DiaSorin S.p.A. (DIA) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the DiaSorin Full Year 2019 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Carlo Rosa, Chief Executive Officer of DiaSorin. Please go ahead, sir.

Thank you, operator. Good morning, good afternoon, and welcome to this conference call. I think we all recognize that these are exceptional times. So what I will do, I will go briefly through the quarter 4 results and year-end, and then I will spend some time commenting on a couple of things. One is how we see the situation in Italy. We've got lots of questions about business continuity, then I will cover the corona and the opportunity and comments about corona effects. So if we go back to the numbers and the status of the business, if we look at quarter 4, and we look at the different regions, I think that what we... [Audio Gap] we continue to have good results in the direct geographies. So overall, if I extrapolate the direct countries from export, we continue to see growth, which is in line with the low end of the guidance, which is around 5%. And then we have a drag on export, as we did comment a few times. We saw lots of visibility in some of the geographies. And certainly, that -- the volatility in these regions now is becoming even more so because of the current situation. But again, going back to Europe, where we saw Europe continuing to grow at around 5%, 6% and again driven by the QuantiFERON. Clearly, in Europe, there is a slowdown compared to the first quarter because we are -- because of the success of the QuantiFERON program. We are coming to a situation where we are getting as much business as possible is -- as a result of either conversion from the ELISA QIAGEN product as well as the send-out that hospital decided to bring in-house. Clearly -- and I will -- I'm going to focus on QuantiFERON a little later. When it comes to the U.S., there is a fundamental difference between the U.S. and the European market. The U.S. market is -- a lot of it has to do with send-outs in the 2, 3 major labs, whereas Europe send-out is very limited, is more inpatient testing and within hospital testing. So there's a lot of opportunities out there. Overall though, Europe continues to do well. North America. Clearly, North America fell slightly short in Q4 from expectation, but that has to do with the fact that we are delayed, as you know, with the QuantiFERON program. QuantiFERON was just approved. I remind you that in late November, early December. When it comes to the -- how we see the opportunity today in the U.S. for QuantiFERON is growing above expectations. And this is because again, the strategy of the 2 companies, QIAGEN and DiaSorin, was to go to the hospital market and capture the send-out opportunity. The send-out opportunity is big in the U.S., and it's a growth opportunity because of: a, the send-out costs, which allows both companies to capture a premium versus what is the average price today of TB in the U.S.; and the second thing is that the volumes that today are sent out at each institution are high enough that would allow, financially speaking, a placement of a system. Today, we're going with the XL. And then clearly, when the XS is going to be available second half of the year, there's going to be an XS opportunity. So far, we have been in literally 8 weeks, we see 180 offers made and 30 customers already buying. So the ramp-up is significant. And by the same token, we are working also with the major labs together with QIAGEN in order to provide to the core facilities or the big labs the XS solution. So as far as I'm concerned, as far as the U.S. is concerned, the hospital strategy is working. The TB is a driver. And clearly, we follow suit with all the other specialty products, as we've indicated in the previous calls, very important to notice that we were able, in Q4, to hire all the people we were planning to hire. So we have a full staff now of salespeople dedicated to the hospital market. So very positive about the U.S. China. China is -- China was fine. In Q4, it continues -- this continue the trend as before. We placed last year over 100 systems, XS systems, in China. So strategy is working well. I'm going to make some comments about China today, but if I need to go back through Q4 if China was fine. And last but not least, Lat Am. You noticed that, in the first couple of quarters we had of last year, we had an issue with Brazil, and that issue eventually resolved itself, and Brazil came back to net positive growth. And Lat Am, actually, in the last quarter, actually grew by 7%. So again, the direct geographies are all fine. And then the net effect of that is that, very clearly, our gross margin is benefiting significantly from this. And you saw that the EBITDA of the quarter is in line with what we achieved previously. Clearly, net of an effect that I'm going to comment later, which has to do with certain accruals taken in light of the decision to continue consolidation of manufacturing and shutting down one of the plants of the company. Now if we move to, again, major, let me call it, business development activities before we get to the corona situation. I think that there has been a lot of attention drawn by the fact that QIAGEN and Thermo Fisher came to, I think, a conclusion, and of their relationship and has been announced that Thermo, subject to antitrust, is going to buy QIAGEN. And I see, there's been a lot of questions that came our way about what is going to happen. Well, without getting into confidential details, I'm drawing everybody's attention to what the CEO of Thermo Fisher said when he did comment on the acquisition. He made a reference -- a clear reference to 2 companies that they do business with. One is Illumina. The other one is DiaSorin. "As far as DiaSorin is concerned is that we've been doing business with DiaSorin for 10 years. We have a great relationship, and we want to continue the relationship with the company as is." So I am very positive about the fact that the Thermo acquisition is not going to destabilize the current program. There are 12 to 18 months, depending on antitrust, in front of us, where we will continue anyway, business as usual. And then clearly, when we get closer to that -- to the deadline, then we're going to transition the relationship from QIAGEN to Thermo Fisher. As far as Lyme is concerned, it's the same situation. We will continue. We agreed to go ahead with the clinical studies, which will happen this summer to obtain CE marking by year-end. If I see a positive effect of all of these from Thermo Fisher besides the relationship, the financial relationship and the relation between the companies, is the fact that Thermo Fisher is a great company when it comes to sales and marketing that is -- and market creation. So I am excited about the opportunity to working with Thermo in developing the Lyme disease opportunity together because of the strength that they have clearly in pushing the scientific value of products through the channel and to the customers. Now if I can go back to now the elephant in the room which is the gorilla, which is clearly what is -- what makes the future, I think all of us difficult to predict and explains why we decided to qualify our guidance for 2020. I would like to touch base on 2 things: One has to do with the business continuity. Clearly, if you're not Italian and you read the newspapers, you get very alarmed by what the government is doing. And the impression is that the country is caged. The truth of the matter is that, today, the business, all businesses continue. Logistics is in place, and goods continue to be shipped to hospitals, actually been a priority. As far as what DiaSorin has done, we have our primary centers in Italy. We have segregated people. We have created 2 shifts so that in case of a possible or potential infection of one of the employees, then we can combat by law. What we have to do is clearly go back and understand all the contact that the person has, which probably means we have seen with other companies that for a week or so that if you segregate it, only one part of the company will be closed. So we have placed 30% of the workforce in smart work. And this is to reduce, as much as possible, clearly, the risk of spread of an infection. And so far, so good. We have 2 months inventory. We took inventory directly to customers or to locations outside Italy, and namely in the U.S. to serve the U.S. market; in the U.K. to serve the European market; and in Germany also for the European market. So I think business continuity is not a problem at this point. Now let's talk about business effect of the coronavirus. We announced yesterday that we are very close to launching, on the MDX platform, a coronavirus molecular diagnostic test. And just to make sure that everybody understands, the MDX is a small footprint system, and we have 800 systems placed worldwide, and the majority of these systems is actually placed in hospitals, where they do influenza testing in the U.S. and/or they do test like HSV, so herpes virus, cerebrospinal fluid analysis, so for emergency. So it's a system that is typically has been designed because it was originally designed for military use for faster response clearly on throughput. And it fits like a global -- the requirement of health care systems today, what we have seen in China, but now we see in our own countries. The typical effect is that hospitals are -- the government first elects a certain number of labs to perform the test and then the logistics goes crazy, and meaning that you have swabs going all over creation, trying to get to the hospitals. And it takes up to 2 days to get a response back. But even if the patient is at the hospital, it takes 6 to 7 hours to get the result back because they are all batched, and then they are sent to the core lab. And the core lab, they use high-throughput system that typically take that time to generate the response. So the excitement we got over here around the MDX is the fact that it would be ideal as a system to be placed in the emergency room for triaging patients. At least if you live in Italy, and you will see that in all the other countries, what happens immediately is that they need to set up external facilities to test patients, not to allow infected patients within the hospital. And in these triage facilities, it would be ideal to place the MDX. So that's an opportunity for us. And today, we are 2 weeks away. By the end of March, we are going to have the CE marking, and we are going to launch the system in Europe and submit for EUA. And very clear to understand -- very difficult to understand how long an EUA process typically takes. Typically, it used to take 4 to 8 weeks compared to 6 to 12 months, which is a traditional 510(k) approval in the U.S. But what the signal we get from the government is that they are speeding that up even further, under pressure of having products available. So if everything works well, by April, we should also have the EUA certification and the ability now to distribute in the U.S. Now what would be the potential positive effect of a corona assay? Look, I don't have a crystal ball, but we did some quick calculations here. And we believe that having in Italy as a major market and the U.S. that have an installed base of MDX up and running, we think, at that point, the potential would be between EUR 5 million to EUR 10 million per month of business. Clearly, there's an estimate today that depend on for how many months this would last, but to prevent the question that will come, for sure, this would be the opportunity. Now let's look now about the negative effects. The negative effects are very clear. Because of the pressure of the hospitals to have access and beds for the infected patients by COVID, what happens is that they push people without acute problems away from the hospital. All regular routine test is postponed. All the insurance testing, whatever that's applicable, is postponed. And it's very interesting, if you listen to what Quest and LabCorp are saying, about how they start to see the business in the U.S., they see in the U.S. exactly the same thing. All the insurance checks are postponed, and there is more emergency testing for the corona. So all in all, without having a crystal ball, we believe that there is a temporary effect on volumes because hospitals would test less volume. How long it lasts? Difficult to say. We saw in China that for the first month, when the infection was at peak, it's a heavy effect. And then it tends to go back to regular course of business. But again, you need a crystal ball to understand how long is it going to take. So from the corona effect, in summary, I see no problems today as far as supply is concerned. I see that there is an opportunity for DiaSorin to develop the business around -- the molecular business around the corona and mainly, again, focus around the domestic market and the U.S. And I see a temporary negative effects on volumes of regular testing, which would be decreased. Now last but not least, I would like to make a comment on another press release we had, which is -- has to do with PPP, and this is perfectly in line with what we said during our Investor Day meeting. We said we believe decentralization is the way to go. And to be able to decentralize, you need a technology that allows fast results. And we have been searching for a while, and then we found this very promising technology in England, and we signed it up. We got exclusivity. And as we speak, we're working in transferring the know-how of the platform and the consumables to our facilities. It's interesting that we made that comment 9 months ago about the necessity to decentralize, especially for infectious disease. And unfortunately, coronavirus is one of the best examples where, if these systems were, in fact, available, portable, it would clearly allow management of the situation completely different from what -- from the mess we are seeing today. Okay. All said and done, I will leave now the CFO, Mr. Pedron, to go through the numbers, and then we're going to [indiscernible].

Thank you, Carlo. Good afternoon, everybody. In the next few minutes, I'm going to walk you through the financial performance of DiaSorin in 2019. And I would also make some comments on the contribution of the fourth quarter. As usual, I would like to start with what I believe are the main highlights of the period. We've closed 2019 with an increase in revenues at constant exchange rate of 3.8%, a little shorter than the full year guidance. Quarter 4 confirms the good performance of all geographies where we have a direct presence, plus 4.8% in the last 3 months of 2019 and plus 6.3% for the full year, whereas the export business decreased by 13.7%, 12.7% for the full year. Carlo has already covered the drivers behind this variance. Quarter 4 gross margin reaffirms the very good results achieved in the first 9 months of 2019, therefore, closing the full year with a ratio of revenues of 69.2% and the profitability improvement versus 2018 of 110 basis points. 2019 full year EBITDA is EUR 277 million, increased by 6.3% constant exchange rate compared to 2018. The EBITDA margin has gained, at comparable exchange rate, is at 39.1% vis-à-vis 38.2% of the previous year. I believe it is important to underline that during Q4 '19, we booked some one-off restructuring costs, net of which 2019 EBITDA margin at comparable rates -- exchange rates, would have been 39.6% with a growth over 2018 of 7.6%, therefore, doing better than the full year guidance. 2019 net result at EUR 176 million or 24.9% of sales records an increase of EUR 18 million or 11.1% compared to 2018. Lastly, we keep maintaining our ability to generate a very healthy free cash flow, EUR 180 million in the year vis-à-vis EUR 164 million in 2018. The net financial position positive for EUR 173 million, has been negatively affected by the introduction in 2019 of IFRS 16, which accounted for about EUR 13 million. This means we closed the year with no debt and EUR 202 million positive cash position. Let's now go through the main items of the P&L. 2019 revenues of EUR 706 million grew by 5.5% or EUR 37 million compared to 2018. During the year, we enjoyed some FX tailwind, mainly driven by the strengthening of the U.S. dollar against the euro. 2019 gross margin at EUR 489 million grew by 7.2% compared to the previous year, with the ratio of revenues of 69.2%. As I said, 110 basis points better than 2018. This increase is a result of 2 major drivers. On one side, a positive sales mix, coming mainly from lower export markets and the instruments revenues and a very good performance of our direct markets and specialty test sales. On the other side, lower manufacturing and distribution expenses coming from the several cost reduction initiatives started in the last couple of years. The divestiture of the manufacturing site in South Africa announced in this quarter, which follows the shutdown of the one in Ireland in 2017, goes exactly in the very same direction and is coherent with the journey to safeguard margins that we started a couple of years ago. 2019 operating expenses at EUR 260 million have increased by 6.1% compared to previous year. The growth at constant exchange rate is a touch above 4%, therefore in line with the growth in the top line. 2019 full operating expenses ratio of the revenues is basically in line with 2018, 36.9%. 2019 other operating expenses of EUR 11 million are higher than 2018 by EUR 5 million or almost 80%. This increase is driven by some one-off restructuring costs booked in Q4. In particular, as I said, I'm referring to the divestiture of our manufacturing site in South Africa and to a restructuring program done in Italy, which has been made possible by the introduction in the 2019 budget law of a measure that allows employees to voluntary anticipate their retirement with the support of some monetary contribution from the employer. It's the so-called Quota 100. Both these initiatives are consistent with our efforts, as I said, to safeguard margins and to streamline manufacturing footprint. And we will start seeing the positive effect from 2020 P&L. 2019 EBIT, because of what described, closed the year at EUR 218 million, with an increase compared to the previous year of EUR 13 million or 6.5%. The EBITDA ratio of our revenues at 30.8% and is slightly better than 2018, which closed at 30.6%. Q4 '19 EBIT decreased compared to Q4 '18 by EUR 3 million just because of the restructuring costs we have discussed about. Full year net financial expenses are higher than 2018 by EUR 1 million. This difference is mainly due to the positive revaluation at fair value of the participation in our Indian subsidiary booked in 2018, after the takeover of full control from the Indian partner. Besides, in 2019, we also have to account for the negative impact of the figurative interest driven by the first-time introduction of IFRS 16. Net of these elements, 2019 net financial expenses would have been close to 0. 2019 tax rate at 18.7% is better than 2018, which closed at 22.6% because of the booking in Q4 of deferred tax asset related to the intangibles, which we moved to Italy in connection with the shutdown of the Irish manufacturing site. Net of this positive one-off, 2019 tax rate would have been substantially in line with 2018. 2019 net results at EUR 176 million or 24.9% of revenues is higher than previous year by EUR 18 million or 11.1%. Lastly, 2019 EBITDA at EUR 277 million is better than 2018 by EUR 22 million or 8.4%. The ratio of the revenues of 39.2% vis-à-vis 38.2% of 2018. The variance at constant exchange rate and net of the one-off costs we discussed about is positive for 7.6%, with a ratio on revenues of 39.6%. Quarter 4 EBITDA decreased compared to Q4 '18, and this is entirely due to the mentioned restructuring costs. Full year 2019 improvement -- EBITDA improvement compared to last year is driven, as we have discussed, by higher gross margin and by the first-time adoption starting from 2019 of IFRS 16, which accounted for about EUR 7 million. Since there are many moving parts, and for the sake of clarity, let me underline that 2019 EBITDA margin is better than full year guidance, which was calling for 38.2% at constant exchange rate, even without considering the positive impact of IFRS 16, which accounted for a bump of a touch less than 1 percentage point. Let me now move to the net financial position and the free cash flow. We closed 2019 with a very positive net financial position of EUR 173 million after the introduction of IFRS 16, which imply that the booking of financial liability for about EUR 13 million. In 2019, the group generated EUR 180 million free cash flow vis-à-vis EUR 164 million of 2018, therefore recording an increase of EUR 17 million, 10%. This variance is the result of the good economic performance of 2019 and the positive working capital variance, mainly driven by an improvement in DSO which is a direct consequence of the different geographical mix we discussed about and the very disciplined collection policy. These 2 positive elements has been partially offset by a higher tax cash-out, mainly coming from the one-off exit tax deriving from the shutdown of our operation in Ireland, on one side. And on the other side, from the depletion of the patent box tax credit granted by the Italian authorities in 2017. For the sake of clarity, let me underline that the Italian patent box tax regime has been renewed till 2014. What has changed is simply that, during 2019, we have exhausted the tax credit accrued for in 2017 and related to the years between '15 and '17. Lastly, let's move to 2020 guidance at 2019 constant exchange rates. We expect revenues to increase at around 5% and an EBITDA margin between 38% and 39%. As Carlo already said, please consider that this guidance does not incorporate the effect coming from COVID-19 outbreak. We will review our projection as soon as we will have a better picture of the impact on the different geographies in which we operate. Before concluding, let me remind, please, that DiaSorin financials are fairly sensitive to FX fluctuations and, in particular, to the U.S. dollar and that for every $0.01 movement of the dollar against the euro, DiaSorin revenues move by about EUR 2 million, EUR 2.5 million on a yearly basis. Now let me please turn the line to the operator to open the Q&A session. Thank you.

[Operator Instructions] The first question is from Maja Pataki of Kepler.

Carlo, I have a couple of follow-up questions to your comments around coronavirus. Apologies, my line isn't too good so I missed some things. Could you just confirm that you said that, in Italy, you had full access to hospitals and, therefore, there was not an interruption of revenue generation due to a lack of access?

Do you want me to take this question now? Or you want to give me both?

I can give you -- I would actually have three, if I may. Second of all, the potential that you've given us for the COVID test, is that correct? You said EUR 5 million to EUR 10 million per month? If that is correct, could you just tell us what kind of volumes you're assuming underlying? And then the last question, it hasn't been really a topic at the conference call, obviously, because there are more pressing topics, but could you please give us an update on what is happening with regards to negotiation with Quest? And what has happened subsequently with the other larger customers?

Okay. The corona questions, yes, so far, there has not been any disruption in supply in Italy. Because of the corona, what we have seen, clearly, in some institutions, especially in the north is that the testing volume of regular stocks clearly is going down because you have less people, as said, accessing hospitals. There is a recommendation not to go to the hospital, except for urgent cases, the impact so far, access and supply, no problem. The second question has to be potential, yes, we say when we see that, look, we see as follows. There are millions of tests today that are done and is -- or prospectively will be done. And I've seen what happened here in Italy. And let me just give you a couple of numbers. So the official -- every night on TV, the Minister of Health goes on TV and gives numbers. And they say that, until today, officially, they performed 60,000 swabs... [Audio Gap] [ 60,000 ]. We know from a different source because of the volume of swabs supply that, so far, suppliers have sent to hospitals over 800,000 swabs. Okay? So it is very clear that this market is -- this volume in this city alone is hitting the suppliers as a storm. And everybody is on the COVID, everybody I know of is on the COVID, from people that are actually synthesizing primers, to companies that launch products. Nobody was able to cope with this surge. So it's very clear that, the way I see this business opportunity, is that there is going to be a pie that will be carved out among different suppliers, depending -- and it's going to be a mix of LDT tests. So you're going to have test performed with labs that are just buying the stuff. And that's today, the reality in the U.S., as you follow, the LabCorp-Quest are getting up, and they are able to do -- to perform LDT testing. And then you're going to have a dissemination of testing in the periphery, in the core labs. And here, you're going to have bigger system, and then in the emergency room, where you're going to have a smaller system. And we will be the first one, small system to go out. I don't think, by the way, that this is going to be a lot to do, especially in Europe, with final testing because it's a test, okay? So the real solution here would be a coronavirus test that is either corona or noncorona. This is what you need to know today. So to make a long story short, I'm saying that, if I do all this and I look at what would be the reasonable number of systems we can place, customers we can serve without really going back-order because you cannot start with the opportunity and then go and back-order. We did a quick calculation, and that is at full speed. So assume that we have a month where Italy is buying and U.S. is buying because we will try to serve other markets. But eventually, the surge is so big that we will try to focus on initially on these 2 markets. We believe the potential is EUR 5 million to EUR 10 million, okay? I cannot give you the volume because I would need to disclose a price. And I don't want to do that, okay? But this is how I am carving out this. And this is simply saying a piece of this volume that DiaSorin can commit to supply and support, okay? Other companies are going to then take other pieces of this business. And what is very interesting is that you are seeing, by the way, you saw that there's been a lot of discussions about the fact that government are actually pushing local suppliers, local company to start to give priority to their own country, okay? So I would not be surprised if what you will see coming is that all the diagnostic companies will have somehow to supply their own domestic market first and then export, okay? But it's very interesting. You already heard, in Germany, what happened and the situation there. Third question has to do with Quest and big labs. Look, the negotiation with Quest, it's not a negotiation. The negotiation has been done, meaning that we announced that 2 things happened, one is that the contract has been renewed for 18 months, and that is the time that is estimated by Quest originally to actually bring up to speed all their systems because the tender has been won by Siemens. So these are 2 official information. Today, I have a feeling that the implementation of all these changes are going to go through some hiccups because everybody has been hit by a storm. So how this is going to pan out, I have no idea. Facts are that as far as Quest is concerned, Siemens won the tender. We kept all the infectious disease. Vitamin D was assigned to Siemens, to what we understood, and there is a soft landing period of 18 months where our Vitamin D will continue to be used at the current price, okay? And then God knows what happens. LabCorp, there has been -- we are working, as I said before, when I was talking about TB we strategically want to develop with QIAGEN the business going after send-outs, but also exploring the opportunity of the centralized [ labs ]. And with LabCorp, we have a great relationship over the years. And we are clearly working with them to explain and understand and have them buy into our technology with our friends from QIAGEN. So every time we do have negotiations of this size, with customers of this size, we always have a trade-off, meaning that we provide discounts of certain things in order to have opportunities on other products. And I think this is -- let me just leave the comment there. So stay tuned to us. It's very strategic to have access to these very big volumes that the big labs are getting today. So in the next call, we're going to update the market about where we are at.

The next question is from Mr. Peter Welford of Jefferies.

Sorry, I was on mute. Apologies, I was on mute. And just a follow-up, please, on the coronavirus situation. And did you mentioned, I think, I'm right in saying there were 800 systems that have placed at the moment worldwide. I wonder if you could give us some sort of geographical breakdown of those systems that have been placed so far. And also whether or not the capacity to actually supply the systems is potentially a limiting factor at all for the coronavirus test as you roll them out. And equally then, I wonder if you've looked into -- are there any supplies of any reagents or third parties that you rely on where you see risk there? And if you, I guess, conducted due diligence of your supplier to determine whether or not there's any risk from some raw material input point of view to your business longer term. And then just on the QuantiFERON business, and you mentioned that -- you talked about, I think, the opportunity there in the U.S. and the ramp-up that you've seen so far there based on, I think, 180 offers you said. I guess could you guys give us some insight into those customers that didn't choose to buy? What the sort of dynamic is there? And what the sort of negotiation and discussion centered around for QuantiFERON-TB in the U.S.?

Okay. Let me start from the last one. It's easy to remember. On the QuantiFERON for the U.S., as said, today, we have a position with our partners, QIAGEN, and the position is, look guys, we bring tremendous benefit when we upgrade, either if we upgrade you to -- from ELISA to a fully automated system and/or if we allow you not to send out but to do own testing in-house. And we believe that it's fair for the customer and fair for DiaSorin and QIAGEN to split the gains. So today, we are positioning our pricing into an area which is very interesting for the send-out. Because today, the send-out cost is between $50 to $70. And therefore, there is lots of space for the customer to gain efficiency and for us to gain the right value for the product. And when it comes to customers that we convert from ELISA to LIAISON, we ask for premium. And we make -- we took with QIAGEN in a very hard stance saying if customers don't want or don't understand the value of the technology, we are not going to make concessions. I have to say today that, again, 180 offers. And with few exceptions, we see pricing and there's an issue. But if they have to say, where we are not going to bend is about value for this product, okay? Now going to supply chain, I see, honestly, today, as we speak, I don't see issues. So Keep in mind, we're -- fortunately, for us, we are a manufacturer, so we don't buy raw material. I've always been very proud of saying that we make all our stuff ourselves in terms of biology, otherwise, we will not be a diagnostic company. The only area where I think there is -- there could be an uncertainty, but again, this is a presumption. It's not what you see today is simply what we hear, is that when it comes to some of our instruments, it's very clear that some of these -- some of which are actually bought in Europe, as you know. Some of these sub-assemblies may be coming from other parts of the world, maybe China. What is very interesting about this corona effect is that everybody is now discovering that the supply chain is global and never local. So even if you think you're buying something in Europe, at the end of the story, a subcomponent is coming from somewhere else. So if I have to look forward, it would be interesting to understand whether -- and how long is it going to take for the Chinese supply chain of parts to be activated and made available to you. For the time being, we see no issue with the instruments viability. And so we continue to be alert with traffic, but if I need to point my finger somewhere, there's a potential risk of some back order in the future, not only for us, but for a lot of companies, it could -- really could be instrumentation. Now working back the list, the first question was on corona. Can you help me out one second? What was the question?

Yes. Yes, sorry, the 800 instruments, just whether or not you could potentially give us a breakdown of where they are, I guess, and whether or not either you see you've got enough supply of the actual instruments to meet demand of the test when obviously the CE Mark in the U.S. is approved?

Look, needless to say that this business was a U.S. business. We bought it from Focus -- from Quest. It was 90% U.S.-developed business. So as you can imagine, a good chunk of the installed base is in the U.S. and it fits in hospitals. And that's the perfect location to exploit the opportunity because hospitals are the one that will do testing in the U.S. In Italy, we do have an installed base, but the problem is that the way now in Italy, this system is positioned or how they want us to position this is more on the triage emergency room. And so what we are doing is we are dedicating to this a certain number of systems that we have in inventory or we are taking away from certain customers, where today the priority is not what they do, it will be more the corona and reposition this base into the emergency room. So to make a long story short, in U.S., installed base in hospitals or right installed base in Italy, systems were in inventory or were taken away and put in inventory to make sure that we deploy into the emergency room in -- as soon as the product is available.

The next question is from Mr. Andrea Balloni of Mediobanca.

Yes. Obviously, a lot of questions about COVID, positive and negative side. On the positive side, I've understood that the impact of COVID new test should be in the range of EUR 5 million to EUR 6 million per month -- EUR 5 million to EUR 10 million per month, which is pretty huge amount, and this should be a full speed coming from Italy and the U.S. And correct me if I'm wrong, I have understood that the impact in Italy should be very soon due to current situation. About the U.S., when do you think to receive the approval? Usually, it's a pretty long period to receive an approval from FDA, but in this case, could be pretty soon as well. So just to calculate the full speed that could be calculated starting from probably already in May is something doable. My second question is about the negative impact of COVID. You have mentioned that, so far, you are normally supplying the hospital back to the level of volume of test in the hospital is lower, dramatically lower compared to [indiscernible] in Italy. I would like you to help me in modeling this. So in China, where we have, let's say, 1 month ahead of Italy, what could happen? I mean which is the drop in terms of volume sold to the hospital you have experienced in Q1 in China? And I would like to know if this is something which could be repeated even in Italy. And my last question is about tax rate. You have mentioned a renewal of a patent box. Which is your guidance on 2020 tax rate, please?

Good question. And I think, in your comments, you already have a lot of the answers. So let me just try to add some. I think you said EUR 5 million to EUR 6 million, but I think you didn't understand what the number was, we said EUR 5 million to EUR 10 million. That's my first comment, as far as the opportunity is concerned. Then you asked about the negative impact on volumes. I said, I wish I had a crystal ball. I will play lotto. I think that what I caution the market is that we're doing -- we have seen is that in certain hospital in Lombardy, that clearly is the region that has been hit first. We saw a 30% drop in existing volumes. We have not seen this so far in the south. So Italy is a complex situation because it's a blend. Today, you have the north that has been hit by a storm. And the south, so far, it has been preserved, okay? So -- but I'm saying what we saw right now is around 30% drop in volume. China is a different situation because China was -- anything was very much concentrated in 4 weeks -- for 4 to 6 weeks. And at the peak of negative effect, you could see certain hospital even down 70% in -- but in China also you need to understand that, fortunately, for all of us, we were able to impose certain restrictions right away, right? And so the effect was immediate. It didn't last long. And then you see recoveries, slower recovery, but you see a recovery. I don't know if this can help you to model it. Believe me, I wish I had a crystal ball to model it myself. How this is going to -- is translated into Europe, I have no idea. Until yesterday, in France, they were still celebrating in the street. If anything is happening, Germany has been hit hard, and I saw a picture of Frankfurt Airport completely empty. This is what I'm seeing in the crystal ball, how long this is going to last, and what we've seen so far is what we told you. About the patent box...

Yes. So as I've told you, the patent box has been renewed. So the -- what we are shooting at in terms of tax rate for 2020 is a similar number of 2018, which is between 22% and 23% tax rate as group level.

The next question is from Mr. Scott Bardo of Berenberg.

A few questions, please. So sorry, I'm a little bit confused. So I just want to be 100% clear on a few things. So firstly, encapsulated within your around 5% group revenue guidance, do you include this new coronavirus test that you have within the portfolio? That would be helpful to get some understanding on or whether this is excluded. The second question, actually, it would be wonderful if you'd answer that one first for me, please, if possible.

So very simple. No, this excluded positive and negative effects. So the guidance we gave or we try to give is what we saw in the business plans with regular course of business. Then on top of that, what we excluded, so we don't know and we'll be able to quantify better moving forward is the positive effect, and we try to give you what we estimate will be the opportunities that we will be -- that we will look at as our -- the size of the business we can get, which is in a full month, EUR 5 million to EUR 10 million. And then the negative one, which would be the volume off. But all of this is not included in the 5%.

Understood. All right. And then -- and I appreciate it's an evolving situation, but you already have then a very established routine diagnostic business, and the test that you talk about here is a new test, which hasn't, if you like, established itself in the market yet. So what I'm trying to understand is, at this point, do you consider yourself a net beneficiary, if you like, of the coronavirus attempts to contain the outbreak? Or should we expect, even including this test, some negative impact to your business? In which case, just help us understand, is this a couple of percent on the top line? Is this 100 basis points additional margin compression to your guidance? I think it would be useful in this environment just to get a little bit more clarity as to what is a more realistic scenario for us to embed at the point.

Honestly, Scott, we've working together for a few years. So if I knew, I would give it to you. I don't know. And I'm trying to explain to you what the uncertainty is and why it is so difficult to evaluate. It is difficult to evaluate because you don't know how long is it going to last, okay? It now is shifting by different geographic regions. And so how long is it going to last? We know -- we not -- we now know, but we can predict what is the effect in China, okay? But I don't think that the Chinese model is reproducible, unfortunately, because you see us reacting with the same speed as the Chinese did. So I'm telling you, I'm giving you some guidelines on what I see in Italy. So far, in Germany and France, we have not seen decrease in testing volumes, business as usual, but we both know that it's getting there, it's hitting hard, and you're going to see the same effect. And certainly, nobody knows what is going to be the effect in the U.S. I mean that, I think, that is a first statement. So I'm telling you, I have no idea. Now -- but one thing is for sure, it is temporary. It is temporary because it's just decreasing volumes, patients not being admitted. But they will be admitted, insurance settings is being postponed, but it will be done.

Okay. Understood. And maybe then just following on from this, I mean you've commented about China routing, testing falling quite considerably in the month of February. I mean these are, if you like, again, established profitable product lines. Are we -- is it fair to assume that the new test that you launched is of a profitability profile that can compensate for some of these losses? Or in the sense, is this more of a revenue generator than a profit generator for the company?

Again, complicated to tell you. Look, I think that we made a decision as a company with social responsibility. We decided that we're going to provide this test to organizations at a reasonable price. And so we are not going to try to exploit the opportunity and the emergency. And so -- and that's an ethical decision that was made by the Board this morning. So we're going to sell this product at the same price that is actually paid for our regular influenza test, which is the only established reference you can use today. So this is as much as I can tell you.

All right. Maybe last question and corona aside. I think your guidance ex all of these impacts is at the low end of your midterm aspiration for mid- to high single digit. I think you also mentioned some comments about renegotiations with reference laboratories. I just wonder if you could share a little bit more about this dynamic because it was my understanding you had previously reached some agreement with some reference laboratories. So just some comments about how watertight these negotiations and previous contracts are? And whether the end goal is still very much in sight to become a high single-digit organic growth business.

Okay. If we go back to our regular course of business and we forget corona, so let's look at 2 effects in 2020. One which is to do with the discontinuation of Siemens' ELISA. As you know, when we have discussed, we are proceeding in the reacceleration of the cannibalization of the last accounts from the Siemens' ELISA to the LIAISON. The contract allows Siemens to stop supplying product to us by mid to the second part of 2020. This when the last lot will be actually shipped to DiaSorin to customers. So when we had bought this business, there were 2 segments of the market results of the customer list. We bought that, we knew we would have lost. One where 3 very large blood banks that we're still using ELISA. And we knew that when the deal would convert, it would convert to another technology, not DiaSorin because we're not above that company. So this happened and we are supplying -- still supplying ELISA to them, but in the next few months, this is going to disappear. They're going to move to a different technology. And then the long tail of smaller customers, where we don't have a solution for the small customers who's small, even for the XS, and we're going to lose them. Net-net, all this discontinuation effect is going to happen in 2020. Okay, so that's a one-off drop that. The other one, look, is a qualitative comment that we made. For us, it is very clear that -- and we said it many, many times, we are vulnerable on certain larger contracts, on Vitamin D with these big, big, big accounts because it's high volume, it's me too and so forth. And it was very clear when Quest made a decision to automate all their immunoassay that we will be not certainly not vulnerable on specialty, actually would gain more specialties like calprotectin, but we will be -- we will lose Vitamin D. When it comes to Vitamin D, then with these very large accounts, it is, for us, better in my humble opinion to trade some Vitamin D value, which is always at threat of being reduced by any of the large competitors putting in front of these labs, I'm not surprised, and/or the concept of Vitamin D being a Me too and being at this point automated on a [ frac ] system. So to make an own story short, every time I have a chance to get more business, at better value with a good contract, and if I need to do that, take an existing assay and exchange some value to get more value, we always do it, okay? So what I'm saying is if I need to use our Vitamin D existing business in order to speed up or make more comfortable a large customer than to introduce another product over to give me more stability and more value, I think it is worth so for DiaSorin to do it. One is compensating the other. So if you give a financial incenting with Vitamin D, that is going to be compensated -- way than compensated -- more than compensated by what you get in return from the lot. And I would like to leave it here because it's a confidential information, but is a principal that we've used in the past and we want to use in the future to secure strategic opportunities with the large labs.

Next question is from Ms. Catherine Tennyson of Bank of America Merrill Lynch.

I have 3, if I may. My first one is on China. Of your 2019 revenue number, what proportion of that came specifically from China? And if of your Chinese businesses, could you just remind us what portion of that is these 2 tests versus specialty tests? That was my first one. And then if we look at Q1 for China, have you seen a number of new coronavirus cases start to decline a bit in March? Have you seen an increase in activity there? Secondly, if I could look at the increase in operating expenses in 2019, could you give us a little bit more color as to what those were and if that stepped-up level is what we should expect for 2020? And then my third one is on your Siemens ELISA customers that you're looking to convert to CLIA, what proportion of those have been done as of late?

Okay. Let me say we never disclose what China is, but I think we say that APAC is around 15% of total business and China is a good chunk of that business, so you can, I think, have enough to make your own assumption. Quarter 1, in China, what we saw is January is, which now seems 10 years ago, but in January, we didn't see much simply because there was the New Year. Then we saw in February -- we saw deep dive in testing volume when the other country fundamentally frozen, is not only the 1 region, but as you follow it everywhere, the country across. And now we see in March a recovery, we can measure in -- which today, I see the recovery coming from the fact that we are back into business of installing new systems because hospitals have opened up now, access to engineers and to -- for installations, and that's very positive. And then we -- but again, it's still very difficult to get data from hospitals. But we -- from the data point we have, and we see a recovery in testing volumes still well below last year, but certainly not to the dramatic levels that we have seen in February. OpEx, the vast majority of OpEx has to do with the investments that we have discussed on commercial and the prep up of the U.S. organization. We have hired over 20 people to be dedicated to the hospital segment and to push the QuantiFERON. And that's had major effect that we have seen last summer, value-based care initiatives online because we are hiring people also to support that program. Last is Siemens. I think to this stage, we have converted roughly 75% of the installed base of the convertible customers. And we're going to wrap all up by June. Was that all right?

Okay perhaps.

The next question is from Mr. Luigi De Bellis of Equita SIM.

Two quick questions for me. The first one on the QuantiFERON-TB. How much of the Italian and European revenues growth in 2019 has been related to the TB test? And the second question on the molecular test. Could you elaborate on the decentralization process affecting large hospitals served by DIA and the impact expected for 2020?

In fact, look, I'm talking about the decentralization, the impact that we discussed is embedded in the corona number. Concept is very simple. You're Italian, so unfortunately, you do see what we see every night on TV. The net effect today is that the hospital are trying to fence out the infected patients. Every day, you read in the newspapers that if they cannot filter patients in acute care, people that come in for other diseases -- there was a case a couple of days ago about hospital in Torino, acute case, a guy with a heart stroke come in and then is not tested because he's rushed in, and then he's positive, and then they need to pretty much run cardiology. So they're building senses today to avoid these people getting inside, and -- but they cannot do it. Because the only way to do it is to stop them outside. They build the tent, awful tent, they put people inside, they take the swab and then if they don't have a way to test the swab right there, now the journey starts. So the swab is sent, if lucky, to the reference lab, to the core lab in the hospital and that takes it 6 hours to come back. If they are not lucky, meaning that they've not been allowed to do testing, so it goes to another hospital, it takes 12 hours. The patient is stuck outside. And this is why today, when yesterday, we announced and we got caught by complete surprise by the -- to be honest with you, by the reaction of systems of the political system, of the hospital system, everybody immediately understood the value of the test because they want to triage people right there and right away. And this is the value I see of the decentralization. And by the way, I hate to say this, but 6 months ago, when we were discussing about why the centralization is strategic and why point-of-care has more system and strategic, we referenced to this. We said, "In case of epidemic, this is what you need." And then it happened. So this is the only thing. But again, just watch TV at 8 o'clock and you see what I see.

And Carlo, I don't believe we give a breakdown of the contribution related to the close of the sale and growth of Europe, right? This is a confidential information. So it is a contributor alongside with all the other CLIA-ex, the Vitamin D tests that we have.

We have a follow-up question from Maja Pataki of Kepler.

Carlo, you mentioned the -- all the tests that are related to insurance, life insurance and there is a certain proportion of your test volumes that are not necessarily linked to acute conditions of patients. Do you have -- could you provide us a bit of a number or a guidance, how much of your tests in general are more used for checkups that could be -- that should be actually recuperated in the second half of the year? And then my second question, it's very helpful to get the understanding of what the potential could be from COVID-19 test per month. So shall we just think that if new countries start to see really dramatically increasing numbers, we should add anything between EUR 2.5 million and EUR 5 million per country to that potential?

Maja, it's very difficult to answer your question. Look, let me just give an example. So we are market leaders of prenatal testing, for some infectious disease, CMV, toxoplasmosis, rubella testing and so forth. There are guidelines that Italy and France, a good example, where this testing is done every trimester, okay? They're not done, meaning that if today a physician has to recommend to a pregnant woman to go to the lab and get tested versus if they stay home considering [ tetany ], they say, "listen, take the risk, stay home? Okay. So this is why I'm saying routine versus nonroutine today, it's become a very loose definition. Vitamin D testing, everybody knows in the U.S. that the vast majority of Vitamin D testing is actually related to the 40 million screening insurance programs that are done every year in the U.S. And again, really what they tried was last [indiscernible], they are seeing all of these postponed, okay? So I think if you look at our portfolio, Vitamin D, vast majority of it is also related to -- is clearly a non-acute case situation and a lot of it in the U.S. is related to insurance programs. And I see that to be postponed after the tsunami hit and this will revert to our regular course of business. On the infectious disease prenatal, again, I see some of it for this period of time not to be done. Other infectious disease for hospital admission, for example, for hepatitis, they do it every time patients are admitted. So in this case, more patients are admitted, more infectious diseases done, more hepatitis testing is done now versus the future. But the truth of the matter, I'm saying is that we are -- everybody is looking carefully to what is happening in China because it's the first country where it happened and now they recovered. Again, as we discussed before, China was relatively short. In Europe, we don't know how long it's going to start -- how long it's going to take before it starts, it peaks and it reverse. I think you're going to have an effect in Italy in the next few weeks because now they're going through draconian measures. They're pretty much shutting down all the north. You cannot leave your house. And then let's see how long is it going to take before the relatively small number of cases, we are talking about 10,000 cases up to yesterday, but still increasing by about 2,000 to 3,000 per day. Let's see how long it's going to take to peak and go back. Italy, will, in my opinion, provide a good example to everybody of what a democracy can do under certain democratic roles.

Due to a lack of time, the last question is from Mr. Scott Bardo, a follow-up from Berenberg.

Just a very quick follow-up. Yes. So boiling this all together and some of the puts and takes and moving parts, and you have highlighted that you're, again, looking to file for approval for your coronavirus tests and you have some renegotiations with reference laboratories and some Chinese impact. If I were to boil all this together or distill it, is it fair to say that we are likely to have a pretty weak soft start for DiaSorin from a revenue perspective? Or do you expect it to be broadly in line with your full year guidance? And also maybe some -- Piergiorgio, make some comments on margin. Would margin, in your opinion, be down in the first quarter or half of the year as compared to the prior year? Or are you expecting a stable development? If you could just comment there, that would be helpful.

Scott, clearly, I think Q1 is going to be difficult because Q1 is pretty much is a tsunami. So you have China, you have Italy, now looks like you have in Germany. So I think Q1 first half for everybody -- forget DiaSorin, for everybody is going to be complicated. Unless you are in the business of supplying reagents to labs to do corona. So if you just do that, you are doing very well because you enjoyed the peak of the demand. If you also have with your regular business a diagnostic business, you will suffer from the decline in volumes. So the answer is yes, I believe Q1 and Q2 will be soft. By the same token, I believe that, as far as margins are concerned, we see -- clearly, you're going to have less -- I mean since we are investing -- since we believe all of this is temporary stuff, we are -- we continue to invest to fuel programs. And so our OpEx rate will go up because we are value-based care because we have aligned it with clinicals, because in the U.S. we have all the good people to push programs. So at the level of the -- of gross margin, I think you're going to see -- continue to see very good margins. At the level of EBITDA, you make an illusion simply because the weight of your OpEx -- since we don't want to stop it because it's the future of the company, you're going to have in the first 2 quarters, a margin compression is relevant because of the OpEx certainly.

Mr. Rosa, back to you for any closing remarks, sir.

Thank you, operator. Bye-bye.

Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.