DiaSorin S.p.A.

Good afternoon. This is the call school conference operator. Welcome and thank you for joining the DSR in 9 months 2021 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 the S4IN. Please go ahead, sir.

Thank you, operator, and good morning or good afternoon to all the participants, to the third quarter 2021 results. As usual, I will make a few comments about the business, more qualitative, and then Mr. Pedron will The CFO of the company is going to take all of us through the numbers. Now, this is the first quarter where we also have Luminex included in our numbers. So in order for everybody really to understand how the business is trailing, I'm going to make my comment without Luminex at the beginning, and then I'm going to give some remarks on the Luminex performance. So if we look at... did business at constant exchange rate and without Luminex. In quarter three, the growth was 10% versus Q3 of 2020. If we look at the different technology, CLIA X vitamin D had an outstanding performance, plus 30%, and we're going to see that this is the result of a successful placement in all the different geographies, primarily U.S. and Europe. And the programs that today are driving the success of our CLIA business are the specialty and the stool program together with the TB deployment and the program that we're running together with QIAGENT to convert and grow the TB franchise around the world. Vitamin D is down 8.7% and this is clearly related to the quest loss that happened in 2020 at the end of 2019 and now is in full effect starting from this quarter. As far as molecular is concerned, the business overall grew 5.5% versus last year. Clearly, the vast majority of the business is COVID-related, and I'm going to make some comments about the COVID later on. Now, if we deep dive into the geographies, and we start from Europe, Europe grew actually 20% year over year, quarter over quarter, sorry. CLIA is including vitamin D, so all in is up 18%. COVID molecular is up 30% versus... quarter three in 2020, and this is due to the fact that, as I think many other operators in this industry have already commented about, the European COVID business has been more flat and so less affected from volume increase or decrease over the last few quarters. We do have an installed base of MDX systems, which today sits primarily in Italy, in Spain, in France. And this is due to the fact that when we had to launch the system during the COVID pandemic, we clearly gave to these geographies preference over other geographies due to the limitation in number of systems that we could manufacture. Today, that installed base in Europe primarily into hospitals and it is used to triage patients. It is used on symptomatic and therefore today we are not at risk of losing some of the volume that typically was related to screening of a symptomatic that was happening in the high-throughput platforms in the core labs. When it comes to U.S. and Canada, the business overall is flat, but I think we need to read between the lines in terms of how technologies are performing. CLIA is up 36% versus quarter three last year. Again, deployment of the hospital strategy with the TB product and the stool again and all the specialties that are really leading the charge is allowing us to penetrate this segment If you remember, at the end of 2019, we had invested $5 million in creating a dedicated cell phone for this segment, and I think that today we are reaping the benefit of the fact that we do have a manual product that fits very well the space. The TB is certainly a product that is interesting in that space. Today, there is lots of send-out in that space that, due to the viability of the azomex, now hospitals can bring in-house and save money versus the send-out opportunity. So, overall, the CLIA strategy is working very well in the U.S. It is becoming our primary geography around the world. When it comes to the molecular business in the U.S., it's flat-ish. It's actually decreasing, I believe, 1% versus Q3 last year. And this is due to the fact that there has been a softening of volumes, clearly, from the peak that the industry enjoyed in Q1 of 2021. I think what is not worthy is that when it comes to the instrument sales, we are €7 million down versus last year, and this is explainable by the fact that all the emergency funding that was available in 2020 to buy instruments, and now it really dried down. And so today we are converting. Clearly, we are not selling systems any longer. We are placing systems under the reagent rental business model, which is what, as you know, we've always been doing before the COVID pandemic and the emergency funds became available. So overall, the business is flat, but the CLIA is clearly very successful in the US. Now, if we move to China, year to date is plus 28%, quarter three is plus 5%. So we see that in China, There is a recovery compared to the debacle of 2020, although I believe that there are a couple of things that are not working in the geography. First thing is that there is volatility testing volumes, and this has to do with the fact that in order to fight the pandemic, there are continuous lockdowns in different provinces and cities. And every time there is a lockdown, certainly the routine testing is suffering. The second effect that is not worthy is that we start to see, as everybody else, price effect due to the fact that these provincial tenders are entering into effect. There has been a report which has been issued a couple of days ago by one of the primary research firms in the U.S. that was actually published. Saying something interesting about these tenders, Diasorin has been one of the companies that has been on the winning side, so we won a certain number of provincial tenders, although it is very clear that the pricing structure for some of the routine assays, like the thyroid and oncology products that today are really suffering the competition from local manufacturers, the price structure certainly is very different from what we used to enjoy when we were going to each hospital offering our products. So I believe that as far as China is concerned and as other manufacturers have expressed in the last few days, I believe that the future for China is quite uncertain and quite difficult really to predict what is going to happen in the next few quarters in this geography. So I believe that from an overall geographical perspective, though, today the U.S. does represent 50% of the diasorian business, and strategically, if you remember when we were commenting about the Luminex acquisition, one of the reasons why we bought Luminex is because we strongly believe that the market today guarantees growth, good pricing, and a reward for innovation in the U.S. And Diasorium is very well positioned to enjoy this opportunity, again, through the Luminex acquisition. Now, I'm going to talk about COVID a little bit, the elephant in the room. So today, COVID, including Luminex, and again, sorry for changing the perimeter, but I think this is important. COVID for Diasorium does represent today 30% of the overall business, Year to date, the business has been growing nicely, around 55%, 57%. When it comes to the last quarter, it's plus 5%, certainly with different dynamics between the U.S. and Canada and Europe, which I've been discussing before. It is quite difficult to predict, in my opinion, what is going to happen to COVID, as I think, again, other operators have been commenting in their quarterly results. But today, again, when it comes to Europe, we see a steady demand. And when it comes to the U.S., we certainly see a decrease in testing volume compared to peak of around 30%. But the demand is, at this point, relatively flat in the last two to three months. So we now need to really wait and see what is going to happen during the upcoming flu season or respiratory season. Today, I always provided you with also volume, testing volume in terms of manufacturing. Today is a combination of diasorin and Luminex. We are shipping roughly 1 million tests a month of COVID products. Then I'm going to make a comment about Luminex. As you know, we have incorporated now Luminex for the full quarter and roughly 90 million euros of revenues in the quarter. The acquisition has been completed in July. Since then, we have started to work with the Luminex management on the integration. We have... recently announced the new organization where we do have now a management team that is a combination of Diasori and Luminex managers that will have the responsibility to lead the company forward. We are completing the integration plan that will be presented to the board of directors in December, and it is going to be disclosed as part of the December 17 investor day. when in broad terms we're going to talk about what we intend to do Luminix and then we intend to leverage all the assets that actually Luminix has brought to Diasorin. I make one more comment about the Verigine 2 platform that, as you know, is one of the key platforms or key technologies that we acquired through this acquisition. We intend, we are planning to have a soft launch of the Virgin 2 in 2022, ex-US, so in Europe, and then we're going to have all the submissions in the US where we expect to launch the platform in 2023. The platform is going to be renamed, so the Virgin 2 name is going to be soon abandoned and is going to be substituted by the new name, which is Liaison Plex, And this is because this platform does complete the product portfolio of Diasorin that I remind you is going to be made of the MBX+, which will be the platform that can offer small plexes, the liaison plex, which will be the one that will allow us to develop high-complex panels and the Aliazone Nest that will be the one that we are going to use for decentralization of molecular testing, alongside the ARIES platform, which is the legacy from Luminex, the legacy platform from Luminex that today has been successfully launched in Europe, primarily in the U.S. with an installed base of roughly 70 systems today placed in some European countries. One thing that is worth noting is the fact that when we look at the customer base in the U.S., what is very interesting is that Luminex is primarily offering its products, I'm talking about the IVD products, to the hospital market. There are over 700 hospitals that the company is selling to in the U.S., And Diasorin has roughly 250 hospitals that we are serving and supporting. And the interesting part is that only 70 hospitals in the U.S. are overlapping. And so we believe that there is a very interesting opportunity for cross-selling products in this hospital base. You know that Diasorin made of the hospital segment one of its primary targets to develop the U.S. market. The reason why there is no overlap between the two companies is because Diosorin did develop its store base using the adiason XL. Adiason XL certainly requires certain testing volumes in immunoassay and the hospitals that typically were running this volume were large institutions in the U.S., whereas as far as Luminex is concerned, they've been serving this market really starting from a mid-low throughput system, which is the Verigine platform, the Verigine One platform, and the Ares. And therefore, they traditionally have developed their business in the mid-size segment areas. in the U.S. And this provides a phenomenal opportunity, in my opinion, to the liaison access. As you know, we are waiting for the approval of the TB assay on the access. We already have all the other products, the stool products and the PCP already ready to go. And as soon as TB is going to be migrated there, and we expect to hear something from the FDA by year-end, Then we are ready. We have an available market of over almost 700 institutions that we can go and sell the excess to. So I'm very excited about this cross-selling opportunity that the Luminous Acquisition has provided to us. Now, I think now I'm going to turn the microphone to... to Pier Giorgio, and he's going to take you through the financials, and then we're going to open up the session, the Q&A session. Thank you.

Thank you, Carlo, and good morning, good afternoon, everybody. In the next few minutes, as usual, I'm going to walk you through the financial performance of PSO in the first nine months of 2021. And I would also make some remarks on the contribution of the third quarter and on the impact of the Luminex business. whose acquisition has been completed on July the 14th. Again, please note that we are consolidating a full quarter of Luminex into the Assyrian financials. So, said that, I'd like to start with what I believe are the main highlights of this period. On July the 14th, we closed the Luminex transaction for a total equity value of $1.8 billion, and starting from Q3 2021, Luminex financials are consolidated into the Assyrian ones. Please let me remind you that the acquisition has been financed by a mix of a bank term loan for 1 billion USD, 5-year tenure, and a zero-interest convertible bond for 500 million euro, with 2028 maturity. Revenues, as reported, so at current exchange rate and with the contribution of about 91 million euro of the Luminex business, grew by 41% year-to-date and 51% in the quarter. The growth at constant exchange rate and scope of consolidation in the nine months is 29% and 10% in the quarter. These numbers, as we will see, are in line with the high range of the guidance we provided in July. Q3 2021 gross margin at 65% is below last year, which closed at 68% because of the expected dilution of the Luminex business. The year-to-date margin at 68% is substantially in line with 2020. Likewise, Luminex consolidation is at a dilutive effect on Q3 adjusted EBITDA margin, which closed the quarter at 41% vis-à-vis 46% of 2020. Once again, this is in line with our expectations and the guidance we provided back in July. Lastly, we keep confirming our ability to generate a very healthy free cash flow €224 million in the first nine months of the year, with an increase compared to 2020 of €71 million, 46%. The net financial position is negative for €1.05 billion, with a €330 million cash position, positive cash position. Let's now go through the main items of the P&L. So, September year-to-date revenues at €850 million, 9 million euros grew by 41% or 249 million euros compared to 2020. Three drivers behind this variance. Sales ex-COVID and Luminex grew by 65 million euros or 15%, 17% at constant exchange rate. Then we have the contribution of COVID sales, which grew by 93 million or 56%. The growth at constant exchange rate is 60%. Luminex which is a difference in scope of consolidation which accounted for 91 million euro. September year to date gross margin at 580 million euro drew by 38% compared to last year, closing the first nine months of 2021 with a ratio of revenue substantially in line with 2020. As said at the beginning of my remarks, the difference with the previous year is mainly driven by the inclusion of the Luminex business in the scope of consolidation. This is even more clear when we consider the gross margin ratio of the quarter, which closed at 65% compared to 68% of 2020. Let me please remind you that this variance, again, is in line with our expectation and the guidance provided. September operating expenses at €243 million grew by 24% compared to 2020, with a ratio of revenues of 28% vis-à-vis 32% of the previous year. The increase in the OPEX ratio of the third quarter from 28% of last year to 31% of 2021 is due to the very same reason highlighted for the gross margin, the consolidation of Luminex into DSRI numbers. Once again, let me remind you that this is in line with what we forecasted, and we are expecting this ratio to diminish as the integration process will move forward. and we will deliver the synergies discussed during the call we had when we announced the Luminex deal. Year-to-date, our operating expenses at €23 million increased by €12 million compared to last year. This variance is almost entirely driven by the one-off expenses related to the acquisition, which accounted for about €16 million. As a result of what just said, September EBIT at €314 million, 37% of revenues, has increased compared to 2020 by 47%, or €101 million. Interest expenses at €14 million are almost completely driven by the bank, term loan, and the convertible bond to support the Luminex acquisition. Let me please remind you that this number includes about 3.5 million euro of non-monetary interest driven by the convertible bond. This is just due by how the IFRS is dictating the way to account for interest on convertible bond. Even though, let me remind you that the convertible bond was issued with zero monetary interest rate. The tax rate at 24% is substantially in line with 2020, which closed at 23%. And this brings us to the net result, year-to-date net result, at €229 million or 27% of revenues, which is higher than previous year by €67 million or 41%. Lastly, 2021 adjusted EBITDA at €383 million or 45% of revenues is higher than 2020 by almost 50% or €125 million. The variance at constant exchange rate is positive by 51% with a ratio over revenues of 45%. The adjusted bid duration, the quarter, is 41% and is lower than 2020, which closed at 46% because of what we said before, the dilutive effect of the consolidation of the Luminex business. And as I said before, for the OPEX, let me remind you that this is in line with our expectations. I want to make this very clear. and it's coming from the lower operating leverage in the Luminex business. Let me now please move to the free cash flow. As usual, in the first nine months of the year, the group generated €224 million of free cash flow, vis-à-vis €153 million of 2020, with an increase of 46% or €71 million. As discussed back in July, I believe it is worth underlining that In 2021, we have had a much higher tax cash out compared to 2020, €78 million vis-à-vis €23 million. The difference has been driven mainly by two elements, a different phasing accounting for about €15 million and about €35 million driven by the higher profit compared to the previous year. Lastly, let me please move to the 2021 phase. as usual, at previous constant exchange rate. So, in light of the performance of the third quarter and what we expect for the remainder of the year, the guidance for 2021 has been increased compared to July. In order to make the numbers comparable with 2020, we will also provide, as we did in July, a breakdown of the revenues between DSR and Illuminex Business. So the new guidance is calling for a total combined revenues increase at around 40% and a total combined adjusted EBITDA margin at around 43%. Besides, the assorted revenues are forecasted to increase at constant perimeter of consolidation and exchange rate by around 18%. For concluding, please remember that the Australian financials are exposed to the U.S. dollar, as we always remind everybody, and even more so now that the United States represents about 50% of the total group sales. Therefore, as a rule of thumb for your modeling, consider that for every one cent movement of the dollar against the euro, the Australian revenues move by about 6 million euros on a yearly basis. Now let me please turn the line to the operator to open the Q&A session. Thank you.

Thank you. 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 touch-tone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question is from Alexander Berglund with Bank of America. Please go ahead.

Thanks for taking my question. Actually, it's two. I'll start. I just wanted to get your thoughts on this kind of recent news on the COVID pill and how you think that might affect testing for COVID, if at all. I mean, I always assume you need to have a positive COVID test before taking any pill, but I wanted to check if you think that kind of maybe on the margin, it could actually increase, you know, some testing as people get less cautious, or if people that are kind of a bit more resistant to vaccine might consider not taking a booster shot. So that was my first question, and I'll let you answer it, and I'll follow up with another one.

Yes, I'll take the question look. You know, the day they announced the pill, I think the oil industry lost over 5%. The company that is making the mRNA for the vaccine lost 19% that day. So I think there has been a lot of overreaction. When it comes to testing, as you said, arrive fully so. You don't get, this is not an aspirin, so you're going to get it under medical advice. And you're going to get it once there is a confirmation that you have contracted COVID. To be honest with you, I don't think that when it comes to volumes, testing volume, this is going to have a positive or a negative effect more than I believe the fact that the vaccination and the fact that now the boost is going to be made available certainly is going to affect testing volume, I believe, next year. especially when it comes to the asymptomatic testing, right? Because let's not forget that a lot of testing and testing volume came from asymptomatic testing. There is testing that will remain. It has to do with the fact that everybody admitted to a hospital is going to get tested. You're going to have professional testing. You're going to have airline testing, da-da-da-da-da. But believe me, I'm not losing sleep on the effect that the pill is going to have on the business. I think the COVID business, as said, is going to be affected by other factors.

Thanks for that. And then just kind of moving on to kind of the base business. I mean, I had a couple of feedback today that, you know, some people were kind of expecting a bit more kind of all the recovery of the base business, especially kind of if you if you can look at it compared to 2019, so looking at non-COVID. You know, I was just going to get kind of your sense, and you kind of mentioned a little bit of what's been going on, but if, you know, how are your kind of expectations of kind of non-COVID business recovery, and how are you kind of seeing, are you seeing kind of any kind of inflection points in the trends, given now that we're already quite far into the fourth quarter? If there's anything you can comment on that, how it's doing right now.

You are referring to 2019. Look, if you compare 2021 to 2019, I think there are two elements that make the comparison, the overall business comparison difficult. The first one is that we are missing a very large vitamin D contract that now the effect is going to be felt throughout 2021. And then it's going to go away, clearly. The second effect, though, that everybody is forgetting is the fact that in 2019, we had FT Steel, an ELISA business that was coming from Siemens. 2019 was the year when we were still shipping the ELISA that we did not convert to the liaison. And all that business pretty much evaporated in 2021. So this is why I keep saying if you really look at the, you need to look at the component of the business, which has to do with the clear growth, you need to look at vitamin D. And in the vitamin D element, as I said, minus 8.7%, there is a negative effect of Quest and a positive effect of the fact that some of the positive impact of COVID and COVID testing for vitamin D on patients. And then clearly you have all the molecular part, which has to do with COVID. So I don't understand why you don't see the growth of the base business, because to me it's exactly the opposite when it comes to the Excel 440 placements year to date. So again, we're going to be placing over 550 systems Considering a slowdown of China, which is telling you that placements are not slowing down in the other geographies, actually they are picking up. The CLIA business, and again, and the success of some of the programs we are conducting together with some of the partners, like the Cajun, or internally developed products is growing very, very nicely. And on top of it, when it comes to the base business, we are weeks away from launching the MIMET SA. You know, we are the only company that will be able to carry that product on the platform. And very excited about that. Last but not least, as I did comment on the liaison access, we have 700 hospitals in the U.S. that today are showing customers. And we are on the verge of launching the liaison access in the U.S. with E.B., and the rest of the menu. So I'm very excited, to be honest with you, about the base business.

Thank you very much. Appreciate it.

Carlo, if you can just add a comment for the benefit of Alex. You know, usually we've always looked at the CLIA X vitamin D and X COVID as a prophecy of how the base business is going. And I believe I didn't mention it in my remarks, but if I look at Q3 data, CLIA X vitamin D and X COVID over 2019 is growing by almost 20% at constant exchange rate, 19% to be precise. So this is just to confirm all of your comments on the growth of the base business.

Thank you.

The next question is from Hugo Solveig with Exambi and Pipariba. Please go ahead.

Hi, guys. Thanks for taking my question. I have one on Verigine 2. Carlo, you mentioned in the call a 2023 US launch. Can you maybe give us a bit more detail on the exact timeline and phasing for this launch? Should we assume that, similar to Europe, you will have a soft launch period in the US during which you will probably upgrade existing customers? So just wondering when we should expect sales to kick in from the US from the Verigine 2. And what menu would you expect to have by 2023 in the US and in Europe? And one question on China. China is up 5%. Can you maybe remind us here what business lines are impacted and how should we expect the recovery? And one last on the margin, use three parts for us, Luminex on the top line. Can you maybe help us understand what are the moving parts on the EVDA margin and what would have been the margin excluding Luminex? Thank you.

Okay. In terms of colors on the Verigine 2 or the Liaison Plex launch, I think you will need to wait. until the December 17 investor day, because I believe we're going to be more specific about this. Today, there are five panels that are in development, the respiratory included clearly, which has been extended to the COVID product. You have the blood culture, three panels. You have the GI panel, and then you have the CNS panel. that is the one that was where Luminex started development later than the other. The venues about the Verigine 2 is that the company intended to start launching the product starting from the end of this year, but due to the fact that the manufacturability of the cartridge and the instrument is not where it should be in terms of being able to face the demand that we foresee for this instrument we decided that we want to make an investment into bringing up all the lines that today are sitting in Chicago not validated moving away from manual manufacturing into the manufacturing line that is validated and is the final manufacturing line and this certainly is generating delays vis-a-vis the launch but we also believe by the same token it is guaranteeing a more robust product. As far as the good news is concerned is that product development has continued in parallel and now rather than launching the system with just one panel, we plan to have the completion of the menu happening very rapidly after launch. Certainly, this is the benefit of the delay in the cartridge and the system availability from an industrial point of view. In terms of positioning, in terms of expectation, I think you need to wait a few weeks until we unveil everything at the investor day. As far as China is concerned, plus 5%. Look, as I said, there are three things that are happening today, and they're not happening today. I'm sorry. I think I already heard a few calls from other companies, and everybody is pointing in the same direction. And it's price. and is a protectionism of the government vis-a-vis the local suppliers. When it comes to price, and we already did comment on that, there is an effect of provincial tenders, which is really resetting the base for some of the two products. When it comes to the protectionism of the Chinese government, well, you can read the financial time, but it is very clear that today There is a preference of the Chinese government to the Chinese suppliers when possible. There has been an acceleration of a strategy that, if you remember, was set in place with a target date of 2030 of having 50% of the medical supplies made in China. I believe that there is today a desire and an ambition to actually make this happen much faster than we thought. and as far as we are concerned and as far as how this is going to affect the business look i think short term there is going to be an effect of the business in chinese business because there is really nothing you can do if a provincial tender is asking you to be a chinese manufacturer and you're not and so you are excluded from the standard by the same token I believe that we've initiated, as you know, over a year ago, the construction of a manufacturing site in Shanghai, which is proceeding. And I believe that what this is teaching to all of us is that you cannot be half pregnant in China, so you have to be perceived as a Chinese local supplier with products that are also directed to the Chinese market, which in some cases is different from what we offer. in the U.S. and in Europe. So fundamentally, I believe that we are at a crossroad today where either you decide that you develop a Chinese brand with Chinese products or you're going to be strategically excluded from that market. And so the discussion we're having internally is that we really need to develop now a strategy that goes behind what we had in mind and developing a Chinese set of products and Chinese manufactured products just dedicated to the Chinese market.

I believe, Carlo, there was a question on margins, so I will take it for Luminex. So we are not going to disclose a detailed margin for the Luminex business going forward, but if you just do some reverse engineering on Q3 numbers, comparing to Q3 2020, what you would see is that Luminex gross margin for the quarter is around, let me say, 55%, 60% compared to the usual margin, which was 68%, 69%. And if you go down to the beta level for the quarter and you do a similar reverse math, you would get to a number which is around 25%. Again, this is quarter one. This is without including all the synergies which we discussed about and which will come from the integration process of the two companies. One last comment. This is a touch better than what we modeled and what we used for our guidance, so I believe we are absolutely comfortable with the numbers we're seeing.

Okay, thank you very much. And just a quick follow-up on those synergies, given that the regime to launch is now expected a bit more far out in 2022 and 2023. Should we expect the impact from those synergies to kick in a bit later than you usually thought? Thank you.

I believe so. Yes, yes, I will take it, Carlos.

I believe, again, we will be more detailed and we will give more information during the capital market day, which is going to happen one month from now. But when we did our modeling in terms of synergies, we gave a number which, if I remember, was $55 million on the cost side. We didn't share any kind of number in terms of revenues on the top line. I don't believe that any discussion we're having on Virgin 2 is going to affect our synergies on the integration process side. Quite the opposite in terms of revenue side. I believe Carol commented pretty well about the good opportunities we see from the 700 or so hospitals to which we can go and offer our access with our menu. which was not included in our modeling and nor in the synergies we gave. So, you know, I still, I don't think that this comment on veriting is going to have any effect on how we see the business going forward.

Okay, thank you very much.

The next question is from Maya Pataki with Kepler. Please go ahead. Yes, good evening.

Three questions from my side, please, if I may. Carla, you're moving up the revenue guidance to the upper end of where we were in H1, and yet when I listen to your comments about COVID testing and volumes, it doesn't really sound like you changed your view very much. So I'm trying to understand what is the reason that you expect now to come in at the upper end of the guidance. If you could just share some thoughts on that. The second question is, as usual, about the point of care rollout that you're doing in Italy. Can you give us some feedback on how it's going? What is the feedback? What is the demand that you're seeing for that product? And then I'll follow up with the third one.

I'm going to make a qualitative comment and then PG can actually add to this. So it's not, I believe that when, let me say the visibility that we have today with COVID versus what we had when we actually gave the guidance is really, is allowing us to be more precise. And I think it's fair to say that compared to a gloomy scenario that could have been possible, and some have anticipated with COVID in this flu season. I believe that quarter three was higher than everybody in the industry was anticipating. I believe, Maya, that the big question mark still is in Q4, but not necessarily whether Q4 is going to be lower than Q3. The question is whether Q4 is going to be higher than Q3 or not, and the impact of the differential diagnosis vis-a-vis the respiratory season, right? So everybody coughing from now on with some fever will have to go through some sort of differential diagnosis, and the question is, In those countries like the US where there is an extended, I think, availability of over-the-counter testing, I believe that that volume is going to be captured primarily by the over-the-counter test in other geographies where the over-the-counter, like in Europe, did not really pick up because not sponsored by the government. You're going to have an increase in testing volume because it's going to be done in laboratories where all the traditional operators are operating. So this explains, in my opinion, now the comfort that we have on the apparent of the guidance. But, Pigi, do you want to add more?

No, Carlo, that's exactly right. I mean, the rise in the guidance is coming from a better Q3. mainly driven by COVID. If you do the reverse engineering, what you would find out is that in Q4, what we are expecting in terms of revenues is a similar number to the one we saw in Q3, and with a margin of around in the quarter of 41%. So the visibility we have in Q3 is the actual, as you said, is the better COVID sales we had in Q3.

Maybe just a quick follow-up. Carla, you have been fairly negative in the first half of the year on what you anticipate to happen with the COVID pricing. Can you just comment whether you start to see some pricing pressure on COVID testing or whether that still hasn't really materialized?

No. Up to today, we have not seen any price effect, but this is because in the primary geographies where we operate, there has not been a reduction in reimbursement. So in the U.S., reimbursement continues to be same level as before. In Europe, in Italy, we're again a second largest geography for us, the government with the emergency decree. is actually the one buying the products at the fixed price from the different suppliers. So that will guarantee that there is no price erosion. Spain is very similar where we have contracts where for the time being the price stays as is. So I do not expect in Q4 price effect. With one exception, which is on the overall one, is the mix, because as you well know, in Italy and in Europe, we sell COVID at 20-25% price discount compared to what we offer it in the U.S. And this is, again, has to do with a different reimbursement system in the U.S. If I can move to the Aliazone IQ, which I think is your question, the program is proceeding in Italy, but I have to tell you that there is a problem, and the problem has to do with pricing, because I believe that there has been an overflow of products made in China that have been flooding the European market since we don't have the EUA approval system that I believe has sheltered the US from this. Today you can go to a pharmacy and Chinese are offering these products lateral flow without much sophistication at 1.3 euro. So you're getting to a point where you need to make a decision vis-a-vis do you want to make money or not on this lateral flow. And if you just sell it in the European market, I believe that the situation is very different when it comes to the U.S., where I believe one of the primary companies providing this is using $9 as an end-user price. So if you operate in Italy, today you want to really decide if this is worth or not. And so for the time being, we have been disciplined in terms of only providing this system to those pharmacies that appreciate the technology added value that we provide, so not a simple strip, but the instrument, the traceability, and so forth. But certainly the opportunity is shrinking unless you accept a dumping on price, which is not what you know we are famous for.

Okay. Thank you for that. And maybe my last question, now I remembered, I'm sorry. I was wondering if you could give us some qualitative statements around the growth in Luminex in Q3 for the various businesses. If you don't want to attach numbers, that's fine, but just give us a bit of a feeling how things are going.

Okay. I'm not going to attach numbers, and I'll give you a feeling. How about that?

Perfect.

Okay. Okay. First, you need to take into consideration that when you are comparing a Q3 to Q3 in this company, you're really comparing for certain product lines, apples with oranges. And let me explain to you why. In quarter three last year, so this company, as far as COVID is concerned, three products, of which one is the ARIES, which is the single-plex. The other one is related with VIRIGIN 1 and VIRIGIN 2, which were plex panels. Certainly, these plex panels are very manual, and they do not stand vis-à-vis products which are offered by competition. But back then, remember, there was shortage all over the place. So hospitals that had the Virgin One platform or the next tech, they were actually taking whatever companies were making available at them. So there has been a spike back then that today is not repeated, notwithstanding the fact that there is COVID testing volume simply because they migrated away from these more manual solutions to more automated solutions. So you need to clean the numbers of the company if you compare to Q3 last year from this spike effect that is not repeated. If you take that away and you look at the Plex business, it is fairly stable. And this is one of the reasons why, again, we bought this company, because there is $120 million of business ex-COVID effect between Verigine 2 and Extech that is a nice, solid business and is a business where we intend to build clearly growth with the launch of the Verigine 2 liaison plaques. When it comes to the Ares, I believe that compared to last year, we are miles better than where we were. And this is due to the fact that we have been able, the company has been able really to bring up the manufacturing volume and stability in manufacturing. And today we are really serving, we are selling like... around 230,000-240,000 tests a month of the cartridge. Back then, I think they were at 50,000, and so you understand that there is, and not because there was no demand, but because there was no ability to manufacture at that point. So that component is doing well, and also we keep placing some of the Ares system in Europe and in the US, so that is proceeding fine. When it comes to the LTG business, it's booming. I mean, if you look at the growth versus last year, it's around 20%. And the reason is that there is, you know, this business is not a life science business. And when we're going to have the investor day, we're going to clarify this. This has nothing to do with life science. This business fundamentally has to do with the fact that the multi-placing technology that this company invented 25 years ago has been made available to partners like Thermo Fisher, BioRat, Biotechnik, and so forth with instruments that the company makes. And the bits and the system have been utilized by these partners to develop products in the space of clinical research, or like for Thermo Fisher WAMLANDA in the case of transplant IVD. The fact that clearly some of these programs have been very successful. If I look, for example, at the Thermo Fisher business when it comes to all the protein testing, antibody testing business is booming. Or when I look at the fact that in life science, billions and billions of dollars have been poured and will be poured into the U.S., especially by the past and current administration, that explains why this business is really growing significantly. And I see this, again, as an opportunity in some of these fields to work with the partner and now launch programs which would include also liaison technology in some clinical spaces where we believe the multiplexing plus deliazone technology can really offer an opportunity to the partner. So it's a very profitable business, by the way. As you understand, it's a solid business. This company has been manufacturing for 20 years. So that component, I think, is performing better than what we expected. And we expect this to be in line in terms of growth, so not dilutive vis-a-vis the the group revenues growth in the foreseeable future. Again, Maya, we're going to be discussing this better in more specifics during the investor day.

Thank you very much.

The next question is from Peter Welford with Jefferies. Please go ahead.

Hi, thanks for taking my questions. I've just got two left, I think, please. And Firstly, just to try to understand with regards to the cost synergies, how much of that 55 million cost synergies is potentially, I guess, have to be delayed or slowed down, given the need, as you said, to invest in the manufacturing improvements that you're doing? Or should we regard that as any way of being, if you like, that just some of this investment you're doing in Luminex is more offsetting, if you like, upside or near-term upside to that £55 million? So I guess what I'm asking is, is the more expense you'd initially assumed required in the near term, or is that to some extent anyway offset by conservatism in that original £55 million aim? Second question then is just with regards to the Luminex platform itself. I think there's been a lot of discussion around one of the issues in the use of these cartridges has been that there's been a reasonably high relative to some of the peers error rate and issue using them. Just wondering whether you think the manufacturing changes that you're doing, will that also improve the error rate? Or is this purely focused on the manufacturing and the warning letter? And what steps are underway to potentially improve the reliability, I guess, of the Lubinex system before you roll it out under your name? Thank you.

Okay. So as far as the synergies are concerned, we said $55 million, and they're going to come alive in the next three to five years. I'm very comfortable about the synergies. I don't think there's going to be any delay. We actually took into consideration the fact that some investments are going to be necessary in order to achieve some of these synergies. very comfortable with that number, and I don't think there's going to be a delay, and it has nothing to do with the delay on Vari-Engine 2 manufacturing. When it comes to the Vari-Engine 2, the cartridge, I think you put it in the right term. Look, this company, when I learned about this company, is that it... It is still a notch away from being an IVD consolidated manufacturer. And this is clearly explainable by the fact that if you think about this company, it was actually built around the research, very successful research products. Today still, as said, the hardcore of this company, the Luminex, is that business, and then the company stepped in to try to step in to accelerate growth in diagnostic buying technologies or buying other companies around the globe, around the U.S., and bringing that IBD well-needed infrastructure to the company. The problem, I believe, that some of the companies that have been bought were small and not necessarily properly structured and certainly from a quality standpoint, from a quality system point of view, I believe, behind what are the expectations in modern IVT. I believe the 483 that was actually given to the company had to do with some of these delays or some of the way that the company was operating that we are in the process of correcting. By the way, we have decided that we are going to participate to, and we've been accepted to participate to a pilot program that the FDA has issued in the US where nine companies are going to be enrolled into a program where the agency together with a consulting firm that the agency has actually selected to use They're going to be working with a company for 18 months, and during those 18 months, we're going to redesign the quality system, and we're going to redesign it in light of what are the most recent expectations by the agency. And this, to me, is great because as far as Luminex is concerned, it's clearly focusing the people to the program. It's giving free access, by the way. to one of the top-notch consulting firms that the FDA is making available at no cost to the company to redesign the quality system. My expectation is that at the end of this process, 18 months from now, we're going to pretty much exit this program with a very modern, up-to-date, and FDA-blessed quality system. As far as the cartridge and what you said, again, I think you are very right. And the problem is that the cartridge we found and the manufacturing system we found over here was not really ready to launch a product. It was ready for a prototyping launch, which is not a tradition of diasoring. You know, being an IBD supplier, we look at products, finished products are launched to the market also. We are talking about a much bigger commercial infrastructure, so we would expect the ramp up of volumes to be faster than prior with Luminex. And we did not feel that we could really go to the market with manual manufacturing lines and a process that was very cumbersome, prone to errors. The company already ordered some fully validated, completely automated lines that now we are in process of validating and putting into operation. And then we are going to conduct clinicals then with a much better process under control. So long story short, we always, it's very clear that when it comes to multiplexing, this is not a space where we're going to be pioneering. is a space that today already has good solutions. And so the only way, in my opinion, to make it to that space is with a system that is very solid and stable with the complete panel. And what is very attractive of this system, in my opinion, is the FlexiConcept, the ability to utilize the FlexiConcept that provides flexibility of the launch of the panels, especially in the European countries, where you know all the reimbursements are different, and also in the US, where there has been recent pushbacks vis-à-vis the complexity of the panels that are offered by the competition. Clearly, if you want to make money with the Flexi concept, you better have your manufacturing costs under control, because certainly there is a margin effect on the Flexi concept, and this is why company more established that they are selling products cannot really go back to that concept. They will be killing their business. As far as we are concerned, we want to have all ducks in a row and the manufacturing costs under control before we launch it. So when we launch it, we are going to make money, right?

Sorry, I was on mute. That's great. Thank you very much. Very clear.

The next question is from Scott Bardot with Berenberg. Please go ahead.

Good evening, guys. Thanks for taking my questions. So I've got a couple of questions for Pier Giorgio, please, and one high-level question for you, Mr. Rosa. Pier Giorgio, just wonder if you can please qualify. I think at the last H1 update, you provided an implicit guidance for 15% growth for your base business, ex-COVID. I just wonder if you could now give us an update on what your expectation is this year on that basis. So outside of the scope of consolidation, ex-COVID, that would be helpful, please. And second question for you, Pia, Giorgio, please. So the revenues coming in from Luminex, I think, were better than we expected. And I think you talked about performance being pretty decent there. Can you confirm, please, whether Luminex's original guidance to the market of $480 million is still on track this year? And maybe give us a sense of what COVID was for Luminex last year and, roughly speaking, what you expected to be this. That would be helpful. I'll follow up with Carlo in a moment, if possible. Thank you.

So let me start with the first one.

I believe what we see, as we said before, increasing the guidance, the fact that we are now in the high part of the range has been driven by better Q3 sales and mainly by better COVID sales. I believe we have commented at length about what we see in the ex-COVID business, which is going very well. And in terms of the ex-COVID sales for the business for the remainder of the year, I believe that what we said in H1 was 15%, and I think that that is still the right number, the way in which we look at it. It's there, you know, 1% better, 1% lower, but that's the right number. In terms of the guidance for Luminex, the $480 million, I believe we said a few times that when we modeled the Luminex business, we didn't take face value of that guidance. We didn't take face value of the plan that they put together and which was made public in all the filing that followed the acquisition. So we didn't use the face value. We used a different one, a lower one. And we are a little bit better than what we modeled for this year. Then for 2022 and so on, you need to wait until the capital market day when we will be more specific. In terms of COVID sales, I believe Carlos said that overall in the quarter, the Asurion Plus Luminex COVID sales accounted for 30% of the total quarter sales. The Luminex part of those revenues, you know, we said 91 million euros of Luminex sales in the quarter. I believe a ballpark number on the top of my head, the COVID-related sales accounted COVID only, right? So I'm not taking a respiratory plan. COVID only is a ballpark 15 million euro out of those 91 million euros.

That's very helpful. Thanks, Pier Giorgio. And a question for you then, Mr. Rosa, please. There's been some market speculation about a potential tie-up combination between BioMaria and QIAGEN. BioMaria, of course, having an immunoassay business, Kyogen, of course, being a player in Quantiferon. So I wonder if you could talk to a little bit about your current relationship with Kyogen and whether any combination of these two companies could impact your ongoing relationship with Quantiferon and Lyme and so forth. Thank you.

Listen, Scott, since I'm in Texas, I think I can use the Fifth Amendment And I will not comment on this rumor and speculation because I think, again, today is a rumor and a speculation. I can comment on the fact that the relationship today with my good friend Thierry is... is doing very well. I believe that in Europe the program today is almost to maturity because together we have been driving the conversion and the growth of this business. And today we are working on actually QIAGEN still works on driving the demand. So testing volume now that we have almost 400 accounts today that are using the product on our platforms. In the U.S., we are at the beginning of the story. We had a very successful conversion of one of the two largest labs in the U.S. to the technology. We have today a very significant number of hospitals that are using the Excel, and together with QIAGEN, we are working and we are eagerly waiting for the approval of the excess because in the U.S. we see the mid-size hospital market as an untapped opportunity. A lot of these businesses send out and we can capture the businesses and the price range that really makes Cajun, both parties, very happy. I would like just to make one comment, Scott. to the famous 480 million that you were discussing about. Look, if you look at those 480 million, there are two components to it that did not materialize. And actually, they were in the expectation of Luminex. And when we look into it, we decided to de-risk. One is to do with the fact that in those numbers, you had a very good launch in 2021, which we know we expected not to happen when we make certain decision as diasoring about the launch of this product. The second thing is the fact that in that assumption there was a certain dynamic of increase of manufacturing capacity that eventually did not happen. And so today the volume is capped at 230, 240,000 testaments. I believe that plan was actually calling for an increase that would have taken the company behind that number. So if you really take out these two effects, and if you look at that number, I think we are running pretty much to where the company was saying, with, I believe, a better mix, which does contribute to profitability, which is an LTG performance, which is above expectations.

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

Okay, operator. Thank you. Take care.