Nanoform Finland Oyj (NANOFH) Earnings Call Transcript & Summary

Welcome to the Nanoform Audiocast Teleconference Q2 2022. [Operator Instructions]. I'll now hand the floor to Henri von Haartman. Please begin your meeting.

Thank you, Mark. Good afternoon all, and a warm welcome to Nanoform's Second Quarter 2022 Report Presentation. My name is Henri von Haartman, and I'm your Director of Investor Relations. Today, our CEO, Professor Edward Haeggstrom; CFO; Albert Haeggstrom; and Chief Commercial Officer, Christian Jones, will present to you. This presentation is webcasted through financial hearings, and there is also the possibility to dial in and listen by phone. The slides are shown on the webcast, and they are also found on our web page, if needed. We will have a Q&A after the presentation, and it's possible to ask questions by calling in. You are welcome to ask several questions, but please do let us answer one question at a time. We will start today with a short introduction to Nanoform, and then move on to CEO review, then commercial aspects and then financial aspects. And operator, if I may ask you to move to Slide 4, please. And with these words, our CEO, Edward Haeggstrom, please go ahead.

Thank you, Henri, and welcome also on my behalf. So very briefly, Nanoform is a technology platform company where approximately 140 people, 30 nationalities. We are located in Helsinki, Finland, approximately 3,000 square meters, and our technology provides APIs that are -- have either failed or are about to have problems a second chance. API stands for active pharmaceutical ingredient, and it's the core in medications. We move to Slide #5. There is a big problem in the pharma industry. Problem is that too few new drugs comes to the market. We do address this problem. Slide #6. Here, you can see that the pharma industry puts in a lot of money and still too few drugs come out. Number 7 tells about the reasons. One of the biggest reasons is the poor bioavailability, which means that an otherwise potent API is not absorbed by the body and therefore, cannot do what it's supposed to do. This problem is growing year-by-year. So we are addressing a big problem that needs growing. Number 8, here you can see that there is a lot of targets for us, both unsuccessful candidates need a second chance, we can improve existing drugs and we can enable new drugs. Slide #9, what do we do? We take in [ core ] powder and make it fine and by doing that, we improve the solubility and we address the problem that we were talking about 30 seconds ago. Slide #10, we have a proprietary technology that basically does this trick. It has several parts, and we have very many years learnt how to master them. Slide #11. When we can increase the solubility, a cascade of good stuff happens, which is depicted in this flower, you can see that it enables new drugs. It can potentially reduce the dose and the side effects. It also allows for patent expansion, reduce production costs and also has a significant impact on the ESG dimension, which is something that many companies find increasingly important. Slide #12. We work on small molecules. Basically, these are the old drugs, but we also work on newer drugs called biologicals. We have been working the size from 6 to 150 kilodaltons, which is a commercially relevant range. Here, you can see several things we can do for these new trucks. On Slide #13, you can see a simplified version of our business model. So basically, our clients own the API. We take them in as bulk and we make it nanoform. By doing this, we can extract the fee for the work we do to show that we can nanoform it, and then we can get into a game where they, at the end of the game can pay us royalty for drugs that are entering the market. On Slide #15, we're going into the CEO review. And here, I want to highlight a few things. I start from the lower left. AstraZeneca has concluded a very thorough evaluation of our report. They have basically found us to be good enough. And therefore, we are happy to announce that this technology evaluation has had positive outcome. I think this is very important, and it has shown that we provide a viable option that can then be used inside that company [ roles also ]. We have set a new half year record when it comes to a number of projects and also number of new clients. Nanoform has also partnered with Pharmanovia, which is a powerhouse for 505(b)(2) assets. 505(b)(2) assets are assets where we can make a generic or [ singulair ] generic [ like ] asset and give it an opportunity in the marketplace. On the top row, you can see that we have made an announcement for U.S. GMP manufacturing. We have launched the STARMAP, which allows us to target assets that are amenable to nanoforming, and we have also scaled up our way of nanoforming hereby mentioned biofactor 1000. On Slide #16, you can see the GMP line #2 that has basically arrived in the beginning of August to Helsinki. And this year, it's a category 2, 3b line, which means that we can deal with potent stuff in addition to the cat 3a line that we had already in place a few years back. This is important for our expansion. And this year is a significant step in our journey for print. Now on Slide #17, you can see the 4 targets for this year. I think the important part is that we are on track with all of them, the number of new GMP lines, the biologics pilot plant, the number of new customer non-GMP projects and also the number of new customer GMP projects. On Slide #18, you can see the goals that we are working towards for 2025. And we thought -- already clear that we have achieved the gross margins. We are well on our way towards 70 new APIs. The lines are coming there, and we are also continuing our work to reach cash flow positivity. With this, I say thank you, and I hand over to Christian.

Thank you, Edward. On Slide #20, we can see the commercial market. The pharma market is rapidly growing as we can see from the chart, with over 20,000 drugs now in development globally. This trend is only going to continue as our global population increases and lives longer, and it gives us a huge opportunity to really implement our technology across many, many different drugs. As we move to the next slide, Slide #21, obviously, with the number of drugs increasing, so do the number of companies with active pipelines. And here, we have over 5,000 currently operating globally. As this market increases, so do the number of companies that we can help and support to develop their medicines. And if we consider that 70% to 90% of all drugs being developed by availability issues, this means that most companies have a good reason to talk to Nanoform. If we move to the next slide, you can see here the now expanded global commercial team. I am delighted and very proud to show this slide. We've grown the commercial team now to 10 in total. And in addition, we added in our latest Nanoform is Dr. Hui Yi Tee, and Joana Moreira da Silva, who joined us just recently this year. But as you can see, all of our commercial team have a real vast and diverse background and experience that's really going to help position Nanoform and our technology very well in the pharmaceutical market. And it's imperative to have such a strength to this commercial team if we want to grow at the rates that we have said we will grow to our investors and shareholders. We go to the next slide, Slide 23. You can see the momentum that we have already established with customers, with client relationships and with projects. So going from H1 2020, 5 new non-GMP to 8 the following year to 13 in this half of the year. And if we look at the number of customers going from 5 to 6 to 12 and really having a good split as well between Europe and U.S. And this continued momentum is only going to continue as we go forward and we expand the team, and we'll talk a little bit more about later. Going to Slide #24, you can see this really gives a snapshot of our commercial relationships. We have 7 major pharma companies that we work with. AstraZeneca and BI, we have publicly named. We have one co-development, 3 collaborations. And we're working with a large proportion of midsized specialty pharma and biotech companies as well. And those companies that we've named are companies, for example, like Pharmanovia, Herantis, TargTex and others that we might have mentioned. Included in that 21 are 5 new in Q2 2022. So the business solvency has been very active in developing new relationships with new clients and progressing relationships with existing clients. If we move to the next slide, Slide #25. This is, I think, a fantastic recognition of the hard work that Nanoform has put in working with AstraZeneca, who are an incredibly diligent organization from a scientific perspective when they review technologies. And as Edward mentioned, they concluded a very thorough technology evaluation of our CESS technology, the outcome is positive. And we're now moving forward with them to identify and implement the technology in current and future development projects. It was very broad, deep technology review across many aspects of development and manufacturing. And I think this is a real testimony to the hard work that the Nanoform team have put in. If we move to the next slide, Slide #26. We have mentioned publicly that we've partnered with Pharmanovia announced in July on the 14th of July. This is a fantastic relationship, and I'm very pleased to talk a little bit about this. This is a recent strategic partnership with them. They're a fast-growing specialty pharma business with a portfolio of over 20 branded drugs in 140 markets. And their business model is to acquire branded medicines from major pharma companies, at the tail end of their life cycle and then continue to sell them as that brand in the marketplace. But what they want to do over and above that is to take those medicines and make them better. So they take the branded medicine, they have their captive audience of their patients, and they continue to sell that medicine to that patient population, but to improve them as they do so. And that's why Nanoform are working with Pharmanovia. And I think it's a really great, very niche angle where we can place our technology to further improve branded medicines to the marketplace and maintain value to our patient population. If we move forward to Slide #27. This is our revenue model. And it hasn't changed at all since we started since we announced at our IPO. We effectively work with clients from early stages of proving the technology, prove it works, make other particles in a fixed fee project basis for a proof-of-concept study. Then we look at a bit more detail around the process, make sure it's robust before we move into GMP manufacturer, and that's a proof of process, again, a fixed fee pricing for that. And then when we move into clinical phase supply, we would have EUR 1 per kilo price for the material that we supply. And then when the product gets to commercial supply, we would have a commercial supply agreement with our partner. And we would also share in the value that the technology delivers to that product. And that revenue share or that royalty share, should we say, could be anywhere between 1% to 20%. And it could be royalty or it could be based on supply price per kilo. But clearly, the technology, the value of the technology delivers has to be recognized by our partners for us to work with them. And if we move to the next slide, final slide on the commercial revenue drivers and industry attrition rates. As I'm sure we're all aware on this call, industry attrition is very high in the pharmaceutical marketplace, which is why as a commercial organization within Nanoform, we need to build a large and broad sales funnel of proof-of-concept projects to ensure that we have our technology enabling marketed products. And we want to do that as quickly as possible. So the sales funnel has to be as broad and as deep as possible on the front end in those early phase development projects to make sure that with this high attrition rate that our technology does get to market very quickly. And to that point as well, we don't only work with preclinical and early phase clinical programs. As I mentioned, Pharmanovia is a good example. We also work at the later end of the drug development life cycle in life cycle management and 505(b)(2) drugs. And that concludes the commercial presentation. I'll now hand over to Albert.

Thank you, Christian. If we then go to the financials and go to Page 30, here, you can see on the left-hand side that we added 13 employees in the quarter. A few of them are summer interns that we then plan to time to time keep and when we have peaks in demand and so forth, but we added 13 people. We are well on the track to the 2025 target of 200 to 250. However, it's also clear that even if the absolute number has grown very stably during the quarters, as a percentage is -- the growth is coming down in the number of employees. And that is, of course, good from a P&L point of view that when the top line goes clearly faster than the costs at some point, we will become cash flow positive. If you look at the number of lines, you can also see that we added on non-GMP line in the quarter. So now we have 16. And as I said, we are planning to get to number 3 and number 2 and number 3 of the GMP lines ready by year-end. That is the target. If we go then to the next slide, as Christian already mentioned, we have had a good momentum in projects signed. And here, you can see that in the second quarter alone, we signed one in 2020, and now we actually signed 5 already in the second quarter of '22. And if you look at the half year, it has been 5, 8 and 13, as Christian said. More importantly, even than the single quarter, a single half year is the cumulative amount of projects signed because we signed more and more. This is the number that when we have done hundreds of projects, likelihood of us hitting successful projects that will take us all the way to market will be much higher. And here, you can see that 2 years ago in the second quarter of 2020, we had signed 7 projects. Last year, it was 20. But actually, now we are already more than 40 projects that we have signed. And the target for the -- by the end of this year, we should have signed more than 50 projects. So there is a 48 plus 5 GMP. And it's, of course, clear that you need to sign lots of POCs. And then with the lag, you will start to get more and more GMPs as well. If we then go to Page 32, you can see the same numbers but a little bit differently as a rolling 12 months number. And this is, of course, related to our target for this year. So the target for this year 12 months this year is to have 20 plus 3. And actually, if you look at it from a rolling 12 months number, we are already at 21 plus 2. So during the last 12 months, we have signed 21 non-GMP projects and 2 GMP projects. Again, if you look at the cumulative the same number as last slide, but this is on a quarterly, you can see that the trend has been very nice and steadily growing. And this, of course, shows that the interest in the technology is good, and our BD team is doing a fantastic job. If we go to Page 33, and we start to think about revenues. Here, you can see the number of projects that are generating revenue on a rolling 12 months basis. And you can see that we have gone from 6, 7 in early 2020. So actually now the rolling 12 months, meaning third quarter '21 to second quarter '22, it's 32 projects already that has been helping us with creating revenue. And these are, of course, most of them are basically all but one is non-GMP projects. On the right-hand side, we see a very important KPI. How many projects can we do on the line per year? And again, we are using rolling 12 months numbers. And here, you can see we have been able to double our efficiency. So 2 years ago, we did 1 project per line. Now we have already come, so we are roughly doing 2 projects per line, and this is about efficiency and productivity. And here, we have earlier said that our target -- long-term target is to get to 5 projects per line per year. And that, of course, means that if we today have slightly less than 20 lines on the non-GMP side, and we are going to have by 2025, slightly less than our, let's say, 25 or so. That means that enabled for us to be able to do the 70 projects plus per year. We need to get this number up. But we don't need to get it up to 5 but 5 is our target. But the trend is very clear there, and we are very happy with this trend because it shows that we are becoming better at doing projects. If we then move from a number of projects to revenues in million of euros first half 2020 to first half 2022, you have seen a factor of 5. So we had EUR 1.65 million in the first half. And these came from 28 projects. of which one was a GMP project. So of the signed GMP project, we have recognized revenue from 1, and the impact has been quite small on the revenue. So we are very conservative, and we want to stay conservative on recognizing revenues. We don't want to be sort of overly optimistic around that. The same goes for the cost. We want to be conservative on that, looking more costs and not activating them. But here, you can see that the number of projects contributing to revenue has grown by a factor of 4 from 7% to 28%. And on the left-hand side, by a factor of 5 from EUR 0.34 million to EUR 1.65 million. And that, of course, means that the average revenue per project has been increasing. And this is also a testimony to the clients' fee value in our technology. And as our brand becomes more recognized, we will be able to get a higher price. If we then go to the next slide, you can see the quarterly revenue. We had a new record quarter again. So EUR 0.89 million in the second quarter. And on the right-hand side, you can see the rolling 12 months, meaning third quarter of '21 until second quarter of '22. And there, we were already at EUR 2.78 million. And this came, as I said on previous slides from 28 projects. If we then go to Page 36 and look at the revenue, gross profit and gross margin, you can see that we have now -- we have been seeing the gross margin grow very fast, but now the last 3 quarters, we have basically plateaued, at least temporary, on the 92% level, which is actually a very good level because it means that we have already reached our 2025 target of being above 90%. However, in these numbers, we have still not seen the synergies from the big CO2 tank. So these 92 percentages has been done without a big CO2 tank. So there might be still some upside in the market. If you look at the quarterly EBITDA, you can see that we had a somewhat bigger negative EBITDA in the second quarter than in the first. But -- and the main reason for that is the quite a big jump in the IT costs, where we are now in a very ethic phase with implementing the SAP. I will come back to that. But as we see it going forward, we believe that we are at the moment in a very sort of intense phase when it comes to investments. And as we book, for example, the SAP or the ERP system implementation as over the P&L, we don't activate it on the -- in the balance sheet. The same goes for our R&D costs, we don't activate them. So that means that we are in a very active intense phase now. So going forward, when the revenue grows much faster than the cost -- we hope and we expect that this trend will start to turn north, and we will see an improvement in the operating cash flow going forward in the coming quarters and the coming years. And of course, the target is to be cash flow positive in 2025. If we go a little bit into the details around what impacted the last quarter on the EBITDA or on the EBITDA level. Here, you can see the IT expenses you have -- to the left, you have the quarterly IT expenses. And here, you can see that we had a very intense quarter in the second quarter. The third quarter will still be intense, but then we should go live with SAP in the fourth quarter. And the underlying the IT expenses from laptops, from stuff like that, other systems have been roughly EUR 150,000 to EUR 200,000 per quarter, and we don't see any reason why this would be much higher going forward. So we should see the IT costs actually already next year come down from this year's level. If we look at the rolling 12 months, you see that we are already -- we were already up at EUR 1.74 million, roughly EUR 1 million of that was related to the ERP implementation, where we take all the costs in the P&L. And then another one, which we have seen a somewhat absolute term, not so big, but this is actually a cost line that I like in a sense because this clearly shows that COVID has at least in our core markets, Europe and U.S. is behind us. And we are now at travel expenses at the same level as we were before COVID. However, I also see efficiency and economies of scale here and potentially also that humanity has learned that video cost is quite efficient because in first quarter of 2020, we had 2 persons in the BD team, and now we have 10, and we are roughly at the same level. So I'm glad to see that we don't have a 5x higher travel expense, but I'm also glad to see that the travel expenses have come back after the very depressed levels during the COVID. After that, there is 3 slides with tables. I won't go through them now. Basically, they include what I have said. One number I want to mention is on Page 40, you can see the bottom line. So our cash position was EUR 83 million in cash at the end of the quarter. So we have a very strong balance sheet, and we have no debt. And the only accounting that we have is the rental leases. But otherwise, we have no debt, EUR 83 million in cash. With that, I say thank you, and let's go to Q&A.

[Operator Instructions] And our first question comes from the line of Max Herrmann at Stifel.

Congratulations on an impressive group of new partnerships in the last 6 months. 4 questions, if I may. Firstly, I just wanted to get an update on the U.S. facility and plans there, how they're progressing. Secondly, on the Biologics GMP line and where you are with that? You've spoken quite a bit about the obviously small molecule lines. And then a little bit more detail. In terms of your partnerships, I wondered, are you able to disclose kind of a number of top 10 partners now that you -- top 10 pharma companies that you now have relationships with? And then maybe a little bit more detail on the number of programs with the Pharmanovia. I'm assuming that since it was announced in July, that's outside the first half numbers. I just wondered how many potential candidates or projects that are within that?

Thanks, Max, for the questions. I will try to provide you with top-level answers and then if Christian, Albert wants to chip in, then please do so. Related to the U.S. facility, we are working diligently on that, basically narrowing down the number of states we have been evaluating 8 to 10 states. And then looking into the counties and looking into the plots and looking into the facilities there. Americans are very effective, and they are also very helpful, and they are very, very interested in helping us out with discovering. So this is absolutely progressing according to plan. And I will be happy to talk more about that later on that this status announcement. And on the biologics one, that one, the pilot line that is also progressing according to plan. We are getting parts done and part in as we speak. And then on the partnerships, maybe Albert can take a stab at that and then the Pharmanovia molecules. Maybe Christian can take a stab at that. Thanks, Edward. Yes. So we have -- as you know, we have mentioned 2 big pharmas, AstraZeneca and Orion. And if your question was that how many of the big guys within the big 10 or big 15 global pharma we are working with, when we use the word big pharma, we mean the really big guys. So we are working with 7 of the real big guys. And Christian, if you then can comment a little bit around Pharmanovia?

Yes. So what we've said in the press release is that we are starting with one iconic brands medicine, but the intention is for this to develop further and broader into multiple products. So as you can imagine, with any relationship, we want to start first with one product, prove it successful and then expand it quickly. But I think both sides see great promise in this particular relationship. So we're looking forward to seeing how that develops. And I'm sure we'll have more news to tell you in the coming announcements and reports.

Thank you. And our next question comes from the line of Lars Hevreng of Danske.

Can you just tell a bit on the GMP projects that you talked about towards the end of last year. And you mentioned in the report that they have not been not significant revenue generator so far. Can you just tell a bit about the status of all these projects?

Sure. So if I start, again, giving a general overview, both these projects are progressing according to plan. And Albert will tell you more about the financials. I think that there is always a lag the way we sort of recognize and do. But my answer to you is that they are progressing according to both our internal funds and then the other partners.

Yes, it's comment. So when you have a GMP project, first, you do planning and first, you do the POP and the tech transfer and you do the planning and then the big work comes when you produce the material or the batches. And that is, of course, when you have a project and you, for example, expect the project to be 1000 hours or so, then you make a plan. And then when you start to have ours, then you book the revenue based on the sort of the total cost where the ours is the most important one, but of course, you have material as well. And there, of course, if you have a too optimistic guesstimate or estimate for how many -- what the total cost will be, then there is a risk that you might book the revenues too aggressively, and we don't want to be in a situation like that, especially when we are doing our first commercial or for a client, the GMP. So we'd rather do it like that we have sort of -- we know that we don't book them too aggressively. And that, of course, means that when we make the GMP material, and we ship it to the client, and we have the stamps from Kenya. At that time, we will feel very comfortable to book to the lens as well. So on a general level, I can say that among all the projects we have done, we are still in a situation where we have clearly -- when you look at the rolling 12 months numbers, for example, we have got paid more from our clients than what we have booked revenues. And this is a situation where I, as a CFO, would rather err on being a little bit too cautious than being too optimistic on booking revenues. When the situation today is, of course, that we only have 1 GMP line. And we -- so the second GMP project will, of course, be as they have also publicly announced is that, that will be sort of this first one and that the shipments will happen next year.

Okay. And what can you say about the -- about the order book in the company today? I mean you mentioned that in the fourth quarter results saying that it exceeded EUR 5 million at that time. And you also had a comment of an order intake in the first quarter of around EUR 1 million. What's the situation for the second quarter?

Yes. So we have a good situation for the second quarter also, and we are seeing clear growth in the order book and -- but we decided not to sort of every quarter, we would rather do it on an annual basis than on a quarterly basis because if you have a GMP project, for example, there can be big sort of swings between the quarters if you talk about the order book. And then when you don't necessarily exactly -- if you sign a GMP contract today, and the plan is that let's say that we do most of the work in the second or third quarter or fourth quarter next year. And then something happened to that, you don't exactly know how that will impact then the revenue from a short-term timing point of view. So that's why we decided not to do quarterly numbers on the order book at this moment yet. When we have more projects and bigger revenues then we will be like more like a capital goods company that gives you both the order intake and the order book and of the revenue, but we are not there yet. But order intake has been good.

And Lars, if I may add to this, I have told Christian that continue to sell even though we are a little bit strapped for capacity on the GMP side, we will make sure that we can deliver. So I'd rather have a little bit constraint in capacity than having idle capacity. So also from that point of view, the order book is growing with the projects that he and his team is working.