Vitrolife AB (publ) (VITR) Earnings Call Transcript & Summary

Good day, and thank you for standing by, and welcome to the interim report January-June 2021. [Operator Instructions] For your information, the conference is being recorded. Now I would like to hand the conference over to your speaker, Thomas Axelsson. Please go ahead.

Thank you very much, and welcome to the Interim Report January-June 2021. The speakers today will be Mikael Engblom, he's the CFO of the company; and myself, Thomas Axelsson, that is CEO of the company. Please change page to them and go into the summary of the Q2. Q2, it was a quarter of good growth. Sales was SEK 382 million, and that was a growth in 83% in Swedish currency. Sales increased by 94% in local currency and the EBITDA with a margin of 39%, excluding onetime cost. I would also within -- together with Mikael in this interim report go through -- and happening after the closing date. And that is the announcement of an agreement to acquire 100% of Igenomix. Please change page and go into the presentation then and look on Page #3. Running through the sales right now. I said that it was a good, good quarter. The total growth was 94%. However, I think that we should take into consideration that last year, during this quarter, the IVF business was heavily impacted by the pandemic situation. There are very, very good signs within almost all markets. The 3 largest markets that are Japan, U.S., China, they seem to be going quite well. In Japan and in U.S., we are currently within quarter 2 of this year seeing that they are doing more cycles than before the pandemic. In China then, they are around the same kind of number of cycles. And the reason why they are not, let's say, increasing the number of cycles is that there have been some restrictions in a few provinces that is then making the difference of having growth and no growth. Going into the different regions, our market regions then. Since Japan and Pacific are having good growth and they are doing more cycles than before the pandemic, we can see that the growth there is 26%. 26% is less in growth in local currency than what we are seeing in the other market regions. The reason is that last year, in comparison, those territories was those that were initially at least and during the year then having an opportunity to do cycles in a restricted way but still performing cycles. You know that there were territories where it was completely closed down. So sales of SEK 55 million in Japan-Pacific. Going into then the region Asia, that for our side is China, India and Southeast Asia. There is a mixed picture. As I said, China is almost back to normal numbers, while Southeast Asia and India still is under restriction and is having a problem. When I mentioned in Southeast Asia and some of the territories there that are dependent upon IVF tourists, globally, I can say that in every clinic, more or less, where they have a customer base from IVF tourism, those clinics are not back to normal cycle numbers. The growth was 32% in Asia, and the sales was SEK 74 million. Then the EMEA region, SEK 178 million, and the growth was SEK 155 million. We have had significant growth. And in comparison, you know that some of the countries more or less completely closed down. But even taking that restrictions into consideration, Q2 this year was a very good number. And we can see higher cycle numbers within the clinics where we have customers in U.K., Italy, France and in many of those regions. We also see within that region a good, good growth of the Time-lapse situation there. Public clinics in Europe are, to a large extent, not back to normal numbers. Then the Americas, growth of 176%. Last year, U.S. Q2 was more or less closed for the IVF cycle. But still, it is a good growth within the market. And we can see later on that we are turning into the divisions that in U.S., the good growth is coming from the products that are directly related to number of cycles, and that is the Genomics and our consumable business. So overall, organic growth of 94%, same as our local growth. Please then go into Page #4. I have mentioned that we see a good cycle growth. We see that -- and it's easy to compare the cycle growth in the region and for our customers in the consumable sides. In the consumable side, this quarter was SEK 233 million and was an increase with 91%. Growth in all the regions, and it is a good mix between the products, and it is also our product offering that we have slowly changed over the years that are being shown quite well in these numbers. It is more labware. It is more media. It is more needles. It is more pipettes. So overall, it is a good comparison to growth with cycle growth in our market position. Within the technology, 72% growth and sales of SEK 102 million. There, we are still having a little challenge with the situation that restrictions in travel. But order intake and the situation looks good. And the outcome of our introduction of iDAScore are looking promising, and that is also reflecting in new orders on the EmbryoScopes. Genomics then. It is, as you know, we are only selling the genomics currently in EMEA and U.S.A. and those were the markets that has the most restrictions last year and the growth of 239% is really, really good, and it shows that the customers are back and doing more genomics, in this case, PGT-A than ever. The growth within our divisions, I would like to say that those are coming from also the -- a couple of, let's say, product development. And within this quarter, we can see that the launch of EmbryoMap, the PGT-A product from ourself, has been good viewed from the customers. And also a positive thing that our media with antioxidants, that has been so successful in Japan in a few other markets are now approved by FDA. Quickly going into the numbers regarding -- and financials regarding this quarter. I'm handing over to Mikael, and please then go to Page #5.

The gross margin during the second quarter was 62%, an increase compared to 53% for the same quarter last year. And the most important contributor to the increase is the economies of scale as a result of increased sales. This quarter, the gross margin was also charged with a onetime transport-related cost of about SEK 3 million. So if we exclude for this onetime effect, the margin was 63%. The EBITDA result for the quarter was SEK 134 million, corresponding to an EBITDA margin of 35%. The EBITDA was charged besides the transport-related item that I mentioned, the -- about acquisition-related onetime costs of SEK 11 million. So if we exclude these 2 items of onetime character, the EBITDA margin was about 39% during this quarter. The net debt in relation to EBITDA was minus 1.9. So we continue to have a large net cash position. And the intention then is to use this net cash to finance or partly finance the Igenomix acquisition. And with that, I leave over to Thomas to talk more about this acquisition.

Thank you, Mikael. And then we are on Page #6 then. As informed last week, we have come to an agreement with Igenomix that we will acquire Igenomix and together we will build a new strong identity within the IVF field. The Igenomix, their leadership within the reproductive genetic testing service and their contacts within the business that they are together with Vitrolife is that our products overall has been focusing on, more product development and what we are doing on clinical outcome by good cultural condition and also stress-free environment. Those two together, the Igenomix services development of that field and the Vitrolife device portfolio, together a joint base is something that we see can benefit our customers and the market. So let's go into #7 and be more specific about the clear strategic rationale regarding why Igenomix and Vitrolife can be a good identity going forward. And I would like to just address 5 things that is quite obvious, at least for Vitrolife and also for Igenomix, and that is that within a growth field like IVF, it is important to have a size and an ability to service the customer on a global base in this niche market. Together, Igenomix and Vitrolife, we can with our portfolio and how we are then structured towards customers, deliver long-term profitable growth. It has been key to Vitrolife and it will be key even for this combined identity. Number two. We've talked about that there are some cycle growth, and we have talked about the monetary growth, and we've also said that there are add-ons there are different fields within the IVF sector that is growing more than the cycles itself. And for Vitrolife to expand into the high-growth IVF diagnostic testing sector is key. We have done it initially by going into Genomics and PGT-A. And currently, by this acquisition, we go into the testing sector, and that is a good add-on for continuous growth. Thirdly, it is also about how we can work together in a commercial network in our customer base. Vitrolife has currently been working mostly [Technical difficulty] clinics and also IVF clinics, our key customer base and our interaction has been with the embryologist. Igenomix, they've been working with embryologists, of course, but also more with gynecologists and some other professional staff. Combined, all of that will help both of us to be able to serve and to interact with the IVF customer base from the clinics to the staff inside the clinics to the owners and also to the patients and patients are the key for further decisions regarding what kind of treatment that they are asking for. Fourthly, the synergy, of course. I mean, what we can see is that we will have gross sales synergies, both geographically and also from solutions to customer. That's one thing. But also the strong innovation side that Igenomix has. I'm quite impressive regarding the development within Igenomix and the ability to turn research into products that are helping the clinics, helping the patients. So further innovation between Igenomix and Vitrolife is a clear strategic rationale. And not at least, it is that we -- it's quite interesting that Vitrolife and Igenomix has the same kind of mission, the same kind of goal. And that is to help the IVF clinics, the ones that are performing the IVF treatment to achieve successful treatment outcomes. And if I will then just explain that one more in detail, we can go to Page #8. And on Page #8, we can see Vitrolife has been working with -- we have talked about selection tools, we talked about ranking, we talked about evaluation of different kind of embryos. And it's been key then to have a stress-free environment, so you can have been able to judge the embryos from either morphology side, which is Time-lapse side, which is key still, and most clinics are using it, most embryologists are using morphology as the key to do an evaluation of the embryo to transfer. Also, the growth side in Vitrolife has been the chromosome testing, the PGT-A. But that is not enough. Igenomix has so much more, the leadership within the reproductive genetic testing and especially within the preimplantation analysis side. So they have their own products on development and within the preimplantation side, preconception, also prenatal and rare diseases. But I'm going to focus right now on the preimplantation analysis. And the combination then of finding the best embryo, which Vitrolife has been doing and also Igenomix is doing. Igenomix also have a definitely clear market leadership and are doing the development and are doing studies within the right timing question, when is the endometrium ready to receive the embryo? So the combination of these two companies is to get a competent embryo and also have information regarding when the endometrium is ready to receive it. Together, that will increase the pregnancy rate and help the customers to get what they're asking for: a healthy baby as soon as possible. By that, going to Page #9 and look into some rationale from the financial side then, Mikael.

Yes. So Igenomix has a proven track record of delivering profitable growth, as you can see on the Slide #9. In 2020, the company was impacted negatively by the pandemic. But in 2020 and 2021, there was also revenue coming from COVID-19 testing, which will then consider nonrecurring revenue. So if we exclude the COVID-19 testing revenue, we can see that the compound annual growth rate since -- from 2017 to 2021 has amounted to about 29%. So it has been a profitable growth company. Moving to Page #10, some more about the structure and terms of the transaction. So the total consideration on our net debt and cash-free basis is EUR 1.25 billion. That's equal to about SEK 12.7 billion. And we will finance this to a mix of issue in kind, directed to the sellers and directed share issue to institutional investors and the cash that we have in the company and some new committed debt facilities. The directed share issue was completed after closing of the stock market on July 8. And the amount of that was SEK 3.6 billion. The issue in kind will be approved on an extra general meeting that will be held during the Autumn, and we will send out notice in due course for that. The transaction is subject to customary closing conditions and regulatory approvals. And we expect the closing to happen during the fourth quarter this year. Move to Page #11 for the financial impact of the transaction. So we expect combined pro forma sales for the last 12 months ending now in June this year of SEK 2.460 billion and an adjusted EBITDA of SEK 864 million, and this excludes the effect of the COVID-19 testing revenue on EBITDA. So we are expecting an immediate top-line growth and a long-time upside potential, as Thomas mentioned, from this growing business. On a pro forma basis, we expect revenue to increase with 68% as a consequence of this transaction. And we are also seeing synergies, as Thomas mentioned, regarding the cross-selling and innovation field. On the EBITDA level, of course, besides the top line, we are seeing the pro forma EBITDA increase with about 45% due to this transaction, and we see positive cash flow generation being added as a consequence of this transaction. The net debt in relation to EBITDA will be below 3x net, which is our financial goal and we are expecting the net debt-to-EBITDA to be around 2x on a pro forma basis. And as Thomas mentioned, we see continued opportunities for growth using this space. With that, operator, we are ready to take questions.

[Operator Instructions] And we are taking our first question from the line of [ Konrad Gaffner. ]

I'm [ Justin Yumin ] from Carnegie. Thomas and Mikael, and I would just start off with a question regarding the quarter. Looking at the good development in your consumables and you're talking about good progress across the board with both, including your pipettes, labware and media and strong developments in the clinics in Europe where you're currently present, are we still talking about you taking market share within the consumables?

Yes, yes. That's what we can see. Within -- our business are fluctuating up and down, as you're well aware of, depending upon how much hardware we are selling a quarter. And this quarter has been a good growth quarter for the technology, but it's not been any outstanding larger orders. There's been a good, good flow of many Time-lapse EmbryoScopes to individual clinics. So when we're looking into the consumer side, as you're mentioning and see the growth, it is quite easy for us to predict the number of cycles within a country, within a clinic chain and compare how much we are selling. It has been a challenge since the pandemic came, and we were considering Q3, Q4, Q1 this year how much are they building up in inventory, are they afraid of being out of product due to the supply situation. We were bouncing those kind of questions back and forth. But currently, when I see a more stable business, and we can predict the flow of a cycle compared to our sales, those things together is that, yes, we believe that we are taking on our consumables in just the market that you mentioned.

Perfect. And I know that last quarter, you highlighted the risk of potential delays in the supply chains related to, I believe, was on the media side. Is there any change to that scenario that you're currently seeing?

Yes, we worked hard. During the quarter, we have had some extra costs for the supply, we needed to fly products from the production sites in U.S. or in Asia that has been extra cost and the flight cost has also gone up. But we've been able to manage that very well. In reality, we have changed a few bottle size. The customer has only experienced that they are getting a different size, and we have all those sizes regulatory approved. There's been not any changes within the cost for the clinic. We have taken it inside the company. Going forward, it looks a lot better. I am a lot more, let's say, certain regarding the supply right now and how we are managing it than where it was in late March, early August. I feel that we are more or less out of the challenge. But you never know. You never know. I'm trying to be careful here.

That's great. And if I'll just go on to Igenomix and just a few questions. So given that this is run sort of diagnostics within the Igenomix labs rather than in the IVF clinics, do you have any idea on how much a current genomics testing is performed in-house in IVF clinics versus in decentralized labs? And what are your expectations on the future? And is it fair to call it out that the knowledge and know-how of running Genomic testing in-house in IVF clinics are quite poor and majority of these tests will be performed in more specialized labs in the future?

Best guess is that around a little bit more than 80% currently of all the preimplantation analyzing. If you talk about PGT-A then, it's done in outside laboratories. So I mean, the clinics are asking for that service. Going forward and why we believe that having a decentralized structure and not only focusing on U.S., U.S. is a key market for us. It will be a key market, but it's already partly a mature market on the preimplantation analysis market. The growth within the -- in all these kind of testing will happen outside the U.S. For instance, what's going to happen in Asia, what's going to happen in Japan, is it going to be a more standard product or not maybe standard but it's going to be more used than being allowed in more countries within the Northern Europe. So there are growth. And then your question was, is it going to be done in-house or out-house. I do think that it's going to be a mix. Some testing, if you are within a clinic chain, you will have the size that you will do some of those testing in-house, for instance, PGT-A. However, there are also other tests that needs to be done. And then will they have the scale? Will they do it so frequently, so they will keep up with the algorithm and being able to perform all the different testing? I don't believe so. I do think that even if you are setting up mid-sized genetic laboratory within your clinic chain, you will get support and you will be in connection with a specialized genetic laboratory. So it's going to be a mixed trend going forward. Definitely. And the growth is going to happen in -- initially in markets that will have an ability and the legal regulatory side to do more PGT-A.

Great. And on -- I find, especially intriguing Igenomix ERA testing. PGT-A is obviously sort of where the majority of the testing has been. But on ERA, especially giving Igenomix strong positioning, do you have any good understanding in terms of number of cycles performed or if we were to look at the more mature markets, the U.S., how much of the cycles include ERA testing currently?

Very little. Very little. Regarding ERA testing, there are a couple of, let's say, situations that are being judged by the customer, by the clinic. And that is if it is going to be used primarily for implantation failures after more than 2 cycles with no success. That's where it is usually today. I mean, that's the criteria that is mostly used. And then the question is, should they use it already for the first cycle? That's the question regarding cost. And also how much if we focus on having on pregnancy, healthy baby as soon as possible. Given your numbers, if you're using the situation then on ERA testing today, there are different numbers, a very conservative number is that 10%, 15% of the cycles could be done under the current clinical judgments regarding when to use it. So it is -- and it is far away from that number. So that's why we believe that the ERA testing -- and let's say, the question regarding the endometrium is key for us going forward. We've talked about the situation that the tools are getting better and better from the morphology side, the tools are getting better and better from the preimplantation [ NIC ] side regarding the judgment of the embryo. But the question has been when to transfer it. And here are the ERA testing, a good solution and a very good beginning on understanding the window of implantation.

That's great. And last question on my end. One related to ERA and another one talking about the synergies. On ERA, it looks like to be a good strategic fit with your Time-lapse. Is it fair to assume that the penetration of Time-lapse and ERA should convert over time and look quite similar in the long run? And the second one is, looking at your current product offering from Illumina on PGT, do you believe that having now Igenomix, that you can take market share from Thermo Fisher Ion Torrent systems and switching those customers from those kits on to Illumina products?

Probably 2 questions. The initial one, if I understood your question, is that Time-lapse and ERA will not be in any kind of competitive situation because it is 2 different things that you are judging.

Sorry, it was -- I planned on complementary. I just want...

Okay. Okay. Your understanding is that ERA will come up to the same type of penetration as Time-lapse over time, and given that they are highly complementary. I do think that the growth of Time-lapse will go a lot, lot quicker than ERA. And probably today, they own 20% of the cycles being done by Time-lapse by morphology and I expect good growth in that side. The growth within ERA will come with more and more publications and there are currently -- and I really like the way that we are trying to do and Igenomix are trying to do IVF more of a clinical -- where we base our assumptions on products on therapy on clinical sites like RCT. A lot of things in IVF are not based on real clinical studies like an RCT, or randomized controlled study. And that's why we are doing that within times currently on the artificial intelligence side so we can see how we can improve the outcome or the easiness of use. And the same thing is that Igenomix are working on an RCT. And you never know the outcome of those. I mean it is -- but just looking into that side, if we can get clear numbers, that it is a positive outcome on reducing time to pregnancy and, of course, also pregnancy rate and not only pregnancy rate, baby born. Then it's going to be a quick transaction of the market. So it is a little bit of a lottery, let's put it that way. Or is the RCT going to look good when it's coming within a couple of years. Then I think this is going to take off quite good. If it is not so positive, then we are probably going to look like it was at the STAR study. The STAR study was the study regarding the PDT-A and if PDT-A was having better clinical outcome than not doing any genetic testing. And the outcome of that was that the first, let's say, the outcome was that it didn't have any positive outcome over a wider population. So my question is that Time-lapse growth will come and is going to continue. ERA growth will come and really big factor for the quick exchange will be the clinical outcomes.

Great. And the last question was then regarding if you can take market share from Thermo Fisher switching to [ UR PDT ] under the agreement with Illumina, if that could be sort of enhanced or taking...

No. I see those as 2 different things. For us, you started to ask about the situation about the clinic, if they want to do testing inside or if they want to send it to an outside center. Our ambition with Illumina and our ambition with having the development of EmbryoMap is to support the clinics that are setting up their own laboratory. So I mean that's one offer and then the offer -- what we are doing within the service side within our laboratories is, of course, regarding how we can have profitable growth and what is the best test. So currently, it is not any direct synergies between those two. Long term, yes, of course, that we will try to have the best offer internally as well as externally, but that will be something that the future will tell.

We are now taking our next question from the line of Patrik Ling.

Thomas and Mikael, maybe you can talk a little bit about your gross margin that came in a little bit softer than I had expected for the quarter. And even if you adjust for the SEK 3 million in extra transportation costs, it's a little bit on the low side according to what I have hoped for. So maybe you can talk a little bit about what we should expect going forward. I mean, if you just compare top line, I mean you have, in this quarter, the same top line basically as you had in Q4. But even adjusting for the transportation costs, I mean, gross margin is down 300 basis points. So if you can talk a little bit about mix changes and geographical changes and if there are any price pressure or anything else that we should be aware of? So we know a little bit more about how to think about the future.

Sure. Yes. I mean, besides the onetime effect then, we ended up at 63%. And of course, historically, the margin has varied a little bit between quarters. What we can see this quarter is that we have had some extra transport costs. Thomas mentioned it before related to transport, in general, has become more expensive in the world after the pandemic. And of course, we have a lot of internal transport in the company that impacts the gross margin. We also had some extra due to that we had other types of sources of supply during this quarter. So that's impacting us short term. What will happen with transport costs long term, when they go back after the pandemic to a more normalized level, we don't know that, but that's some extras that we've had. We also had some negative currency effect hitting the gross margin in the second quarter if you compare to the same quarter last year. And of course, on the mix side, we had relatively high sales of genomics this quarter, and genomics has considerably lower gross margin than, for example, the consumables and the technology business. So the more -- the mix effect was also negative. So there were a couple of items that went against us in the average gross margin this quarter.

Okay. Great. Then my last question was really about this patent litigation that you've talked about in the report. I mean, maybe you can elaborate a little bit on how important those patents are for your Time-lapse operations?

Yes. So I mean, the patents are related to method patents that are used in the software. And those patents are then -- I mean, these patents, based on our assessment, we are not infringing these patents. We have developed the technology, considering that these patents exist. So of course, software solutions are part of our offering. And of course, that is -- that has an importance in terms of our products. But I mean, our position is still that these patents -- we're not infringing these patents regarding these method patents.

There are no other questions on the line. Please go ahead.

Okay. If there is no other questions, thank you very much for listening in this very, very warm day in July before the vacation. Thank you, and goodbye.

That concludes the call for today. Thank you for participating. You may all disconnect.