completely fulfills the requirement and that the evaluators will put us back on the list. There's a process to that and we participate in that process and look forward to getting the results. Of course, it's unfortunate that we've got a hiccup like this, but things happen. Did I miss a part of your question?

I think I had asked that most -- in the review, so they had -- so that the median usage we saw was 4x and only in a duration of 12 weeks. So what are the corresponding numbers for Kerecis? Like I think they have mentioned that if it distributes beyond 12 weeks then you have to provide a good rationale, yes.

Yes. So I think if you look at the average -- the median use of Kerecis products, I would say, on the portfolio as a whole and not in the study, it's less than 4. If you look at the study, it's 5.9. But the language of the policy, you read that carefully, the language of the policy around the four applications basically says that if you're not seeing progress after the four applications, you should stop. I mean, who could disagree with that, that if you're doing a treatment and the technology is not showing progress, I mean you should stop. That's not a good use of taxpayer money. And the key thing and the key language in the document is that this is a clinical evaluation. So if there's a clinical need, of course, you should continue treatment. And by the way, this is not part of the evaluation, to be part of the inclusion or to be part of the coverage. I hope that clarifies. Next question, please.

The next question is from the line of Martin Brenoe from Nordea.

I have two, if I may. The first one is surprise-surprise, also on the Kerecis. The first question would be if you are getting any feedback from any medical doctors or your salespeople, whether this is already having an impact of the perception of Kerecis out there? That would be the first question.

So the answer is that both field force and clinicians are confident that the product will be reinstated. I was at Yuma last week -- in London and had a chance to engage with a lot of customers and key opinion leaders. A lot of people using the product day to day and are confident that with the clinical study that we have, that we're going to get back on. Our field force is also confident.

Okay. Just a quick follow-up on it. I guess that there is a little bit up to discussion. So it sounds like you've got your argument straight. But I guess that when we see these regulations coming down, a part of it is also -- potentially that the regulators are looking at price versus outcome. So is there a scenario where you might be accepted, but you need to do something about the price that you have, which are significantly higher than the standard of care today?