Biotage AB (publ)

Good afternoon, everyone, depending where you are joining us today for the Biotage Q3 2024 earning calls. My name is Frederic van der Hagen, CEO of Biotage. I joined the company a little more than six weeks ago, and I'm thrilled to share with you our solid Q3 2024 results. Joining me today on the call is Andrew Kett, our CFO. Here's the agenda for the call today. After a short summary of who we are as a company, I will provide the highlights for the Q3 results, and Andrew will second me in detailing those. I'm thrilled to join the company, as BioTage is a very resilient business model. It does equipment, services, and consumables that addresses sample preparation challenges across multiple markets. From applied markets such as forensic, food, and environmental, all the way to drug discovery and development for the biopharma industry. In that particular market, we have solutions from discovery all the way up to downstream processing. BioTage has continued to evolve its portfolio to capture market opportunities from small molecules to the new modalities. We are pleased to announce that Q3 has posted results that are aligned with the consensus on revenue and EBITDA. Barriotage delivered a solid 12% organic growth over prior year and a 9% reported growth. Astraea is now completely reported as organic. Our recurrent revenue, coming from services and consumables, continues to drive our overall results, while our equipment sales remains somewhat weaker, driven by China and conservative spending from our pharma customers in Europe. As many others have commented, we are seeing some customers deferring equipment spending decisions to quarter four. We have made some progress in addressing our backlog in peptide synthesis, but the demand continues to outpace our current manufacturing capability. As we speak, we continue exploring solutions to address A short note on our revenue split by geographies perspective. North America posted strong results benefiting from a diversified portfolio of businesses. In that region, the analytical testing and diagnostic business is delivering a steady growth year over year. We're also progressing well on our priorities. We did rescale our OPEX in China to a new normal. We are continuing expanding in the area needed to support our growth, such as expanding our manufacturing site in Il-Daman, aiming for commissioning the site in October. We did also open in Canton, nearby Boston, Massachusetts, our new clean room facility that will help us to attract an attractive cologne packing market. Lastly, we are pleased by the progress made in the market with the product we recently launched. like a Toxiclear used for endotoxin removal, AstraAdept trial-to-adoption focused on early adopters, which is an high-flow technology for antiviral vector verification. We have recently launched our BioTel Select ELSD detectors, which has been very well received in the market. And we continue addressing the opportunities on PFAS testing with the Medisa that is well received from a customer's point of view. I would be remiss if I didn't close by mentioning that we have signed up for the SBTI targets through the quarter three. Let me now turn it over to Andrew, who will provide you more color on our financials. Thank you.

Thank you, Frederick. Good morning, everybody. The Q3 report, along with the presentation, is now available on our website and the investor section, and then on actual reports. The business had a good Q3 performance. We delivered positive organic growth of 12% and had strong recurring revenues. Our underlying EBITDA was ahead of last year, and we were super efficient at turning that adjusted EBITDA into cash. Our business is in good shape and built on solid foundations. Our small molecule and analytical diagnostic testing businesses delivers predictable revenue stream, industry-leading gross margins, and solid underlying EBITDA and cash generation. Our large molecule business gives us access to higher growth by processing market and the ability to generate superior revenue growth and attractive margins. coupled with our expansive modality offering, our enviable broad suite of innovative must-have solutions and a balanced geographical profile gives us an attractive competitive offering. In the quarter, we saw similar trends to what we've seen and communicated throughout the year, a gradual momentum building in our key Americas and EMA markets and continued headwinds in China. Our drug discovery and development business delivered reported revenues of 349 million sec, up 13% or 16% organically for the quarter. For the first nine months of the year, it delivered reported revenues of just over 1 billion sec, up 25% or 4% organically. We are working at pace with our supply partner to resolve the previously reported production capacity constraints for our peptide systems. While we are gradually seeing a sequential quarter on quarter increase in production capacity, there is still work to be done to match supply with the current level of demand, with this holding back some reported growth in this area. Our analytical and diagnostic tested business delivered reported revenues of 141 million in the quarter, up 1% or 5% organically. For the first nine months of the year, it delivered reported revenues of 451 million, up 12% or 14% organically. In the quarter, geographical-wise, of core Western markets of America and EMA accounted for 86% of total revenue, with APAC accounting for 14%. China represents less than 5% of our revenue. In Q3, we had recurring revenues of 351 million, representing 72% of total revenue, up 20% over Q3 23. We saw FX headwinds in Q3 of approximately 50 million SEP, or 3%, holding back our revenue growth. The first nine months of the year, geographical-wise, our core Western markets of America accounted for 85% of total revenue, with APAC accounting for 15%. So a very similar trend we saw in Q3. We have recurring revenues of just under 1.1 billion sec, again representing 72% of total revenue, which was up 39% over 2023. Our gross margins at 63% year-to-date are robust and ahead of last year. In the quarter, which is traditionally quieter, we did see some transitory changes in product and customer mix. What I would say is do not get too fixated on one particular quarter as our business goes long. Yes, margins in Q3 were a little lighter, but in Q2, they were a little stronger with an averaging of 63%. Importantly, we continued to deliver attractive adjusted EBITDA. In fact, in Q3, we delivered an adjusted EBITDA of 124 million, up 6% over Q3 23. The first nine months, we've delivered adjusted EBITDA of 380 million SEC, 17% above 2023. In Q3, we delivered adjusted cash flow from operations of 153 million, up 18%, representing 124% of adjusted EBITDA. For the first nine months, we've delivered adjusted cash flow from operations of 399 million, up 61%, representing 105% of adjusted EBITDA, demonstrating clearly our ability to successfully convert profits into physical cash. We finished the quarter with gross cash of 370 million and net cash of 120 million. In the year so far, we funded acquisition and outpayments of approximately 220 million, dividend of 128 million, and investments in intangible and tangible assets of 132 million, approximately 480 million in total. We've been able to do that because we generate good margins, good profitability, and importantly, we can convert that profit into cash. We continue to invest in our operational facilities to increase manufacturing capacity to enable future attractive growth. In the Isle of Man, additional capacity will come on stream in Q4. In Boston, our new facility has clean rooms so we can more fully exploit the column packing market, as well as warehousing for rapid delivery of products to our customers. Additionally, Our continued investment in research and development underpins our steady stream of product launches and cements our reputation for thought and innovation leadership in the markets we operate in. To conclude, we've delivered a very solid Q3 and year-to-date performance, and the business is in good shape as we enter Q4. Nothing in this Q3 announcement alters our view of the business. The fundamentals are super strong and biotage is well placed and we're confident of delivering on our full year 24 targets. We're now open for questions. Operator, we're now open for questions.

If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Carl Noren from SEB. Please go ahead.

Yes, hello and good morning, Frederick and Andrew. A couple of questions from my side. If we start on the gross margin here in the quarter, as you mentioned, Andrew, a little bit weaker than what we've seen before. I say it's driven by mix. I'm just wondering if you could be a bit more explicit and tell us a bit what is the driving here in the quarter? Because it seems like

instrument sales are still down and consumables are growing so i'm just wondering a little bit if you could comment on on the gross morning um yeah i mean i say it's it's we saw just uh some um some transit changes um particularly you know in our service um you know kind of our service business ebbs and flows and sometimes we have a a a a pickup in the amount of um amount of work we have to do under our service contract so you know in a quarter on a on a on a yearly basis that that evens itself out but can move around in in the quarter um and also so that you know we had a few um kind of um you know kind of just the mix it can be slightly different in q3 it doesn't alter our view carl of of the full year You know, kind of year to date with 63. So I wouldn't kind of think that just Q3 is a harboring of kind of weaker margins. We don't believe that. There's nothing we see in our business that suggests that. So we still feel confident that we're going to see margin growth year on year. And we have done and we'll continue to see that. So I kind of I wouldn't read too much into into a slightly lighter view. Q3 gross margin. Let's say we're able to protect the EBITDA, we're good at converting that EBITDA into cash. I know there's been a bit of commentary this morning on the Q3 margin. I wouldn't read much into that and see it as this at the beginning of some sort of trend. No, it's not.

It's very clear. And just follow up on the S3 gross margin. Is it possible to say anything on if that was accretive or dilutive to the gross margin this quarter? Accretive.

Yeah, you'll start to see the Australia gross margin now being higher, and we expect that trend to continue.

That's good. And it leads into my next question here, as we're heading into the seasonally strong Q4 for Austria. So I'm just wondering a little bit how we should think here going into the fourth quarter. I mean, you said historically that seasonality should come down, but I guess we should still expect quite a big ramp up here sequentially in Q4. So do you expect yourself to be able to reach close to last year's Q4 in the large molecule segments?

Yeah, you know, kind of what yourself and others have got penned in for Australia, we, you know, we say we're not shying away from that. You know, we've got a solid business. We've got a good pipeline. We've got backlog. So, yeah, I mean, absolutely. We, you know, are super excited about the Australia business. You know, it's got great potential, great growth trajectory. So, yeah, we, you know, it's, You know, the Australian business, you know, on a year-by-year basis is growing over 70%. Yeah, and we still think, you know, plenty in the tank yet. So, you know, Q4, so, you know, the numbers that are out there for Q4, you know, we're comfortable with.

Sounds good. And then last question here on the analytical testing business. I think it seems to be down a little bit. versus the previous quarters. I'm just wondering if there's anything specifically impacting that business. At least to my numbers, it looks a little bit softer than what I've seen before.

Yeah, I think particularly the analytical testing business, Carl, it's, you know, we have a very, very strong position in the Americas, in the U.S., yeah? And typically within the Q3, the holiday period, it can get quieter. So, you know, I think it's just that. It's a particular quieter quarter, particularly for that analytical testing where we're selling into the U.S. path labs.

Yeah, that's great. And just the final one, if I may, on the gross margin again. For the full year, I mean, you're down 63% now year-to-date. Do you think that's a fair assumption for the full year as well, around 63?

We think there is a bit of legs left yet in that.

Okay. That's great. Thank you for answering my questions, Andrew and Frederik, and have a good day. Good luck. Thank you, Carl.

The next question comes from Ludvig Landgren from Nordea. Please go ahead.

Hi, Fredrik and Andrew. Three questions for me, if I may. Continuing a bit here on Astraea, I noticed sequential growth continues in Americas, or at least looking at the large molecule segment as a whole. I assume that with this process chromatography offering, I suppose that new customers typically order small columns and then eventually scale up. Could you elaborate a bit on what type of customers are currently buying these products in the US?

Yeah, I'll take up the question. So we're fortunate to have a solid business that addresses multiple modalities. So we are targeting plasma customers, but also we are targeting customers that are addressing large molecules such as monoclonal antibodies, but also we have been active in expanding our customer base within the cell and gene therapies for lentivirus cleaning and endotoxin removal. So we have a pretty steady strategy that aims to expand the number of customers to whom we seed the product. And you are straight to the point. We need to seed before the process development occurs so that when the customers adopt the technologies and ramp up later in production, we can enjoy a steady stream of revenue throughout the life cycle of the molecule. So that's the strategy, and I think the strategy has proven to be successful so far.

Okay. But then specifically, would you say that order volumes are typically smaller in the US compared to Europe, for example, currently?

No, actually to the opposite. We are performing well in the US. I think this is a global industry. So there's a lot of early seeds that can occur in one geographies and ultimately the pharma industry may decide to try to do a tech transfer into another geographies or operate through a CMO. So what, again, I would reiterate what is important to the business, which is to see that the process development, sometime the process development may occur in the US or sometime it may occur in Europe. and the molecule ultimately and the revenue may come later on into another geography. So I think what is important is not so much where the revenue does occur at small scale, but whether or not we are penetrating the downstream processing. And from that perspective, the more molecules we are getting specified is the more likely we are to see one of those materializing into revenue. And the revenue can come in Europe, can come in US or in Asia.

Okay, thanks. That's very clear. And then a bit on equipment. I suppose this, it was up sequentially, I think you're in Q3, but I suppose it's negatively affected by China. Would it be possible to elaborate a bit on this business excluding this region and also maybe if this is mainly related to small molecules then or like the split for small molecules versus analytical testing?

Yeah, analytical testing is characterized by a higher share of recurrent revenue, so it's pretty steady from that perspective, and it's contributing to a strong growth, in particular in America, given the nature of the space we operate in that region. When it comes to equipment specifically, it's true that the biggest contributors for the equipment decline is still coming from China, as we compare to the prior year. We think that we have bottomed down right now in China, and that's what I said. We have rescaled operating expense to this new normal, I would just say. As we think about Europe, it's mostly on the scale-up of small molecules that we have seen. This is, again, product-related to CROs mostly, and it's a business that's a little bit more higher volatility when it comes to those. The fundamental of the business remains solid, but the customers don't change columns on a large scale for small molecule flash chromatography every other week. So I think you need to see that business as being a little bit more volatile, but it's coming from the small molecule, that's true.

Yeah, okay, thanks. And then final one, just on the peptide synthesizer business, you had a backlog, I think, of 35 million in Q1 and saying that you're sequentially improving production now. Like, is currently the order intake somewhat in line with production or Is the order book still building here, or how should we view this?

So I think we have seen a huge demand. I think it's well known that the industry is very much into the peptide and building peptide libraries. So I think we have seen an increase in the demand substantially higher than what we have been able to address through our Rampage manufacturing. So we have increased our production capacity by 50% with our partners. But it's nowhere near what we see the market potential can be. So I think we are working diligently with our partners and exploring various opportunities for us to continue expanding our opportunities to capture market share there.

The big of our backlog, although we are kind of increasing that capacity, our backlog is at similar levels. So yeah, we can't get them out quick enough.

OK, thanks. That's helpful. Thanks for taking my questions.

The next question comes from Matthias Heggblom from Handelsbanken. Please go ahead.

Good morning. Two questions from me, please. So the cost initiatives in China, can we quantify what that means in terms of numbers or structure? And then secondly for you, Fredrik, in the CEO statement, you talk about sharpening the strategy. Any early thoughts on what that entails or when we can expect more on that topic?

If I do the first question, Jess, yeah, I mean, we kind of regularly look at our businesses. China is obviously a particular focus for that business to remain profitable. We've taken heads out. Our aim is to bring that cost structure as a percentage of our revenue in line with pre-COVID levels, you know, we will be getting there in Q4. So, you know, we, yes, China is, yeah, China is a declining business, but we still have a business there, you know, and then, you know, we are looking at, you know, kind of the new way of doing business in China and what does that entail for us? What do we need to do? What returns can we make? But obviously in the immediate term, we have taken immediate cost actions to kind of align its cost structure with the business it's got now, you know, we'll, we'll continue to do that in, in every business that we, that we see to make sure that, you know, we are, we are trading, uh, we are trading profitably.

Yeah. And, and I guess the question was about sharpening the visioning and the strategy of the company. I think, uh, This is a great company, and we say we want to address all the modalities from small molecule all the way up to new modalities. This is a pretty broad space when it comes to new modalities. As you know, today we address, we have worked on cell and gene therapies. When you come with Astra, we have worked on to monoclonal antibodies, we have worked onto peptides, oligos. I think we need to be, we need to recognize that we will always be limited in terms of resource. So sharpening the spreading and the vision for the business is really to think about which market are the fast growing market that we can platform our technologies to penetrate when it comes to the applied market. but not get dilutive onto that. So I think we've provided a couple of examples of progress we're making. Most of them are front end to mass spectroscopy, if I would describe to those that can address multiple applied opportunities, both in the US and Europe. And if we come about the small molecule drug discovery and development, I think we'd like to build onto the fast-growing segments, the attractive ones, but also the ones that are large in scale. So as illustrative of that, the monoclonal antibodies is a very large market that we ought to address. oligos, peptides, sorry, is also a very attractive market that we have building blocks to strategically continue building upon. So I think that's what I mean by sharpening the strategy. It's just defining across the multiple modalities where we have a technology that we can build upon and where the market is attractive and growing and where we can take and leverage or go-to-market strategy to really engage with the customers. There are some segments where we are a little bit less present that I would deprioritize over those segments.

And a quick follow-up, if I may. Andrew, is it possible to quantify the portion of sales that comes out of China? Is it less than 5% in this quarter or year-to-date? It is, absolutely.

Yeah, yeah. China is, as I mentioned before, China, yeah, it's it's a slight headache for us as it is for all, but for many other businesses, you know, such as TECAN and so on, it's, it's a major migraine for us yet. We, we, um, we, we're seeing falls, but it's, it's, it's a small part of our business now, very manageable. Um, so yeah, from, from the heady days of 15% plus we down to less than five.

I'm trying to follow up, um, the, um, pharma customer base in europe and and holding back instrumentation orders in the quarter what what's the confidence in that coming across in the fourth quarter and they are the science already in october or is that dependent on final part of the quarter which is typically the case we historically have a a backlog view as we enter the quarter so backlog is is at a similar level uh as as priority and prior quarters so i think uh

And as we go through the quarters, we have a funnel. We review the opportunities diligently with our commercial team. Historically, we always saw an order flush at year end. Now history has also proven that last year we didn't see that coming. So we are reasonably prudent as we are looking at the business. And we'll probably have to work with our customers to make sure that when we have opportunities, we capture those. But I can't tell you the level with certainty whether or not those customers will place the order. So I think it is an ongoing process of opportunities to review. I think we haven't lost uh opportunities which is a very good sign it's depending on on the customers to release their budget that's very helpful thanks so much the next question comes from carl noren from seb please go ahead hi again i just had a follow-up on uh on the peptides i didn't really hear what you said there but

Could you just comment on the deliveries you've had here of the backlog in Q3? And do you think that will be higher in the fourth quarter compared to Q3?

I think we increased our delivery by 50% over what our history was. So I think you... We believe we have reached a plateau right now that is driven by the resource and the capability of manufacturing that our partner has right now. So we don't envision that Q4 will be higher than what is our ability to deliver in quarter three. It is a journey. We have started to increase. We have to continue working with the partners to get to the next plateau of our operation. We believe the market is attractive and large enough for us to continue expanding into that field. And that's what we're working on. But it doesn't occur overnight. So I think that we need to find the resource. We need to find the materials. We need to train the people. So it's a steady ramp up. But I would take a conservative view for quarter four, which would be we want to be less than what we have done in quarter three.

And obviously Carl just commented that the backlog is the same. So while we are increasing production, the backlog is maintained, if not slightly increasing. So that just tells us there's some great demand out there.

Yeah. And just another one on the small molecule side. I mean, looking at the numbers here, it looks like America's back to growth again, while EMEA a bit weaker. Can you just comment on the overall demand trends within small molecules? Are you seeing a continued strong or come back in demand, or has it leveled off, or what would you say?

I think we are, as I said, if we trip up the component of China and the scale of countries, I would say Europe would be probably not as solid as the US is right now, but flat to moderate growth already. We, by no means, small molecule will be driving growth as much as the new modalities. I think that's well known. All the large molecules are addressing large therapeutic areas that small molecule cannot. But we believe the worst is behind.

Yeah, if you look, Karl, at the, if we look at the kind of decline in, The organic decline in system cells in Q2, it was like minus 10, and it's now like minus 5. So we are seeing light. It is easing. We just see that it continues to start easing further. So I think there will be, you know, I suppose never say never, but, you know, we think that, you know, the worst is behind us now. And those, you know, we hopefully will start turning that, you know, dropping that minus in front of the number soon.

Yeah, okay. And one question on the level of personnel in the company. I just noticed it was a slight increase around a quarter, you know, 675 employees. Do you think that will remain approximate at that level in the coming years? waters as well, you think, or do you see an immediate need to increase the headcounts?

I think we will add resource for the critical gaps that we may have in order to execute the strategy, but we'll continue being mindful about how the business can evolve or what could be the volatility in some of the areas of the business, and we adjust resources to the business so that we can continue delivering strong results.

Clear. Thank you.

The next question comes from Ludwig Lundgren from Nordia. Please go ahead. Ludwig Lundgren, Nordia, your line is now unmuted. Please go ahead.

The one for me as well, if I may just looking at the the Australia bookings here for Q4 I think you typically book up this manufacturing slots ahead, but could you elaborate a bit on how this is looking compared to last year.

yeah I mean we yeah I mean it's it's it's it's it's a similar we have a similar profile. You know we we. yeah I mean I don't think there's anything. you know, different from what we've been seeing from last year and into this year. I mean, you know, the plant is running well. We've got, you know, some good bookings, solid bookings. We've got some very, very solid pipeline that we, you know, kind of, we are expecting to close, you know, progressively as we go through the quarter. So it's, you know, No new news. It's well as she goes.

And if I may add, I think I had a privilege to review the final review with the commercial leaders. I think they have a very robust process, very good customer intimacy to understand what is needed by the customers and when, which enables the site to level load at its capacity and allocate the slots appropriately so we can address the demand when it occurs.

Okay, thanks. Sounds good.

As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. There are no more questions at this time, so I hand the conference back to the speakers for any closing comments. Please go ahead.

Well, thank you all. Apologies for the slight delay starting the conference, but hopefully we've shown that we've delivered some very solid Q3 results, you know, organically, our business is growing 12%. I'm sure if you cash your net round the market, you'll struggle to find businesses delivering organic growth of 12%. You know, we've advanced, you know, we're delivering solid year-to-date gross margins. Up on last year, we're delivering solid adjusted EBITDA generation up both in the quarter and last year. And very, very importantly, we are turning those profits into cash. Our cash generation is above our adjusted EBITDA. I think we're going to Q4 very confident. There's nothing in this announcement and results that suggest that we're shying away from anything that's our targets. We are very well placed. The fundamentals of the markets are very strong. I think Baratage is very well placed. And we're very lucky, I think, to attract the caliber of Frederick and his experience and knowledge of the market into our business. And I'm sure that's going to have a major positive effect as we go into Q4 and in future years. So thank you very much for joining us.