DiaSorin S.p.A.

Good afternoon. This is the Carosco Conference Operator. Welcome and thank you for joining the DSR in first half 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. Carlo Rosa, CEO of Diasorin. Please go ahead, sir.

Yes, thank you, operator. Good afternoon to everybody. Welcome to the Diasorin Quarter 2 call. As usual, I'm going to make some general remarks about the business, and then Mr. Pedron, our CFO, is going to take you through the numbers. I think that as you have heard from other competitors in the field of diagnostic, when you look at the business these days, you really need to look at the business to weigh the current business and the underlying trends and the COVID-19 effect. Let's talk first about the underlying business. The underlying business ex-COVID, the result of the business is primarily driven by volume associated to the fact that especially in Q2, which was the peak of pandemic in many European countries and in the US, the volume per se, the business volume declined sharply. simply because patients were not available to go to hospitals to avoid, to get infected. And clearly there is a trend. Overall, for Diasorin, in the quarter, the non-clear business declined roughly 30%. Again, primarily driven by declining volume. If you look at the different regions, what is noticeable that along the quarter, in quarter two, we see a stabilization or an improvement in Europe. In several European countries, we see that at the end of the quarter, the volume is roughly down only around 10%, indicating that the situation is better. Whereas in other countries like China we continue to see volume that is certainly improving but not to the level and the extent that we have seen in Europe and somehow in North America. Certainly North America is a question mark because we all realize they're not at the peak yet and actually they are still increasing in terms of prevalence of the disease. So we don't know whether this pattern of stabilization that we see will continue or how it's going to behave. Now, if we look at the COVID business, I think that we need to distinguish between COVID molecular and COVID immunoassay. COVID molecular revenues continue to be very strong. is driven by strong demand in all geographies related to the fact that guidelines today do recommend to swab patients, inpatients for sure, outpatients, to swab employees in certain geographies to guarantee that the manufacturing The manufacturing departments of the companies stay without getting employee infected. So there is a surge in demand of molecular driven a lot by North America. You know that there is a plan by the government to sharply increase the swap capacity in preparation of the coming fall. Today reports, I think in the U.S., the total number of swabs is around 15 to 20 million per month. And there is an objective by the government to get to 100 million. So lots of pressure to the labs and to the industry to continue to supply more reagents. As far as diastoring is concerned, we, as I think everybody else, has had an opportunity to deploy more systems. We now have over 1,000 MDX placed worldwide with a sharp increase compared to last quarter. I remind you that the positioning of our system is not point of care because it's a small system but can process eight samples at a time. So what we see is that there is an increase in demand in small mid-sized hospitals that cannot wait until the big labs, the turnaround time of the big labs where they send out. They cannot afford technologies, high throughput, and the point-of-care systems that are available are too small. And therefore, the MDX perfectly fit with this mid-size hospital. And this is certainly true in the U.S. And if you remember what was the company's strategy pre-COVID, driven by quantifiering and penetrating the hospital market strategically, this again is supporting a lot. Because now we can go to these hospitals, we can provide a solution with... the COVID molecular and we can also provide serology and our liaison excel and you saw that placements for liaison excel surge in quarter two. So as far as molecular is concerned is a matter of manufacturing capacity and the company I know over the last call I think I gave an indication in terms of what would be the objective of the company for capacity and today We are able to manufacture around 700,000 tests per month molecular and we have a plan to bring that number to a million by year end in anticipation again of big demand with the next flu season starting from October. so now let's move to serology serology is a very interesting story because at the beginning of the pandemic as soon as products were made available to customers there was a surge in demand and if you look at what different companies declared in terms of capacity manufacturing capacity it was among the number of tests that the diagnostic industry was prepared to provide to customers. After an initial consumption of the serology test, I'm referring to the IgG test, the situation froze as a result of lack of guidelines. You know, there has been a tremendous amount of discussions at the scientific level vis-a-vis was the value in detecting antibodies. The initial hope and dream was the fact that antibody detection would provide an indication of immunity. That clearly was not the case simply because our clinical threshold for immunity has not been defined and will be defined the day that the vaccine industry is going to declare it once they launch the vaccine. Then there was a usage of this test for epidemiological studies. It is still there, but I think the initial intent of governments to conduct large epidemiological studies eventually faded away because there are different priorities today for governments. I'm referring to the Italian government, for example, which launched a campaign of 150,000 citizens to be tested, and from what we understand from public information, they were only able to collect around 80,000. And other governments as well declared massive screening programs that eventually did not materialize yet. So today serology, the use of serology is more clinical and is related to those countries where there is an ongoing epidemic or there is a lack of swabs because somehow IgG and IgM are used to complement the fact that there is a chronic lack of swabs. So we see still opportunity for serologies in Brazil, in India, where we see adoption of IgG and IgM. But in the more mature countries, we see that the volumes eventually decline to numbers which are far below what were the expectation of the industries. Initially, as clearly you picked up following comments from other diagnostic companies, including some large labs in the U.S. So today, what's the future of serology? Well, we believe that the future of serology rests with vaccination and vaccination campaigns. And as it happens with certain vaccines, after post-vaccination, there can be a need of determining whether the patient has properly responded to the vaccine. It's the case, for example, of some vaccines like the hepatitis B. If that happens and is an if, because it depends what the regulatory bodies eventually will mandate and or what the guidelines will say post-vaccination, we see a tremendous potential for serology that probably is going to be a combination of classical tests, venous tests, and a combination of probably some rapid testing that in that case could fit the market because they don't need an excessive sensitivity, which usually is the problem with these tests. but can probably be sufficient to determine whether a certain threshold of antibodies has been generated or not after vaccination. So I think that it's difficult to predict what will happen with serology. We need to wait for guidelines for the vaccine. From a geographical point of view, very clearly what I said is reflected in the performance of the company. North America has been growing rapidly. dramatically for the company. In the quarter, 72%. In the first half, 42%. Again, driven by a tremendous adoption of swabs and initially of serology, which was actually used by some of the labs in massive volumes. Initially, again, that interest is fading away a little bit. Then we have Europe. Europe behaves well for the same reason. In Europe, we have distributed, we made available to European countries, including Italy, certainly, our home market, our molecular product and our serology product. And that has allowed Europe to grow, notwithstanding the fact that we have experienced in different countries decline of volume, as said, of the base business because of the COVID pandemic. We have a black eye in China, as I think everybody else. And this is because so far in China, there is no foreign company with a COVID product. And so you don't enjoy as a company the opportunity of COVID in China, whereas you suffer from the decline in volume. So China declined sharply for us in Q1. It continues in Q2, although we see slow improvement in volume, but still negative. And then let's talk about Latin America. Latin America, we all know the situation in Brazil, which for us is the main geography. In Brazil, in Q2, we did suffer by the fact that, well, first, we did not launch our molecular assay in Brazil, and so we don't have the support of molecular assay. And recently we got our serology product approved and therefore we expect that starting from Q3 we will see adoption of our serological test in Brazil and that will actually revert the result of the region of South America from being sharply negative to being positive in quarter three and quarter four. As far as futures, I want a couple of comments. The first comment, I believe that we do have an intensive research program for COVID. And as I stated before, we see that there is a need for a saliva-based test more sensitive than what's currently available. to complement the chronic lack of swab. And we have a program in that direction with a partner, with a U.S. partner in order to try to come to the market with products by the coming fall season and flu season. And also, we believe that there is a need from a serological point of view of a qualitative test that is actually set up for, again, post-vaccination. And therefore, we are actually working in developing a new serological test for IgG determination, quantitative, that standardize that we plan to make available, again, by the time the vaccine is launched. From a product perspective, all our effort on COVID, the COVID program is an IGG, SBA, SA quantitative for vaccination and saliva and nasal swab product to try to reach to the best sensitivity to try to complement swab for the coming season. At this point, just again, one remark. COVID has been an opportunity for the company not only to establish a brand with the products we have developed, but it has been a great opportunity in North America to establish a new store base. As said before, if you remember, we had strategically, we had a plan to penetrate the hospital market with in mind a certain number of hospitals to be actually rich and close by end of this year. Well, comes Q2, we already almost doubled the target of the hospital number that we targeted for the full year. So that I see as a tremendous legacy opportunity for the SORM because we are penetrating with our products with COVID molecular and immuno, a segment that's strategic for the company. And certainly we will see then adoption on our systems of the quantifier and all the specialty products that we carry on those systems. So I see a very positive effect of COVID strategically in terms of positioning, branding, and install base. Now I leave the podium to Mr. Pedro. He's going to talk about the numbers, and then we're going to start a Q&A session.

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 half of 2020. And I will make some remarks on the contribution of the second quarter as well. As usual, I would like to start with what I believe are the main highlights of the period. We closed half one with an increase in revenues at constant exchange rate of 8.7% or 31 million euros. As a result of the soft first quarter, mainly due to COVID-driven reduction testing volume in China, as we discussed, and a very good second quarter, up by 15.4% or 28 million euros. Q2 gross margin confirmed the good result achieved in Q1-20, with a ratio of revenues of 69.1%. H1-20 gross margin ratio, at 69.1% as well, is slightly lower than H1-19, which closed at 69.5%. I will discuss later about the main drivers behind this variance. H120 EBITDA at €154 million records an increase at constant exchange rate compared to the previous year of 10.1%. H1 EBITDA margin, again at comparable FX rate, is 40.2% vis-à-vis 39.8% of 2019. Q2 20 EBITDA. at €89 million or 42.9% margin registers a very good performance with an increase of 24% or €17 million compared to Q2 2019. Lastly, we confirm our ability to generate a very healthy free cash flow €74 million in the first six months of the year which brought the net financial position to positive €190 million. Let me please remind you that in June we paid €52 million dividends to our shareholders. Let me now go through the main items of the P&L. H1 revenues at €382 million grew by 9.1% or €32 million compared to last year. The growth at constant exchange rate is 8.7%. The strengthening of the U.S. dollar against the euro is the main reason behind these FX headwinds, which has been partially offset by the devaluation of the Brazilian reais. Considering where the U.S. dollar is trending now compared to 2019, I believe it is fair to say that we might experience in the second half of the year some FX headwinds that will likely offset or even more than offset the upside of the first part of the year. H1 gross margin at €264 million grew by 8.5% compared to last year, closing the first six months of 2020 with a ratio of revenues of 69.1%, a touch below H1-19, which closed at 69.5%. The slightly decrease in the year-to-date gross margin is the result of the following. a negative product mix coming from lower CLIA sales and higher molecular sales, which enjoy slightly lesser margins, partially offset by better fixed cost absorption as a consequence of higher manufacturing volumes. Higher distribution and freight costs, mainly driven by the fact that many commercial flights, which under normal conditions would have been used to move our goods, have been grounded because of COVID, and so we had to use cargoes which are usually more expensive. H1 total operating expenses at €131 million or 34.3% of revenues have increased by 2.4% of €3 million compared to last year. OPEX ratio of revenues is 34.3% vis-à-vis 36.6% of 2019. Here we have two effects of opposite sign. On one side, we have had a slowdown of activities and the consequent reduction in costs caused by the widespread lockdown measures that interested all the geographies in which we operate. On the other, we have had an increase in costs, mainly driven by the investment we made in the U.S. commercial team aimed at sustaining our hospital strategy. as we talked over in the past few quarters and Carlo just mentioned. Each 120 other operating expenses at €9 million increased compared to 2019 by €4 million. As discussed during Q120 call, most of this variance is driven by a non-forecasted loss we suffered in our South African subsidiary during the shutdown process for which we have activated our insurance policy, our group insurance policy. As a result of what just described, H119 EBIT at €124 million or 32.3% of revenues has increased compared to 2019 by 12.2% or €13 million. Q2 closed at €74 million or 35.7% of revenues with an increase of 30% or €17 million compared to last year. The tax rate at 22.5% is substantially consistent with H1 2019. The net result at 95 million euro or 24.8% of revenues is higher than previous year by 11 million euro or almost 13%. Lastly, H1 EBITDA at 154 million euro is better than 2019 by 14 million euro or 10.3%. The variance at constant exchange rate is positive by 10.1%. First half EBITDA ratio revenues is 40.2% at current exchange rate, vis-à-vis 39.8% of last year. Q2 has recorded a very good result, closing at 89 million euro, or almost 43% of revenues. Both H1 and Q2 improvements compared to last year are mainly driven by the higher sales and gross margin coupled with a very nice operating leverage, coming from the reasons that I've just talked about. Let me now please move to the net financial position in the free cash flow. We closed the period with a positive net financial position of €190 million after payments in June of €52 million dividends to our shareholder. In the first half of the year, the group generated 74 million euros free cash flow, vis-à-vis 70 million euros of 2019. The semester has been negatively affected by an increase in working capital, driven by higher sales and so accounts receivable, higher inventory to sustain COVID test volume, and higher capex, driven by the acquisition in Q1 of the TTP license. partially offset by lower tax cash out, mainly coming from a positive payment phasing. Lastly, guidance. So, considering the uncertainty and unpredictability of the impact of the coronavirus pandemic in the second half of the year and the risk of further widespread strict lockdown measures, The Azorin, similarly to what done in Q1, is not in a position to give an economic guidance for the remainder of the year. Nevertheless, at the light of the good performance achieved in H1 and taking into account the importance of the diagnostic industry in managing the consequences of the COVID pandemic, the management is not expecting a negative impact on the results of the second half of the year. Now let me please turn the line to the operator to open the Q&A session. Thank you.

Excuse me. This is the CARFCO conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their touch-tone telephone. To remove yourself from the question, please press star and 2. Please pick up the receiver when asking questions. Anyone who has a question may press star and 1 at this time. The first question is from Andrea Balloni of Mediobanca. Please go ahead.

Good morning all and good afternoon. Thank you for taking my question. My first question is about serology test production capacity utilization. In your last conference call, you guided production capacity expected to increase from 5 to 10 million per month. We understood that so far the utilization is much lower compared to the top of range. If you can give us an idea about the capacity utilization in July, just to understand where to set our estimates. My second question is about the molecular test. During the last conference call, if I'm not wrong, you guided for around 10 to 12 million sales per month without stating the amount of tests produced. Now you said that you are producing 650 units per month and if I have understood correctly, you would like to achieve a level of 1 million per month by the end of the year. If you can give us an idea about the target in terms of sales by the end of the year per month. And my third question is again about serology tests. We saw in Italy a draft law in order to allow students reentering in the school. And one of the points included in this law is the utilization of a serology test for both students and also for teachers and so on. Do you expect this could trigger higher utilization of serology tests, at least in Italy, or this could represent an example also for other countries in order to increase the utilization of serology tests in the school?

Okay.

Listen, I will not give volumes in July for serology. My indication is clear. Serology, our manufacturing capacity is indeed 10 million a month. That capacity today is clearly not used. You can go and check. If you want to have an understanding of volumes, I think you go to LabCorp and Quest Reports, and you understand what the current expectation of volume is, which is far below versus... what everybody thought. I remind you that there have been statements by certain competitors where the capacity was up to 100 million per month, to 40 million per month, to 30 million per month. So the industry really set up its capacity for a demand that eventually did not materialize after an initial surge. I'm saying that the big question, Mark, is vaccination, and the big opportunity is with vaccination today for serology, and we need to see what that will be. As far as school, I don't know about the Italian law, to be honest with you, not clarity these days about what Italy is doing, and I think you can share the pain with me about that. But all said and done, I look at the U.S., for example, and as far as the U.S. is concerned, there has been actually a guideline to say that testing will not be required. Okay, so today there is lots of confusion, I think, in the market among experts about serology. And there's a lack of interest, and this confusion is actually pushing for less adoption and lack of interest. And this is the difference between serology and swab because today for swabs there is a very clear guideline which starts from the WHO and then has been transposed into the different countries. And this is why there is a clear usage and clear increased volume for swabs and lots of uncertainty on serology. For molecular, I gave initially an indication of revenues. But then In the last call, I also spoke about manufacturing capacity, which I think is, in this case, is a good correlation between revenue and revenue simply because there is more today demand and capacity for everybody. And so what you can manufacture actually correspond in this case and for the foreseeable future to your revenues. And we've indicated that today we do have a capacity overall around 700,000 tests per month with a plan to increase it to 1 million tests per month by year end. And I think from that you can, in understanding what is the price on the market, you can make a gross estimation of what diaspora and revenue per month can be moving forward between now and December.

Thank you.

The next question is from Catherine Tennyson of Bank of America. Please go ahead.

Hi, thank you for taking my questions. I have two. Just following up on the previous question, in Q2, we had about 89 million euro of a benefit from COVID. Could you roughly help us understand how much of that came from molecular versus serology? I appreciate you won't give the July run rate, but if you could just give us any idea of what we need for that and how we should think about the monthly demand for serology going forward. Thank you.

Catherine, I cannot. because I believe that even if some competitors were very analytical about their revenues and some other competitors decided to keep the numbers to themselves. I think that this is what we decided to do. And again, the indication is as follows. I don't think that what happened in Q2 is a good proxy for serology to what is going to happen in the future. And therefore, I see no value in really declining serology revenues because it has been a peak that is not going to be repeated until there is something that will make serology as a technology needed. Okay, and again, as I said, the only way is going to be the post-vaccination title determination. Molecular, you can do your math. Clearly, you can do your math with the information I gave you because you understand what is the current price for a molecular test on the market. And so do the math and understand the potential for molecular, which is certainly vast, I have to say. And it is like that in the U.S. because the government has announced this grandiose plan objective to be able to get to 100 million swaps per month. Okay, so it is very relevant for me that as investors and as analysts, you guys understand that serology in Q2 has been a nice opportunity, but eventually it cannot be repeated, whereas the solid business today stays with molecular products.

That's super. Thank you.

The next question is from Maya Pataki of Kepler-Chevreux. Please go ahead.

Hi, guys. Carlo, just to follow up on your statement with regards to serology tests and in general a bit more about the outlook for COVID-19. I mean, as we're passing time, as we're learning about COVID-19, you've mentioned that there could be an opportunity for serology tests in combination with vaccination. Do you believe that, based on the data that we have today, COVID-19 will remain of the portfolio for a medium to long term, rather than what we anticipated all in the beginning, that there would be one vaccination and, you know, you might have immunity for forever? So do you think that the opportunity from COVID-19 is obviously always changing, but do you believe that now there is a potential longer-term opportunity?

Maya, look...

To be honest with you, if today I make a public statement on this, I would be better off just playing the lotto because the probability for me to give you the right answer is fundamentally the same. But let me just give you a common sense comment. Let's talk about the vaccination. First, you understand that there has been a very nice publication recently on Lancet which has in fact described the initial data on one vaccine. And I think that today there is a fundamental discussion and nobody knows yet whether the vaccine will first efficacy, second what is the effect of the vaccine. So you're going to be vaccinated or simply just going to tame the infection and avoid that the severity of the infection once you get it without vaccination. So to make a long story short, this is what I believe. I believe that there will be a need somehow to test whether the patient has reacted to the vaccine. I see the complexity, though, because if you use a traditional serological assay, it means that you need to have millions of people lining up to take blood and to get blood drawn and tested. And that is a complication. I see in that sense that there is an opportunity if the technology can deliver for a lateral flow test, something that makes the testing post-vaccination simpler. So the question is, what is going to be the opportunity for serology, and is it going to be more on the lateral flow versus the traditional immunoassay done in a lab? And I don't know that yet because it's too recent. As far as the opportunity, I believe, I think I share the comment that some competitors make vis-a-vis 2021. So if you heard what I believe Kayagen said, Roche said, everybody sees that 2021, we like it or not, notwithstanding availability of vaccine, we are going to go through the hurdles together. of COVID and that we will need more testing for COVID. In my opinion, we will need more molecular testing because of the need to isolate people very rapidly. You see what is happening in Europe because of the fact that this swab is becoming common practice in admitting people at the hospital, for public workers, for police people and so forth. So I see 2021 still COVID. I have no idea whatsoever what is going to be 2022. And to be honest with you, I wish to myself that COVID goes away because quality of life and economy needs a word free of COVID. As far as we are concerned, I would like to make a comment. What is COVID doing to us? Tremendous branding because we were the one that, you know, because of the pandemic, Characteristic of our technology for molecular, we do not extract. So it's a direct determination of the virus. That allowed us not to go through the hurdles of a shortage of reagents for extraction, which has been one of the problems of other competitors. And since the beginning, we have not backordered a single customer with COVID. So there is a reputation that we have acquired in the business. On top of that, we clearly had an acceleration, as said, of the installed base, both of COVID and the non-COVID, so the serology. And today, as far as serology is concerned, if I look at what the company got out of it, we got cash, for sure, from serology because it has been a significant opportunity in Q2, but strategically, we got an installed base of systems in hospitals, especially in the U.S., that will continue to do COVID serology at a much smaller volume than what was expected from a very large lab. But they do COVID, they use the serology, and taking our system there, they will do quiniferon, they will do all the rest. As I said before, we had a target of hospitals to be closed by in 2020, and by June, we already almost doubled the number of hospitals we have enrolled as customers. And this is, I think, as much as a common sense person can say about COVID.

Okay. And just to follow up, Carlo, on the saliva test that you briefly mentioned, that would be for active infections, correct?

Yes, it would be for active infection because today if you, you know, there are assays that, and I think Quidel is a good example. So there are companies that launch product on NPS or on nasal, right? So you need to swap and then you can test antigen with a relatively good sensitivity in the active phase of the infections. There are two problems. The first one is the swab per se, which, as you know, is relatively complicated, especially you can get negatives if it's not done properly. So swabbing people, it's an art. It's not something that anybody can do. Saliva is a perfect medium for testing because it can be simply collected but you need a device and we do have a collaboration with a U.S. company that does have this kind of experience and device on saliva collection. This is why we believe that an antigen and something else that we have not stated yet but an improved antigen test on saliva would be a tremendous tool because it's much simpler to collect. It can be a widespread use, and it can be adopted very rapidly by hospitals. You saw that in the U.S., I believe, the government has signed up Quidel for, I think they stated, 700,000 tests. So the need for this kind of test is huge.

Okay. Thank you very much.

The next question is from Scott Bardo of Barenburg. Please go ahead.

Thanks, guys. Thanks for taking my questions. Yeah, first question on serology again. Sorry for that. I think at the time that you and the industry were developing serology tests, it was pretty apparent that there was no strong evidence that detecting antibodies, IgG antibodies, strongly correlated with immunity yet I think this or in claim that you had isolated a neutralizing antibody and you best to prove that I think that you were expecting very strong lab demand as a result of that along with the whole industry so what I'm trying to understand is in the last few months What has massively changed such that the industry has got it completely wrong with respect to capacity and demand and the ability to make this link to immunity? So I wonder if you could discuss that a little bit more. Second question, please, on the antigen test. I think at the last call you highlighted that this could indeed be an even bigger opportunity than serology, and those expectations last quarter were clearly quite high. Along this development process, first of all, can you give us a bit of an update? Are you incrementally more positive on your ability to launch a solution here at all or in full, or is this still in a high-risk camp? If we could just discuss that a little bit more, that would be helpful. And last question, please, Carlo, and I appreciate that this is somewhat of a sensitive topic, but Can you give us some sense and understanding for some of the legal challenges that you've been facing in investigations in Italy and where the company's stance is with respect to the forward positioning of the business? Thanks.

Okay, Scott. Now let's talk about serology neutralization and immunity. Since the beginning, we clearly stated that we were not providing any information on immunity. And if you followed the thread of information back then, funny enough, I think there were more politicians saying, you know, we are going to have now the silver bullet with serology because it's going to provide what everybody in Italy was called the patentino d'immunità, so like the immunity card, which was obviously... a surreal statement by politicians. We had devoted a certain amount of time in clinical studies to look at neutralizing antibodies because we thought that, as it is true today, if eventually in order to provide an information around immunity It is all to do with the ability to neutralize the virus, and this is why we conducted a clinical study in order to prove that. And we provided a tool, XUS, that has been used by several centers around Europe that appreciated the neutralizing claim. In the U.S., we did not get the claim approved, as you noticed from the package, for a very simple reason, because the FDA came back with the $100 billion question. Tell us what the immunity threshold. So tell us, okay, we understand you measure neutralizing antibodies, but tell us what would be the threshold of neutralization that provides immunity. You know, that's a very smart way out of the question because we cannot, that's a question for the vaccine industry. But the signal that came from agencies, look, we understand value of neutralization. By the way, you know, there are different labs that today are providing LDT solutions for neutralization. I think Quest announced it, LabCorp announced it as a research tool. But nobody can actually claim what neutralization means until somebody will establish what the protection level is. And that can only be a company that has conducted a clinical study. So this is why at the beginning, look, at the beginning I think everybody in the industry declared that extreme capacity for this because nobody really knew how it was going to be used. And governments were making statements, public statements about their willingness to conduct very large studies with millions of people involved in this study. Well, it didn't happen, in my opinion, for two reasons. First, that eventually, if you run an epidemiological study to understand the immunity, well, on the general population, you're going to have a prevalence which is very low with the exception of a few places. If you go today in In Bergamo, in the area where eventually was a hotspot for it, you would find 30, 40% of the population which is actually being infected. But if you go anywhere else in Italy, especially if you go south, you would find a prevalence of 0.1%. So the concept was, with the exception of a clear use in certain hotspots, why should we conduct a study when the prevalence is so low? The second information back then was the so-called tool to reopen. If you remember, in all the newspapers, everybody was saying serology will allow companies to reopen. But then the algorithm was set such that you can do serology, but then any positive you find, then it goes to... It now enters into a program which has been managed by the government, which means, A, you need to be quarantined. B, you need to get a swab until you return. And third, you're going to take you and your family and be segregated until you get the result. And people really started to wonder, what's the value of this information? So I'm going to do an IGGE. God permits, I'm going to turn off positive, and if I turn off positive because of a past infection, I have no information about immunity, first. Second, I get into a nightmare because I need to get tested, I need to be quarantined, I need to be segregated. That's fundamental. That uncertainty has created a lot of questions about, okay, why do we need to do serology? In surgery today, I reverted to where it belongs, to clinical use. So when you have patients which are hospitalized, then you do serology in order to understand when they develop after the swab, when they develop the IgG and IgM as part of an algorithm which is a diagnostic algorithm but is not for epidemiological studies. And this is what honestly we see today. There is one more usage of the serology test which is very interesting. which has to do with the fact that one possible treatment for COVID, as you know, is a transfusion to critical patients with blood coming from donors, which got infected, develop a titer, and then eventually recover from the disease. There are certain protocols, experimental protocols, which have been approved in Italy, in Pavia, for example, and in the U.S., but still, there is not a massive use of the product to screen donors then for donation. That is fundamentally the story around serology. Antigen testing. Antigen testing, where are we? We are in the, we are beginning the clinical studies and it's a complex clinical study simply because today In Europe, you understand first that you need to do a clinical study on active patients. Today, with few hotspots in Europe, there are no active patients any longer, so it's difficult to find these patients. It sounds funny, but it's terrible. The place today where to do clinicals is the U.S. because it's a place where you can find lots of active patients. Therefore, We are initiating the studies with the U.S., although you know the IRB and the time it takes in the U.S. to get the clinicals approved takes longer than Europe. And so today we are in the phase where we have internal data, which are interesting and promising, but then we need to validate this data with patients that we will need to collect, we are collecting in the U.S. I believe we are going to have more certainty around the September timeframe. We plan eventually to bring this product to the market, hopefully by year end. Third element is the legal. Look, unless you are Italian, it's very complicated to describe the legal system, but I'm trying to do it the best I can, and clearly I'm not going to make any statement vis-à-vis the current DOJ investigation because I cannot do anything like this. Well, the situation is very simple. There has been a legal case which has been brought up by a competitor, a Chinese competitor, in front of the administrative court in Pavia, and that was against the agreement, which was a clinical experimentation between us and the hospital in Pavia. And the claim of the company was that that agreement gave diasorin an unfair advantage in terms of its ability to develop a serology assay. In the first degree, the administrative court actually ruled in favor of the company. And so the net result was that the agreement between us and the hospital, which at that point was concluded because the experimentation was concluded, was in fact declared nil and invalid without repercussion on the diasorian product per se. Then we appealed to the High Court in Rome, and the High Court in Rome ruled recently to say that actually the first administrative court ruling... And then it indicated the court in Rome asked the Minister of Research in Italy to give an opinion whether the clinical study which was conducted in Pavia between the Dioessorians with the San Matteo Hospital was something that was common, let me say, or if it showed anything there that would be unusual in the way it was conducted. But as we speak today, the High Court ruled that the first court ruling has been declared nil and suspended. Okay, so we are now waiting for the Minister of Health to provide a report to the High Court, and then we expect that by your end, the High Court is going to rule the initial indications of the High Court. I'm not going to comment, but if you read what the High Court said, I think you understand what the inclination of the court is. And this is from the administrative point of view. That company also has... provided to the Department of Justice in Pavia documentation to look from a penal point of view the agreement again between Diasorin and San Mateo. And I think that what we have seen in the news these days that I can comment on is that the Department of Justice has decided to initiate an investigation again based on San Mateo and Diasorin agreement, which has been declared today valid by the High Court. That's the interesting part. So the panel of judges initiated an investigation. They came to the company and they've taken information about all the development work that has been done in diasorin for the development of the serology assay. And this is where we sit today. So today there is no effect as far as the business is concerned. The company continues clearly to operate. You know that as far as penal responsibility is not with the company, it's to do with the company legal representative. So the company continues to operate as is. It continues to manufacture products and serve customers well. And we're waiting to see what the DOJ will decide to do, but you know that it may take a long time. And this is what I can say factually for what has happened in the last 90 days.

Thanks very much, Carlo. I'll get back in the queue.

Any further questions? please press star and one on your telephone. The next question is a follow-up from Scott Bardo of Barenburg. Please go ahead.

Thanks very much for the follow-up. Just a real quick one. And Pia Giorgio, I wonder if you can help. I think you're expecting then a recovery of your base business in the second half of the year and pretty high continued growth in molecular diagnostic, which, as we said, is coming largely from the U.S. and confers favorable margin. So the nature of the question is this 43% EBITDA margin that you post here in the second quarter, I mean, is this a basis that you can progress forward from in the second half of the year? Any understanding about the sort of profitability development of the businesses the rest of the year unfolds would be very helpful.

Yes, Scott. So it's very difficult to make projection for the second part of the year, and that's the reason why we're not giving the guidance. But I believe that 43% margins are I'm not expecting to be able to maintain such a level of margins in the second part of the year. Also because these margins in Q2 have been driven by the fact that OPEX have been very low. As I believe I said during my remarks, we have had a slowdown on a lot of activities because of the lockdown measures. in all of our geographies. Now activities are picking up again. So our people do travel, see customers on a recurring basis. A few projects which we put on hold at the beginning of the pandemic are now picking up again. So I'm expecting OPEX to pick up again. Besides, as you know and I believe we have discussed a few times, margins of molecular products are lesser than clear products. What I'm expecting to see is some kind of pressure on the gross margin, which will be somehow offset by some operating leverage, but not to the extent we saw in Q2. What I believe it's fair to say is that I think we should be able to maintain an EBITDA margin around, let me say, 39%, 40% by year-end, but I'm not expecting to see anything like what we're showing you for the reasons I just mentioned. That's very helpful. Thank you, David.

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

Thank you, operator. Bye-bye.