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.

Excuse me. This is the course call conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. To remove your question, please press star and two. Please pick up the receiver when asking questions. The first question comes from Catherine Tennyson of Bank of America. Please go ahead, madam.

Hi, thank you very much for taking my questions. I have two, if I may. So my first one is on the China growth number, which was a little worse than I expected. Is that a fair proxy for the exit rate that you saw in April in Europe? Or should we expect a more significant impact from a revenue perspective, given that Europe has a greater mix of specialty higher ASP tests? So that's my first question. And then secondly, can you give us help us quantify the benefit from the stocking impact in Q1, and if in early Q2 you've been seeing any reversals of that. Thank you.

Okay, I'll talk about China versus Europe. You need to understand that our business in China is very much skewed on... more I would call routine testing because the Chinese market today does not really accommodate yet the specialties as we have discussed a few times. And so what you have seen in China is that lots of the routine testing has pretty much evaporated and the only business left has been that related to pregnancy testing. and some sort of non-adjective surgery. In Europe, as you know, the situation is completely different because we do have a specialty strategy and therefore what we have seen is that we have a milder effect on the European market. Notwithstanding that, if I may, in China we had again 65-70% decline In Europe, you're talking more around 40%, which I think is in line with what has been reported by other diagnostic companies. In the U.S., the situation is slightly different because we do have a lot of vitamin D businesses, you know. The vitamin D business in the U.S. is the vast majority has to do with pre-employment changes sorry, pre-employment with insurance testing, the annual checks, and all this testing has been postponed because of the fact that people were not available to go to get tested and because of the lockdown. So certainly the decline in the U.S. has been more severe because of the vitamin D dependency, but by the same token, that's a decline that I expect to get back as soon as the routine checks will start again, probably in Q3 and Q4. Second question is about the stocking effect in Europe. Look, it's very difficult to assess because it was really different policies country by country but I would estimate the stocking was in the range of 5-6 million euros but again take it with a grain of salt because it's very difficult to assess thanks so much that's very helpful the next question is from Maja Pataki of Kepler please go ahead

Yes, hi, good afternoon. I have a couple of questions, but I would like to start with your performance in Germany, which saw very strong growth in Q1. And I was wondering whether that is related, you mentioned, I mean, stocking, but is there also something that we should read into that in the conversion of the ELISA business to CLIA? Is there anything that we're seeing quite an uptake from that side? Then, thank you very much for providing us some clarity on the manufacturing capacity you have for the serology test, ramping up to 10 million. That's obviously significantly higher than what I understood from your IR department. Is that pure allocation for the serology test for COVID-19, or is that a reallocation of some other manufacturing capacity whereby you would see maybe some... evaluation going forward to what kind of test you're going to produce. And then lastly, Carla, I understand you don't want to give us an exact revenue number for the monthly revenue potential of the serology test, but you have been mentioned in an Italian newspaper saying that you would at best... Bill, five euros per test. Is that the number we should take to understand the potential upside from COVID-19 serology tests? Thank you.

Okay. Germany, a good chunk of it clearly is talking yesterday. And this is because, you know, in Germany we do have very large private chains, and they were the ones that originally have been actually spending time in understanding the situation, logistic situation. But I have to say also that we are, as you know, at the end of the Siemens – story and so we saw an organic growth of the Aliazone which has to do with the fact that we converted in Q4 last year, Q3, Q4, a good chunk of customers in Germany with add-ons and we see the benefits clearly starting from Q1. So there is a mixed effect. About the volume of testing, look, certainly, especially in the U.S. where we do manufacture vitamin D, the fact that you see vitamin D decline, you do have capacity. And so what we had has been a reallocation of some of the existing capacity to the COVID product. However, It is very clear that we do have capacity today to allocate the current volume plus the existing volume when we hopefully go back to normality. What we have to do probably is to move to more than one shift in some of the sites, but I don't see that as a problem. Last but not least, look. Unfortunately, I've been in the newspaper more than I wanted in the last few weeks, and I am understanding the journalists better than I did eight weeks ago. And to be honest with you, I would not take what a journalist writes about pricing ever in my life. So I think that you need to go back and you need to understand in the different geographies what the price is. And what I think is very relevant to understand about pricing is that depending on the country, you really have a different pricing structure. And this has to do with appreciation of certain countries on the quality of the result and the differentiation of the diasporic product versus the price. existing competitors. Second, you have to deal with government tenders. And in this very specific case, the governments are truly investing into technologies that allow management of the pandemic. And so there is premium price that we see across the world vis-a-vis some of the good quality products. The problem that we have today, as you know, is that Europe and the US, we have been at the beginning of this COVID story, we've been flooded by low quality products that were coming from China to a point that different governments And different authorities, including WHO, really started to say, hey, we need to really watch after all these products because they're not qualified. We don't understand how the heck they were validated. And so now a lot of countries are coming back and putting restrictions on these products. And some of these products, very interesting, some of the products have been actually thrown to the market at a very low price. But some of these products, especially what we call the lateral flow products, have been provided to Europe at an astronomical price. Okay, so long story short, don't read what the papers say, but the price is very different from country to country depending on what the government decided to do in terms of reimbursement and in terms of the government tenders. and B, what the competition did when the only competition available were actually products imported from China.

Understood. Maybe just quickly a follow-up question, Carlo. Can you quantify how much the molecular test generated revenues in March, the COVID-19 test?

No, I can't. As you can obviously imagine, we just, so in March it was, but I can tell you that it was very small.

Okay, thank you. Okay. The next question is from Andrea Baloni of Mediobanca. Please go ahead, sir.

Thanks, good afternoon, everybody, and thanks for taking my question. My first question is about live machines. In the press, you have mentioned about a slower trend in the East to COVID impact in China. On the other hand, thanks to the launch of a new serology test, you have also mentioned about an acceleration in the penetration in the U.S. What should we expect as a net effect over the full year 2020? And my second question is about the serology test. You have commented about an increase of capacity from current 5 million to 10 million tests per month. But when should we expect this increase? This is something that we can do in the very short term or something we should expect more in the medium term, thinking about last quarter this year, for instance. The next question is about the new test that you would like to launch in autumn. in order to detect COVID-19. I didn't get a point. Did you see any risk of overlap in Italy or in the U.S., for instance, with a molecular test that you already have launched? And my very last question is about China. What's the speed of recovery there? What did you experience in March and April in terms of recovery? Thank you.

Okay. So the first question is net number of Excel. We are actually very positive about the Excel because we are building a new install base and a new customer base. So we see that we are going to, this is going to be a year where the number of Excel placed is going to be on the high end of what historically we've been doing. The second question is to do with capacity. I said, yeah, that we are working to rapidly, so in the next few weeks, move from the current 5 million to 10 million tests per month. And by the way, you should take note of announcements made by different companies about their volumes, of their manufacturing volumes. And I think you should also verify with these companies whether eventually this is what they are saying or they are selling. because I saw numbers that I never heard in my life. But as far as we are concerned, we are talking about going to that monthly volumes. The third question is with COVID-19 in the USA. Look, the overlap. Look, as I said, if you listen to what the Americans are saying, and I think you should take that as a reference, their ambition is to move to testing capacity in the range of 100 million tests per month. because what they believe is that that is, and I'm talking about the ability to swab people, and that is what they believe is necessary if you want to coexist with the virus and test people routinely to guarantee that they don't spread the infection. That's an ambition. But I have to say that today the industry will struggle to cope with volumes of this size if the ambition is to do routine testing. If the ambition is that before you board the plane, you want to make sure that you're not infectious and so forth. And my point is that the technology, the molecular technology, has to be complemented with something that is cheaper, faster, and can be adopted also in different settings. And by definition it cannot be a molecular product in my very humble opinion. And so the challenge is that we as a society will be able to cope with massive testing only if we are going to be able to achieve sensitivity of molecular with non-molecular technologies. And that's the challenge and then the challenge that we are taking upon ourselves working with a partner that is a worldwide leader in this kind of technologies. And I need to leave it to that for confidentiality. Last but not least, I think looking at China and the speed of recovery. To be honest with you, that is the real conundrum here. Because what we see in terms of volume, diagnostic testing volume in China and what people say about China going back to normality, don't see eye to eye. We still see in the current weeks volumes of routine testing volumes in China down 40%. And this is not necessarily in the geographies that are hit. We see it pretty much in many geographies in China. And that tells you that there are still a lot of skepticism from the people, by the people, to the fact that they would go to the to hospitals and get tested. So how long is it going to take before it goes better? I have no idea. I don't know. I think the dynamic in Europe and in the U.S. may follow the same path. Keep in mind also that the markets are completely different. In China, everything is off-pocket, so patients do pay. in Europe and in the U.S. digital insurance or is covered by national health systems. And I don't know if that will actually favor what we call the go back to your normal life. And this is why, as said before, I don't want to make any comment about the future and guidance because that's a big question and nobody today has a serious answer to that question. And I don't think necessarily China today is providing you the answer you want.

Thank you.

The next question is from Scott Barda of Barenburg. Please go ahead, sir.

Yeah, thanks very much and congratulations on your flexibility in this environment. It's truly remarkable how the company has changed in only a matter of weeks. With that in mind, many questions, but I focus on serology. So first question then, you mentioned about the environment which is competitive, lots of different companies now offering serology tests and that you have some differentiation as a company. I think there are lots of companies claiming high specificity, high sensitivity, even against the spike protein which you target, so can you help us better understand why your product is different. That would be useful. The second question related to this, a lot of companies now, particularly the very high volume players, are expecting to price their tests meaningfully lower than what you highlighted or the reporters picked up, if you like, in this five euro mark. Does that matter if they have lower prices than Diasorin? And does that, if you like, trigger a reaction for you to reduce pricing? Third question please here and again I just really want to understand this because it potentially has quite material connotations. I don't understand why in regular interaction with the company the discussion was more one or two million tests per month in the month of May building up to three million or so tests per month by the end of the year. It takes time to build capacities and all of a sudden within a matter of weeks we're now at ten million. How can one underestimate this by three-fold and actually therefore provide this additional capacity so rapidly? So maybe you can comment on that.

Okay, so as far as why the product is competitive, look, the way we design the product is, and again I don't want to give everybody a very boring biology 101 lesson, but today I think companies have developed a product using two proteins. The majority of the companies have used a nuclear protein. A nuclear protein is easy to do because you can make it in massive amounts. It's not necessarily too complicated. It's small, but it's a nuclear protein. And if you look at the mechanism by which the virus is infecting the cell, the nuclear protein has nothing to do with it. The virus is infecting the cell through the ACE2 receptor, through the spike protein. So at the beginning of the product design, we decided to take a much more complicated route. And that was, let's take the spike protein because of two things. A, we believe... and it was actually recommended also, or evident from the initial literature that was actually getting published those days from China, that the spike proteins was extremely antigenic. Okay, the second thing was much more prospective. And we said, well, if you think about positioning this product vis-a-vis immunity and vis-a-vis the vaccine, there is a very good chance that the vaccine candidates have spike proteins, and therefore, if you eventually need to test vaccination, that's the right way to go. And based on that, we have developed the assay, and it's been cruel, in a sense, what we had to go through, because the spike protein is heavily glycosylated, so it's a primer, and so you need to take it, you need to express it in mammalian cells, complicated. And we have done it through a very successful partnership with a very small company that is located in England, but phenomenal company. And because of that, and because of the ability of this company to engineer all these reagents, we were then able to scale up way before than expected the manufacturing capacity. And this is why today we feel more comfortable because we have been stabilizing the inflow of raw material and now we have quantities of this raw material that allow us to move to scale up manufacturing way before than what we expected. So what do we have today? I think we have a product that has been It's very interesting. It's been evaluated and it's been built by us to identify the antibodies against spike. It's been validated, not only in Italy, but now it's been validated at the Erasmus Hospital in Holland in a beautiful study. It's been validated that it does pick up neutralizing antibodies, which are the good antibodies. and now is in the evaluation in the U.S., in the primary centers in the U.S. for the same claim. So that's the differentiating factor, and this is what people understood. Lots of discussions today about immunity, not immunity, what you do, which antibodies you need to pick up, and we've been leading that discussion, and that to me is a differentiating factor, and this is why Certain governments have decided to buy our product, not standing a higher price because they understood the value. Now it's very clear that latecomers and some of the very large companies that typically we have seen before, they don't give value to products. They give value to systems. They give value to volumes. They price it differently. And we're going to let them go the wrong way. And we're going to continue to fight our own battle for quality and for a certain positioning. And this is why we don't need 100 million tests per month. As some claims they're going to make available, 100 million tests per month is larger screening. We're going to go for 10 million per month, but the 10 million goes for the clinical use and the proper use of the product. And pricing will follow as... And pricing, positioning, I will follow. Certainly, we all know that price is the only way to go, which is down. So we expect that it's going to be some price erosion, but we are not going to follow some of the pricing crazy concepts that I've seen on the market these days. And Scott, did you have another question?

No, I think you summarized all of those. Thank you. Maybe just a quick follow-up here then would be just to understand this. I mean, even using a five-euro number, say, you know, we're talking maybe 150 million euro a quarter, you know, more maybe 200 million euro a quarter on full demand on an annualized basis, bigger than the revenue base of the company today. I just want to make sure I understand this. I guess the question then is, if I am right there, how long does this go on for? Does this all disappear rapidly when a vaccine comes out? What do you do with the excess capital?

Scott, I don't know where these numbers are coming from, to be honest with you, and certainly I'm not making any comment on numbers of this size. Let me just make a comment. Where is this going to go? I hope it's going to go away now because I'm sick and tired of spending my weekends on my balcony. But all said and done, I think that it's going to unfortunately take time, and I think that strategically this has to leave a legacy with the company. And what is the legacy? More systems installed, more hospital-based in the primary market, visibility as an innovative company. These are the intangible assets we're building today that will become tangible moving forward because, don't forget, we do have a pipeline of products. We have a value-based care. We have lots of things that we were developing before this pandemic. And the way we position, again, the product, the way we build the product is betting also on the fact that when vaccination is going to be with us, and I hope it's going to be with us soon, there's going to be a need to assess efficacy of vaccination. So there's going to be continuous testing that will be required. And if vaccine will be built as it looks like, using as target the spike protein, well, you are very well positioned at that point because the spike protein, the antibody to the spike is what we measure today. So I see this product strategically positioned. $200 million a quarter? I have no idea. Scott, I'll talk to you in a couple of months, and we'll see where the crazy world is going.

All right. Thanks very much, Conor.

The next question is a follow-up from Maja Patiki of Kepler.

Please go ahead. Ms. Pataki, your line is open, madam.

Yes, hi, sorry, I was on mute. Carlo, maybe just two more strategic questions. The first one, we've seen a couple of countries debating heavily, you know, who has to pay basically for the COVID-19 testing. In Germany we have the debate with the private insurers pushing back claiming that governments need to do that. Do you anticipate that with the ramp up of testing going forward and maybe getting out of the worst but the volume staying high, we will see some pushback from governments on pricing rather than seeing the competitive spin coming through? That would be the first question, and then I'll follow up with the second one afterwards, please.

Okay. Maya, to be honest with you, I have no idea. What I've seen, and this is why, you know, I think everybody today is trying to understand the space, and I think that I noticed a few things. I've seen... the U.S. very proactive. What the U.S. did, if you think about it, it said that they put lots of pressure on suppliers to supply the U.S. and the U.S. labs, but by the same token, they put on the table a very hefty reimbursement. You have seen for molecular, $50 for low throughput, $100 for high throughput, And so they said, what the government said is, you know, lots of companies have to put a tremendous amount of effort to provide products to the community. What people don't understand is that companies like that, you're sorry, but everybody else did the same. You had R&D people doing other things, and now you had to take all your people and put all of them to do COVID. Otherwise, you would not explain how the heck usually takes 18 months to develop a product, and now it took eight weeks. So there is a cost that companies are incurring into because of this story. And I think the U.S. government has been the one that recognized that and have been very generous, in my opinion, to their own industry, supporting the industry with what they could, which is money to the system to allow the people to get tested. How is this going to move forward? I have no idea. I really don't know, to be honest with you. I certainly know that there is going to be competitive pricing. Yes, that I understand. I believe that is going to be more on the serology than on the molecular, simply because on the molecular there is going to be a chronic, chronic shortage moving forward. And so there's going to be more demand than supply, and that will keep, I believe, molecular pricing high. serology, it may be different, but I really have no idea how the reimbursement policies are going to move.

Okay. And then just lastly, I think you were elaborating on that already a bit based on Scott's question, how to think that this is going to develop in the long run even when we have a vaccination. Do you believe this will take the same kind of characteristic like the flu tests, or do you believe... it's going to be a different kind of dynamic since there will be a high push for the vaccination or vaccination for the whole society.

Listen, Maya, you are making me smarter than I am because I wish I had that answer, to be honest with you. What I know is just one thing. I think the next flu season is going to be very challenging. Because if you think about it, take Italy for example. Italy was actually hit by this virus toward the end of the flu season. And also this year we had a beautiful warm weather. So the spring actually came very early. Now we are getting into the real flu season that will start in October, November. You're going to have all the symptoms. or flu, regular flu, and you are not going to have a vaccine, unfortunately, I believe, and you're going to have a strong need for differential diagnosis. So what I'm saying is that there is a need, there is a social need by companies to bring forward certainly more capacity on molecular testing, but I believe also technologies that would allow a more widespread use of reagents for acute testing. So I see the fall being very complicated. But I hope, as I said before, then long term, who knows, I hope that COVID will go away. I really hope so through vaccination.

Thank you very much, Carlos. The next question is from Giorgio Tavolini from Intermonte. Please go ahead, sir.

Hi, good afternoon, and thanks for taking my question. I was curious to see if at this early stage, do you see any demand for COVID-19 tests by single local firms, banks, enterprises to allow employees to return to work? And if so, do you have the technological, the right technological platform to provide a very point of care test for COVID-19, I mean, for these firms or small enterprises? Thank you.

No, we don't, because we're not playing that space. As said many times, We work with, in the central lab, and we do not intend whatsoever to get ourselves into the finger-tricking technology. That is a completely different game today. Let me just remind you some facts. And the facts are the following. There is a WHO recommendation that says, guys, you need to be careful with lateral flow and these technologies because there are too many products out there that have not been validated to the point that the WHO has initiated a program to validate some of these assays and discriminate between the one of low quality and the one of high quality. And I'm not pointing fingers to anybody And I'm not hinting that by definition a fingerprint assay is of low quality. I'm just saying that today the WHO said, you don't know. We don't know. So we need to conduct an evaluation to the point that they recommended CLIA analyzer. Go through the WHO document, which I think is April 2020. They say today the technologies to be used are CLIA analyzer. with a specificity and sensitivity which are over 90-95%. That's the recommendation. Now, different story, different question you're asking about going back to work and testing. Look, there is plenty of discussions in the different countries and different legislations about that. And today there is not a legal requirement to actually test employees for COVID-19. Actually, what you realize today is that a lot of companies have decided to offer it as a benefit to their employees that do want to get tested on a voluntary basis to know whether they've been in contact with the virus or not, but certainly is not mandatory. And that is not a market we are going after today. This is not our positioning. And how companies decide to do it is actually not my business, to be honest with you.

Okay, thank you. Just a follow-up. Are you cooperating with pharmaceutical companies to provide, I don't know, clinical studies for vaccines? with the testing COVID-19?

We have initiated contacts with some of the candidates. The problem, you know, the real problem is that today you have so many companies claiming that they do have, they're going to have a vaccine, which is difficult to understand who to work with. But yes, we have initiated a screening of who is out there, who is working with vaccinations, But what we saw, which is very interesting, is that the vast majority are actually working around using the spike protein as the protein for vaccination. And that's comforting our decision in terms of which antigen to use.

Thank you very much.

The next question is from Hugo Solveig of Exxon BNP Paribas. Please go ahead.

Hi, thank you. Thanks for taking my question. You mentioned, Carlo, in your previous remarks your increased ability to access and enter labs thanks to your COVID-19 offer and also strike contracts for TB products. Are you able to drive a premium when converting the accounts and when are you expecting volumes to normalize and possibly pick up? And a follow-up to that would be an update on a Lime product that you are developing. Considering COVID is delaying a lot of trials, do you expect any delays here? Thank you.

Sorry, the first question, if I understand correctly, has to do with TB and the crossover.

Yes, are you able to drive premium when converting accounts?

Yes, we do. We do have the ability to drive premium because, again, that strategy, if you remember, primarily in the U.S., was driven by the fact that we're going after send-outs and that we're very expensive in the U.S. And so, on average, I think we did comment before that we were getting around 25% premium over current pricing because of that positioning. And again, what I see that is working beautifully on that program is that it was frozen certainly around January, February timeframe because of the pandemic. But now the fact that the hospitals do want the COVID assay, then we're able to actually jumpstart it back again. Because once we install the Excel, then you get pretty much two birds with one stone. the serology and the TB business. As far as Lyme is concerned, look, I think the jury's out because we have all the collection centers set up. They are in Germany, in Austria, in Holland. We are more in Italy, certainly in some of the northern regions. The jury's out because we don't know Certainly, look, I was joking last night with the head of R&D. During a lockdown, it's very difficult to get Lyme because either you get it in your balcony or you don't go out in the woods. But now they are reopening, especially in the northern part of Europe, then we expect that Lyme is going to pick up again. And in fact, we saw a few patients showing up in Germany already. So I honestly don't know, difficult to tell whether we'll be able to collect the necessary amount of patients during the season or not. We need to wait a month or so and see how it goes.

Thank you very much.

The next question is a follow-up from Mr. Scott Barda of Barenburg. Please go ahead, sir.

Yeah, thanks very much. I know you've been generous with your time. So I just want to understand a little bit further your views on the different sorts of elements where serology testing can be used. I mean, epidemiological work is clearly one of the near-term considerations, and you've talked about being used in the commercial sector and so forth. But, you know, some players are claiming that their antibodies, in essence, are being used as a disease escalation marker which is useful in treating these critical patients. Is that a quality that you think your product has and therefore could see extensive use in hospitals both managing the crisis and reactivating them to normal elective procedures? Last question, Mr. Rosa, please, just to understand. In some ways, the serology test has some characteristics to the rapid rise you had in vitamin D, which obviously has remained at a high volume and declined for a long time. I guess at that point you used that capital and cash from vitamin D to strengthen the organization. Are you starting to nurture ideas to use any potential windfall here to strategically strengthen the business?

The answer is obviously yes to the second one, because I think that, remember, we have an obsession, and the obsession is that we want to get bigger in the U.S., because we see it as the market where an innovative company can really make it. And we, as you know, we've been looking for targets and opportunities and with the proceedings coming from this, we are going certainly to invest in that market because we want to, again, strategically we want to get bigger there. Yes, the answer is we are seriously looking at that. First question, Scott, difficult to, I didn't really understand what you mean about escalation marker. Can you just repeat it for me?

Yeah, some conversations we've had suggest that by doing serology tests on critical oil patients on a regular basis and working how quickly their IgG response rises, this is a prognosis for whether you have a cytokine storm and end up on a ventilator. So in a sense, it's a marker of disease escalation. which a lot of intensive care surgeons say are very useful additional unexpected application for these antibodies. I'm just wondering whether this is a quality or an attribute that you are aware of for your own product. Is this an interesting angle or is it something different?

Look, what we have seen, and I can tell you, we saw ourselves doing the clinical studies, but you also see it now published everywhere. is that critical patients that are in ICU have a tremendous high titer of IgG. Okay, whereas hospitalized patients that are not in critical care have a lower level of IgGs, and then people that have been exposed but they are asymptomatic usually have low level of IgGs. Now, if you read literature, what this suggests is that In this high antibody response, you may have ADE antibodies, those antibodies that actually allow the virus to infect, to, sorry, get bound to the macrophage and then elicit the inflammatory response. And this would explain why this very high antibody titer actually is associated with patients with worse prognosis. But I think that this is true so far with antibodies level measured with different products. So I don't think it's specific of a product. It has to be with the antibodies per se. What is a very intriguing project, to be honest with you, would be to try to understand if you can identify the good antibodies, neutralizing from the bad antibodies, which are the ones that do bind to the protein but actually favor the inflammatory response. And that's something that I've seen a few research, is a research product, and I've seen a few research groups starting to focus on that. Keep in mind that the first indications on this concept were actually discovered in 2012 with the original SARS. So it's there for sure. There's a negative effect of antibodies, but today is a research product, more than commercial.

Okay. I could ask questions, but I'll stop now. Thanks so much.

Okay. Mr. Rosa, at this time, there are no questions registered, sir.

Thank you, operator. Take care. Bye-bye.