DiaSorin S.p.A.

Good afternoon. This is the Corsco Conference Operator. Welcome and thank you for joining the diasoring third quarter and nine months 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 the telephone at this time i would like to turn the conference over to mr carlo rosa ceo of diasorin please go ahead sir yes uh thank you operator and uh good morning good afternoon to everybody welcome to the 43 conference call

I think this time we are going to make some short comments and then I'm going to leave Mr. Pedron to go to the numbers and then we're going to leave ample time for Q&A because I think there are lots of questions, not I believe necessarily related to the results, but to the environment ecosystem after the Pfizer announcement a couple of days ago. I would start and comment on revenues. As you have seen, the quarter has been a very strong quarter. I think in line with what we have seen also from other players in diagnostic. And we need to look at the revenue from perspective of COVID opportunity and from what the rest of the business is doing. The rest of the business is recovering better than expected. We were coming in Q2 from a minus 35%, and that was pretty much generalized in all the different geographies. In quarter three, now we are at minus 7%. With a different mix, we have U.S. and Europe with strong recovery, We are almost close to where we were last year, whereas China is still lagging behind, and I'm going to make some comments about China specifically. U.S. and Europe, we have seen constantly that testing volumes in the major geographies in major countries in Europe are going back to last year levels pretty much, and this for us is a combination of Regular prescriptions that we see, again, going back to normality, and then combination of new business that we closed last year and growth of our product lines. The gastroenteric line is, notwithstanding the COVID situation, is growing over 20% year-on-year, which is phenomenal. And then the TB program that certainly is fully incremental for us, and it's firing up. It did fire up well in Europe, and it has been firing up in the U.S. as well. So in U.S. and Europe, a combination of recovering of testing volume and our traditional programs firing up, we see the traditional business doing okay. When it comes to China, we still have a red flag in China, and I think I heard also other diagnostic companies making similar comments. And the reason we believe is the fact that, as you know, in China there is no, so medicine is practiced right at the hospital sites, and so hospital sites additionally are extremely crowded, and I believe still the general population does not want to go to see their doctors except for emergency cases because they don't want to be exposed to the risk of, of infection, and this is the only way I think all of us can explain why, notwithstanding what is happening in the rest of the world, China is still lagging behind vis-a-vis volumes. And so we will watch carefully what happens in quarter four, and we hope that eventually volume is going to go back. But so far, I don't think we have lost visibility. Now, let's talk about COVID. certainly the business is doing extremely well. And we need to look at two components of COVID, on one side serology and on the other side molecular. Serology Q2 was phenomenal and this was because there was lots of excitement about the adoption of serology for epidemiological studies and then the viability of serology to support lack of testing capacity from a molecular side. So lots of hype that eventually died pretty fast. And if you have seen comments from the major labs in the U.S. as well as other competitors, the spike really lasted two, three months. And then serology went back to where I think it deserved. which is an interesting tool to follow up at this point, all the patients that are hospitalized. So more clinical use than general use. In quarter two, I remind everybody that we had roughly 45 million euro revenues on serology. This is in quarter three, is not there, certainly is not there anymore. I think that our projection of C serology more around, you know, between 8 and 10 million per quarter, which is what we believe is physiological use of serological tools, especially in those countries like Brazil, India, and some of the export countries where lack of swabs and molecular testing is somehow compensated by the use of IgG and IgMs, which is an assay that we have launched a couple of months ago. As far as the molecular is concerned, look, today I think everybody is in the same situation. There is growing, growing demand of molecular testing. And molecular is considered, as we all know, the gold standard. And it is used both for clinical use, so to diagnose the acute phase, and also today to try to identify the asymptomatic carriers. Sales are proportional to manufacturing capacity. In Q3 we had versus Q2 50% growth rate of our molecular testing, which is pretty much in line with increased manufacturing capacity. We are a little bit far ahead compared to what we said was our goal. If you remember, we said we would have a million tests of molecules per month. capacity by the end of the year, and I think we were able to anticipate a couple of months that capacity, so we are enjoying good, good growth. Price is stable. We have positioned our assay as a specialty product for triage in admission. We have a relatively small system, our MDX, that has been very successful into the hospital setting, so where we enjoy specific positioning as well as a price premium, because we sell the ability to triage within 45 minutes, so you are able to triage patients and properly redirect the COVID positive and COVID negative patients. So far, as far as the installed base is concerned, we have We've been able to place roughly 500 additional systems for molecular. A good chunk of it is in Europe. Prior to COVID, as you can imagine, our installed base was primarily U.S.-driven. After COVID, the installed base has been growing significantly in those countries where we have elected to sell the product. Certainly we had to make certain decisions in terms of priorities and as I think we have stated from the beginning, US, Italy were the primary markets that we decided to serve, followed certainly by Spain and France and few other placements in other European countries. So COVID is doing fine. The positioning, I believe the correct positioning, and we now have another goal, which is to get to 1.2 million tests around the February timeframe, which would be the next step of increased capacity. At the same time, we have also launched our flu assay, which now is compatible with COVID, so we can follow the trend of differential diagnosis in patients that do show up with the same symptoms, although I think as we have seen in Australia, now it's also fairly clear in the US and in Canada, where we have a big install base, the influenza season looks like it's going to be fairly mild. And I believe that this is the consequence of all the social distancing and hygiene measures that were adopted because of COVID. The results in Australia that I've seen were unbelievable. Whereas last year in June, there were 7,000 cases a month of reported flu. I think it went down to 50 a month. And so it clearly showed that this influenza season is going to be very mild, which is a living space to actually manufacture more COVID. And so we are actually balancing today our manufacturing more toward COVID than flu. There is another program that for us is very strategic, is antigen testing. Antigen testing was clearly made available a couple of weeks ago, so it's not part of the quarter three results. However, these antigen tests that we launched, I believe is a very strategic product, has been the first one And so far the only one to be launched with certain characteristics is, you know, as public information is ortho clinical and is Diasorin the only two high throughput assay launch. Our assay though is different than ortho because it's quantitative and allows the determination of the viral load, which we believe is a very relevant characteristic of this product. And by the same token, the positioning is specific because, you know, there are a lot of point of care antigen tests available out there that have been deployed in different settings to be used. This product, which is a high throughput and is actually run on our liaison platform, has a better clinical performance than some of these rapid antigen testing, and that's This comes without saying because the chemiluminescence technology is a much more powerful technology than this laminar flow. It guarantees traceability, which is something that some of the laminar flow point of care assays don't do today. This is key in my opinion. Increased sensitivity and traceability is very relevant in order to allow the identification of asymptomatic carriers. For diagnostic, there are fundamentally two uses. One, the swab, the molecular testing is used more for clinical identification and for diagnosis and to release patients to guarantee that they're not infectious any longer, whereas the antigen testing would be, the use of it would be a widespread use in the community to identify hotspots and asymptomatic carriers. Our assay, because of the sensitivity that it has, does allow certainly the identification of asymptomatic, and this is how we are positioning it. So we expect, we launched it 10 days ago, it's doing very fine, and now we are commercializing it in the U.S. under EUN and submitted for EUA approval, which we expect to come in the next few weeks. Last but not least, we are working on a new product, which is a new serological assay that we intend to submit to the agency in the next few weeks. And this assay is intended to be a post-vaccination test. And the idea shortly is to use the same protein that has been used by the vaccine companies, which is a very specific spike protein, and then use that protein to understand the vaccine, the response of the patients or the vaccinated individual to the vaccine. It's a bet, certainly, because today there are no guidelines that do recommend post-vaccination testing. But if that comes and there is going to be a utilization of serology, We believe that this assay is superior to what's existing on the market because it's been specifically designed with, again, the same protein, S protein, that has been used as a candidate for most of the vaccine programs. At this point, I'm going to leave the mic to Mr. Pedron. He's going to take you through the numbers, and then we're going to take questions shortly thereafter.

Thank you, Carlo, and good morning, good afternoon, everybody. In the next few minutes, like usual, I'm going to walk you through the financial performance of Diasorin during the first nine months of 2020, and I will also make some remarks on the contribution of the third quarter. So we close September here to date with an increase in revenues at constant exchange rate of 17% or 91 million euros. As a result, if you might remember, a soft Q1, mainly driven by a volume reduction in China due to COVID, and a very good second and third quarter. Specifically, Q3 saw an increase in revenues of comparable FX of 34% of €60 million. Carlo has already discussed at length the reasons behind these variances. As expected and anticipated during last quarter call, Q3 20 gross margin ratio at 68.3% of revenues is below what we see in Q1 20 and Q2 20, which closed at 69.1%, mainly because of higher sales of COVID molecular tests. Year-to-date gross margin, though at 68.8%, is just slightly lower than 2019, which closed at 69.1%. September year-to-date EBITDA at €258 million records an increase at constant exchange rate compared to last year of almost 25%. Year-to-date EBITDA margin, always at comparable rate, is 42.3%, vis-à-vis 39.8% of 2019. Q320 EBITDA at €104 million, or almost a 46% margin, registers a record performance with an increase of 54% at comparable rates. Lastly, we confirm our ability to generate a very healthy and predictable free cash flow, €153 million in the first nine months of the year, thus bringing the net financial position of the group to positive €256 million. Let's now dip a little bit into the main items of the P&L. We said that the year-to-date revenues at €610 million grew by 16% or €85 million compared to last year. The growth at constant exchange rate is 17%. The impact of COVID revenues, again at comparable rates, has been €166 million year-to-date and €73 million in the quarter. As expected, the appreciation of the euro against almost all the currencies in which the group operates has caused some material effects headwind in the quarter, therefore offsetting the tailwind we saw during the first half of the year. Considering where the U.S. dollar is trending now compared to 2019, I believe it is fair to say that we will experience a similar 7 million euro or thereabout negative currency effect also in the last quarter of the year. Gross margin at 420 million euro grew by almost 16% compared to last year, closing the first nine months of 2020 with a ratio of 68.8%. Q3 gross margin increased compared to 2019 by almost 30%, with a ratio of revenues of 68.3%, vis-a-vis, as I said, 69.1% of H120. This slightly decrease in the quarter gross margin ratio compared to the first two quarters of this year is mainly the result of a different product mix. To be more precise, lower clear sales and higher molecular sales. which enjoy, as we have discussed several times, lesser margin, slightly lesser margin. The increase of the molecular franchise, 34% of the total quarter sales, has been mainly driven by COVID testing. Total year-to-date operating expenses at €195 million of 32% of revenues have increased by less than 2% of €3 million compared to last year. The OPEX ratio of revenues is 32% vis-à-vis 36.5% of 2019. Here we have two effects of opposite sign. On one side, we have had a slowdown of activities and a consequent reduction in costs caused by the widespread lockdown measures that interested all the geographies in which we operate. On the other side, we have had sustained and increasing costs mainly driven by the investments we made in the U.S. commercial team aimed at supporting our hospital strategy, again as discussed a few times during these calls. Year-to-date other operating expenses at 11 million euros increased compared to 2019 by 5 million euros. As discussed, the biggest driver of this variance is an unforecasted loss we suffered in our South African subsidiary during the shutdown process. for which we have activated our group insurance policy. And we are hopeful that the old claim process will be completed within the next 18 months. As a result of what just described, year-to-date EBIT at €214 million, or 35% of revenues, has increased compared to 2019 by almost 29%. Q320 closed at €90 million, with an increase of 62%. or 34 million euro compared to last year. September to date tax rate is in line with 2019. This brings us to net results of the first nine months at 163 million euro or 26.6% of revenues, which is higher than previous year by 36 million euro or 28%. The increase in the quarter is almost 60% or 25 million euro. Lastly, September year-to-date EBITDA at €258 million is better than last year by €49 million. EBITDA rational revenues is 42.3% at constant effects vis-à-vis 39.8% of 2019. Q3 closed at €104 million, or 45.7% of revenues. The substantial margin improvement toward last year, both in the year-to-date but even more so in the quarter, is driven by the operating leverage resulting from the increase in revenues amplified by a muted increase in operating expenses. Let me now please move to the net financial position and the free cash flow. We close the period with a positive net financial position of €256 million and €284 million cash. In the first nine months of the year, the group generated €152 million free cash flow vis-à-vis €138 million of 2019. The year-to-date free cash flow has been affected by an increase in working capital, mainly driven by higher accounts receivable and higher inventory to sustain the COVID testing volume and sales, higher capex, driven by the acquisition of the TTP license and higher installment of our platforms, and all of these just partially offset by lower tax cash out, mainly coming from a positive phasing, and the one-off of €6 million exit tax we paid in 2019 when we closed our Irish manufacturing site. Lastly, the full-year 2020 guidance at 2019 exchange rates. We expect revenues to increase at around 25% and an EBITDA ratio at around 43% of revenues, all at 2019 exchange rate. Please remember that the assuring financials are highly exposed to the U.S. dollar, and even more so now that the United States represents more than 40% of the total sales of the group. Therefore, as a rule of thumb, consider that for every one cent movement of the dollar against the euro, the Australian revenues move by about 3.54 million euro on a yearly basis. Now let me please turn the line to the operator to open the Q&A session. Thank you.