DiaSorin S.p.A.

Good afternoon. This is the Chorus Call Conference Operator. Welcome and thank you for joining the Diasorin Q1 2020 Results Conference Call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mr. Caldorosa, Chief Executive Officer of Diasorin. Please go ahead, sir.

Thank you, operator, and good morning or good afternoon to everybody, and welcome to the quarter one call from Diasorin. What I will do is I will spend some time giving qualitative remarks about the how I see really not quarter one, but how we see moving forward the situation with the market and the company. And then Mr. Pedron is going to take you through the numbers. The reason why I do not intend to emphasize too much on quarter one is that since quarter one is fairly evident that the world has completely changed. in terms of perspective and needs. And this is what I would like to focus on because I believe that Diasorin was one of the companies that was able to adapt and respond to this crisis situation and transform that into also an opportunity to provide very innovative products. Very briefly, if we look at quarter one, March, if you think about it, has been the first month where you would start to see effects on the business in geographies outside China. However, I think quarter one gave a good indication of what we are now seeing in the rest of the world in China, because what we could observe at the peak of the pandemic situation is that you see that the regular routine testing completely crashed. And this is simply related to the fact that the authorities and people themselves did not go to hospitals in London. because of the risk of infection. As a result of that, what we have seen in China in February, March timeframe, we have seen decline of routine testing by 60, 65%, which is what we see also now in the rest of geographies that are going through the pandemic wave. Now, So if we leave that to the side for one second and we consider COVID and what has been the strategy for COVID and what we still plan to do about COVID, I think that we need to frame the discussion around the epidemic and the clinical need. And it's very clear that today there are two tools which are fundamental to fight this epidemic. One is the ability to diagnose the acute infection. And today this is done primarily through the swab. And the second need now is to understand two things, prevalence of the infection and the second one is to answer to the question whether patients exposed are developing or they're not developing an immune response that is protective. So what did we do about it? Well, as everybody else but among the first in the world, we have developed right away a very fast assay for for the virus diagnosis. And that has been done through a regular PCR assay designed by our system on our small MDX system. And the way that we position the product has been as an emergency product. And we've been very successful in doing so because we can process eight samples within 60 minutes. And immediately the system was adopted, widely adopted in the U.S., in Italy, and in a few other geographies where we had capacity to distribute as a de-analyzer that was used for triaging patients while they were waiting for the admission on the hospital work. In the last conference call I said I qualified this opportunity as five to ten million dollars or euros of revenue per month. And what we have seen right now is that in fact the revenue opportunity is actually on the more 10 million, 10 to 12 million per month. We have a certain capacity. We manufacture roughly half a million tests every month. that we distribute among the main geographies, we expect this capacity to increase a little bit, but not dramatically because we have some limitations on the supply chain, on this manufacturing, and we don't believe we can expand too much behind that. So that I consider as a product that will continue to deliver this kind of revenues on a monthly basis and moving forward. Then as soon as the molecular assay was actually developed, we then moved to the second question, the second tool. The second tool is a serological assay that can be used to assess immunity. And I think very successful, we have done that through collaborations with major institutions in Italy, And this is because of the pandemic situation in Italy. There was in these centers a large availability, unfortunately, of patients. And so we were very rapidly, we were able to collect all the clinical data that had been necessary to support both C-marking and the FDA registration. I am very proud of the fact that when Diasorin was granted for the serological assay in the U.S. by FDA, we were the fourth company to get the certification from the FDA. Today, this assay, we started actually distribution of the assay in the last week of April. we see that this essay has been received extremely well by different governments, and in fact we have been able to get a good chunk of the volume that today governments like Belgium, Israel, in other countries have assigned to companies for epidemiological study. So we are extremely successful with this product. By the way, last night we got also approved in Canada. And we are the first assay, serological assay, to be approved in Canada by Health Canada for SARS-CoV-2 IgG diagnosis. And I'm very proud certainly about this achievement. So today we have provided to the market a very important tool. It is a very special product because we not only have a claim outside the United States for IgG determination, we also have very convincing evidence that has been collected now in more than one center about the fact that by design of the product we identify neutralizing antibodies. As far as opportunity or use of this product, look, today I prefer to talk about capacity. and today we are ramping up our manufacturing capacity and we are looking very soon in the next week or so to move from the current 5 million tests per month of manufacturing capacity to 10 million tests per month of manufacturing capacity and we believe that this will allow us to actually fill up the large orders that we have received from the different European countries. Interestingly enough, before you ask me, in Italy, the government decided to go a different way. They have selected a U.S. supplier for the national tender for 150,000 tests, and I did comment several times saying That's the good thing about the fact that there are many companies offering products. So we are going to be supplying our products to other governments, but not to our own government. Now, let's talk about the future products, because we believe, again, that there are two products that the company now is developing on COVID. First one, let me call it a complementary product to the IgG, which is an IgM assay. Today, there is a lot of discussion about the use of IgM for the diagnosis of this disease. I've seen lots of discussions because Everybody says the swab and the molecular product is the one that should be used to assess the presence of the virus during the acute phase. However, as you all know, there is a chronic shortage of swabs today. And so in many countries, they elected to use also an IgM assay when the swab is not available. And I'm taking as a reference, for example, France that very recently has issued a policy whereby they recommend IGG and IGM. So we see this product more to complete our product line really than as a strategic advantage. However, I think that what remains today strategically important and more so if we think about the next flu season that is coming a few months from now, is the chronic lack of swabs. So the inability of the industry to be able to provide enough reagents to allow repeated testing with molecular products. And that's very understandable because molecular products are complicated. They require complicated reagents on one side and also complicated equipment. And so what we believe is that we need to buy the coming season. We really need to provide to the medical community a different tool. And as has been indicated by the NIH in the U.S. and by many, many experts, the real way to do this would be to develop a sensitive test that can be done on oral swab. Many companies have tried, some have achieved to do it. I've seen that there are initial reports on sensitivity of some of these products which are not as good as they should be in order to substitute or be able to complement the swab testing. We have, I think, an idea today and a partnership with a leader in this space that should allow us to develop a new generation of this product where we hope we are going to achieve the necessary sensitivity to be able to provide the tool again for the determination of the infection during acute phase. Stay tuned. This is the current main project for diasorin, and we are going to let you know more in the next couple of months. I also would like to make another remark. which has to do with what is the effect of COVID and the success of the COVID product to Diasorin vis-a-vis the rest of the business, because we cannot forget, certainly, that we have 140 products on the liaison Excel. What is very relevant, if you remember, is that prior to COVID, we had a very precise focus on the U.S., and we said that because of the viability of the TB test and the strong alliance with QIAGEN, our strategic objective was to develop an installed base in the hospital market. If you remember, we said today we have a little bit less than 150 customers in that segment. We are heavily skewed in the U.S. toward the big commercial labs. And we saw TB as an opportunity back then to actually enter strategically in that market. And we have hired, prior to this COVID story, we have hired 20 more reps and more people in the U.S. in the marketing department to support that strategy. That came very handy and comes very handy today because what we are experiencing in the U.S. is a very strong interest by the hospital chains on COVID serology. And what we see is that we see an acceleration of placements of systems in the hospital market with a combination of COVID, that today is the primary interest, and TB. And so one of the things that the benefit of the COVID serology and this strategy is the fact that we see an acceleration of placements, not only in the traditional segments where diastole operates, but also in a segment where we wanted to enter. And now we are actually called in because of the availability of this product. As far as molecular is concerned, you all know that our molecular business was primarily a U.S. business. The install base was all in U.S. The system was designed by a U.S. company. And we were actually spending time and strategic resources to develop that business more than the European one. It is certainly true that, again, the availability of a high-quality COVID molecular assay has allowed in Europe to completely reposition our molecular franchise. We certainly did that in Italy. We are doing it in other geographies like Germany, where our assay has been selected for a decentralized testing of COVID. In Spain, where we see the same opportunity in a country that is, you know, has been hit hard by COVID. So as far as the molecular franchise is concerned, there is a tremendous repositioning of the company in Europe and an opportunity to develop an installed base through COVID. Let me just make a last remark, which is strategic. If you remember in June, we, the company said, we strongly believe in decentralization and, uh, As I think I did comment in the last conference call, I had to be a Cassandra, but back then we said decentralization is severely needed in case of situations where you need to face an emergency and you need to drive patients away from hospitals. And as you know, we have pursued an acquisition of a technology from TTP, and we are developing that technology with that intent, so developing a point-of-care system that will favor a decentralization? Well, if I ask myself what COVID is going to leave us, once COVID will leave us, I think it made the diagnostic known to everybody, from taxi drivers over here to people that didn't understand diagnostics. And also it made people and institutions realize that the decentralization of certain assays, especially in infectious disease, is good. And so I believe that we are going to encounter a very positive trend in certain geographies, but including Europe, not only the U.S., where decentralization is needed and a need of new generation of systems for molecular diagnostic is going to be strongly needed. I believe that also strategically that you saw in mid-long term is positioned very well to catch that opportunity. Now, if I may then make one more comment about the guidance. As everybody else in the industry, the world has changed and our guidance was actually issued pre-COVID. And it's very obvious that post-COVID or in-COVID, things are changing. And this is why we decided, as everybody else, to withdraw the guidance that did not make any sense. I see today a combination of two effects. I see a negative effect, which certainly has to do with routine business. And as we speak, the routine testing is down 40%, 50% as reported even by the major labs in the U.S., but I see a positive effect by the ability of the company to reposition very rapidly with innovative COVID products. And I believe, from what I'm seeing today, that the positives will overcome the negatives, even if I cannot quantify right now, it's not serious to do it because we see that... and we really don't understand what is going to happen to COVID. And so we withdraw the guidance. We are not going to provide the guidance today, and we are expecting then in a couple of months to come back and discuss more thoroughly the effect on the company of these two trends. Now I'm done with my remark, and I'm going to leave Mr. Pedron with the... speech about the numbers.

Thank you, Carlo. Good afternoon, everybody. In the next few minutes, I'm going to walk you through the financial performance of DSR during the first quarter of 2020. As usual, I would like to start with what I believe are the main highlights of the period. We closed the quarter with an increase in revenues of 2.3% or 4 million euro. The increase at constant exchange rate is 1.7%. Carlo has already covered the main items regarding the first quarter and the impact of COVID. Q1 gross margin at 69.1% of revenues confirms the very good results achieved last year. The difference with Q1 2019, which closed at 69.5%, is mainly driven by a different product mix and higher distribution costs driven by COVID-19-induced global logistic issues. Q1 EBITDA at €65 million records a decrease in the constant exchange rate compared to the previous year of 3.7%, with a margin, again, at comparable FX rates of 37.5%, vis-à-vis 39.6% of 2019. I believe, though, that it is relevant to underline that Q1 EBITDA, net of some unforecasted one-off loss, I will discuss about in a few minutes, records an increase compared to last year of 1.6% at constant exchange rate, with a margin of 39.5% of revenues, again at comparable effects rates, and so in line with what we achieved in Q1 2019. Lastly, we keep confirming our ability to generate a very healthy free cash flow, €40 million on the quarter, with an increase compared to 2019 of €4 million, or almost 12%. We closed the quarter with zero debt and €242 million positive cash position. Let me now go through the main items of the P&L. Q120 revenues at €175 million grew by 2.3% of €4 million compared to last year. The growth at constant exchange rate is 1.7%. The strengthening of the US dollar against the euro is the main reason behind this FX tailwind, which has been partially offset by the devaluation of the Brazilian REIT. Q1 gross profit at €121 million grew by 1.7% compared to last year, closing the first quarter with a ratio of revenues of 69.1% compared to 69.5% of 2019. The slight margin decrease compared to previous year is the result of a different product mix and marginally higher distribution costs as a result of the fact that many commercial flights which under normal condition would have been used to move our goods, has been grounded because of COVID-19, and so we had to use cargoes, which are usually more expensive. Total operating expenses at 66 million euros, or 37.6% of revenues, have increased by 3.5% compared to last year. The difference is mainly driven by the investment we made in the U.S. commercial team. and is aimed at sustaining our hospital strategy, as just covered by Carlo and discussed during Q4-19 call. Q1-20 other operating expenses at €6 million increased by €3 million compared to last year. This variance is almost entirely driven by an unforecasted loss we suffered in our South African subsidiary during the shutdown process. for which we have activated the group insurance policy. We expect the insurance claim process to be completed within the next 18-24 months. As a result of what just discussed, Q1 2020 EBIT at €49 million, or 28.3% of revenues, has decreased compared to 2019 by 6.7% or €4 million. The tax rate at 23% is in line with 2019. 2020 net result. at €38 million or 21.6% of revenues is lower than previous year by €3 million or 6.6%. This difference is almost entirely due to the loss that affected our subsidiary in South Africa. Last, if you want to beat that, at €65 million is lower than last year by €3 million of 4.5%, with a ratio on revenues of 36.9%. The variance at constant exchange rate and net of the one-off South African loss is positive by 1.6%, with a ratio on revenues of 39%. 0.5%. Therefore, in line with the marginality achieved in the last few quarters. So let me now move to the net financial position in the free cash flow. We closed the period, as I said, with a positive net financial position of €216 million and €242 million cash. And we generated a €40 million free cash flow compared to €36 million of last year. Lastly, As Carlo just discussed, due to the significant uncertainty regarding the duration and the impact of the coronavirus pandemic, DSR is withdrawing the previously announced 2020 financial guidance. Now, let me please turn the line to the operator to open the Q&A session. Thank you.