DiaSorin S.p.A.

Good afternoon. This is the Coruscall conference operator. Welcome and thank you for joining the Diasoring 9-month 2023 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.

Thank you, operator, and good morning, good afternoon, and welcome to the Q3 conference call. As usual, I'm going to give some comments at constant exchange rate. about the three legs of the business, the immunodagnostic, the molecular diagnostic, and the life technology. And then I will let our CFO go through the numbers. So if we start from the overall results, the quarter was in line with the expectation. Growth excluding COVID at constant exchange rate, it was 2% in the quarter, over 3% year-to-date. So it's in line with... with guidance and expectations, although if we look at the three legs of the business, we have different results. So let's start from the immunodiagnostic. Immunodiagnostic continues to do extremely well for the company. In Q3, growth is 6%. and has been a very strong growth in Europe and in North America and some other smaller geographies, and notwithstanding some of the weakness that we continue to experience in the Chinese market. If we look at CLIA, which is the main component of our immunodagnostic, overall in the quarter, plus 10%. So we continue to experience double-digit growth in our main technology. If we go now by the different geographies, starting from Europe in the quarter, immunodiagnostic up 7%, with CLIA up 13%. What we continue to experience in Europe is a combination of a growing business, and sustained volume of testing in all the different geographies from Italy to Northern Europe. We see that the trend that we've been experiencing from Q1, which is an increase in testing volumes, continues. And we expect to see it as well in quarter four. We believe that this is not only a post-COVID effect, but I think structurally, After COVID, there is more testing that is requested by physicians, and this goes across all the different countries, as I said, and we don't see today in any particular geography any effort to cartel this increase in testing volume in terms of reimbursement decrease. which is pushed by government. So Europe is doing extremely well for the company and better than expectation. When it comes to North America, in the quarter, the immuno is up 13%. If we look at CLIA standalone, it's plus 16%. In line with the company expectation, this is the result of the hospital strategy that is working very well for the soaring because of the menu and the platforms that we have now approved in the US and certainly We also see a very interesting contribution coming from MIMET, which I'm going to comment later. So North America and Europe, the main geography, are doing very well. If I look at the rest of the world, the quarter is negative for immunodiagnostic of 4%, clear minus 3, which is, although a combination of plus and minuses, if I look at Brazil, Mexico, Australia, and India, which represents give or take half of the business, we see in quarter three immunodagnostic up 8%, with CLIA up 9%. So in these direct strategic geographies, we see the business continue to performing according to expectation. If we look at exports, what we see is we see a phasing effect in the quarter due to shipments to a very relevant country for us, which is Iran, which have been delayed and are going to be actually postponed to quarter four. So we see in that case a phasing issue, although it's impacting the quarter. And then if we go to China, we continue to see headwinds, which is a combination of volume and pricing effect. The value-based pricing is not in effect yet, but we see pressure on pricing notwithstanding that. And we clearly see the made in China effect for some of our mainstream commodity products. We don't have still visibility in quarter four, and certainly we don't have visibility in 2024 when the value-based purchasing procurement is going to be set in place. And so once the final ruling is going to be out, then I think we'll have better visibility on China. So overall in immunodiagnostic, our strongest market are performing as expected. And from a strategic point of view, I think we're collecting what we've been feeding in the last few years in terms of product development. In terms of future development, I would like to comment on Mement and Lyme. When it comes to MIMED, there has been, as you know, an acceleration in the marketing program, which has been decided at the beginning of 2023, where we have increased the number of clinical reps, which today are doing the product promotion in the market. digital marketing campaign and clinical studies to support the product. We see that the funnel of hospitals interested to implement the MiMed product is very rich. We are talking about over 200 hospitals so far that have been touching and evaluating the product. So we're building the funnel. And I think what is very interesting and strategic about this product is that roughly a third of these customers are actually hospitals that we did not have access before. So we're actually building a business on our installed basis system alongside with new customers. So it's a very, very important door opener for the assorting in the U.S. Lyme, we completed the clinical study, and I'm talking about the Lyme detect algorithm, which includes a B and T cellular response. We are completing the file, and we expect to submit on time by December in the U.S. to have possibly approval by the next Lyme season in the U.S., results are promising, and we believe that the combination of T cell and B cell response is really addressing the need of a better early diagnosis, which was what this product was intended for. Last but not least, I would like to comment on QuantiFERON. QuantiFERON is continuing to grow. I think that we mirror what QIAGEN is experiencing on the market. I know Kaj has been reporting and commenting on the success of Quantifiorum a couple of days ago, so I will not spend too much time. But certainly we continue to see an uptake and an interest in our technology in all the main geographies, so US, Europe, and everywhere else. And we certainly see an opportunity to continue to expand this business, as Kaj is saying, both geographically, because China is an untapped market, as well as from a technology point of view on migrating skin to blood. Okay, so as an overall remark, I believe the immunodagnostic franchise is doing very well. Now let's talk about the molecular diagnostic. Molecular diagnostic is performing as per expectation. Fundamentally, we have a stable business when it comes to multiplexing. The Virgin One technology is holding its position, slightly growing. Certainly, the limitation is the technology per se, which is very strong, but it's very manual as well. When it comes to the rest of the menu, so the singleplex, we see a growth of single digit around 5% of the portfolio. What we see are two negative effects. One is on the revenue line on instruments because we are comparing to 2022 where on the tail of COVID, we were still selling a lot of instruments and this is not happening any longer. So the lack of growth that you see there is mainly attributable to the sale of systems. The reagent line is, again, growing. The second element that we have discussed already in the last two quarters is the fact that the loss of a very large contract, the Luminex contract, had with a main lab in the U.S. which is now affecting Q3, Q4, and I think the tail of it is going to be Q1 next year, and then that business will go back to where it was. As far as what we are doing strategically with the business, I think three things which are very relevant. The respiratory panel has been submitted, as discussed a month ago, And the interactive review was started. And, you know, this is very important for us because through the first panel, we're going to get clearance also of the platform. And clearly, we expect now to be able to play in the U.S. market with this platform starting from the next flu season. When it comes to the liaison NESS, we have completed the preclinical study in Australia. And now we are evaluating the clinical study in quarter four and in 2024. But I think we're going to shed more light and give an update on this one when we're going to be discussing the long-term plan in December of this year. Last but not least, as we had anticipated in our strategic plan, Part of the synergy plan with Luminex was a consolidation of platforms, and so we have announced the discontinuation of the Ares platform, which was generating very, very low revenues and actually at a high cost of infrastructure that we're going to be removing the platform from the field. And this does have a non-monetary impact in this quarter. Very limited amount of monetary impact, like a bit over a million euro. And we clearly have a very positive benefit starting from next year on the margin of the company. But more than anything, we are progressing in the simplification of catalog that I think was one of the main issues with the profitability of the Luminex business run as a standalone business. Last but not least is the license technology. Let me remind everybody that this business is a B2B business primarily, so we actually sell to life science companies. I think most of the life science companies are using our technology. And we see this business flat, flattish. Year to date, I think we are in line with 2022 with a mix which is actually favoring the royalty line and the service contracts, which is expected, which means that fundamentally our partners continue to sell their reagents in their markets. Although we see today two very important effects. One is a decrease in inventory, so destocking when it comes to instruments and when it comes to some of the raw material consumable, we expect the destocking to be pretty much completed in quarter four. So we will start clean the 2024 We are clearly following what our partners are saying vis-a-vis this market, but due to the fact that we have a fairly wide portfolio of partnerships which include life science and diagnostic users, we see a less draconian effect vis-a-vis what some of the partners are saying when it comes to specifically biopharmaceutical and life science business per se. My message is this is a more protected business because of the diversification of partnership geographies and applications. And so certainly we were expecting growth, but we don't see the level of decline that some of the partners actually have anticipated in their numbers. Now I'm going to leave the microphone to Mr. Pedron who is going to take you through the numbers.

Thank you, Carlo, and good morning, good afternoon, everybody. In the next few minutes, I am going to walk you through the financial performance of the SORIN during the first nine months of the year. And I will make some remarks on the contribution of the third quarter. Please let me remind you that consistently with what we did over the past earning course, to better understand the performance of the business, I will mainly refer to adjusted P&L items. Therefore, sterilizing the impact of the Luminex integration elements. With that, I'd like to start with what I believe are the main highlights of the period. As Carlo just mentioned, during Q3-23, we started the sunset program of Luminex ARIES, a single-plex molecular business platform, offering to ARIES customers the possibility to switch to Diasorin MDX products. in line with the synergy plan we presented after the Luminex acquisition during 2021 Capital Market Day. I believe this to be another very important step toward the complete integration of our combined product offerings. This initiative will be accretive both at gross profit and EBITDA level starting from 2024 onwards. The total P&L impact of the ARES discontinuation is about €15 million, non-recurring one-off costs, the vast majority of which has been booked in Q3. Only €1.5 million of these costs will have a monetary impact. Year-to-date, the total revenue at constant exchange rate decreased by 15%, whereas the reduction at constant perimeter of consolidation, which means without the contribution of the flow cytometry business, has been 13%. which is in line with the full year guidance, is a combination of the expected falling COVID sales down by €156 million in the first nine months of the year, partially offset by a growth in the ex-COVID business in the first nine months of the year of about 3.5%. To be more precise, this variance, this 3.5% variance, is the result of the following elements. As we saw, a very good performance of the Muno franchise, which grew by almost 7% year-to-date and 6% in the quarter, despite some negative phasing in the shipments to distributors, which moved to the very first days of Q4-23. And as we saw, a weak performance in China. A flattish LTG business, which is expected after the spike in Q2, is recording a decrease in Q3 because of the anticipated destocking of consumables implemented by some major partners. And the general softness in the life science business, which has recently been reported by many players of the space. A negative performance of the molecular franchise and net of respiratory business is minus 7% driven by the budgeted loss of the cystic fibrosis business with one primary commercial customer in the U.S. And lastly, the molecular respiratory business recorded year-to-date a slightly better performance than 2022. September year-to-date adjusted EBITDA at 278 million euro or 33% of revenues is substantially in line with the full year guidance. and align with H123 margins. The decrease compared to last year, €114 million, 29%, is mostly driven to the drop in COVID sales and therefore to the corresponding worsening of the operating leverage. Lastly, we generated €160 million free cash flow in the first nine months of 2023, down 92 million euros compared to last year. This variance is mainly driven by the fall once again in COVID sales. Before moving to the P&L, let me please summarize for you the last episode of the so-called payback saga. As you might remember from previous earnings call, this measure originally introduced in 2015 by the Italian government and never implemented since then, has been eventually reactivated in September 2022, but only for the years between 2015 and 2018. Not clear yet what might happen, if anything, for the years after 2018. The Azorin, as almost 2,000 other operators, have filed a legal appeal to the competent courts to challenge this reactivation decree. The payment due date originally set for January 2023, after being postponed a few times, was eventually shifted to the end of October, so to the end of last month. Moving from this very complex situation, rich of legal controversies, the government introduced the faculty for each company to settle any dispute by paying 50% of the total amount requested by the region and by renouncing any pending legal action. In the meanwhile, the Administrative Regional Court in Rome has had a first hearing on October 24th, so just a few days ago, to discuss the merit of the appeals, and pending the legal conclusion of this litigation, has suspended the payment terms for the company that has made such a request, including us. The Australian, as many other companies, and this is the piece of news, has decided not to settle and to continue its legal dispute, which might take three to four years before reaching its conclusion. Please note that prior to September 22 reactivation of the payback mechanism, the Australian had already built in its balance sheet a provision based on the information available back then. and its relative risk assessment. Now pending more clarity on the legal front for the years following 2018, and considering the amount already booked for in our balance sheet in the past, we have not changed our provision for the period 2019-2022. And we have not accrued anything more from 2023. We will keep on monitoring the evolution of this complex and changing, ever-changing situation and update investors during the next quarter course. Now moving to the P&L. September year-to-date total revenues at €846 million decreased by 16% or €166 million compared to last year as we saw variance decrease due to the expected lower COVID sales and the disposal of the flow cytometry business. Year-to-date adjusted gross profit at €553 million decreased by 18% compared to last year, with a ratio of revenues of 65%, broadly in line with the same period of 2022, which closed at 66%. The curve out of the flow cytometry business alongside all the initiatives aimed at improving operations processes and containing costs, some of which part of our broader cost synergy plan, allowed us to preserve margins despite the reduction in COVID revenues and the tale of the inflationary pressure we talked about in 2022. I believe this to be a remarkable indicator of the relentless efforts we put in place to safeguard margins, which has been confirmed by Q3-23, which closed with a gross profit ratio of revenues of 65%, despite lower quarterly sales, as it is typical for the summer months, when most northern hemisphere countries enjoy their summer vacations. The difference with the reported, so not the adjusted, but the reported gross margin in the quarter is entirely due to the provision booked for the ARIES inventory write-off, as we have just discussed. September year-to-date adjusted operating expenses at €342 million decreased by 1% compared to 2022, with a ratio of revenues of 40% vis-à-vis 34% of last year. The worsening of the operating leverage ratio is entirely due to the reduction in COVID sales. Moving to Q3, adjusted OPEX decreased compared to last year by 7% or €8 million, with a ratio of revenues of 41% vis-à-vis 37% of 2022. This reduction is mainly the result of all the initiatives we implemented to control costs the positive impact of the cost synergy plan, which followed Luminex acquisition, obviously the disposal of the flow cytometry business, and eventually some positive FX effect. Adjusted other operating expenses at negative 1 million euro are better than 2022 by 7 million euro. The difference with last year is mainly driven by the combined effect of some positive one-off elements booked in the quarter and negative ones booked last year, such as the cost of the high-down project that we went through in 2022 and some material severance costs we had last year. The difference with Q3 reported, once again reported, not adjusted, other OPEX is mainly due to the write-off of the ARIs tangible and intangible assets, once again, as we just mentioned at the beginning of the call. As a result of what we just described, year-to-date adjusted EBIT at €209 million, or 25% of revenues, has decreased compared to 2022 by 34%. Adjusted interest income at positive €4 million is better than last year by €7 million, mainly because of improved yield on our cash investment, whereas the tax rate at 23% is in line with 2022. Year-to-date net adjusted result at €164 million, or 19% of revenues, is lower than previous year by 80 million euro. Let me now move to the net debt position. At the end of September 2023, the net debt was negative for 832 million euro, vis-a-vis negative 907 million euro at the end of 2022. This improvement has been mostly driven by the operating cash generated in the first nine months of the year and by the proceeds of the sales of the flow cytometry business, partially offset by the payment of just short of €60 million dividend to our shareholders in May 2023 and €28 million of Treasury shares buyback. Lastly, we confirm 2023 guidance, as usual expressed at previous year exchange rate. total revenues minus 14%, total revenues at constant perimeter of consolidation minus 11%, and adjusted EBITDA margin around 34%. Please let me remind you that 2023 guidance does not include any possible impact from the payback, as we just discussed. Since the company decided not to settle and consider in the old situation, which is in a flux, and the most recent news, we believe it is even more difficult to make any long-term reliable prediction on what is going to happen. Let me now turn the line to the operator to open the Q&A session. Thank you.

This is the Coral School 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 touchstone telephone. To remove yourself from the question queue, please press star and two. We kindly ask you to 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 Odysseus Manisiotis with Berenberg. Please go ahead.

Hi, thanks for taking my questions. Great to hear some encouraging KPIs from MIMED in the US. So first of all, could you touch on where these discussions with the 200 hospitals interested in the assay are focused? And is there a lot of willingness for adoption prior to the DRG unbundling? And on the back of that, your previous midterm guide implied this franchise could generate low to mid double digit million sales by 2025. Are you still confident this is achievable? And secondly, could you please remind us of the basic specs of liaison flex? I understand there's a cost advantage with the flex panels, but how does time-to-result and ease of use compare to the newer platforms that we've seen in this market? And at what timeline should we expect GI and sepsis to be in the market post-launch, pre-season next year? Thank you.

I'll take the question. Let me start from Plex first. Clearly, as we have described, the system, I think, is part of the course with other systems that today are available on the market. The differentiating factor, as we have again discussed, is the positioning of the system, which makes a more financially viable system. for some of the account to do multiplexing versus other solutions where there is, in our opinion, excessive cost in performing the plexing. When it comes to ease of use, is sampling result out, single cartridge, da, da, da, da, da. When it comes to MENU, we're not going to comment on MENU now. I think that we're going to give a more detailed explanation on our view on MENU development during the LTP presentation which will happen in December, around mid-December of this year. When it comes to MIMED, yes, I reiterated the concept that the opportunity we see is what you described in 2025. Bundling was not expected, unbundling was not expected to happen after two years after launch. And I think that today our partner is actually working to achieve that result together with reimbursement coming from the private insurance. I believe that clinically it should not be a surprise the fact that there is an interest because there are very strong clinical evidence provided by MiMed on the use of this product. And I think, as I stated several times, every time we have repeated our own clinical studies, we were able to pretty much confirm the very high negative predictive value that this test has vis-a-vis the bacterial infection, which is actually the added value for this algorithm. So I'm not actually surprised by the fact that you have is a perfect, I say, for hospitals. And I think that what we are understanding in terms of the position, which is interesting, is that there is a high level of interest on the small to mid-sized hospitals, where it is more complicated to penetrate the high end of the hospital market than but simply is because of technology availability, current platforms that are widely available in very large hospitals, but they're still lacking when it comes to the small, mid-sized hospitals, and where clearly there is more interest because with a very easy assay, with an immunoassay, you can actually discriminate quite rapidly between bacterial and viral. Again, we're going to give, I think, a more detailed view on MIME and the opportunity during the LTP discussion.

Very clear. Thank you.

The next question is from Maya Stephanie Pataki with Kepler Shriver. Please go ahead.

Hi. Thanks for taking my questions. I have a couple. Carla, just very quickly, when you talk about the discontinuation of the ARIES platform and consolidating the test menu on the liaison MDX, is that on the existing platform? Because I think you mentioned that the investor day in 2021, that you're planning to have a next generation platform in the market that would combine the test menu. That's one question. Then the second question is, You mentioned a delay in Iran for some of the instruments. Could you just remind us how big Iran is? I remember a long time ago, it represented enough big part that it had an impact on your revenues when there were the sanctions. And given the uncertainty or the instability in the region, we're just good to have it for modeling purposes. Then the next question, when you talk about lower instrument sales, on the molecular side, is that a swap from instrument sales versus instrument placements? So, you know, we've seen a high degree of instrument really being purchased during the COVID period and now we're returning to the reagent rental model. Or is it really a decrease in instruments that you're putting into the market? And then my last question is purely for clarification. When you talk about a strong growth in an immuno, you refer to CLIA. Is that CLIA X vitamin D or is that including vitamin D? Thank you.

Maya, long list.

Long list, I know. I'll repeat. It's Friday afternoon late, so I'll repeat if you have confidence.

No, no, don't worry. You're trying my memory. Okay, let's start from the last, which is easy. All the CLIA numbers known and given are with vitamin D inside. Right. And so I'm referring to the full clear franchise. So 10% does include clearly a decreasing vitamin D and which will continue forever. I believe as a combination, mainly at this point of pricing, because pricing continues to decline and a strong increase of all the other product lines. Now, second is Iran. Look, I don't want to give you remember. Well, we did suffer in the past from Iran. In this case, I honestly don't see an effect as we had back then. I think it's more a phasing of the shipment, but overall is around less than 10 million euro of business in Iran. It's all clear, by the way. When it comes to instrument, I'm referring to the sale of systems because, as you stated, and I think everybody is saying during COVID, everybody bought systems without tomorrow. And now, clearly, there is a slowdown, so there is no capital available any longer. And so you go back to the typical model of a regional rental. You don't sell anymore, and that line suffers from that. And the last question was Ares, right? So on the Ares, this was a very controversial technology and actually was one of the technologies that were sculpted by the FDA. And since the beginning, a combination of the size of the business, very limited, the fact that we had, with the exception of one S.A., We had everything on the MDX that we can offer to the customers. And the extent of work that our engineering had to do, you know, to take care of obsolescence of parts. And the fact that we don't see a future for this technology. All in, since the beginning, we said, let's... get rid of it, which we are doing elegantly. We gave 12 months last buy to our primarily U.S. customers. This technology was primarily in the U.S., and then we're going to clear the market from this technology. A great benefit in three ways. A, we are addressing, we are limiting the work that had to be done to redo all validations for the FDA. Second, we are limiting and free up resources of engineering facilities for the development of new platforms. And the third element, I think, we are clarifying for customers the portfolio of products that they need to run products.

Okay, thank you.

Thank you.

The next question is from Aisha Noor with Morgan Stanley. Please go ahead.

Good afternoon, Carlo and Pietro. Thanks for taking my question. My first one is on China. Do you have any early thoughts about what proportion of your testing menu could see VBP next year? And based on what you've seen so far, what magnitude of price cuts that could be seen? And the second question is on the U.S. hospital strategy. Where are you tracking against the 50 hospitals per year target? And how much would you say is driven by the doubling of the U.S. sales force you mentioned, I think, late last year? That would be helpful. Thank you.

Ayesha, good morning. Look, when it comes to China, today is a little bit over 5 million euros that would be subject to the current VBP in the 17 provinces. So it's relatively minor. What everybody expects to see is a price effect of anything that goes from 50% to 65%. and that's what I think today the expectation from the business is. So today is a relatively small effect, but it can be more than 5 million if it is extended in Beijing and Shanghai and the other provinces where a lot of our business is concentrated. When it comes to the U.S. hospital, actually 50%. was the old target. So the first three years, it was 50 per year, done. And then starting from 2023, our target is actually 75, 90, 90 for a total close to 250 new hospitals. And we're actually tracking above that number when it comes to 2023. So it's working really well.

Great. And then just to follow up with Pier Giorgio on the ARIES integration, You mentioned it could be an impact on growth and EBITDA next year. How big is the Aries business today? And if it is low revenues, then would it be a small impact on margin, or would that be countered by the fact that it has a higher cost structure? Just some thoughts on moving parts for 2024. Yeah.

So I would say, hello, Aisha, by the way, I would say that, you know, the board part number, in order to assess the impact on our EBITDA for next year, positive, obviously, impact on our EBITDA is a number between 5 and 10 million euros. That's what we are expecting. And that is coming from two factors. One, the fact that the ARIES, without COVID, the ARIES business was actually, you know, having almost a negative impact at the EBITDA level. whereas all the business that we will be transferring to the existing Diasorin MDX offering will enjoy much higher margins. So as a combination of those two effects, let me say, lower costs coming from the ARIS platform and much higher margins on the molecular platform, we are expecting to have a positive impact in the range of 5 to 10 million euros. next year.

Okay, thank you very much.

Thank you.

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

Thank you, operators. Bye-bye.

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.