DiaSorin S.p.A.

Good afternoon. This is the course call conference operator. Welcome and thank you for joining the DSR in full year 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.

Thank you, operator, and good afternoon to everybody, and welcome to the year-end result conference call for Diasorin. I would like to make an initial statement. This has to do with some rumors that are being reported about the company. And so it is very clear, as you know, that in line with our strategy, we routinely explore transaction opportunities with strategic partners. And this, as you know, is done to create long-term value for our shareholders. So I will not comment on any rumors about potential M&A transaction until such disclosure is appropriate or required. Now let's move to the discussion about results and how we see the business progressing in 2021. I would like to focus on quarter four. Quarter four is important because it projects company results into 2021. And I'm going to comment the results, as you know, as usual, at the constant exchange rate to avoid any misunderstanding due to the exchange rate that you know has been impacting company results significantly in 2020 because of mainly the dollar fluctuation. So in Q4, The first news that we need to discuss is that the ex-COVID business is flat in spite of the second pandemic wave that hit North America and Europe. And this is a good news. This means that the routine business that suffered significantly during the first wave was now did not really suffer in the second wave. So hospitals and patients especially have learned how to manage their routine testing in spite of the COVID situation. Now, if you look at the COVID business, for us, Q4 was a record quarter. We had over 100 million euros of revenues, which is very significant. The majority of these revenues were related to our molecular COVID product. The rest was serology. And not only revenues were, record revenues in Q4, but also placements of systems. So if we look at the Excel, We have placed throughout the year more than 600 systems and in quarter four, placement was 180. So again, good job. Almost a third of the systems were installed in quarter four. When it comes to the liaison NDX, so the liaison platform, similar picture. 650 MDX placed in the year and 200 placed in quarter four. So the rate of placement is not stopping and it continues to progress. When you look at the different geographies, clearly we see a strong growth in US and Europe. This is the effect of base business stabilizing and additional COVID business. China still weak. but a significant improvement compared to previous quarters. So China, as you know, for us, as for many other companies, did not represent a COVID opportunity because of the Chinese regulations and the fact that none of the foreign products for COVID have been approved by the China SFDA. So let's look at, now that we understand the 2020 and Q4, let's make some statements about 2021. And let's discuss COVID and how we see it. So, and let's start from molecular diagnostics. We continue to believe that molecular testing remained a gold standard. You know that today, Two technologies are offered to the patients. One is molecular, the other one is antigen testing. And you see molecular because of performance remaining as the gold standard technology inside the labs and inside the hospital labs, whereas the antigen opportunity picked up significant business outside the hospital, so in decentralized setting with point of care testing. I think it has been brought to everybody's attention recently, the fact that the point of care antigen testing volume has been softening significantly. I think one company recently reported 30, 40% decline in antigen testing. If you remember how we did comment technologies for COVID in the last few quarters. We always said that we believe that antigen would have been the first to decline, whereas we believe that there is more resilience on the molecular testing, and this is simply because of the fact that it remains within the hospital, the reference technology. So in order one, We see that our ability to ship roughly a million tests a month of molecular COVID tests remain. Because we don't see decline in volume as far as our molecular testing is concerned, clearly And you saw from the guidance indication, we don't know what to expect in the second half. There are lots of variables that may affect this. But for the time being, we keep seeing a strong revenue flow coming from molecular. Now, let's talk about the second component of our COVID strategy, which is the antigen test. As you know, we have developed an antigen test that was launched in Q4, and that is for routine labs, so no point-of-care routine labs on the AreaZone XL platform. The product has been CE marked and has been submitted to the FDA for EUA approval. EUA approval has not come yet. This is because the FDA is taking longer than before to approve these products. Today, they are really focused on point of care and OTC. We believe that we are close to receiving approval in the next few weeks, but we are still waiting, although we are commercializing in the U.S. the product under the U.N. according to the FDA policies. What is the strategy for this product is very clear to us that the success of this product is related to the ability of some of the large commercial labs to gain contracts from state for antigen testing for reopening. So we see that there is going to be an opportunity for consolidating antigen testing for not critical care into commercial labs. You have seen that LabCorp, a week ago or so, they issued a press release where they said that they have a partnership with for the liaison antigen test, which has been implemented in other labs. And we, together with LabCorp, we expect that LabCorp will get contracts from the reopening, and then we may benefit from volume coming in the U.S. with the antigen test. In Europe, we have seen volumes increasing, although soft volumes, and this is because in Germany there has been a shift from the laboratory testing more into the point of care and OTC testing. And therefore, we've seen interesting volumes and interesting business develop across Europe, but less than what we originally projected, although it is getting traction in Europe. We don't have the registration of this product still in some of the emerging countries where we believe this is going to be a substitution in those countries where molecular is too expensive. substitution of the molecular testing and we expect that they're going to receive some of these approvals in q1 q2 now let's talk about the third component of the strategy which is the antibody testing as you know we did comment in the last calls that we believe this business so antibody testing for covet is going to be the one that will stay with us and within the three for many years And this is because people are getting vaccinated and there is going to be a need to test, um, uh, individuals and see how long the vaccine is going to last, how long the protection is going to last. And in fact, we see this happening. We see a strong demand for our antibody testing. We see diabetes growth, and we have recently launched our new generation of serology IgG assay, which has been developed on purpose to pick up response after vaccination and as for immunostatus monitoring of patients after vaccination. In fact, this is the only product on the market that is using the full length trimeric spike protein of the virus, which is the same protein that is used by the different vaccines, RNA vaccine or the DNA vaccines, and these vaccines actually elicit the production by the different sense of the process that they recognize by the immune system and that develops an immune response. So we believe that we are online, in line with our expectation with antibody, and we are expecting the approval of the new product in the US in the coming few weeks. Now, I would like to talk about the other strategic projects that we have. As you know, throughout 2020, sometimes without too much success, we've been trying to draw the attention of everybody to the fact that COVID is certainly strategic, but then they are soaring as a COVID company. And therefore, we have announced throughout 2020 certain partnerships, which are strategic. I remind all of you the one with Mehmet. And also, we announced the fact that we were completing clinical studies of key products that would have been launched in 2021. Specifically, Lyme has been, the product has been CE Mark and Lyme Quantiferum, sorry, has been C-mark and the product is being launched these weeks when the season starts. We have a lot of expectations about this product. Clearly, the product will require a specific reimbursement to be issued in certain countries like Germany, for example, that is a big market for line. We are working with our partner to expedite some of this work in order to obtain the investment and marketing effort. In order to let the product known to the physician is in place. So, so we are confident that line as discussed in our long term strategic plan will become one of the key products of our T-cell strategy that we developed with our partner QIAGEN and will go in parallel with the tuberculosis product to create a franchise around T-cell. I remind all of you that we believe with QIAGEN since the beginning that TB has been a success, but there is a need to expand around TB, the concept of T cell testing, and this is the commitment that the two parties have discussed many times in the last quarters. Now, the second one is the TB. As you know, tuberculosis was approved in the US at the end of 19, 2020 has been An interesting year, we are notwithstanding pandemic, we were able to close good business in the US together with QIAGEN going after the send-out business. Today, there are millions of tests that are sent out from the periphery from hospitals to the core lab, and our strategic intent was to actually provide these customers with the opportunity of bringing the test in the lab, which happened with success. In 2021, we will see a conversion of certain key customers to the Liaison technology. The conversion has been managed with the support of QIAGEN. And it was done because we believe that It's very interesting for the two partners to continue to provide customers with the opportunity to use this technology versus older technologies or other technologies on the market, which clearly are not so favorable in terms of throughput. The third element that I would like to comment on is hepatitis and HIV. As you know, the full line of hepatitis HIV was approved by the FDA by December, and we are now in the US in full launch of this product line. There are a handful of companies in the US that are able to provide these products on a fully automated platform. And we believe this is going to be key in the strategy for Vaya Soren because we will be able now to serve all the install base of Excel that we installed in 2020 because of COVID in the US now with this product line. So we believe there is going to be an accelerated pickup of these products by customers. Not to mention and not to forget the fact that in the U.S., we work with Beckman. Beckman is our partner for HIV and hepatitis, and they also will pursue a campaign to go after the large accounts with an automation that now Beckman has, and we'll be able also to implement the use of the neosomic cell together with the Beckman instrument. So 2021, let me just summarize, and then I'm going to leave the podium to Mr. Fedron. 2021 is going to be an interesting year where we will continue to pursue the opportunity for COVID. As I told you, we will see what is it going to be, the second half. For COVID, we really don't know because the second half testing opportunity is going to be a combination of, I believe, a few elements. The first one is the variant that, as we have seen now, is creating a third wave in certain European countries, still not in the U.S. The second element is vaccination. How fast is vaccination going to be performed in Europe? It looks like in the U.S. The U.S. is ahead. Europe is delayed, and this does and will have an effect in terms of the adoption of diagnostic testing volumes. And the third element is the next season of flu, where we believe that there is going to be a transition from COVID-only product to a mini-panel concept where flu and COVID are going to become routine testing during flu season to monitor respiratory diseases. So now I'm going to leave the podium to Mr. Pedrone, who is going to take you through the numbers. Thank you.

Thank you, Carlo, and good afternoon, good morning, everybody. In the next few minutes, as usual, I'm going to walk you through the financial performance of DSR in 2020, and I will also make some comments on the contribution of the fourth quarter. As usual, I'd like to start with what I believe are the main highlights of the period, So we closed the year with an increase in revenues at constant exchange rate of 27%, some two percentage points above the full year guidance, which was calling for an increase of 25% CER. Q420 confirms the trend of the previous quarters, a steady recovery in the ex-COVID business, minus 3% year-on-year at constant exchange rate and a strong contribution of the COVID franchise. mainly driven by PCR testing. Carlo already went through all of these elements. As expected and anticipated during the last quarter course, Q4 gross margin ratio at 67.6% of revenues is below what we saw in the previous quarters, mainly because of higher COVID molecular sales, which enjoy slightly lower margins. 2020 full year gross margin at 68.4% is for the very same reason slightly lower than 2019, which closed at 69.2%. 2020 full year EBITDA at 385 million euro of 43.7% of sales is slightly better than the guidance. The increase towards 2019 at constant exchange rate is 42%. Q4-20 EBITDA closed at €128 million, or 47% of revenues. Let me please remind you that during Q4-19, we booked some one-off restructuring costs, which makes the year-on-year comparison at plus 94% CR even more favorable. We keep maintaining our ability to generate a very, very healthy free cash flow, €232 million in the year, vis-à-vis €118 million in 2020. The net financial position is positive for €305 million with no debt and €340 million positive cash position. The difference is always between the two is driven by the right of use introduced by IFRS 16. Finally, the Board of Directors approved to propose the distribution of an ordinary dividend of €55 million, equal to €1 per outstanding share. Now, if we move through the main items of the P&L, 2020 revenue at €881 million grew by 25% or €175 million compared to 2017. COVID revenues contributed for €266 million, 75% of which were PCR-driven. Q4 revenues at €271 million grew by 50% compared to Q4 2019, 55% CR. €100 million or so revenues were COVID-related, whereas the ex-COVID business at €170 million confirmed the recovery we have discussed about. It is expected that the appreciation of the euro against almost all the currencies in which we do business has caused some material effects in the second part of 2020, therefore closing the year with a negative effect of more or less 15 million euros. The gross margin at 603 million euros grew by 23% compared to last year, closing 2020 with a ratio of revenues of 68.4%. 80 basis points below 2019. The decrease in the ratio of revenues is mainly driven by different product mix, lower CLIA sales and higher molecular sales, which we said enjoy slightly lesser margins. In case of the molecular franchise, 29% of total 2020 sales, as discussed, has been mainly driven by COVID tests. 2020 operating expenses at €267 million or 30% of revenues have increased by 2.6% of €7 million compared to last year. The OPEX ratio of revenues is 30% vis-à-vis 37% of 2019. This variance is the result of two effects of opposite sign. On one side, especially in Q2 and Q3, 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 do business. On the other side, we have sustained an increase in costs, mainly driven by the investment we made in the U.S. at the beginning of the year and the commercial team aimed at supporting our hospital strategy. 2020 other operating expenses at 12 million euros are higher than 2019 by 1 million euro, or 11%. As discussed during Q1 call, the biggest driver of this variance is an unforecasted loss we suffered in South Africa. 2020 EBIT, because of what just described, closed the year at 324 million euro, with an increase compared to 2019 of 106 million euro, 49%. The EBIT ratio of revenues is at 37% vis-à-vis 31% of 2019. Q4 at €111 million increased by 112%, or €59 million compared to 2019. 2020 tax rate at 22.7% is higher than 2019, which closed at 19% because of the booking in the last quarter of the previous year of the deferred tax assets related to the intangibles which we moved to Italy in connection with the shutdown of the Irish manufacturing site. Net of this positive one-off 2019 tax rate would have been substantially in line with 2020. 2020 net result is 248 million euro or 28% of revenues compared to 176 million euro of the previous year. therefore recording an increase of €73 million or 41%. Lastly, 2020 EBITDA at €385 million is better than last year by almost €110 million. The EBITDA ratio on revenues is 44% vis-à-vis 39% of 2019. Q4 closed at €128 million or 47% of revenues. The substantial margin improvement toward last year, both in the full year 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, which in Q4 accounted only for 26% of sales. Let me now please to the net financial position and the free cash flow. We closed the period with a positive net financial position of €305 million and €340 million cash. During the year, the group generated €232 million free cash flow vis-à-vis €180 million in 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, higher capex driven by the acquisition of the TTP license and higher installments of our platforms, and all of this partially offset by lower tax cash out, mainly coming from a positive phasing of the TTP. on a positive phasing of tax cash out and the one-off 16 million euro exit tax we paid in 2019 when we closed our Irish manufacturing site. Lastly, let me please move to 2021 guidance. As usual, at previous year constant exchange rate, we expect for the first half of 2021 total revenue to increase at a rate of around 40% and an EBITDA margin at around 45%. Please consider that because of the impossibility of forecasting the speed of the rollout of the SARS-CoV-2 vaccination program, the unknown effect of the potential mutation of the virus, and the possible development of new treatment, we are not in a position to provide a full year guidance. We will review our projection as time goes by and provide a full 2021 guidance in case and when we will have a better visibility on the evolution of the business in the remainder of the year. Before concluding, please let me remember you that the sovereign financials are highly exposed to the U.S. dollar and even more so now that the United States represents 40% of our group sales. Therefore, remember as a rule of thumb that for every one cent movement of the dollar against the euro, Diasorian revenue moves by about 3.54 million euro on an yearly basis. Now, let me please turn the line to the operator to open the Q&A session. Thank you.