Photocure ASA (PHO) Earnings Call Transcript & Summary

Good afternoon, good morning. I'm Dan Schneider, President and CEO of Photocure. Welcome to today's presentation of second quarter 2026 results. With me today is Priyam Shah, our Vice President of Investor Relations; and Dick Peters, our Vice President of Finance and IT. Just a reminder that the usual disclaimers are in effect for today's presentation. So the slide you've seen before, this is Photocure's corporate strategy. It's centered on 3 priorities that guide execution and capital allocation. First is strengthening the core, drive disciplined growth in Hexvix and Cysview franchise by expanding blue light cystoscopy tower installations, upgrades and the U.S. mobile BLC adoption while increasing penetration across key markets. The second is leading the standard, establish BLC as a standard of care across non-muscle invasive bladder cancer detection, surveillance and treatment monitoring through next-generation high-def systems, expanded market access and global flexible BLC adoption. And third, expand the platform, build a broader uro-oncology and precision diagnostic platform through biomarkers, artificial intelligence, partnerships and strategic M&A. Recent examples include the acquisition of Vesica Health and our partnership with Artera AI. Together, these priorities are designed to drive near-term growth while strengthening our long-term competitive position in non-muscle invasive bladder cancer. So some highlights from Q2. Product growth. Overall, we had 11% product revenue growth ex FX. In North America, we delivered 12% product revenue growth minus foreign exchange and 10% unit growth. And by the way, rigid growth was 13%. The installed base of Saphira upgraded blue light equipment continued to increase with 4 new tower placements and 2 tower upgrades in the U.S. And for the second half of this year, Karl Storz is running a promo on those systems. We expect some pickup. ForTec continues to favorably impact the growth with 24 towers in their national fleet of rentals, underscoring the growing demand for blue light cystoscopy across hospitals without the capital budget expenditures. The number of active accounts increased by 20% year-over-year to 436 accounts in the U.S., setting the stage for continued momentum into the future. In Europe, EU product revenue was up 10% and units up 8%. We continue to execute in the EU with strong growth across all key markets, driven by continued execution focus and tower upgrades. The Olympus Visera III BLC equipped system continues to gain momentum, now with 87 Visera III installs in the field, and a Stryker blue light enabled equipment has also commercially launched in the EU as of Q2. Upgrades through the world have proven to increase the usage of BLC with Hexvix and Cysview, and encouraging accounts to upgrade them remains our top priority. Looking at adjusted EBITDA for the quarter, which is our core business of blue light cystoscopy with Cysview and Hexvix, was NOK 27.2 million, while the reported EBITDA was minus NOK 2 million. As a reminder, as of Q1 2026, we now report adjusted EBITDA as our key profitability metric, in line with conventional practice to better reflect the underlying operational performance and scalability of Cysview and Hexvix while investing in existing growth opportunities. Adjusted EBITDA margin in Q2 was 19%, relatively in line with 20% in Q2 2025. Year-to-date 2026 adjusted EBITDA was 15% in 2026 compared to 14% prior year. We continue forecasting improved operating leverage for 2026 while investing in growth opportunities. We had approximately NOK 21.8 million in business development expenses in Q2 on various strategic initiatives, including the acquisition of Vesica Health and the partnership with Artera AI. At the end of Q2, we have currently NOK 162.4 million of cash. And lastly and most importantly, we have no debt on the balance sheet. Additional highlights for Q2, the Vesica Health acquisition in June was completed following our minority investment, which we announced in Q1. Vesica's multi-omic urine-based biomarker test strengthens our leadership in bladder cancer diagnostic and advances our precision diagnostic strategy. The Artera AI partnership, we entered into a joint collaboration with Artera to evaluate its AI-powered digital pathology test using Photocure's blue light cystoscopy registry, monetizing this registry. The FDA reclassification, the FDA reaffirmed plans to begin the proposed reclassification process for BLC equipment in the second half of this year. This will significantly expand U.S. addressable market and accelerate adoption over time. Stryker launched in Europe, commercially launched its CE Mark blue light cystoscopy system in Europe in late second quarter. China milestones, Richard Wolf's blue light system received market approval in China for the use with Hexvix with commercialization by Asieris, and Richard Wolf expected in the coming months. Cevira also completed its first commercial shipment with the first global prescription issued in Beijing. On the clinical evidence and scientific engagement front, the BRAVO study published in uro-oncology demonstrated that blue light cystoscopy achieves cost neutrality versus white light cystoscopy through lower recurrence rates and reduced downstream health costs. Said another way, better clinical outcomes, no additional costs. The Journal of Medical Economics publication showed blue light cystoscopy is cost effective compared to narrowband imaging over a patient's lifetime. And finally, at the 2026 AUA Annual Meeting, 2 Photocure-supported abstracts highlighted the clinical and economic benefits of blue light cystoscopy, including improved detection of high-risk non-muscle invasive bladder cancer and a lower 5-year recurrence-related costs. Moving to segment trends. We had strong unit sales in both regions. Both North America and Europe delivered continued growth. In North America, product revenue increased 12% ex FX, with in-market unit sales increasing 10% with rigid growing at 13%. Six new Saphira towers were installed, 4 new, 2 upgraded, adding to the active BLC account growth strategy of roughly 20% year-over-year. And the ForTec mobile solution now covers over 200 accounts and over 350 different physicians who otherwise would not have had access to blue light cystoscopy. They are now trained and demonstrating the growing momentum in demand with 70% year-over-year unit growth, and mobile now constitutes 17% of North American sales in Q2 2026 versus 11% last year this time. In Europe, product revenue increased 10% ex FX and in-market units increased 8%, driven primarily by 11% growth in the DACH countries with 9% in Germany alone and 10% in priority growth markets, including France, U.K. and Italy. There are now 87 Olympus Visera IIII installs through Q2 2026, and there are many more in the pipeline. 20 upgrades of other equipment year-to-date, while Stryker ramps up its commercial efforts in Europe beginning in late Q2. Taking a look at active accounts. 20% growth in the active accounts in the U.S., which are accounts that have ordered in the last 12 months. Over the past 6 to 8 quarters, we have consistently seen strong year-over-year growth in these accounts as an ongoing trend fueled by ForTec and increased interest and importance of BLC in a macroenvironment where precision diagnostics matter as precision medicines hit the market. The ForTec program continues to exceed expectations and the reactivation accounts with BLC upgrades along with new accounts remains an important initiative as upgrades throughout the world provide double-digit uplift in sales in those same accounts. We see continued momentum in the overall interest and adoption of BLC with Cysview and Hexvix in both the U.S. and the world. Moving to growth initiatives. Despite the accelerating growth of Cysview business, today, Photocure serves less than 10% of the addressable market despite strong clinical evidence and demand for blue light cystoscopy. Three key catalysts have the potential to materially expand our serviceable market drastically. First, additional manufacturing capacity in the FDA's planned reclassification process, along with alternative OEM pathways, are expected to unlock substantially larger rigid BLC market. Second, expand flexible BLC access will extend use beyond the initial diagnosis into surveillance, driving broader adoption and recurring utilization. Richard Wolf's interim flexible system is now available in Europe, with a global 4K solution expected in 2027. That is the system that we are co-developing with them. Together with reclassification, this will expand our addressable market by double-digit multiple versus today. And third, improved reimbursement, supporting ongoing legislative engagement would reduce economic barriers and further accelerate adoption. As these catalysts come online, Photocure's commercial opportunity expands significantly. We have a clinically validated product, growing physician support in a highly underpenetrated market that provides meaningful upside over the coming years. As a reminder, bladder cancer remains a major unmet need in the U.S. and approximately 85,000 new cases, 730,000 patients living with the disease with more than 400,000 TURBT procedures per year and at least 800,000 surveillance cystoscopies performed annually. Flexible cystoscopy alone represents a global market opportunity exceeding $1.3 billion, positioning blue light cystoscopy to capture a meaningful share as market access continues to expand with a proprietary blue light flexible scope co-developed with Richard Wolf. But there's opportunities throughout the precision diagnostic pathway. Beyond Hexvix and Cysview franchise, we continue to expand our precision diagnostics strategy through biomarkers, artificial intelligence and strategic partnership. As bladder cancer care becomes increasingly personalized, we believe future patient management will rely on integrated precision pathways spanning detection, surveillance and treatment. Today, Photocure primarily serves the diagnosis and treatment stage through blue light cystoscopy in the operating room. With Richard Wolf's flexible BLC platform, we will also expand in the office-based surveillance, much larger market space, 2 to 3x the size. Artificial intelligence is another important growth pillar. Our partnerships with Claritas and Artera leverage Photocure's unique clinical data to advance artificial intelligence enabled imaging and digital pathology, strengthening our long-term competitive position. Upstream, approximately 7 million U.S. patients present annually with hematuria, blood in the urine, creating a significant opportunity for noninvasive diagnostics. Our acquisition of Vesica Health adds AssureMDx, a urine-based biomarker test designed to identify high-risk patients earlier, improve the referrals into cystoscopy and increase the appropriate use of BLC cystoscopy. We expect AssureMDx to begin generating revenue in 2027 with reimbursement anticipated by CMS in mid-2028 and the potential for an earlier pathway still exists. Together, these initiatives expand Photocure's role across bladder cancer care continuum and strengthen our long-term position in precision diagnostics. And moving to the Asieris program. Our partnership with Asieris continues to make progress. We have taken in over $26 million in milestones across both Hexvix and Cevira programs to date from Asieris with the potential for additional milestones and royalties in these programs as they advance through regulatory and commercial goalposts. The Richard Wolf blue light equipment received its approval in China in April. As a reminder, Hexvix has already received marketing authorization in China in November 2024. Both Richard Wolf and Asieris will begin commercializing the drug device combination in China in the coming months. Cevira was approved by China by the NMPA in March, and the MAA was accepted by the EMA, or European authorities, for regulatory approval. Both events triggered milestone payments to Photocure in the amounts of $11 million and $2 million, respectively. To date, we have received a partial payment for the Chinese approval at $6.6 million, and the full amount for the EMA submission of $2 million. Photocure has since maintained constructive dialogue on pending payments with Asieris and remains in ongoing discussions. In parallel, we have initiated the legal steps as part of our effort to pursue recovery. I now turn it over to Dick Peters, our Vice President of Finance, to review the financials. Dick, over to you.

Thank you, Dan. Let's dive straight into the financials. Today, I will present to you the second quarter 2026 results. In the second quarter, we delivered NOK 140 million Hexvix/Cysview product revenue, which is an increase of 11% at constant currency. During the quarter, we also collected revenue for API sales to Asieris for the production of Cevira. And with that, the total revenue came in at NOK 142.5 million for the quarter compared to NOK 135.6 million in Q2 '25. Gross profit ended up at NOK 132.1 million, and the margin of Hexvix/Cysview remained stable at 93% of sales. Operating expenses were NOK 134.1 million. That's an increase of 21% versus prior year or 29% excluding the favorable impact of FX. But please note, this includes business development expenses related to the Vesica Health transaction of NOK 21.8 million. We also had open positions during Q2 '25, which are now filled, for example, in Canada and Spain and in our global marketing department. If we normalize for those items, operating expenses actually increased by about 5% versus last year. Reported EBITDA was NOK 2 million negative and adjusted EBITDA, which excludes milestones, business development expenses and other certain ad hoc or noncash expenses came in at NOK 27.2 million. That's at level with prior year. And on a year-to-date basis, it was NOK 42.6 million, and that's a small margin improvement versus 2025, and we continue guiding on a further margin improvement versus last year. Further down the P&L, we report a financial gain of NOK 7.7 million, which is mainly driven by FX gains on intercompany loans and an FX gain on the deferred Vesica Health transaction liability. Those FX gains are partially offset by the Ipsen earn-out payments, which we will be paying through '27, '28, '29 and '30, but they will be lower from the end of next year. Tax expenses were NOK 1 million, and the resulting net earnings for the quarter were NOK 0.7 million negative. Next slide, please, where we go into the segment performance. In the North American market, we grew revenues by 12% at constant currency, but we faced significant headwinds from the weakening of the American dollar versus the Norwegian krone. The revenue growth, including the impact of FX, is therefore 3%. Gross profit remained stable at 95% of revenue and came in at NOK 56.4 million. In North America, direct costs decreased by 4% versus prior year to a total of NOK 43.8 million. There was an increase driven by bonus accruals and other employee-related expenses, but those were more than offset by the tailwind of the FX impact on expenses. The resulting contribution margin in North America is NOK 12.6 million versus NOK 9.2 million in prior year. That's 21% of revenue, and last year, it was 16%. EBITDA, which includes allocations of nondirect overhead expenses, ended at a negative NOK 4.3 million. And remind you that these allocations may change over time as the weight of the sales for each business segment changes. And as the North American sales grow, we are allocating a larger portion of overhead expenses to the North American segment. In Europe, revenue were NOK 80.7 million in 2026, an increase by 4%, including FX impacts, but 10% at constant currency. Growth was mainly driven by in-market unit sales increases in the DACH region of 11% and 10% in priority growth markets. Direct costs in Europe increased by 4% to a total of NOK 29.9 million, and that's mainly due to merit and inflation, but again, partially offset by FX impacts. Contribution margin then ended at NOK 44.6 million or 55% in revenue, pretty much in line with last year's 54%. Finally, EBITDA in Europe remains relatively constant at just above NOK 25 million in both '25 and '26. And then we go to the last finance slide, I'll walk you through the cash flow and balance sheet for the quarter. During Q2, the operating cash flow was NOK 26.8 million. This is mostly driven by EBITDA adjusted for noncash expenses and working capital changes. The large change in working capital is a result of the timing of the invoice of the milestones to Asieris during Q1 and the partial payment received in Q2. The cash flow from investments in the quarter was a negative NOK 80.7 million, and that was mainly driven by the payment for the acquisition of Vesica Health. The cash flow from financing was a negative NOK 12.3 million, and that includes a payment to Ipsen of NOK 10.8 million during the quarter. And with that, the total cash flow in Q1 was a negative -- sorry, Q2 was a negative NOK 30.3 million, and the cash balance for the quarter ended at NOK 162.4 million. Then when we go through the balance sheet, we can see that we have noncurrent assets of NOK 531.6 million by the end of the quarter. That includes intangibles and goodwill, both for the Ipsen transaction and for the Vesica Health Inc. transaction. We also have inventory and receivables of NOK 207.7 million, and that includes the invoiced but still outstanding NOK 4.4 million in milestones from Asieris. And as mentioned, already, cash and cash deposits at the end of the quarter were NOK 162.4 million. Finally, shareholder equity was NOK 606.7 million or 67% of assets and total long-term liabilities, which includes a liability for the Ipsen earn-out and the deferred Vesica Health earn-outs, were NOK 193.3 million. Current liabilities were NOK 101.4 million at the end of the quarter. And that concludes the financial section of today's presentation, and we can go back to Dan.

I think you're going to say key performance metrics there.

Sorry, I'll take those as well, of course. So are we on the right slide?

Yes, we're on adjusted EBITDA.

Adjusted EBITDA. So just reflecting a little bit on the adjusted EBITDA trends, a newly introduced metric, to show the underlying performance of our Hexvix/Cysview business. We see that adjusted EBITDA has improved over time, both in absolute terms and as a percentage of Hexvix/Cysview revenue from a negative amount in 2022 to 13% of total revenue -- of Hexvix/Cysview revenue by 2025. And if we look at the year-to-date numbers, we also see continued improvement, and we are now at 15% of Hexvix/Cysview revenue at the end of Q2 '26. And as said, we expect a continued improvement versus 2025. And then if we go to the next slide, we have a recap of the adjusted EBITDA and the way we calculate it. As you note, in this quarter, we have included the biomarker segment expenses because they are not part of the Hexvix/Cysview core business as we reported today. Going forward, and once the biomarker segment matures and commercializes, we will obviously not adjust for biomarker expenses going forward. Another minor change you may spot versus the prior quarter is that we've decided to not only normalize for non-Hexvix/Cysview revenues, but also for the related cost of goods sold. If not, we would have normalized NOK 2.5 million in Cevira API for the quarter, but kept the COGS in the adjusted EBITDA, which I don't think is a fair comparison. So just to note, a small correction there on the non-Hexvix/Cysview revenue and margin adjustment. And with that, the finance section is really concluded.

Thank you, Dick. All right. We'll go to summary. In the interest of time, I want to move quickly because we want to get to the questions in this quarterly. You can see the quarter 2 2026 results, which I have gone through in the prior presentation, I encourage you to read through it to your leisure. Moving to near-term milestones and corporate objectives. We are raising guidance 8% to 11% top line growth with adjusted EBITDA expansion as we realize further operating leverage on the commercial business, continued increase Hexvix/Cysview account utilization through upgrades, installs and the mobile solution through ForTec. We want to advance the development of the next-generation state-of-the-art 4K HD Flex system, which is still on its developmental pathway. We expect to launch in 2027 and unlock the very large surveillance market, which is 2 to 3x the size of the current markets we serve today in the operating rooms. Our strategic partnership with ICS Claritas is developing a BLC AI, which will also become what we believe a game-changer in bladder cancer precision diagnostics in the detection and surveillance of patients. We will continue data generation of novel precision pathways and health economics to help position BLC as the go-to precision diagnostic in bladder cancer; increasing access to BLC in the U.S. through FDA reclassification, which we anticipate in the second half of this year and also supporting the manufacturers who are seeking out alternative pathways through the FDA currently. And we also will continue to support Asieris. The partnership still remains strong, although we have a disagreement in progressing usage of Hexvix in China and Cevira worldwide. And finally, longer-term business outlook, and this was presented when we did the Vesica acquisition back in June. I want to close on this for the longer-term outlook because I think it's very important everyone is anchored into who we are, who we've been and who we're becoming. So looking beyond 2026, we believe Vesica adds a compelling second growth engine. Assuming Medicare reimbursement by mid-2028 and continued positive clinical data supporting commercialization, we expect initial AssureMDx revenues in 2027 and positive EBITDA contribution from the business by 2030. We also expect commercialization and market access investments to be funded through Photocure's existing cash generation. In the near term, Vesica is expected to generate only modest operating losses as we invest in market access and commercialization activities. As volumes scale, however, we believe the business has the potential to achieve EBITDA margins north of 30%, consistent with the attractive economics typically seen in successful molecular diagnostic businesses. The most important takeaway is the impact on our long-term growth profile. On a stand-alone basis, Photocure was expected to grow in the mid- to high-teen CAGR through 2030. With Vesica, we now expect the consolidated company to deliver revenue growth above 25% annually from 2026 through 2030, while maintaining strong profitability and targeting adjusted EBITDA margins above 25% by 2030. And importantly, we continue to see upside beyond the assumptions, potential FDA down classification, additional scope manufacturers entering the U.S. market and the reintroduction of the world's only proprietary Flex blue light flexible cystoscope would further strengthen the growth outlook for core Photocure business. Overall, we believe this transaction positions Photocure to accelerate growth meaningfully, expand into a large adjacent market, create a larger, more diversified and increasingly profitable bladder cancer company over the coming years. And so with that, I think we've left a lot of time for Q&A this time. So I will turn it over to Priyam and take it from there.

All right. Thank you, Dan. Thank you, Dick. And yes, we have quite a bit of time to take as many questions as possible. So I'll jump right in. Question number one, when does Photocure become a profitable company? When will the various investments in Photocure transfer into earnings? Maybe Dan, do you want to start with that one?

Yes. I think there's 3 points here. One, our strategy is profitable growth. The investments we have made are intended to create operating leverage over time. As revenue scales, particularly from our existing commercial infrastructure, we expect profitability to continue to improve. We believe we've materially strengthened the business through regulatory approvals, geographic expansions, strategic partnerships and platform development. Our focus now is on converting those investments into financial performance. And quite frankly, when I came to the organization, we were a single product company relying on OEMs with all the challenges that we've all lived through over the last several years. Our strategy now is to build a leading bladder uro-oncology cancer diagnostic platform by growing our core business while adding complementary high-margin technologies near revenue or revenue generating that leverage our commercial organization, which is really a cornerstone of our success.

Great. Maybe a question on U.S. S&M allocation. So to help shareholders evaluate the underlying scalability of the core Cysview business, what proportion of the U.S. S&M budget is strictly attributable to maintaining existing active accounts versus acquiring new accounts? Dick, maybe you want to take that one?

Sure. So I think one important thing to note is that once an account matures, we can't just leave it behind and expect sales to continue growing. Accounts need maintenance. Doctors change clinics, new doctors come in and need to be educated and trained on blue light equipment on how to read the graphics. Equipment breaks down and new equipment needs to be ordered, issues need to be identified, and we are helping out with that as well. So both account types need maintenance from our reps. And it's not that we can only focus on new accounts, we will lose the existing accounts if we lose focus on those as well. Now having said that, I do not have a specific metric on time spent per account.

Okay. I see quite a few questions here on our new financial reporting in lieu of adjusted EBITDA. So as analysts increasingly focus on unadjusted operating cash flow, why does management view adjusted EBITDA as a representative metric for underlying performance given that reported EBITDA was negative and the net cash flow after investments was also negative in the first half of '26? Dick, you can take that one as well.

Yes, that's a great question. So from the strategy, we understand that Photocure is going through a transformation phase. And what we want to achieve by presenting adjusted EBITDA is really to give shareholders an insight into the performance of our existing Hexvix/Cysview core business. And that's exactly what adjusted EBITDA is doing. And as our business matures and diversifies, we will adapt this metric to reflect the new state of business. But right now, we believe that adjusted EBITDA, as we presented, is the best way to track performance of Hexvix/Cysview over time.

Next, why did you go into arbitration with Asieris? What is the status of this partnership? Dan?

Well, as we discussed, we initiated the arbitration in accordance with the terms of our agreement. We feel like we're in a very strong position. Asieris has an alternate view of the contract. It's now in a legal proceeding, so we can't really comment on specifics of the case. It's part of our legal strategy. What I can say is that we believe the contractual terms do support our position, and we are pursuing the appropriate process to protect the company's interest in accordance with the contract that we have with them. Importantly, this matter doesn't change our long-term strategy or commitment working with Asieris. In fact, our teams work very closely day in and day out, supporting Cevira launch in China or the Hexvix launch in China or even the submissions around the world. Our interests remain aligned. So we'll provide updates if and when there are material developments appropriate for disclosure. But again, now that we're into sort of official legal processing, I'd really rather not comment on any specifically. But we're doing what's right for Photocure.

Several questions here on Vesica. So let's start with the more broader one. Why was Vesica the right acquisition for Photocure?