Igenomix S.L. (VITR) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Vitrolife presentation. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand over the call to your first speaker today, Mr. Thomas Axelsson. Thank you. Please go ahead.

Thank you very much, and welcome to Vitrolife presentation today on the 9th of July. The topic today is that Vitrolife acquires Igenomix. And by that, we will create a global leader in reproductive health. Today's speakers, if you go to Page #2, is Mikael Engblom, the CFO of the company; and myself, Thomas Axelsson, and I am the CEO of the company. If you then go to Page #3, you will see what we are trying to cover today in this short meeting. And since we don't have so much time, let's go into direct the transaction highlights on Page #4. The reason behind this is, from our side, quite obvious. Vitrolife is, as you know, a company that are producing, selling products in the specialty medical devices then. And what we are producing, what we are doing is to increase the outcome of the process up until you do the selection or an evaluation of the embryo. We have products that are reducing the stress. We have products that are also for having an ability to judge the process itself and also at the end, vitrify the products. Igenomix, we are not competing at all. Igenomix is a company, and they have a leadership in reproductive genetic testing services. So they are coming in this process before the couple has decided to go into an IVF journey, and they are also having products to check and to advise and to be involved in the testing of the embryo and also products for the process after the embryo are tested and will be implanted. Please go to Page #5. It was a very, very quick introduction, and let's go into what we are trying to create them. The ambition from both sides, and I would like to say both sides because this is an acquisition, but I see this as 2 companies coming from different sides, but having the same kind of attitude, having the same kind of goal, and we have also been running our companies quite similar. The companies are built upon the situation that we have a goal to create the best possible outcome of an IVF cycle or within the reproductive health cycle. It's 2 strong brand names, it is 2 companies that are basing their product development and the interactions with the clinics with providing good services, good products and also an R&D focus. Igenomix has a very, let's say, impressive situation with the R&D, definitely best-in-class within this field, coming back to that later on. Both has capabilities to work together with the customers, and we are serving them both on a global basis. However, there are still some blind spots for Igenomix that hopefully Vitrolife can contribute, and there are also situations where Igenomix has a great relationship with some customers that Vitrolife has an opportunity to increase that relationship due to the services and support that Igenomix has done. Both companies are growing. Both company has a very good financial profile. We are both making money. We are both having a strong cash flow generation. So it is 2 companies that are mature in that stage. In that sense, we are not, let's say, within the situation where it is technology that has to be developed, it is a situation where both companies can create product sales and, at the same time, through our own structure, do R&D and continue to improve the outcome. Let's go into Page #6. And you are seeing that Igenomix in perspective. And you will see on Page #7 then, they are the global leader in the reproductive genetic testing service. Their sales, EUR 122 million, we are coming back to the financials later on. They have a good profitability, EUR 36 million. What's very impressive is the scientific publications, 492 publications and behind that is a long-term development within the company and the structure that has been managed by [ Carlos Simon ]. And what the company has and what is the base for this growth is also a situation that 14% of the people inside Igenomix holds a PhD, and there are very impressive numbers of Masters. So it is a know-how organization that Vitrolife are going to acquire. And together then, we will be able then doing the development side. 560 full-time employees in December last year, and they are continuing to recruiting more competence. They have labs in 21 jurisdictions, and they serve around 80 countries globally right now. Please go to Page #8. So the testing portfolio. They have a testing portfolio that is quite impressive. It is from preconception to the preimplantation in the license side, and I will come back to that more in detail, prenatal and also rare diseases. So it is a full portfolio of testing for the complete process then within reproductive and personalized medicine. Please go to Page #9. On Page #9, it's 2 tests, I would like to have a quick description on, and that is the genetic evaluation tools, PGT-A. The ones that has been following Vitrolife before knows that we had PGT-A, but we are, in this case, not doing the services. We are selling, and we have currently developed 1 kit for the usage when you do a PGT-A. Igenomix has their own testing. They have developed also their own algorithms that are quite impressive. What they also have is a testing and it is also their own proprietary rights and that is the ERA testing, and both of them then is for checking the genetic embryo and also the endometrial evaluation then. And all of this is completely in line with the concept idea within Vitrolife about helping the customer, helping the patient to shorten the time to pregnancy. So that's just an example on the product range that Igenomix has and what ambition has been within Vitrolife and how these 2 can combine each other and where the testing regarding the situation of the 2 most important factors can be described in this picture. Please go to Page #10. It's just another example. So we're not going too much into details about the different kind of tests is that they have a couple of key competitive advantages on PGT-A. As I mentioned before, they have their own proprietary data and algorithm, and they also have a huge technical expertise to provide competitive advantages in different ways. On the endometrium side, endometrial-related test on the earlier page, I mentioned ERA, it's the same there, proprietary test and the test that they had are also showing very good clinical outcome. Within the company, an interesting area also for growth for being able to expand into new areas, where it's coming more or less from the customer a situation, a demand, a question if Igenomix can fulfill their demand and Igenomix are doing it. They have currently developed and are in the phase of meeting more customers within this niche area, especially from a geographical and specific panel area. Please go to Page #11. There are many different tests if you look into this diagnostic industry. What Igenomix are doing is that they have been focusing on products tests that makes a clinical difference, has a clinical value. And what you can see on this page is a couple of examples on products that has a complexity level. So it's not so easy to compete. It is not just to set up a laboratory. It is a complexity level together with the clinical value. And there are the tests that I have mentioned. And as you can see then, it is PGT-A, it is ERA testing. And on other side is the liquid biopsy, which is an interesting one at the top. Development in different areas goes on within this company. Please go into Page #12. Two examples, portfolios that are backed by science. I talked about the impressive number of publications, and you can see that on the right side on Page #12. They've done 492 publications, and the company has published 40 times per year for the last 5 years. One of the examples you can see on the left side of a publication then is the ERA example. And the ERA example shows that their products, their services, their algorithms combined are increasing the clinical outcome. As you can see, there is a difference of well -- significant difference within the delivery. On the left side, below that one, you have a PGT-A example. PGT-A can be done by and are being done by many different even clinics and also by different kind of -- different centers. And this is an example on when you provide good services and good algorithms, what you can do for example, that has been sent to different laboratories and see how they are able to rate aneuploid situation. Please then go to Page #13. Talked about the decentralized organization, and this is part of the success of Igenomix, and it is also the same kind of ambition that Vitrolife has. And that is to be a company that are within a niche market. And when you are in a niche market, we have to be close to the customers. And decentralized structure, it is decentralized with laboratories in many countries, in many places. And the reason is that they can then talk to the customer, they can react very, very quickly. So the support to the customer, to the clinics is key for the growth, and that's the strategy that Igenomix has had. Very, very similar to the situation that Vitrolife are in, growing together with the customers locally. Please go to Page #14. Initially, I said that it is 2 companies that together are having good growth. And on Page #14, you can see there's a proven track record of driving attractive growth and profitability. So once again, the same kind of idea of running the companies, profitable growth are shown in reality on Page 14 for Igenomix. Transaction rationale. And let's go to Page #16, it is. I have explained quickly about a couple of those. But to repeat them, it is that we will together be able to fulfill the customer need, and we can grow the customer base. The synergies between the products and within the reproductive health is quite high, both in cross-selling products and also that we can have a combined platform sharing, integrating platform for that. Number-wise, of course, it makes sense that we can then have synergies regarding how we are doing the development and also synergies regarding in how we can meet the customers. And all of this is around Vitrolife's thoughts for acquiring Igenomix. It is to get into this high-growth IVF diagnostic testing center. The growth rate within the IVF diagnostic testing sector is higher than the growth rate of the IVF cycle itself. So it is to come into a growing segment, be involved in developing this segment in different fields and then having an effective structure to meet the customers and provide that kind of service. If we go into Page #17, I will just repeat a little bit regarding it, so you can see how we have done the strategic development. Page 17, the ones who know Vitrolife knows well. On this page, look on the evaluation. You see the time lapse. What we have done here is that we know through studies that the challenge is what you can see on Page #18. And that challenge is when you transfer, what embryo to choose and how is the endometrium. An IVF clinic that works extremely well, they are successful. But even if they are successful, they can have use of more tools, and they are successful because they're using some tools, too. So on this page, that is from the systems production technology from 2018, we can see that it is around 40%, 45% of the transfers that you do that are ending with a good result, the live birth. So there is a challenge. It is not really the challenge about when you do a retrieval up until you have done the culturing. It is what embryo to choose and are the endometrium ready. So Page #19. You can see that Vitrolife has been working on embryo evaluation, time lapse. We have initially and we are working with is also the PGT-A. Two techniques to do embryo evaluation. Igenomix, they don't have any products for the morphology. They have products for doing the embryo evaluation like PGT-A. What Igenomix has that we do not have is the situation in the genetic testing, and that is right embryo. Yes, of course, through testing but also the right timing because there are situations that recurring implantation problem often can be the reason behind it, can be that the endometrium is not ready to receive the embryo even if the embryo looks good. So those 2 together is Vitrolife's thoughts to get a full synergy for the customer, for the patients and the same thing is for Igenomix, that combining a good embryo is a key thing also for judging the ability to do a very good IVF cycle for the clinic. So in summary, we have a competent embryo and also that the endometrium is ready to receive it. That's the basic story and the transaction rationale from a clinical point of view, and that will reflect also in the growth and the development of these 2 identities together. By that, we are going to transaction terms and structure on Page #20, and then I hand over to Mikael.

Thank you. So let's jump into Page #21 then. So we are -- based on expected pro forma sales for the 12-month period ending in June 2021, we forecast that sales will amount to SEK 2.460 billion. And we forecast that the EBITDA will amount to SEK 864 million, so that is excluding the COVID-19 testing revenue and profitability impact that we consider nonrecurring. So of course, there will be an immediate effect on the top line for the combination. But also, as Thomas mentioned, we see long-term growth opportunities in this growing segment. When it comes to synergies, as Thomas touched upon, we do see cross-selling opportunities on the revenue side, we see opportunities in the innovation side from the evaluation business, for example. When it comes to the financial impact, we're looking at somewhere like 68% on a pro forma basis last 12 months, accretive to sales and about 45% EBITDA. And we have a strong cash flow from the business that we are acquiring. When it comes to the net debt situation, we will be well below 3%, which is our target. We expect to be somewhere in the region of 2x EBITDA net debt. And that, of course, creates opportunities. I mean financially, we will not be limited through this acquisition, and we are able to use this new platform to grow further. Switch to Page 22, and I will take you through a little bit of the highlights in the terms structure. And so the transaction is the EUR 1,250 million then, SEK 12.7 billion enterprise value. And the way we have financed this is that it's a mix then of issue in kind to the sellers, and it's a direct share issue that was performed last night. And we have the cash balances in the company. We had a net cash position when we went into this, and we also have secured new committed debt facilities. And we have had the transaction supported by our largest owners, William Demant and Bure as well as new shareholders, Fjärde AP-fonden and AMF. And the transaction is then subject to customary closing conditions and regulatory approvals in jurisdictions. So if we move to Page #23, I will go through the financing and share issue a little bit more in detail. So first, we have the issuing kind to the sellers of EUR 626 million, that corresponds to about 12.7% of the outstanding shares. And then there is a commitment that William Demant and Bure Equity and Fjärde AP-fonden will purchase EUR 300 million of those shares from the sellers. Then we have the new share issue that we completed last night of SEK 3.6 billion, and that was directed to institutional investors through an accelerated book-building procedure. And on top of that, we have the EUR 274 million cash and debt component, and the debt was provided by SEB and Nordea. So all in all, we expect the number of shares to increase from 108 million to about 135 million shares, and that's equal to a dilution of close to 20%. And the issuing kind is conditional upon the approval at the Vitrolife Extraordinary General Meeting, which will be summoned for in the autumn. We have secured that 47% of the shareholders will vote in favor of issuing these shares at EGM. So with that, Page #24, the time line. So announcement yesterday, we had the share issue last night and the director share issue, and then the EGM will be done during the autumn, we will come back with specific time regarding that. And then we expect closing to happen in fourth quarter after the regulatory approvals. So with that, operator, we are ready for questions.

[Operator Instructions] So our first question is from the line of Björn Olander from Murgata Equity.

First of all, a very interesting combination, and I think it really improves one of your weak spots in my opinion. So the first question, I'll limit myself to 2. I can ask many questions, but I'll limit myself to 2. The first on integration and synergies. You mentioned a bit about the potential for future developments and so on, and that makes sense to sort of, I suppose, combine time lapse and these types of technologies and also some sales synergies, which I expect are quite limited, given the strong positions the both companies have on the customer side. But on the cost side, are there any cost synergies? I suppose if you don't have any labs and so on, the cost there are going to be quite limited. Or is this going to be somewhat kind of more integration with sales -- on a sales level as well -- I mean sales organization level, so to speak. So basically, how much sales synergies will it be? And also, are there any cost synergies? That's the first question.

Björn, it's Thomas here. I think it was 2 questions combined then. The first one was around the product development and the situation there and the technique. So yes, we see synergies and how can you combine -- how can you see the synergies regarding the R&D. That is to understand what the customer is asking for and how you can combine that with product development. Just one example is that the development of time lapse, as you know, is something that we have done for many years. The development of media is what we are also doing. That is a stress-free environment. And it's also to be able to do the morphology checking. What we -- with Igenomix that has scale know-how in a field that we don't know about, the combination there for product development can, for instance, be that noninvasive techniques, the ability to do algorithms is something that Igenomix has within genetic testing. So the combination of those 2 is just an example where the 2 teams together can hopefully do something that is decreasing the cost for the customer, making it a lot easier to use. That's key also for the customer and improving the clinical outcome. So that's just one example of it where you can see that our combination of things within the development. That is not only regarding the reproductive genetic testing where Vitrolife will not be able to do anything for Igenomix and, on the other side, Igenomix will not do anything for our, let's say, traditional disposable products. But combined in front of the customer are a development potential. Regarding the synergies on sales, regarding the cost synergies also, on the sales side, it's flattering that you said that we have a very, very strong position. I would like to say, yes, we have a strong position, but there is still a lot to do. So there are opportunities in going in and doing cross-selling. It is opportunities for us to use the decentralized organizations of the genetic laboratories combined with hopefully then a larger local sales force from our side and vice versa. So of course, there are sales synergies. There's also situations where customers currently are asking for, let's say, leverage of their size. I'm talking about the consolidation of IVF clinics. For sure, that's a stronger offer here of both being able to provide products, services for those products and also genetic testing is a strong cross-selling opportunity. I do think I covered those things. I don't really remember all your questions, to be honest.

Yes. I mean the cost synergies, I mean, there are labs and in some markets, you probably have the [ sales ] organization and so on. But does it make sense to sort of squeeze out some cost synergies from that? I suppose it will be quite limited in that case.

It's interesting that you mentioned cost. What I see is profitable growth. I mean how will we be able to grow, and we are not buying Igenomix and Igenomix is not accepting share from us. It is a situation where we believe that the combination will create profitable growth. And that's the key thing. I'm not going to -- our intention is definitely not to go in and do any kind of cost cutting and trying to find, let's say, synergies by taking away structures for development or structures for sales and marketing, definitely not.

That's very good. In order to grow, I think you have to invest so that sounds reasonable. The second or maybe the third or however we count it. The current offering from your Illumina agreement, which is sort of partly in the same area, but more for, I think, customers who have their own capabilities and so on. How should that be viewed in relation to the Igenomix offering? I mean partly, of course, complemented, but are there also some -- I mean, in principle, you could sell kits to clinics to that agreement as well. But -- yes. Any thoughts on that would be interesting.

Yes, yes, quickly. Looking from the customer perspective. Currently, where genetic testing is done or, let's say, where they want to have results from genetic testing within the IVF clinics, if you're only looking on the IVF side right, roughly an estimate 80-plus of all the test that's being sent outside their IVF laboratory globally. So from our perspective, if you say the Vitrolife perspective, we have found out that there is 2 questions that is being asked. If you run an IVF clinic, it is, should I build up my own laboratory or should I send it to an outside genetic laboratory. And in those situations, we have not been able to provide a good answer on 80% of the cases because we have not had any partnership or anything with a service place. We've only been selling the products we're doing the PGT-A. So first is that it is 2 different approaches from the customer. Our intention and our belief is that we can fulfill both groups, both the ones that want to do their own testing and the ones they want to send it to outside. Another thing is it is only regarding PGT-A. Igenomix is so much more. The situation within the testing portfolio for Igenomix is preconception testing. It is more test within the preimplantation side. It is prenatal, rare diseases. So to view the testing portfolio within Igenomix, it is not really fair to compare that with only Vitrolife's position within PGT-A. So I thinks that we have a larger portfolio, a better service opportunity, but also still being able to provide products and support to those that would like to run their own genetic testing for PGT-A.

Our next question is from the line of Patrik Ling from DNB.

I have a few questions. First of all, could you say anything about any potential integration costs?

Should I take it? Okay, Mikael, I can take it. The integration cost, as I view it, it depends what -- as you know, I said to Björn on an earlier question that I don't see that it is going to be so much synergies within the cost side. Of course, there are going to be a few synergies probably within some functions. But this case is not built upon cost synergies.

Okay. I wasn't talking about really costs for -- or cost savings, but rather if there are any legal costs or stuff like that, that we should keep in mind when you're actually integrated?

Yes. I can mention that we will, of course, have some transaction-related costs where -- I mean with the new share issue and the bank loans and the due diligence process and the filings for regulatory approvals and things like that. And we expect this to be in the range of EUR 15 million in total in that ballpark.

And will those costs primarily hit 2021? Or will we -- so 2022 will be a pretty clean year? Or how should we...

Yes. Yes. I mean based on our time line, we expect that to hit this year.

Okay. Great. Next question is really margin development in Igenomix. I mean when we look at the numbers, they look to be -- I mean they still have very high EBITDA margins, but clearly below your level. What do you see driving those margin upwards? Is it more volume? Or is it anything else? Has the company reached what you would consider a critical volume already? Or are there anything else that could improve the margins over time?

Well, we are seeing that the business has certain economies of scale as the laboratories are doing more tests. So we are seeing certain opportunities to improve margins over time.

Do you care to elaborate on where you think they could end up in a positive long-term scenario?

No. I mean we're not doing any forecast. And of course, we haven't completed the acquisition yet. I mean there is, of course, a lot of things that we should learn more about, but we see certain opportunities in that direction.

And when it comes to margin, do you think that's a reasonable base case for us that needs to do some calculations here? Is the sales and EBITDA excluding the COVID-19 testing? Is that where we should start?

Yes. I mean we are -- we don't look upon the COVID-19 testing as a long-term or recurring business. So I think it's wise to exclude those when you do future forecast.

Good. Then my last question is really if you could elaborate a little bit on the rare disease testing? I mean that -- is that related to IVF clinics? Or is it related to anywhere in the health care systems where you want to test for rare diseases?

It is coming out from a cooperation between hospitals and clinics that belongs to hospitals and also from the development. It is -- currently, there are a couple of panels. So it is prenatal and it is reproductive panels and it's also other panels that are being involved in this side and especially for specific areas. I am not right now in a position to go through the rare diseases. I have not gone into those kind of, let's say, know-how. So I prefer to wait couple of months up until we have finalized this acquisition to learn more about it and also to understand more about the potential that looks quite good. But I would like to know more about it before I start to talk about that.

Okay. But should we think about it as couples coming into a clinic, and they know that there are some rare diseases in their family history and they are testing for that? Or is this something that we should see as something that's potentially much broader for you that...

Yes, yes, much broader. I mean what you are mentioning first is one area, but it is a much broader perspective on what they have developed and what they currently are looking into and what they currently have started to work with some customers on.

Okay. Would you like to say anything about how large that rare disease testing is in Igenomix today? The part that is not related to IVF clinics that is.

Currently, it's very small.

And that's like 10% or below?

Yes, slight below.

Our next question is from the line of Ulrik Trattner from Carnegie.

Congratulations on acquisition. And I know I've been on to you guys that you should be doing acquisitions. So obviously, a relief and really great as you're doing this. And now looking at this, it looks like this is really now comparing up to CooperCompanies, them also operating in their sort of labs and having their wider product range and diagnostic testing. So just how does Igenomix stack up to CooperCompanies' offering within this area?

Yes. I'm not going to talk about Cooper. What I see in this area is that we have a wider portfolio. We have also development, and that's the key, key thing with Igenomix that you can just see in the publications and what's coming out of that kind of pipeline and the development of some specific fields, like the ERA area. So it is a situation where it is an intellectual growth organization that we think is a competitive edge.

And just how should we sort of -- looking at this from a wider perspective, how should we view this acquisition? There are a multitude of tests that can be sort of added, looking at sperm analysis. Should we view it as a sort of a new platform to do additional M&A to buy an additional diagnostic test kits to call it or integrating that into Igenomix?

I mean the first thing is to close this business. Of course, we have looked into what are the different kind of areas for our strategic development. And as you said initially, we have talked about that we will go into technology. We will continue to focus on the areas where it is a challenge within the idea. Challenge has to be to understand when is the right time to actually transfer an embryo. How does the embryo look like? How can you have a stress-free environment? So if we are getting more tools and we can find tools that are fitting into this process of doing better, that are increasing the outcome. And you just mentioned the sperm side. Yes, there are a couple of areas there, but it's not anything that we have in, I can say directly. It's not anything that is my key focus right now.

Okay. Great. And just last question on my side. Just trying to wrap my head around how this sort of -- your current product offering from the collaboration with Illumina, how it all sort of fits together? I know that Björn asked a question about this earlier. Is there sort of any way that we should be able to see that your product range within genomic testing fits into Igenomix? Is there any sort of infringement on your current collaboration with Illumina? It would be helpful to if we could -- if you could shed some more light on that, please?

Yes. I mean -- as Thomas mentioned, I mean, we don't see these products as competing businesses. I mean we were selling the kits to clinics. So we would like to do in-house testing and Illumina -- I mean Igenomix is providing the service. So in terms of how all these contracts are being laid out, I mean we don't go into details on that.

There are no further questions. [Operator Instructions] And it looks like there are no further questions. Please continue.

Okay. If that's the case, thank you very much. The attention was 30 minutes, and we are up to almost 45 minutes. So thank you for listening in. Bye.

So that does conclude our conference for today. Thank you all for participating. You may all disconnect. Speakers, please stand by.