Ypsomed Holding AG (YPSN) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the 2020-21 Half Year Results Conference Call of Ypsomed. [Operator Instructions] I would like to introduce your host for today's conference, Mr. Thomas Kutt, Head of Investor Relations. Sir, the floor is yours.

Thank you, Olivier. Thank you very much. Good day, ladies and gentlemen, and thank you for joining us for our 2020-21 Half Year Earnings Call. Joining me today is Simon Michel. Our press release, report and presentation discussing our results and business performance is also available in the Media and Investors section of our website. With that, I will turn the call to Simon. Simon, please?

Thank you, Thomas. Ladies and gentlemen, a very warm welcome from Burgdorf, Switzerland today. Growth shows and proves how robust our business model is and how privileged we are. Our good business model has proven itself. Our products are vital for people with chronic disease. Infusion sets for pump users are required every 3 days and devices as well. And our processes, as you know, are highly automated and vertically integrated, so our manufacturing has never been interrupted. Our supply chain towards customers, towards our clients has been ensured in all times. So our core strategy and our focus are really aligned. the market is right. And therefore, we continue to pursue our growth path. Yes, we have grown a bit less than expected 12 months ago, but we have grown at 4.6% and currency adjusted at 6.8% even. And this has also shown and it is also being reflected that we have created over 100 new jobs during this crisis. We have hired people, especially in the area of software engineering and production and less so in administration, as you may see from the figures. Ypsomed's focus align with the following 4 strategic initiatives, as we have shown before: expand, innovation, operational excellence and sustainability. In the area of expansion, we extend the reach to pharmaceutical companies on a global scale, and we are working extensively on the U.S. comp access. In the area of innovation, we closed the digitization exercise for most of our products. We save cost on lean remanufacturing. Our lean transformation program in all manufacturing floors are very far and leads to our cost leadership. And as you know, we have committed to become CO2 0, carbon net 0 by 2030, a commitment which has been very well received by our pharma clients that are in a similar position and under pressure from society and from politics. So what have we achieved in the last 6 months in those 4 strategic areas? As you may have seen this morning, our sales growth of over 22% year-on-year in injection systems is just phenomenal. We are extremely motivated that we are able to actually fulfill our clients in less time than we have told you 2, 2.5 years ago. So we basically have doubled injection systems in 2 years to 2.5 years, and we're going to double it again in the coming 3 years. So this is a clear proof that our platform program works. On YpsoPump, we are very close to finalize a very important partnership in the U.S. for the distribution of YpsoPump. We hope to be able to communicate it in the coming weeks. The date today, the 3rd and 4th of November, are quite full with topics in the U.S. So we have decided to move it up a bit. On the innovation level, we are on track with our Loop Program, i.e., the integration of Dexcom into our mylife insulin pump system. We have also been able to secure 2 YpsoDose cases. YpsoDose is the large volume injector in the area of YpsoMate Delivery Systems, a very interesting new field devices that will make us very happy in 5 years from now, a new class of devices. We call them large volume injectors, LVI. Very lucrative mainly in the area of oncology. We have been doubling the capacity on YpsoMate by installing 2 lines in Schwerin in Germany, our new site. And we're delivering at the moment our large infusion set line in Schwerin, so the 10 million infusion set capacity line. So we are no longer dependent from the Mexico factory. As you may have seen, we have introduced YpsoMate Zero, our zero option, as we call it. It's an option that our pharma clients can choose, and we sell it and we ensure that the products are carbon net 0 that they are getting from us. This growth is also shown and reflected, of course, in our investments. But interestingly, as you see, we spent less money in concrete and steel, but more so in software and intangible assets, and that's very important. So we basically moved our investments from infrastructure into R&D and software into future business. And in order to achieve this, we have been able to increase our short-term credit line with our banks slightly from CHF 210 million to CHF 265 million. And also my family has decided to extend it and credit line by CHF 45 million additional to CHF 55 million. So now we are in a comfortable situation that we can finance all these investments in R&D and in production capacity. As you know, we had to prefinance the YpsoMate and UnoPen at all these lines, and it requires capital. This is now possible without further discussions with banks. We've also decided to relieve Ypsomed a bit from large programs, and we have decided to sell YpsoPod program. It's our patch pump program. There we had invested so far roughly CHF 9 million. We sell it for CHF 13 million to TecMed. TecMed is a company which is 100% controlled by my father. So we basically sell the development program into our family. It's a small gain here on Ypsomed's side. We have been discussing that with our lessor, and he said, it's okay. How we get to the calculation? We basically do it to relieve Ypsomed in order to focus. It's a CHR 75 million additional program, which is derived for this product until we can deliver to the market. Importantly, as you know that we have decided on an earn-out clause and also the possibility to buy it back once it's finalized and developed and ready to market in '24. So it's [indiscernible] the same. We simply finance it no more out of our company, but our family. And we take the responsibility to support here at this time [indiscernible]. They're convinced it is a very important product for the market. It supports -- it's a very nice alternative to the [indiscernible] company that you know, which has a cost benefit. We don't want to stop it. So in a way, we decided to take it externally. That's what we'll do, and we move it over in January '21. So COVID-19, what are the effects on our business? Let's start with Ypsomed Delivery System. Basically 0. We have no real effect. Operating business is running. We're delivering products. Some companies are even ordering more in order to have stock, you can imagine. Some few products have a small delay in introducing them, because some hospitals don't allow sales force from our pharma partners in their offices. But overall, we are very happy that we can deliver and that we can continue the business on a very, very stable manner. Just as a reminder, for those of you that are new to us our platform device strategy is the really the core piece for the success in Ypsomed Delivery Systems. Such a constant. high-growth in this area is only possible because we have done our upfront investments. We started that already 8, 9 years ago. So we have started by investing in platforms, products such as auto-injectors and disposable pens. We have installed manufacturing capacity, and we still go on to install manufacturing capacity. This is basically something we have to do upfront in order to sell products and to customize them, support the studies and bring them to the market. This platform device strategy is the reason why we have this technology leadership and the cost leadership at the same time. We're so focused on not changing too much on the product that we can actually profit from scale effect. Scaling effects lead, of course, to lower cost. We can have, several clients on one line, which is very efficient working with our tools. On Diabetes Care side, we are, of course, lucky in our situation that we can continue to deliver infusion sets and strips. Patients on a pump can use these products. You don't go off the therapy just because of corona, you continue to use your disposables. But, and this is very similar to what Medtronic and others go through, we cannot really put many more patients on the pump. We have calculated an 800 to 1,000 patients per month average, and we are rather at the 300 per month average, which is of course too low, but those patients are simply not able to talk to us, because Ypsomed and also the other companies, we are not allowed to join the hospitals, the offices and actually talk to the people. But it's important to know, we use the time in order to catch up on technology side by introducing the mylife Loop, those elements by doing integration of Dexcom. And it's a very important piece for our customers and by basically catching on to Tandem and Medtronic during the time. So we're finding a good position that we can use this situation that the virus gave us in order to do our homework. Just to give you a bit more details on what is happening here in Europe. Basically, Germany and Switzerland are in quite a comparable situation. Germany and Switzerland work with specialized practices, so diabetic practices [indiscernible] with mask and it works. But most hospitals in the U.K., France and Italy are really shut down. It's difficult to get appointments with clients that are interested in our pump. And also tenders in the Nordics, for instance, and Eastern Europe are postponed. And there is a pent-up demand, and we see this wave. We see the prescriptions waiting. We have trainees lined up and don't simply know when this will be. Will it be in spring? Will it be in early summer? We don't really know. This is the main reason basically why it's quite difficult for us to give exact outlook. We clearly see a slight decrease on top line sales, and we definitely see further growth in operating profit. So the second half is still growing, and all in all, will certainly have better results than in '19, '20. But it's difficult for us to tell you where we are ending simply because of -- we don't really see yet how many patients in Q4 have been able to put on the pump. We continue, of course, our very strict cost control, in operations especially. You have seen that we're down to 5.2% administration cost. And my clear goal is to be below 5%, as you may know. So this is a clear focus of my team here, taking out cost, unnecessary fat. It's a good moment to dig in again and to stop initiatives, stop products, stop elements which are not really, really core. And this is something where we'll get a very strong support from our employees. Especially when we still hire people, it shows that we have a clear focus on what we do. Important point to note, we're still crystal clear convinced that medium-term EBIT target of CHF 100 million is achievable. This is 3, 3.5 years. It's moved out a bit eventually now because of the delay of putting [indiscernible] pump. But it is clearly here in our midterm planning. I mean doubling delivery systems by itself will bring us north of CHF 100 million in this segment only. So all we have to do is to get to a black 0 income business in order to achieve these results. Let me go a bit more into the details on top line revenue. We see this 4.6% growth in sales. And it's clear now that why YDS is the strongest revenue driver. The Delivery Systems segment, as you may know, is part of injection systems of our OEM business, our own developed pens and the contract manufacturing business. So this combined segment is growing at 18.9% last half year, while Diabetes Care overall has declined 8.9%. The is mainly due to the -- let's first go into a bit more detail on Delivery Systems. So over the last 2 years, we have grown at 59%, 22% growth in injection systems. This is a very high-margin business where we are basically growing up. It's just a bit [indiscernible] out there, and there's nobody really left. So this is a situation we can really profit from and can keep our timing up. We charge [indiscernible] in Swiss francs. We don't have the currency effects in this business, a very comfortable situation for our auto-injectors for prefiltration and our disposable pens for cartridges. The contract manufacturing is growing, and that's very motivating. As you have heard, we have been able to extend the partnership with Sanofi. So we are able to double the capacity and drive this growth mode at the moment, and we make money with contract manufacturing. That's important. We add a little bit of FX here to our fixed costs, which supports, of course, our overall infrastructure depreciation. On the Diabetes Care side, this total of 8.9% is combined of pump and pump [indiscernible] decreased -- a decline 13.7%. That's not a lot compared to some of our competitors. But it is, of course, due to less new patients on the pump. And that's a little issue, we know, but it's not being lost. It's basically delayed. On pen needles, we had a bit lower sales because of less needles in America at the moment. We are heavily working on filling that volume in '21 again. And then DiaExpert test strips is mainly a currency effect. And of course, test strips are a little bit lower, but on a very, very low volume because of CGM new technology. I'd like to end the specific discussion here with EBIT bottom line. It's solid, especially almost on the area where we have been the year before. We have added CHF 8 million in growth and efficiency gains through our lean manufacturing and lean transformation program. But we have CHF 5 million less compared to last year because of the one-off license agreement that we have been able to book into our books -- our P&L last year. So net, it ends up at top 3. We have a CHF 4 million effect on the depreciation area, especially for capacity, that now is ready and there and starts costing and putting a cost in our P&L, mainly due to now the fully operating and live Schwerin site. With that, I would like to dig a little bit into our business areas, and I would like to start with Ypsomed Delivery Systems. Ypsomed Delivery Systems, you may have read, 6 weeks ago, we have launched Zero option, that YpsoMate Zero Initiative, the first 0 carbon emission auto-injector. It has been extremely well received, I can say, by a global big pharma biotech. And the industry clearly realized that YpsoMate [indiscernible] needs that we have shown the industry where we have to go next. It's not only digital, it's also green. And it's a very important element, because most of our pharma customers, they get the pressures from their investors, from their government, from their clients, from their end users. And we're putting here a very strong signal and support in our industry and make it very difficult for our 2 remaining competitors to catch up with us. And so how do we do that? Basically twofold, by substituting and by offsetting. Substitution means that we are changing material. So we're basically taking the oil-based plastics and exchange them through biopolymers. This is polymers coming from plants, sugarcane and stuff like that, and also recycled plastics. So -- and we change the parts and lower the carbon footprint just like changing the material. We're also working on many initiatives on circularity, i.e., taking trays back, pallets back, taking packaging back, not throwing it all away after shipping. But it's clear, the substitution, you can only do roughly 50% of carbon emission reduction. The rest are going to offset, and we're doing that by buying certificates from the market, but also by creating own certificates. As you may know, we have started 3 years ago in the Masai Mara, so near the national park in Kenya, a very large reforestation program. And in '22, we are going to be able to deliver our first own certificates, which will support us really bringing us down to net carbon 0. And that you -- as I have said initially, as a group on the net carbon 0 by 2030 latest in order to support the CO2 and Paris initiative. But it's not only green, it's also verticals of volume, and this is an actual picture actually here last week, which shows the 2 new lines for auto-injector in our new site in [ Hall B ]. On the left side, this is a 20 million capacity for auto-injectors, 2 lines including over 20 plastic molding machines. It's being installed now. And at the Christmas, you're going to see the first test run. So we can start manufacturing out of Germany in Q1 calendar year '21. When you look at our order pipeline, which is very strong, we have added in the last 6 months as many new projects as in the entire previous business year. That's extremely remarkable. At the moment, we have roughly 50 auto-injector variants and 60 disposable UnoPen variants under customization. Some of them now move into the studies. Some are already in the registration FDA phase. So this big, big wave is coming closer to market in the next 3 to 4 years. We will see dozens of launches every year of new products, new drugs. It's not only diabetes. It's many interesting molecules that we enter the market and support and relieve patients with chronic disease. With that, I would like to move over to Diabetes Care. And Diabetes Care, of course, most of you are interested. So what is this instrument doing in America? We are in discussions and very extended discussions with a distribution partner that we're going to announce, hopefully, in the coming weeks, not months. We have a clear understanding it's not going to have its own brand in America, its own sales organization, its own processes. They're going to have a small organization that will support in -- second-level support and regulatory support and logistics. Ypsomed will be their registerer. So we are going to register the product in a 2-step process and towards ACE with the FDA. So step 1 in June '21, we're going to enter the dossier for the YpsoPump. And YpsoPump is going to become the predicate device for the ACE interoperable approval, which we're going to hand in, in December-ish Q4 Q1 latest, '22. So we're going to have a market launch by mid-'22. [indiscernible] together with our partner, we are extremely motivated to do that. There's now a very clear view. It gives Ypsomed a relief on the bottom line. We don't have to do the upfront investment. And we basically build an OEM business relationship in the managed diabetes care space. Similar to what we do today, independent auto-injector role, not doing the same thing in the pump. I think it's a very fine position to collaborate with a strong partner, a strong distributor diabetes insider. Outside of the U.S., we're basically fulfilling what we have to do. Our duty is our Loop Program. Our Loop Program, just as a reminder, it consists of 3 pumps. It's the mylife assist, it's a Dose and the Loop. The mylife Assist is integrating Dexcom G6 into our mylife app. There's 17-language versions, Android, iOS, et cetera. So this is well underway. We're going to launch it at the beginning of the year. mylife Dose is the old [indiscernible]. It is long-awaited killer app. It is still feature that every diabetic wants. It basically fills your pump with your mobile phone. They give you bolus in the restaurant and home without showing everybody the pump. That's the core piece, which will be launched in June-ish, June '21. That depends on [indiscernible]. And then [indiscernible] on Loop. So Loop is integrating Type Zero into our app, the Control app, in order to have a controller-enabled pump as well as Medtronic and Tandem do. It will help bring people into range. And we expect to launch that in '22, beginning '23. Depends a bit on [indiscernible] and whether we have to do a larger or a smaller study only. Well, this is just a reminder here on mylife Assist, and some of you may not know G6. This is the piece of the Dexcom's in center, a great product. It's continuous glucose monitoring system, which you put on your arm, your abdomen, and it measures continuously the glucose value. It sends it via Bluetooth to the mylife app. You can see the values online on your phone. It gives you a bolus advice, and you can then keep your bolus from the pump, and pump of course is connected as well. And then as the next step, mylife Dose can match and give you bolus directly from the phone. You no longer have to touch the pump. [indiscernible] doctors now finally have all data at a glance, the BGM, CGM data and the pump insulin data and all support a much better therapy during the time. We are also ramping up the capacity for infusion sets by installing the 10 million line in Schwerin. It's being delivered right now. We are going to be [indiscernible] our production in the second half of '21 at the summer. At the moment, we have enough capacity out of Mexico, but it's clear we have to ramp it up. This program is well underway. It's an enormous line that we install there, including all necessary plastic molding capacity, but it's something we can do. It's a core competence, as you know, manufacturing excellence. So just as the last element, what happens on mylife with the Explorer app. We have used the time to work on digital side in order to introduce training tools in this time when we cannot see patients, when we cannot see clients. So we have launched it just a couple of weeks ago and pushed it up into the Android and iOS shops, in the various languages, our so-called Explorer app. The Explorer app is explaining you the pump, how it works. You can really [indiscernible] you can take tests. It gives you a clear feeling and they can get in contact with our offices in the various companies in order to ask questions, et cetera, to understand how the product works and to get acquainted with the therapy. A very, very helpful tool that we have now delivered in these special times. And in order to do the things, both in the future and in a very robust and clear way, we have started to build up our digital hub in Barcelona, so next to our stoppage near Burgdorf and Solothurn in Switzerland. We are now building up in Spain our hub. We have 15 people now. We're going to be roughly 40 people in 18 months from now. And eventually, there will be more. The speed we are adding people here is excellent, and we are very pleased with the quality of the software engineers in Spain. So 0 carbon emission, our sustainability program, of course, is not just to exchange material in our devices, it's also doing our homework on the infrastructure side. So we have had, for instance, photovoltaic on all the buildings. We have kicked out gas heatings and reused our own heat that we generate from our plastic molding machines, our pressure lines. We have also now added silos, a new interesting concept that supports us in bringing plastic granulate into the factory without using the space of the factory and without generating waste of its pallet and carton plastic. So we have trucks coming here a couple of times per week, picking up these huge silos that bring the plastic into the factory directly on to the plastic molding machines without a lot of handling. It's a much, much leaner, and it reminds me of a much more friendly process. With that, I would like to come to my last 2 slides, and I would like to just reflect a bit on lasting effects of COVID-19. Ypsomed self-care Solutions, that's our claim, and a COVID pandemic clearly shows that we are here in the center of this [indiscernible]. People want to treat themselves at home. We are not allowed to leave our home. So home care becomes an essential part of life. And Ypsomed has been there since its inception. So home care, self care is becoming more and more relevant. Even during that time, and we're convinced that this will stay like that, we are more open now using the therapy in our [indiscernible]. Digitization, of course, with our decision a couple of years ago to make our devices digital, we have done what is [indiscernible] now, because doctors can be in contact with the patients easily by having access to the pump, patient data, the data from the injections. And this is why we are continuing and are convinced that we have to continue to invest in digitization even though after the crisis. And affordability, something that we've been talking about for many years. Now we see the world is getting a hit. There will be less money around in the health care environment in the future. So we have to do our homework. This is why our lean program, our lean manufacturing, our scaling effects pay off. And we want to believe that Ypsomed has affordable products that can be used by patients with chronic diseases all over the world, not just in the western world. And the supply chain, we're delivering products through our existing very stable supply chain. We have done our central warehouse in Europe. It's -- we have SAP-based [indiscernible], so all systems are in place. There's no further work there. This is de-risking for our clients. And during the whole crisis, there has not been one single interruption of the supply chain. This is something we love very, very well. And what we have also seen during the time that partners are willing and able, and we're together, is they're willing and able to make pragmatic and innovative deals. I think a Dexcom partnership and also partnerships that we're going to announce soon in America is mainly done with our team, each had a face-to-face, all done by Zoom and Webex. And it just shows that if there are partners who want to make it happen, it can happen. And we get closer by digital means also in the space of collaboration. So Ypsomed makes self-care simpler. This is Ypsomed. It is what we do. It's 8 pieces, it's pen needles, infusion systems and therapy management. It's our core in the managed diabetes care world, our B2C business. And then, of course, our pen, auto-injector, patch injector and data business, where we are the market leader in systems and devices for pharma and biotech clients. With that, ladies and gentlemen, thank you very much for listening. I would like to hand over the floor now to Thomas to start the Q&A. Tom?

Simon, thank you. So Olivier, please open the line for the Q&A.

[Operator Instructions] Carlos Moreno. Very well. We'll go to the next question.

Good afternoon. [indiscernible]. I have 2 more questions after the last conference call. The first is about the YpsoPod, you decided to give to TecMed. And you mentioned that you achieved a profit of around CHF 4 million. And just to understand what it booked in the first half, what it booked in the second half and where will it book? This is my first question.

Yes. Thank you, [ Sybil. ] Yes, YpsoPod is under contract in the second half. So we are going to sign the sales -- the sale of the program in January. So it will be 100% in the second half. And it will be booked under financial income. So it's not in the EBIT [indiscernible]. Is that correct? So we booked the YpsoPod profit in the EBIT or in the financial income in daily. Directly in EBIT. All right. Sorry, but [indiscernible] other operating income. When we talk about slight increase in operating income, in operating and EBIT in our guidance, then we mean this without this selling YpsoPod. This is additional to our regular guidance.

Okay. That's helpful. And the other thing is about the pen needles. Is it -- I understand that the sales were decreasing quite heavily. [indiscernible] still positive?

Yes, it has been -- it is increased quite heavily to roughly CHF 100 million. [indiscernible] about all 1/5 of all pen needles that we are selling less. And in the U.S., now U.S. pen needles, as you could imagine, have not been with the highest margin. So from that perspective, the effect is not so big. But of course, because we sell less needles, we have less adding to the -- to our fixed cost. So overall, I think pen needles have been negative, simply because it's the overall Diabetes Care infrastructure with sales organization that still cost. And we have signed costs from the countries to all the different 4 business areas in Diabetes Care. And that has been negative. But it's a matter of time and -- until we're positive again.

As I say, we will keep the substitute. We will substitute this reduction of sales very soon. Yes, it's a question of time.

Okay. And the last question, just when I calculate your figures with my divisions and units, so I understand that YpsoPump is attractive [indiscernible] sales were higher than the negative EBIT, the [indiscernible]. Meaning if you had said, let's say, 10 million pumps the EBIT was lower than [indiscernible] number.

I didn't quite get the question. I tried to -- yes, there is a lot of echo here. Maybe you can go quickly on loop on your phone and try to repeat the question. What you're telling is indiscernible] whether that EBIT on the pump has been bigger than the total revenue of the pump.

Right.

Yes. We don't really disclose this, [ Syvil ].

That's fine, I try to ask this question.

A big loss for our YpsoPump, because we have depreciation already there in now for production site [indiscernible]. And last year, we had it from the beginning of the 1st of December. Now, we have all the infrastructure, all the [ clean ] room, all the machines already there. And we have about [indiscernible] about CHF 2.8 million to CHF 3 million additional depreciation, which is related to YpsoPump at the moment. And that's why we had a big loss in the year for YpsoPump.

Yes. I would say that it's more or less different between this year and previous year. So this is mainly this additional cost for infrastructure, yes.

So we just received another question, if that is okay.

Please. Please feel free.

It's Carlos from Premier Miton. Sorry, made a system mute button. I just wanted to ask on the Pod again. I mean what's the reason to kind of move that into kind of private development? Was that purely to kind of save the P&L? Is it kind of purely financial move? Or can it be developed faster, better in the kind of [indiscernible]?

Carlos, thank you for your question. It's definitely mainly a financial move to relieve Ypsomed. But it has been in a world of spin out, you can imagine, and that is also my expectation that the team is going to work more independently. I mean they are all basically staying in our offices. It's all the same people, 35 people working on the program. And -- but they have -- they are probably a bit less disturbed by corporate staff. So my expectation is that our program lead there is going to use this freedom in order to be quicker and more brave in decisions.

We have no further questions at this time.

Thank you, Olivier. So for sure, so please for our participants, please don't hesitate to contact us anytime for additional information. We are here to support you. We really try to be transparent, and we are open to all your questions. So thank you for joining us today. We look forward to our next call very soon. And stay healthy. Operator, please close the line.