Devyser Diagnostics AB (publ) (DVYSR) Earnings Call Transcript & Summary

Welcome to the Devyser Diagnostics Q4 Report [Operator Instructions]. Now I will hand the conference over to the speakers, CEO, Fredrik Dahl; CFO, Sabina Berlin; and CCO, Theis Kipling. Please go ahead.

Good day, and welcome to the Devyser Q4 2024 Earnings Call. I'm Fredrik Dahl and the acting CEO of Devyser and would like to thank you, everyone, for joining our call today. On the call today, we have, in addition to myself, also our CFO, Sabina Berlin; and our Chief Commercial Officer, Theis Kipling. Since this is my first earnings call for Devyser, I will start with a short introduction on who I am and my background. I will then review our updated strategy before handing over to Sabina for a review of our financial results in Q4 2024 and then to Theis for an update on our commercial activities. I have been a Board member of Devyser since 2021 and is the acting CEO since January 16. I have a PhD in molecular medicine from Uppsala University and carried out the postdoc at Stanford in DNA technology development. After my studies at Stanford, I worked in start-up scene in Silicon Valley and next-gene sequencing and have co-founded both Halo Genomics and Vanadis Diagnostics that we sold to Agilent and PerkinElmer. I have a background from both start-up companies as well from large international corporations in both the research tools and diagnostics space, and I will remain as a member of the Devyser Board of Directors. During my first few weeks, my team and I have focused on updating our strategy, and it was reconfirmed to me that Devyser has a great potential with a lot of commercial and scientific talent. An overall goal for us in the coming year is to make Devyser a more efficient organization, and that goal starts with a clear and more focused strategy. With this updated strategy, we proposed to focusing on 2 customer segments. The first is our customer group in clinical genetics labs. In these labs, both research and diagnostics of patients within the field of inherited diseases is carried out. Many of our current products belong to this research discipline such as our inherited cancer products, cystic fibrosis and diagnostics of cardiovascular disease-causing genetic variants. We have a well-established commercial footprint in these labs with long and good relationships with the leading researchers as well as recognized commercial brand. We strongly believe there are significant more unmet diagnostic need that we can address in a systematic approach together with our customers and scientific collaborators. Our ambition here is to become the #1 partner and the one-stop shop for these laboratories. The second customer group we would like to focus on is the transplantation lab and their patients. The fast-growing diagnostic field has been subjected for a paradigm shift with the introduction of cell-free DNA as a sensitive diagnostic marker to measure transplant reaction. By detecting transplant reaction early, more organs and human lives can be saved. Devyser has developed a highly competitive product in cfDNA measurement for post-transplant analysis with superior sensitivity compared to competition. We currently have a partnership with Thermo Fisher to allow for faster market entry and our longer strategy is to continue to expand our portfolio in this field to become the pioneering partner for decentralizing transplantation diagnostic. So, what does decentralization mean in this field? Well, today, the great majority of all samples are being shipped to large central service labs. These samples are prepared and analyzed by the central lab and data finally sent back to the local transplant laboratory. This procedure is subjected to high cost and long turnaround times. With devices reagent kit, we have an opportunity to bring the test closer to the patient at the local hospitals, increase turnaround time without compromising on performance. With that, I would like to shift focus to the fourth quarter results for 2024. I'm very pleased to announce that we had our first profitable quarter as a public company. And the theme for 2025 is to leverage our recent investments and continue to focus on profitability. With that, I would like to hand over to Sabina to share more details on our financial results for Q4 2024.

Thank you, Fredrik. Let me here give you a summary of the financials for the quarter. Revenue for the period October to December came in at SEK 64.2 million compared to SEK 45.5 million in the same quarter last year and SEK 48.7 million in Q3, a growth at 41.5% in the quarter brings us back to full year growth just below our target of 30% annual growth. All of our markets have performed well in the quarter, and Theis will soon share more specific highlights from the commercial side. The trend over our historical quarters remained stable. Q4 showed the best quarterly revenue so far with the first-time above SEK 60 million in a single quarter, catching up from the slightly softer Q3. We can expect some of the inventory buildup that we saw from Thermo Fisher in Q4 to impact their purchasing pattern in the early months of 2025 before partner sales pick back up again. Our EMEA region remains our biggest market and grew by 33% compared to last year during the quarter and just below 30% over the full year with our new direct markets carrying the strongest growth. APAC has seen a small decline in growth, but North and South America grew at about the same pace as Europe, landing at a full year sales of SEK 19 million. During 2024, direct sales made up 65% of total revenue, which is lower compared to the 77% of sales last year as sales to Thermo Fisher has picked up. Distributor sales have almost doubled compared to 2023 for the same reason. The fact that direct sales being lower than the same quarter in 2023 is mainly due to the transfer of the last transplantation customers to Thermo Fisher in 2024. Outside of the agreement with Thermo Fisher, also our other distributors show a healthy growth during the year. Gross margins during the quarter is back close to 85% in October to December, but remained just below 80% for the full year after the impact from our move to the new office and expanded production facility during Q2 and Q3. We were very proud of the first EBIT positive quarter since the company was listed. Even if EBIT was only SEK 0.7 million, it would have been a positive SEK 6.9 million without the provision for Italian payback that was made in the quarter. This payback fee was initiated several years ago when the Italian Parliament imposed a law enforcing companies selling medical devices in Italy to make payments to the Italian state if medical device expenditures exceeded the regional maximum ceiling. During 2024, a decision in the Constitutional Court in Italy confirmed the law and deviser decided to make a provision for the period of 2015 to 2024, and the annual reservations for payback fee will be made going forward also. The positive EBIT results mark an important step in the path towards profitability, which is under control and progressing on plan. As part of the journey, there will be quarters in H2 of this 2025 year that are as strong than H2. During the Q4, we also saw gains from the savings initiated in Q3, which impacted that quarter negatively. We closed the year with SEK 145 million in cash and our liquidity, and I feel comfortable that our cash flow will turn over the foreseeable period as our focus on profitability continues. And with that, I hand over to Theis.

Thank you, Sabina. Q4 was indeed a great quarter in many ways, as you just heard. We are continuing to make lots of great improvements across markets and especially within the U.S., including our partnerships with Thermo Fisher as well as Cyted. During Q4, we received the expected order from Thermo Fisher, the largest in the history of our company. We are pleased to see the partnership continue to advance in the right direction. We recently had a joint leadership meeting with Thermo Fisher, including also our acting CEO, Fredrik Dahl, who once again underlined the commitment on both sides to make this partnership a success. Both companies are ambitious and eager to build as large a market position as possible. Let me start with an update from our CLIA lab in the U.S., where we, during the past months, have been working diligently to prepare for obtaining reimbursement for our cfDNA transplantation assay. We had a first pre-submission meeting with MolDX and are on track to getting reimbursement during the second half of this year. Furthermore, we recently signed and extended the agreement with a U.K.-based oncology company cited to continue through 2027 and with certain revenue commitments associated to the agreement. Just on this agreement alone, we will be doubling our revenues in 2025 versus 2024 within North America. Turning towards our momentum we have with RHD. We continue to be optimistic around the potential for this product within North America. Starting in Canada, I'm pleased to see that Canadian Blood Services are expecting to reach clinical routine within a few months from now. Additionally, I'm equally pleased to see that Hemo-Quebec recently ordered their first set of RHD products to commence their validation. Within the U.S., we continue to be working with some large potential customers around RHD. If we win just one of these large opportunities, then we will be poking a sizable hole into the U.S. market, which you will hear more about as we progress the year of 2025. Moving on to Europe, but staying with RHD, I'm happy to mention also the recent Class D-IVDR approval that we obtained late last year. Class D within the IVDR represents the highest risk classification within the framework and hence, is also associated with the toughest data requirements. This is definitely a milestone for the company as well as it's a clear differentiation within the market that I expect will help us with the continued expansion of RHD across Europe. Beyond this, I'm equally reassured that managing the highest risk classification puts us in a solid spot for working with the FDA in the U.S. to have products approved within the U.S. market. We're committed to making the most of this momentum in Europe. And one of the next markets to adopt the testing first before giving the prophylactic treatment is our largest market, Italy. I expect to be able to share more good news within the next quarters around the first public hospital in Italy to take on our RHD assay as part of regional screening. The team in Italy continues to make impact, as you recently saw from our press release with a new tender for cystic fibrosis that we won for 5 years, and they are continuing to ride the way that they have created for themselves as well as the remaining direct markets are doing equally so. All in all, as you can see, the momentum is building, and I look forward to keeping you updated throughout the year. And with that, I pass the word over to you, Fredrik.

Thank you, Theis and Sabina. With the updated strategy, I'm confident we can build a solid foundation for Devyser going forward with improved productivity, customer focus and optimized investment spend. With a more focused and efficient organization, we are positioning Devyser to better serve our customers and patients as well as our employees and shareholders. With that, I open up for questions.

[Operator Instructions] The next question comes from Ludvig Lundgren from Nordea.

A few questions from me. Starting off in the direct sales channel here. I think Sabina said that this was negatively affected by you transitioning customers to Thermo Fisher then in the transplant tests. Is it possible to quantify like the cannibalization then of direct sales and maybe the growth rate when excluding transplant in direct sales?

Okay. Sabina, do you want to take that one?

We're not fully allowed to quantify, but I think Theis can give a little bit more color on the direct sales and transition to distributor sales.

Yes, I can do that. And as mentioned, obviously, we have, in a couple of iterations now expanded the agreement with Thermo Fisher. And what happened in July 2024 was that we reached an agreement with Thermo to hand over the exclusive -- we had an exclusive number of customers for Chimerism that we had kept out of the contract, but to enable Thermo Fisher to gain access to those accounts and broaden their reach within those, we agreed to carve those out. And that meant carving it out of our direct sales business and then reporting it in Q4 as part of Thermo Fisher, meaning that it's part of distributor sales, that's how we are classifying Thermo Fisher. Overall growth, we have not commented on neither for the respective businesses. So there, I would have to defer back to the comments that we provided at the Capital Markets Day a few months ago.

Okay. Understood. And just a quick follow-up. Like can you elaborate anything on like what these assays will be used for from Thermo Fisher? Is it for like clinical diagnostics? Or is this some validation batch that you deliver here?

Can you clarify, I'm not sure. Are we referring to the drop in direct sales and the other questions you just had or...

Thinking about this large order then for transplant or assays basically, like will this be used -- I suppose in Europe, most of it will be used in the clinic, so to say, but is there a boost from some initial validation batch and so on in this quarter?

It's all of the above and not only restricted to Europe, but obviously, there's expected to be quite a number of this utilized for demoing and onboarding new customers as well as providing existing customers who are already in clinical routine.

Okay. And then jumping to Cyted because here, you said that you have extended your agreement. Reading your own old press release when you initiated this partnership, I think you estimated a SEK 6 million sales from this agreement in '24. Like is it a doubling from this amount that you're referring to here when you say that you will double the business in '25? Or is it the full SEK 16 million Americas sales that you reported here for '24?

It's a combination. So, it's the direct sales that we have within North America and not the number -- because the number you see for North America, I believe, are covering the whole of North America sales, including Thermo Fisher. So, this relates to what is in our own remit and is a sizable incremental increase. But we're not providing more specific guidance on exact numbers.

Understood. But could you say anything about -- so you estimated this to be about SEK 6 million on a SEK 25 million contract. Could you say anything about how much of this is delivered, so to say?

In '24 or '25 or can you specify?

'24.

We have been following the agreement pretty to the letter. And now we have expanded.

The next question comes from Ulrik Trattner from Carnegie.

And a ton of questions on my end because to be honest, it looks pretty massive. And if we can just start off to get some clarification, additional clarification on the direct sales development and how worried we should be. I heard what you said, Theis that you carved out the chimerism now reported under distribution. But taken from your slides at the Capital Markets Day, adding that back like by a quarter, it still looks like a really poor performance in direct sales. So is there any sort of fundamentals that we should be worried about or trend shift that sort of direct us in '25 to direction where you're not growing and you're declining in sales as well as, I guess, we should extrapolate the direct sales in Q4 into the absolute numbers for '25, given that it's been transferred and it's hitting numbers now and will be hitting numbers going into '25.

So, I can only appreciate that it's difficult to see through, obviously, all the details here. The guidance I can give is that we had a fairly attractive number of customers with associated revenue that we saw would be beneficial to pass over to Thermo Fisher. That had a double-digit million revenue in Swedish krona associated, and you cannot dissect that and take out a quarter and then add it back because it has some seasonality. But all in all, there's nothing, that makes a lot of sense for us and for Thermo to hand that over to Thermo Fisher. That will only increase and accelerate the overall momentum also utilizing our solid organ test. That was part of the rationale. To your question on direct sales, from my side, we are right on plan with all our direct markets. There are no markets going back. We're right on plan, right? And that is a sizable growth number. We have not disclosed exactly what that looks like. But it's promising. It is exactly as we have been planning. And I'm only highly optimistic when I look into the funnel of the direct markets. I hope that can initially clarify some of the questions.

Sure. But a follow-up on this. So given the fact that you have transferred customers to Thermo Fisher, I guess this only refers to the transplantation, the chimerism and accept customers or products. But then you talk about ordering sort of stocking from Thermo Fisher side and expecting or sort of guiding for sort of burning out this inventory for Q1. But I guess that the customers you have transferred is not part of the order stocking, right?

Yes and no, you can argue. Obviously, those customers are, from our side, ordered and built at a different revenue basis. So, they can supply those customers with the kits, but then there's in the agreement, certain considerations that we obviously fully acknowledged at end user pricing for those specific customers. And that's going to be with a deferred revenue logic. So we are, in that sense, delaying that part of the revenue by a quarter or so. But that's fully as per design and fully on plan and meant to support the acceleration of that business.

And what's the risk of sort of churning out the inventory will linger into Q2 and Q3 that Thermo Fisher is now sufficiently covered for the entire year?

They will be low. I mean as guided, this will have an impact on Q1 for sure. It may go into parts of Q2, but there's nothing here indicating that there will be any softness for the year and beyond either.

Okay. And then on the extended agreement with Cyted, these are obviously not your own diagnostics tests, and you talk about positive on gaining reimbursement on your own tests in the U.S. sort of midyear this year. But how should we interpretate you using the sort of the volume in your labs to a nonproprietary product? Is this a priority or do you have that type of excess volume in your CLIA lab in the U.S. where you feel that you can do cover the volume that you will make up your own with the expanded sited agreement?

I mean, it's a very clever way of doing business, I'd say. It's a highly attractive profitable business model doing services for other companies like the partnership we have with Cyted here. So that will go on. When you look into the capacity, there are no risks in our capacity for capitalizing and doubling down on the products that we are soon bringing out with reimbursement. And to your point, we are on track with what we call the transplant trace so the cfDNA solid organ test that we are launching through our CLIA lab here later in the year as we get reimbursement. And we expect that to also gain quite attractive revenues, right? And here, again, I defer back to the commentary we provided at the Capital Markets Day on how we are approaching the market in 2 ways, now with the kits. And as I also had a comment on the slide, we may even go together with Thermo Fisher for them to be the channel for selling the services on. And then we have the FDA project ongoing, right? And those 2, we expect will be able to carve out a fairly sizable market share in the U.S.

Yes. And you mentioned coming out if you are awarded a few of the tenders that you're participating in. And you also mentioned that Blood Canada is now starting to run clinical samples from Q2, but we have yet to see any sort of announcement of you being awarded the large tender that we've been talking about for the last few years. What does the sort of -- that information that you provide today, what does that entail in terms of time lines and sort of size of such a tender, et cetera?

If we look into the Canadian market, you need to kind of -- let's break it up into 2 sole providers that we are working with. Hema Quebec that we announced now a couple of years back even, covering the region of Quebec. They just ordered their first initial batch of products for validation. And that means that now they have concluded they made a restructuring and a remodeling of their premises that was sizable and took a lot of time, buying in new equipment, designing the whole workflow in accordance to the device or RHD workflow. Now that is designed and in place, and they are starting validation. I don't expect them to reach clinical routine any time before late this year, but they will continue to order for validation. Moving into Canadian Blood Services, which could or could not cover the rest of Canada. And I think the or the region you're referring to still being a question mark was the region of Ontario, which is a very sizable region of Canada, holding 16 million citizens out of the about 40 million in the nation. So very sizable. Canadian Blood Services have already initiated validation. They are about to complete it. And as I mentioned, they are soon to initiate clinical routine. So that's great that we are still working with them on signing off a few final pieces before we will issue this more formally in the press release with more information. We have also positively heard indications of them being partly or fully awarded, we don't know yet, but the Ontario tender. But since there are still uncertainties, I can't give you more specific information than what I'm sharing today. But it is looking from my part of the table, very attractive and very positive and as we have planned.

Great. And last question on my end, and that would be addressed to Sabina, and it's great to see progress on EBIT. And I know that like adjusting for the Italy levy, it looks better, but it also looks a bit boosted by higher capitalized R&D and FX tailwind. So, if you can give us some rough guidance on what to expect in terms of net capitalized R&D because it has close to doubled year-over-year '24 versus '23 and just what it entails for the profitability near term as well?

Yes. I can confirm that we definitely had some tailwinds when closing the year. And the increase in R&D mostly comes from gained efficiencies in ways of working, including the new office that we have been able to strongly focus on getting our processes and we are working in the R&D structure up and running. And we will have a continued strong focus on profitability and on stable cash flow during 2025. I think that if we want to guide even further on the quarters, that would be for Fredrik to answer.

Yes. Great. But in terms of capitalized R&D, where should we expect and extrapolate the trend that we're seeing, i.e., the capitalized R&D doubling sort of again in '24?

I don't think it will double year-over-year in a way that we've done between '24 and compared to '23. But there will definitely be sort of continuing on the path that we saw in Q4 and just us having our new way of working in place. So, we will have a strong R&D, and we will continue to capitalize the work we do with new products.

The next question comes from Oscar Bergman from Redeye.

I got a few questions. I could start off with, I guess, the direct sales. Just wanted to get an update on the conversion of the [indiscernible] markets and maybe some comments on how you think Q1 could develop in comparison to Q4.

Yes. I mean we have converted the markets we believe are relevant to be converted to direct sales for the time being. And then there will be a phase of which we are building indirect markets to the maturity needed before we turn them into direct. So, there are no real changes in that moving element. Direct sales from my side, it is looking, as I said initially also, it looks promising. There's nothing that would make me see this and the outlook more negatively on the contrary. So, we have already announced press releases in the first month of the year. I can reassure you we are working on a lot of additional deals. It's across a number of markets and across a number of products within especially the European direct markets, leaving out the updates I've already given related to both U.S. and Canada. But I can't give you more concrete guidance than that.

Okay. So, no broken quick guidance. I guess it's unnecessary if I ask you if Q1 sales are likely to be more in line with, let's say, Q1, Q2 2024 than they are to be aligned with Q4 sales.

Well, I think in other words what I can comment on is the great thing with our business is it's a very stable run rate business. So that means it's pretty -- it should be fairly easy to -- the baseline is stable. And then we are a highly competitive and relevant company. So, we're continuously winning over new customers and new tenders. And that will be the challenge on your side, obviously, to projectify, right? But as mentioned, I'm very bullish on the potential. I don't believe we're not even beneath the surface yet. We're still scratching. There's a lot of growth for us to be taken out of these markets. But it will take time. But the trend is continuing. There will be bumps along the way, but it's going to be a very clear and on upwards going slope.

Okay. And then distributor sales, I just wondering if you operate with any volume commitments from Thermo Fisher or will they order when they feel like ordering?

We have not disclosed the terms of the contract. But obviously, we have certain guardrails in the contract to steer performance and also transparency and forecasting ability, right, which is relevant on both sides. So, we remain having a very close collaboration and conversation with Thermo Fisher.

Okay. And this inventory buildup, I mean, it seems to be mostly focused for the European market, if you look at the sales from the different geographical markets. And I'm wondering if Thermo Fisher is having a strategy in this early launch phase to target the European market? Or could we expect also inventory buildup order from Thermo Fisher focused on the U.S. market?

It's easy to go obviously continue the momentum in the European market as we've already built, right? You need to take into consideration that the U.S. market is different. And going back to Fredrik's initial slide on decentralizing. Here, we are bringing in a paradigm shift. So, we are up against very established services market. And to break into that and changing patterns and routines takes longer time. So, it has a longer pathway in the U.S., and that's why we are also investing into the FDA program. But the inventory will cover both of those markets.

Okay. But I suspect that we should expect most of Thermo Fisher sales for 2025 to be directed to the European market.

I can't help you any further, unfortunately.

Okay. That's up to me then, I guess. And then a final question on investments in Q4 were quite high, NOK 20 million. I was wondering if you can elaborate on that figure? And is it a result of increased activities regarding studies and so on for the FDA approvals?

Of course, it's a combination of several aspects. It is R&D buildup as in normal work done, ours created in-house. It is studies and preparatory work for the FDA program, and it's also investments into software as we have transitioned to both a new ERP and new CRM during the year.

Okay. And I mean this figure stands out if you compare it to the other quarters. Is this something that we should expect for Q1 and Q2? Or should it come back down?

Similar to what I said before. I mean, all the work done for in-house in terms of activities related to the new office activities related to software, they are 2024 only. But we will see costs continue for the FDA program as well as for our road map to increase our portfolio. So, we should stay for R&D at a similar level as in Q4.

There are no more questions at this time. So, I hand the conference back to the speakers for any closing comments.

Okay. So, with no more questions, I would like to thank everyone for joining today. And with that, I think we're going to close the session.