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 Third Quarter and 9 Months 2020 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Carlo Rosa, CEO of DiaSorin. Please go ahead, sir.

Yes. Thank you, operator, and good morning, good afternoon to everybody. Welcome to the quarter 3 conference call of DiaSorin. I will -- I think this time, we are going to make some short comments, and then I'm going to leave Mr. Pedron to go through the numbers, and then we're going to leave ample time to -- for Q&A because I see there are lots of questions, none, I believe, necessarily related to the results, but to the environment, the ecosystem after the [ Pfizer ] announcement a couple of days ago. So I would start and comment on revenues. As you have seen, the quarter has been a very strong quarter, I think, in line with what we have seen also from other players in diagnostic. And we need to look at the revenue and the revenue from perspective of COVID opportunity and from what the rest of the business is doing. Rest of the business is recovering better than expected. We were coming in Q2 from a minus 35%. And now in the -- and that was pretty much generalized in all the different geographies. In quarter 3, now we are at minus 7% with a different mix. We have U.S. and Europe with a strong recovery. We are almost close to where we were last year, whereas China is still like India, and I'm going to make some comments about China, specifically. Yes, in Europe, we have seen now constantly that testing volumes in the major geographies in Europe -- major countries in Europe are going back to last year levels pretty much. And this, for us, is a combination of regular prescriptions. So that we see, again, going back to normality, and then combination of new business that we closed last year and growth of our product lines, the gastro enteric lines is -- notwithstanding the COVID situation, is growing over 20% year-on-year, which is phenomenal. And then the TV program, that certainly is fully incremental for us and it's firing up -- it did fire up well in Europe, and it has been firing up in the U.S. as well. So in U.S. and Europe, a combination of recovery of testing volume and our traditional programs firing up. We see the traditional business doing okay. When it comes to China, we still have a red flag in China, and I think I heard also other diagnostic companies making similar comments. And the reason we believe is the fact that, as you know in China, there is no -- some medicine is practiced right at hospital sites. And so hospital sites additionally are extremely crowded. And I believe still, the general population does not want to go to see the doctors, except for emergency cases, because they don't want to be exposed to the risk of infection. And this is the only way, I think, all of us can explain why, notwithstanding what is happening in the rest of the world, China is still again behind, vis-à-vis, volumes. And so we will watch carefully what that is in quarter 4, and we hope that eventually volume is going to go back. But so far, I don't think we have lost [indiscernible]. Now when we -- now let's talk about COVID, which is the elephant in the room. Certainly, business is doing extremely well. And we need to look at, I think, 2 components of COVID on one side, serology; and on the other side, molecular. Serology, Q2 was phenomenal, and this was because there was lots of excitement about the adoption of serology for epidemiological studies and then the availability of serology to support lack of testing capacity from the molecular side. So lots of hype that eventually dies pretty fast. And if you have seen comments from the major labs in the U.S. as well as other competitors, the spike really lasted 2, 3 months, and then serology went back to where I think it [ deserved ], which is an interesting tool to follow up at this point all the patients that are hospitalized, so more clinical use than general use. In quarter 2, I remind everybody that we had roughly EUR 45 million revenues on serology. This is -- in quarter 3, it's not there. Certainly, it's not there anymore. Where I think that our projection of C serology more around between EUR 8 million and EUR 10 million per quarter, which is what we believe is physiological use of serological tools, especially in those countries like Brazil, India, and some of the export countries, where lack of swabs and molecular testing is somewhat compensated by the use of IgG and IgMs, which is, and let's say, that we have launched a couple of months ago. As far as the molecular is concerned, look, today, I think everybody is in the same situation. There is growing, growing demand of molecular testing. And molecular is considered, as we all know, as the gold standard. And it is used both for clinical use and so to diagnose the acute phase, and also, today, to try to identify symptomatic carriers. Since proportional to manufacturing capacity, in Q3, we had versus Q2, 50% growth rate of our molecular testing, which is pretty much in line with the increased manufacturing capacity. We are a little bit far ahead compared to what we said was our goal. If you remember, we said we would have EUR 1 million test of molecular per month of capacity by the end of the year, and I think we were able to anticipate a couple of months the capacity. So we are enjoying good growth. Price is stable. We have positioned our assay as a specialty product for triage in admission. We have a relatively small system, our MDX, that has been very successful into the hospital setting. So where we enjoy specific positioning as well as a price premium because we sell the ability to triage within 45 minutes, you're able to triage patients and properly redirect the COVID-positive and COVID-negative patients. So far, as the -- as far as the installed base is concerned, we have -- we've been able to place roughly 500 systems, additional systems for molecular. A good chunk of it is in Europe. Prior to COVID, as you can imagine, our installed base was primarily U.S.-driven. After COVID, the installed base is -- has been growing significantly in those countries, where we have elected to sell the product. Certainly, we had to make certain decisions in terms of priorities, and as I think we have stated from the beginning, U.S., Italy, were the primary markets that we decided to serve, followed certainly by Spain and France and few other placements in other European countries. So COVID is doing fine. The positioning, I believe, is the correct positioning. And we now have another goal, which is to get to 1.2 million tests around the February time frame, which is -- will be the next step of increased capacity. At the same time, we have also launched our flu assay, which now is compatible with COVID. So we can follow the trend of differential diagnosis in patients that do show up with the same symptoms. Although I think, as we have seen in Australia, now it's also fairly clear in U.S. and in Canada, where we have a big installed base, the influenza season looks like it's going to be fairly mild, and I believe that this is the consequence of all the social distancing and hygiene measures that were adopted because of COVID. The results in Australia that I've seen were unbelievable, whereas last year, in June, there were 7,000 cases a month of reported flu. I think it went down to 50 a month. And so clearly showed that this influenza season is going to be very mild, which is a living space to actually manufacture more COVID. And so we are actually balancing today our manufacturing more toward COVID than flu. There is another program that for us is very strategic is antigen testing. Antigen testing was clearly -- was made available a couple of weeks ago. So it's not part of the quarter 3 results. However, this antigen test that we launched, I believe is a very strategic product, has been the first one. And so far, the only one to be launched with certain characteristics is -- as public information is ortho, clinical, and DiaSorin is the only true high-throughput assay launch. Our assay though is different than ortho because it's quantitative and allows the, I think, determination of the viral load which we believe is a very relevant characteristic of this product. And by the same token, the positioning is specific because there is a lot of -- there are a lot of point-of-care antigen test available out there that have been deployed in different settings to be used. This product, which is a high throughput, and is actually run on our LIAISON platform. It has a better clinical performance than some of these rapid antigen testing. And that -- this comes without saying because the technology, the chemiluminescence technology is a much more powerful technology than this laminar flow. It guarantees flexibility, which is something that some of the laminar flow point-of-care assays don't do today. And this is key in my opinion. So increased sensitivity in terms of it is very relevant in order to allow the identification of asymptomatic carriers. You know that, today, for diagnostics there are fundamentally 2 uses. One, the swab, the molecular testing is used more to -- for clinical identification and for diagnosis and to release patients to guarantee that they're not infectious any longer. Whereas the antigen testing would be -- that the use of it would be a widespread use in the community to identify hotspots and asymptomatic carriers. Our, assay, because of the sensitivity that it has, does allow certainly. The identification of symptomatic, and this is how we are positioning it. So we expect -- we launched it 10 days ago. It's doing very fine, and now we are commercializing it in the U.S. under UN and submitted for EUA approval, which we expect to come in the next few weeks. Last but not least, we are working on a new product, which is a new serological assay that we intend to submit to the agency and in the next few weeks. And this assay is intended to be a post-vaccination test. And the idea surely is to use the same protein that has been used by the vaccine companies, which is a very specific spike protein, and then use that protein to understand the vaccine, the response of the patients -- or the vaccinated individual to the vaccine. It's a bet certainly because today, there are no guidelines that do recommend post-vaccination testing. But if that comes, and there is going to be a utilization of serology, we believe that this assay is superior to what's existing on the market because it's been specifically designed with, again, the same protein, S protein that has been used as a candidate for most of the vaccine programs. At this point, I'm going to leave the mic to Mr. Pedron, who is going to take you through the numbers, and then we're going to take questions shortly thereafter.

Thank you, Carlo, and good morning, good afternoon, everybody. In the next few minutes, like usual, I'm going to walk you through the financial performance of DiaSorin during the first 9 months of 2020, and I would also make some remarks on the contribution of the third quarter. So we closed September year-to-date with an increase in revenues at constant exchange rate of 17% or EUR 91 million. As a result, if you might remember of a soft Q1, mainly driven by a volume reduction in China due to COVID and the very good second and third quarter. Specifically, Q3 saw an increase in revenue to the comparable FX of 34% or EUR 60 million. Carlo has already discussed at length the reasons behind these variances. As expected, and anticipated during last quarter call, Q3 '20 gross margin ratio at 68.3% of revenues is below what we see in Q1 '20 and Q2 '20, which closed at 69.1%, mainly because of higher sales of COVID molecular tests. Year-to-date gross margin, though at 68.8%, is just slightly lower than 2019, which closed at 69.1%. September year-to-date EBITDA at EUR 258 million recorded an increase at constant exchange rate compared to last year of almost 25%. Year-to-date EBITDA margin, or with the comparable rate, is 42.3%, vis-à-vis 39.8% of 2019. Q3 2020 EBITDA at EUR 104 million or almost 46% margin registers record performance with an increase of 54% at comparable rates. Lastly, we confirm our ability to generate a very healthy and predictable free cash flow, EUR 153 million in the first 9 months of the year. Thus, bringing the net financial position of the group to positive EUR 256 million. Let's now dip a little bit the demand through the main items of the P&L. We said that the year-to-date revenues at EUR 610 million grew by 16% or EUR 85 million compared to last year. The growth at constant exchange rate is 17%. The impact of capital revenues, again, at comparable rates, has been EUR 166 million year-to-date and EUR 73 million in the quarter. As expected, the appreciation of the euro against almost all the currencies, in which the group operates, has caused some material FX headwind in the quarter, therefore, offsetting the tailwind we saw during the first half of the year. Considering where the U.S. dollar is trending now compared 2019, I believe it is fair to say that we will experience a similar EUR 7 million or thereabout, negative currency effect also in the last quarter of the year. Gross margin at EUR 420 million grew by almost 16% compared to last year, closing the first 9 months of 2020 with a ratio of 68.8%. Q3 gross margin increased compared to 2019 by almost 30% with a ratio of revenues of 68.3%. Vis-à-vis, as I said, 69.1% of H1 '20. The slightly decrease in the quarter gross margin ratio compared to the first 2 quarters of this year is mainly the result of a difference product mix. To be more precise, lower CLIA sales and higher molecular sales, which enjoy, as we have discussed several times, lesser margin -- slightly lesser margin. The increase of the molecular franchise, 34% of the total quarter sales, has been mainly driven by COVID testing. Total year-to-date operating expenses at EUR 195 million or 32% of revenues have increased by less than 2% or EUR 3 million compared to last year. The OpEx ratio of the revenues is to 32%, vis-à-vis 36.5% in 2019. Here, we have 2 effects of opposite sides. On one side, we have had a slowdown of activities and the consequent reduction in costs caused by the widespread lockdown measures that interested all the geographies in which we operate. On the other side, we have had sustained and increasing costs mainly driven by the investments we made in the U.S. commercial team, aimed at supporting our hospital strategy, again, as discussed a few times during this call. Year-to-date total operating expense at EUR 11 million increased compared to 2019 by EUR 5 million. To discuss, the biggest driver of this variance is the -- a non-forecasted loss we suffered in our South African subsidiary during the shutdown process, for which we have activated our group insurance policy. And we are hopeful that the old claim process will be completed within the next 18 months. As a result of what I've just described, year-to-date EBIT at EUR 240 million or 35% of revenues has increased compared to 2019 by almost 29%. Q3 '20 closed at EUR 90 million, with an increase of 62% or EUR 34 million compared to last year. September year-to-date tax rate is in line with 2019. This brings us to a net result of the first 9 months at EUR 163 million or 26.6% of revenues, which is higher than previous year by EUR 36 million or 28%. The increase in the quarter is almost 60% or EUR 25 million. Lastly, September year-to-date EBITDA at EUR 258 million is better than last year by EUR 49 million. EBITDA ratio by revenues is 42.3% at constant effect, vis-à-vis 39.8% of 2019. Q3 closed at EUR 104 million or 45.7% of revenues. The substantial margin improvement towards last year, both in the year-to-date, but even more so in the quarter, is driven by the operating leverage resulting from the increase in revenues, amplified by a muted increase in operating expenses. Let me now please move to the net financial position and the free cash flow. We closed the period with a positive net financial position of EUR 256 million, and EUR 284 million of cash. In the first 9 months of the year, the group generated EUR 152 million free cash flow, vis-à-vis EUR 138 million of 2019. The year-to-date free cash flow has been affected by an increase in working capital, mainly driven by higher accounts receivable and higher inventory to sustain the COVID testing volume and sales; higher CapEx, driven by the acquisition of the TTP license and higher installment of our platforms; and all of these are partially offset by lower tax cash-outs and mainly coming from a positive phasing and the one-off of EUR 6 million exit tax we paid in 2019 when we closed our Irish manufacturing site. Lastly, the full year 2020 guidance at 2019 exchange rate. We expect revenues to increase at around 25% and an EBITDA ratio at around 43% of revenues, all at 2019 exchange rates. Please remember that DiaSorin financials are highly exposed to the U.S. dollar, and even more so now that the United States represents more than 40% of the total sales of the group. Therefore, as a rule of thumb, consider that for every $0.01 movement of the dollar against the euro, DiaSorin revenues move by about EUR 3.5 million to EUR 4 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 Catherine Tennyson of Bank of America.

I have 2 questions, if I may. So firstly, can you just help us understand what are your expectations for the phasing of the antigen testing opportunities inside 2021? And secondly, obviously, you [indiscernible] Pfizer new flow. What are your expectations for how that vaccine impacts your business into 2021 results?

Catherine, sorry, the line was not the greatest. So I hope I was very -- you were very choppy. So very difficult to understand. So if I understand correctly, you want to understand the antigen opportunity in 2021 and the effect of the viability of vaccination on the business. Is this correct?

Yes. That's [ correct ]. And then I have a quick follow-up after that.

Okay. As far as antigen testing is concerned, as said, antigen testing, I believe, is going to be used fundamentally to trace asymptomatic in the population. And today, this requires lots of volume, lots of testing volume. And today, because of the lack of capacity for the molecular swab, this cannot be done using the molecular test. So I believe that as long as there will be a need to pick up asymptomatic individuals in the general population, there is going to be a substantial demand of antigen testing. How long this is going to last, which I think ties to the second question. I think that anybody honest in the industry will tell you, no idea. We have no idea, in my opinion, simply because I was very surprised last night when, without any scientific data made available, a statement was actually made by the vaccine [ industry ] to say, "Hey, we have 90% protection." But already, today, lots of people are asking really show the data, and let's understand exactly what the vaccine is, how it works, how effective it is. And there are a lots of questions that I don't think we will have an answer to by the time the vaccine is going to be launched, and one of which is, for how long is this protection going to last. And then the other question, I believe, is going to be adoption rate. Today, I'm amazed to read the statistics, both in U.S. and Europe, that says that half of the population does not want to get vaccinated. Okay. So to make a long story short, I have no idea of what would be the impact of the vaccine because we don't know what there -- what kind of vaccine we have. We have no idea in terms of how long this is going to last, and we have no idea about the deployment. Okay. So I think what we need to understand, and we're going to understand later in the year, I think, by mid next year when we are going to be presented with data, more secure data about efficacy of the vaccine. Also and then, I just want to make sure you understand that personally, I hope that this vaccine will have 100% efficacy so that COVID goes away. I am tired of spending my weekend in a lockdown on my balcony in Milan, as I already said a few times. But all said and done, very difficult today, in my opinion, to make a projection. Antigen testing is very -- it's a very good tool as long as you need to pick up asymptomatic people. It's also a very good tool when it comes to secondary geographies. And we've already seen in India and in Brazil and in Mexico, some of these geographies where there is a capacity issue with molecular. Then IgM and serology was used, and then antigen testing will become a very nice and better way, improved way to actually also diagnose the acute infection. So we see an opportunity on the couple of thousand systems that we have today installed in the secondary markets. As far as in molecular, as said today, we have -- we don't have enough. I believe that what will happen eventually, when the tool of testing is going to shrink, the first one to go is going to be the antigen testing. And the molecular will continue to be there because that is the gold standard is the -- clearly more sensitive than any antigen testing. And it is going to be used and it's going to be extremely relevant, in my opinion, until the virus is going to be completely eradicated for differential diagnosis because, don't forget, what you need to do, right after the vaccine is going to be made available, is still to identify hotspots. And as soon as they have been identified, then you need to proceed in lockdown and have lots of testing in that particular population. And it will be used, again, next season -- next flu season for differential diagnosis. We'll still be there. By then, I don't think that the virus is going to be eradicated. So you're going to have symptomatic people that will show up with symptoms, and you still want to know, is it COVID or flu? And in fact, I project that next year, there's going to be lots -- much more use of flu and COVID combined than what we have seen in this season. But to be honest with you, this is as much as I can tell you because I don't have a crystal ball.

That's helpful. And if I could just squeeze in a very quick one. Now you are also seeing the second wave pick up again and you're seeing localized lockdowns. From what you're seeing in the communications of hospitals, do you see that as an impediment to the recovery of the base business back to flat in Q4? And also, just a reminder, in case I missed it at the start of the call, what drove your full year guidance down for a recovery of the base business?

Again, we -- today, we don't see it as an impediment because, I think, that hospitals are much better organized in terms on their ability to, first, triage at the entrance or they have what they call the clean side of the hospital and the COVID side of the hospital. And therefore, a viability of testing right there. Triaging has allowed immediately to separate the different patients and then admit patients in the clean area and keep it clean. And I think that today has been understood by patients, and we don't see right now a problem with testing volume. Okay. Anything can change, okay? But so far, if I need to look at October and November, the -- we still continue to see the recovery of the base business.

The next question is from Andrea Balloni of Mediobanca.

And congratulations for the strong set of results. The first question is a very general one. I understood you don't have a crystal ball, but, in any case, how do you suppose 2021 could evolve quarter-by-quarter assuming the [ local ] vaccine in terms of your free covenant impacts, I mean, the molecular antigen and serology? What should we expect, not in terms of guidance absolutely, but just in terms of the general market trend? And my second question is about the antigen and monocular tests. I don't understand why I shouldn't assume that antigen tests may at lease actually erode some market share to the molecular one. I mean, for example, if I believe to have flu before doing a molecular test, I may try an antigen test. And if this is negative in the end, I don't do any molecular test anymore. And my last question is about the routine test. I didn't get your answer to the previous question, which kind of recovery do you to expect for next year? Is it feasible to assume volume returning to 2019 level?

Okay. I'll start from the last going to the first. As far as next year recovery, I believe that for sure, the availability of vaccine is going to make the recovery faster. The general level of confidence, I believe, is going to return back. And this could be a problem, but there is a strong expectation by people that our idea of vaccine is going to address the problem. So even psychologically, I think that people will feel better about going to the doctor, going to the hospital and so forth. So I think when you look at 2021 projection, we project that the volumes are going to go back to what they were in 2019. As far as antigen testing and why it does not cannibalize, because the use is completely different. The -- today, the PCR assay, which is the gold standard, is used for clinical diagnosis. And -- but it's not enough. I keep saying, "Look at the U.S." The U.S. has said that, today, they do 1 million PCR a month. So EUR 30 million a day -- so 30 million PCR a month. And they said that in order to coexist and reopen certain activities, fly and being able to go to watch football, you need to do much more testing. And that cannot be done by molecular because it's too complex and is too expensive, by the way, and it should be done by a cheaper alternative, which is the antigen testing. By the way, you said if I do an antigen test, and I'm negative, I'd be comfortable. I wouldn't, to be honest with you, because one of the issues with the antigen test is sensitivity. And, today, there has been a work that has been published by the French health authorities, which I -- so far, I found it to be the best evaluation ever, the vaccine on antigen testing. And what they prove is that antigen testing sensitivities as compared to PCR is 75%. Okay. So 75% means that you're going to be missing 1 out of 4, which is good enough if you want to use it for testing of asymptomatic in areas with a relatively high prevalence. But then if you go to the individuals and you want to rule out -- with symptoms, rule out whether it is or it's not COVID, it is not good enough. You need to do PCR. This is why I'm saying, the first one to go away is going to be antigen. First, all antigen testing is going to disappear, in my opinion in -- when the vaccination is going to be widely available. And again, I'm remarking widely available because you need to reduce the pool of negative patients to the virus. And then PCR eventually is going to go away, meaning that the PCR will be used still for differential diagnosis with symptoms when people show up, especially during the peak season. So what you will see eventually is that you're going to have a surge in volumes during the flu season, and that is going to revert more to less volume during the summer, which -- that is the segment that I will tell you that COVID is going away. Because it is just becoming another diagnostic test for the differential technologies and making sure that the symptomatic patient that shows up is a flu patient and not a COVID patient. And also, that one is going to disappear when then the virus is going to be eradicated, okay? But think about it. Even today, I think, 20 years, 30 years after the need of vaccine has been made available, and 90% of the population or over 90%, 95% is vaccinated against measles, you still have the measle outbreaks. Last year, for us, was a record year -- 2019 was a record year on measles because there were outbreaks across the United States. So you really need to be careful about projecting. In my other opinion, today, it is very difficult to make a projection until you really understand what the vaccine is all about.

Okay. The next question is from Maja Pataki of Kepler Cheuvreux.