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Edited Transcript of BCART.BR earnings conference call or presentation 5-Sep-19 12:00pm GMT

Half Year 2019 Biocartis Group NV Earnings Call

MALINES (MECHELEN) Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Biocartis Group NV earnings conference call or presentation Thursday, September 5, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ewoud Welten

Biocartis Group NV - CFO

* Herman Verrelst

Biocartis Group NV - CEO & Director

* Renate Degrave

Biocartis Group NV - Manager of Corporate Communications & IR

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Conference Call Participants

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* Alexandru Cogut

Kempen & Co. N.V., Research Division - Analyst

* Hugo Solvet

Bryan Garnier & Co Ltd, Research Division - Equity Research Analyst

* Lenny Van Steenhuyse

KBC Securities NV, Research Division - Financial Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Biocartis conference call on the results for the first half of 2019. Please note that today's conference is being recorded.

I would now like to turn the conference over to Renate Degrave, Investor Relations, Biocartis. Please go ahead, madam.

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Renate Degrave, Biocartis Group NV - Manager of Corporate Communications & IR [2]

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Good day, and welcome. Following today's presentation by management, we shall have a question-and-answer session.

At this time, I would like to turn the conference over to Herman Verrelst, CEO of Biocartis.

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Herman Verrelst, Biocartis Group NV - CEO & Director [3]

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Thank you, Renate. Good afternoon to everyone calling in from Europe. Good morning or good evening to people calling in from overseas. I'll be presenting today together with Ewoud Welten, our CFO. And before I start, let me pause a moment so you can all read the usual notices and warnings.

We will start today's webcast with a short strategy recap, followed by discussion on our first half 2019 results and following that, a general business update.

After that, we will discuss the outlook for 2019 and close with a Q&A session, where Ewoud and myself will take your question. But before I proceed, please allow me to make some introductory remarks and put some context on the first half year results.

We are a fast-growing company with ambitious targets that require expanding sales, R&D and manufacturing operations, all at the same time. And I think when moving fast, it can happen that you hit a bump in the road. And whilst we are making great progress on many fronts, we experienced such a bump in the road in our U.S. commercialization. Ambitions were high, as were expectations. And while reactions to the results published today are quite strong, we at Biocartis remain confident and focused on the long term. Analysis has been done on what happened, on what worked and what didn't. Actions are taken to address it, that we will discuss later in this webcast.

It happened, and we will correct for it. But I want to stress again that on many fronts, we continue to make great progress and strengthen our business. For example, today, we can highlight our progress advancing into the immuno-oncology testing space, both in respect to a key product launch as well as attracting and engaging key partners in this strategy.

We continue to have strong foundations. We're a leading innovator in a dynamic and fast-growing market, with a beautiful and unique platform, with a business and operating model geared towards increasing economies of scale as we will expand, and we are increasingly supported by strong ecosystems of partners around the platform.

Let's first dive into why we're here, on our mission. Targeted oncology therapies have shown the significantly improved treatment outcomes for patients. Unfortunately, today, it's still difficult to get rapid access to molecular diagnostic information to assess the presence of biomarkers, the key in deciding which targeted therapy to select. It can easily take on average 2 weeks in Europe, around 3 weeks in the U.S. before oncologists have received the information they need. That's an awful long time, something an increasing number of oncologists and patients no longer find to be acceptable.

It is our mission to change that by providing direct access to molecular diagnostic information faster and closer to the clinical decision-making point. With our flagship product, the Idylla platform, we are in a unique position to offer our customers a fully automated workflow for molecular testing, combined with superior performance. Idylla is a first of its kind within the oncology market. No other company so far has been able to combine the broad menu we have with full automation, speed and superior performance in 1 single platform.

Since the launch of our platform, we have built an impressive customer base of Idylla users. A lot of these customers have been actively publishing Idylla performance studies in periodic journals or representing them at the largest international conferences.

In addition, an essential part of our strategy is to further accelerate menu expansion through partnerships with pharma and biotech companies, content partners and development partners.

The focus of pharma partnerships is on development and promotion of companion diagnostics, aid at product registrations with the regulatory authorities, such as the U.S. FDA, to further support and increase market adoption of the Idylla platform. Our partners are expected to benefit from a faster and better selection of eligible patients for their targeted therapies.

The focus of content partnership is on reporting of proprietary biomarkers or panels of partners in most cases or are developed and clinically validated through Idylla. And by doing so, we add proprietary content and as such, further increase the attractiveness of our menu. The benefit for our partners is that they can accelerate global rollout of their content, can achieve cost efficiencies and faster customer adoption given ease of use provided by the Idylla platform.

Partnership with co-development partners, mainly research institutions, allow us to develop highly innovative test content, while reducing development costs. We are experiencing an increased interest from partners as demonstrated in the announcements we made this year so far and some of our partners shown on this slide. Apart from the menu synergies and the acceleration of our development and registration activities, the expansion of our partnership business is also adding a significant revenue contribution, complementing and balancing to a certain extent our dependence on product revenues. The interactions between our customers and partners create a unique and dynamic ecosystem around the Idylla platform. And this ecosystem is further improving the platform's positioning, allowing all stakeholders to leverage on their platform event.

All of the above is making us as a company more resilient. And for that reason, our clear intent is to continue to expand our partnership ecosystem in the future.

Let me now switch over to the key messages of our first half year 2019 achievements. Starting at first instance with commercialization. End of June 2019, we reached an installed base of 1,129 instruments by adding 156 Idylla instruments in the first half of 2019. We're now over 1,100 instruments. We crossed an important milestone in the global commercial rollout of the Idylla platform and are further strengthening our position in partnership discussions.

Our commercial cartridge volume grew to around 72,000 cartridges, representing a year-over-year growth of around 24%. This is far below expectations and is mainly driven by slower pickup of U.S. volumes, our bump in the road in the first half of 2019.

Another key highlight is that this morning, we have announced the termination of our U.S. distribution agreement with Fisher Healthcare. Furthermore, we strengthened our commercial footprint through a commercialization agreement with Nichirei in the Japanese market.

The second instance, we'll move over to menu and partnerships, from which we make good progress, especially in regards to progressing in the immuno-oncology testing front, as part of our long-term menu strategy. We successfully launched the CE-IVD version of our MSI Test, initially focused on strengthening our colorectal cancer menu, but also offering us a gateway into I-O testing. And as part of our immuno-oncology menu strategy, we initiated 2 assay development or registration projects through new partnerships with Bristol-Myers Squibb and Kite Gilead. And next to that, we added Covance to our partner network in support of executing our global pharma research project.

And thirdly, last but not least, our financials. Total operating income increased year-over-year with 36% to EUR 17.3 million. We successfully completed 2 funding events, a EUR 55.5 million equity raise and a EUR 150 million convertible bond issue. Our cash position end of June 2019 amounts to EUR 209 million.

We will now give more color and detail on these key messages. Growth in Europe and our distributor or rest of world markets continues to be solid. In Europe, we saw good continued cartridge volume growth and new instrument placements exceeded expectations. The performance in Europe was mainly driven by an increased usage of Idylla in first-line testing in several key geographies as well as a strong overall contribution from pharma collaborations.

A similar picture is seen in our rest of world markets, where also instrument placements exceeded expectations. And next to that, cartridge volumes grew -- continue to grow significantly. The performance in rest of world was mainly driven by strong overall customer base expansion and the addition of new market authorization.

And now the U.S. situation. During the first half of this year, our U.S. customer base and our U.S. installed base was further expanded with several new high-profile customers. Cartridge volume growth on the other hand was below expectations as said and also impacting our outlook for 2019.

While efforts are already made to accelerate Idylla implementation plan of instruments at new customer sites, cartridge volume pickup was delayed due to, amongst others, a more gradual increase of cartridge orders after the Idylla instrument implementation. Cartridge itself is driven by many reasons of which the most important are, first and foremost, more time needed in identifying and amending operating procedures at our customer sites around Idylla. And secondly, a tendency amongst our new customers to more gradually switch from current testing modalities to Idylla.

We have carefully analyzed the situation and are taking action. One key action is that we have shifted towards a new commercial setup in the U.S. This morning, we announced the termination of our distribution agreement with Fisher Healthcare, and going forward, Biocartis' direct sales team will drive commercialization in the U.S. This team is a small, but expanding group of strong sales executives and support team that have shown an excellent performance in signing up new customers.

The focus of this team will on the short term be assisting our current U.S. customers in completing Idylla implementation and shepherding them towards cartridge volume ramp-up.

Next to that, we expect to then accelerate again the growth of our U.S. customer base towards the second half of this year and the end of this year once the operational transition from Fisher Healthcare is completed and the expansion of our U.S. direct sales force is further progressed.

The view that our current challenges are more operational rather than structural is to a large extent based on the direct feedback that we get from our customers. That is well illustrated by the growing number of publications of performance and performance comparative studies. While most of the studies so far have been conducted by European customers, we are seeing more and more publications of studies that performed in the U.S. In the first half of this year, around 30 new performance studies were published, 12 of them were published in the U.S. by, amongst others, Memorial Sloan Kettering Hospital, Dartmouth University, Medical College of Wisconsin and Wake Forest. And also, a good number of the mentioned studies have been presented at conferences that welcome the top of the international scientific community, such as ASCO and USCAP. And in general, these studies continue to show the excellent performance of our platform.

As we discuss our commercialization strategy, of which the U.S. is obviously an important part, we need to continue and take a global perspective. As said, we continue to show strength in Europe and our distributor countries. But you also should look at the progress we made in China and Japan, as both are important markets for Biocartis in the mid to long term.

Our joint venture in China with Wondfo was formally established in the first quarter of this year, and that closing resulted in the first capital contribution of both partners to the JV as well as a license payment from the JV to Biocartis.

Earlier this year, we announced a commercialization agreement with Nichirei Bioscience for the Japanese market. And during the first half of this year, Biocartis and Nichirei further progressed the local registration preparations for the Idylla instrumentation and assays. With the go-to-market strategy in place for Japan, Biocartis' commercial footprint is now covering all major diagnostic markets worldwide.

I will now move on to discuss our menu and partnership highlights. The CE-IVD launch of our microsatellite instability or MSI Test early this year was a key menu event for Biocartis. An MSI Test basically measures defects and errors in a person's DNA replication mechanism relevant to certain cancer types. And it's the e-version of our MSI Test is geared to provide information on the MSI status of colorectal cancers as recommended in international guidelines.

In addition to colorectal cancer, MSI is known to be present as well in several other tumor types, such as gastric and endometrial cancer. And furthermore, MSI is also an independent factor that may predict a patient's response to certain immunotherapies, a fast-growing and promising market.

So our MSI Test has provided us a gateway into the I-O testing space, which earlier this year, we indeed indicated to be one of the key growth opportunities in our target market.

Our focus within immuno-oncology will be on the 2 dominant therapeutic classes. On the one hand, immune checkpoint inhibitors. On the other hand, cell therapies. And it's in these 2 areas that we have announced new partnerships in the first half of this year.

In March this year, we announced the signing of a collaboration agreement with Bristol-Myers Squibb, a global pharma company. BMS markets, amongst others, Opdivo, an immune checkpoint inhibitor plus low-dose chemotherapy. This is the first immuno-oncology combination treatment approved by the U.S. FDA for MSI-High or mismatch repair deficient metastatic colorectal cancer that has progressed following treatment with certain chemotherapies.

The collaboration we have with BMS is focused on MSI testing in connection with these immuno-oncology therapies. And the agreement we have with BMS allows for joint developments and registrations of the Idylla MSI tests for use in a variety of indications, commercial settings and geographies. And the first focus under the agreement is registration in the United States of the Idylla MSI Test as a companion diagnostics for metastatic colorectal cancer.

In June, we announced we have entered into a market development and commercialization agreement with Kite Pharma, since 2017 part of Gilead. Kite is focused on innovative cancer immunotherapies and have an industry-leading pipeline of cell therapies to address hematological and solid cancer. Cell therapies are a specific form of immunotherapy, where a patient's own immune cells, so-called T cells, are genetically engineered to reprogram these T cells to specifically attack tumor cells.

The announced collaboration is aimed at the development of molecular-based assays on Biocartis' Idylla platform that are supportive to Kite's therapies. Rationale behind this is that the speed and ease of use of the Idylla platform could enable regular and rapid monitoring of patients under such cancer cell therapies in a near-patient setting, which is expected to help optimize patient management. Through the partnerships with BMS and Kite, Biocartis is fully executing on its strategy to build an Idylla immuno-oncology menu with now 2 active ongoing assay development or registration projects in that field.

Another new partnership that I would like to highlight briefly is our global strategic collaboration with Covance, announced in April this year. Covance, which is LabCorp's Drug Development business has a leading central laboratory network serving the biopharma industry with specific focus on precision medicine.

Covance has been involved in the development of all of the current top 50 drugs on the market as measured by sales revenue. The announced collaboration supports the execution of our global pharma research project. Under the agreement, the Idylla platform and its Idylla oncology assay menu will be offered to Covance's customer base.

Several Idylla instruments have already been placed at Covance sites in the U.S. and in China. The agreement could provide for additional placements of Idylla instruments at Covance site globally to support customer need for clinical trials and when appropriate to validate and implement companion diagnostics application.

With this, I would like to hand over to Ewoud for a discussion on our financials.

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Ewoud Welten, Biocartis Group NV - CFO [4]

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Thank you, Herman. I will now discuss the financials for the first 6 months of the year, starting with our total operating income. Key drivers behind our operating income, our product sales and collaboration revenues from partners. For both, a breakdown is shown on the right side of this slide.

Product sales increased year-over-year with 17% to EUR 10 million, driven by an increase in cartridge sales and instrument sales. Cartridge sales increased from EUR 6.6 million in H1 2018 to EUR 7.5 million in H1 2019, a year-over-year increase of 13%. Instrument revenues amounted to EUR 2.5 million in H1 2019, a year-over-year increase of 28%. Collaboration revenues increased year-over-year with 93% to $6.8 million in H1 2019, driven by a strong growth in R&D services and license revenues as the result of our growing partner ecosystem. Service revenues amounted to EUR 351,000 and grants and other income to EUR 151,000 in H1 2019. This all resulted in a total operating income of EUR 17.3 million, a year-over-year increase of 36%.

Total operating expenses, including cost of sales, grew from EUR 33.9 million in H1 2018 to EUR 44 million in H1 2019, an increase of 30%. Cost of sales increased year-over-year with 27% to EUR 8.7 million in H1 2019, mainly driven by higher cartridge as well as instrument volumes.

Expenses for research and development amounted to EUR 20 million in H1 2019, a year-over-year increase of 25%. That increase was mainly driven by higher staffing costs and allocated depreciation expenses. The latter also due to the first-time adoption of IFRS 16.

Expenses for sales and marketing increased year-over-year with 23% and amounted to EUR 8.8 million. This increase was mainly driven by higher staffing costs, also as a consequence of an expanded U.S. sales team and higher expenses for consultancy and subcontracting.

G&A expenses increased year-over-year with 68% to EUR 6.4 million, due to an overall organizational growth as well as a general cost allocation that is shifting more towards a commercial stage organizational structure.

The above resulted in an operational loss for H1 2019 that was equal to EUR 26.7 million compared to EUR 21.1 million in H1 2018. The net financial result for the period amounted to minus EUR 2.8 million, of which EUR 1.1 million is related to accrued interest on the outstanding convertible bonds and EUR 1 million related to interest and repayment costs of the company's subordinated loan.

Consequently, the net result for H1 2019 equals to minus EUR 29.7 million. I will now comment on our cash flows and cash position.

Cash flow from operating activities in H1 2019 amounted to minus EUR 28.4 million compared to minus EUR 23 million -- EUR 20.3 million in H1 2018. This increase is the result of a higher operation loss for the period, increased investments in working capital as well as higher interest and other financial expenses.

The cash flow from investing activities in H1 2019 amounted to minus EUR 5.3 million compared to minus EUR 2.3 million in H1 2018. And consisted of the initial capital contribution made to the China joint venture and capitalized Idylla systems.

The cash flow from financing activities in H1 2019 amounted to EUR 179.5 million. This was driven by the net proceeds of the equity and convertible bond issues earlier this year of in total EUR 198.9 million, partially offset by the repayments of borrowings of EUR 19.4 million, mainly consisting of the repaid subordinated loan.

Because of the aforementioned, the net cash flow of H1 2019 amounted to EUR 145.8 million compared to minus EUR 21.4 million in H1 2018. This all resulted in a record cash position of EUR 209 million as per the end of June 2019.

As just mentioned, the cash position that we announced today was driven by 2 successful funding events in the first half of 2019. In January of this year, we concluded an oversubscribed capital raise with gross proceeds of EUR 55.5 million. In May this year, we concluded our first convertible bond issue with gross proceeds of EUR 150 million. The issued convertible bonds are due May 9, 2024, and carry a 4% annual coupon payment. The bonds can be converted into ordinary shares of Biocartis.

Biocartis has convened a special shareholders meeting for September 27, to obtain shareholder approval for the change of control provisions included in the terms and conditions of the convertible bonds.

Such shareholder approval is required under Belgium Corporate Law and not related to the structuring of the convertible bond as such. Furthermore, application will be made to list the bonds on the regulated market of Euronext Brussels by no later than the 1st of December this year.

This concludes our business update, and we will now move to the final part of the presentation, our outlook and calendar.

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Herman Verrelst, Biocartis Group NV - CEO & Director [5]

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Thank you, Ewoud. Based on performance of the first half '19 and the latest forecast, we have updated our full year guidance. But other -- this guidance reflects, amongst other, the revised outlook for the U.S.

Our guidance on installed base expansion, which was initially guided at 350 instruments is now set in the range of 325 to 350 instruments.

Our guidance for increase in commercial cartridge volume is decreased from a year-over-year growth of around 60% to 70% to around 30% to 35%.

And the targeted year-end cash position is now set in the range of EUR 170 million, EUR 175 million.

Our short-term menu outlook is not substantially changed versus the communication around our Q1 business update. Most important in the short term is the expected launch of the liquid biopsy version of our EGFR test in the first quarter of this year. And this is another addition to our lung cancer menu as liquid biopsy EGFR testing is now included in the guidelines for situation where no tumor tissue is available.

We continue to work towards the launch of our Idylla GeneFusion test in 2020, and this test, together with an Idylla EGFR test, will allow us to cover the majority of actionable lung cancer mutations, further strengthening the attractiveness of Idylla and the lung cancer menu.

Moving on to our colorectal cancer menu, I want to mention that the U.S. FDA submission for our MSI test and the submission of the Idylla RAS PMA documentation with the U.S. FDA are both expected in 2020.

And finally, our strategic partner, Genomic Health, expects to start a placement of Idylla instruments at European sites to support the clinical validation studies of the Idylla Oncotype Breast Recurrence Score later this year.

I will now hand over to Renate for some brief comments on housekeeping.

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Renate Degrave, Biocartis Group NV - Manager of Corporate Communications & IR [6]

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Thank you, Herman. Our special shareholders meeting is set for September 27. Our Q3 business update is set for November 14. On February 27, we will publish our full year results for 2019. And finally, our 2019 annual report is expected to be published on the 2nd of April.

We will now start the Q&A session. The operator will first take you through the Q&A instructions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Lenny Van Steenhuyse.

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Lenny Van Steenhuyse, KBC Securities NV, Research Division - Financial Analyst [2]

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Two questions from my side. The first being, could you please describe the involvement of Thermo Fisher in the commercialization process up to now? And you already alluded, of course, to actions taken in the short term to take over from Thermo Fisher and focus again on the existing customer base.

I was wondering what steps would be taken on the longer term being post FDA approval to further strengthen the commercial organization and to which size would the organization grow to tackle the U.S. market. And after this one, I still have a follow-up question.

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Herman Verrelst, Biocartis Group NV - CEO & Director [3]

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Thank you, Lenny, for that question. It's indeed, perhaps, one of the most pertinent questions we want to address today.

The setup with Thermo Fisher was, as you well know, a hybrid setup, where we had Fisher Healthcare as an exclusive distributor for the U.S. market. But we retained the right to sell direct in the U.S. market as well. This meant that from our side, we had a smaller team in the U.S. that was both in support of Fisher Healthcare in the context of their commercialization and it was a primary function of the team, but they also had a task to approach customer directly, as we felt that it was important that we had a direct feedback from the U.S. market in order to establish our [KOL] network and so on with quite positive results, I have to say. What we now found is that, that setup was not optimal setup to really respond to the true market opportunity in the U.S. market. And to comment on that, perhaps, you could roughly divide the U.S. market in 2 main categories. Those prospective customers that have experience with molecular testing and those that do not. In the latter segment, customers are new to molecular testing, there was a great appetite to adopt the Idylla system to bring testing in-house, but by definition, these customers have limited to no experience in molecular testing and are facing challenges with integrating a quite simple platform in the end in their perhaps sometimes complex operating environment. For them to bring testing in-house is proving to be more challenging than expected.

And the first segment I mentioned, the ones that do molecular testing, they're also are quite positive about the incremental value or the complementary value that Idylla can bring in comparison to existing testing modalities they already have installed. But they're more cautious bringing volume to the Idylla system. They take a more gradual approach transitioning volume from their existing methodologies and systems to the Idylla platform, not much dissimilar to what we have seen in European market, but also we have to fight for market share and presence. Now for us now to respond to that environment, we've looked at how best to do that.

We have found in all honesty that we do not have challenges getting in contact with the customers. We do not really have challenges to convince them of the potential of the Idylla platform. Where we now have to put more effort is in guiding the customer towards that implementation, operational integration and ramp to volume. And we have found that a direct approach in a simplified structure would better cater for that challenge we currently face. So that is the best approach going forward. Hence, that is the decision that we've taken to really go ahead with direct sales approach. You indeed mentioned that on the longer term, as and when we will have regulatory approvals of assays and we can deeper penetrate into the pathology franchise, we probably will need more feet on the ground. And we'll have to see how we best do that. It could be that we continue and grow the direct sales force or reengage with distribution partners to achieve that. What we're now faced with is solve the first problem first and take it from there. And that's the action that we have taken.

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Lenny Van Steenhuyse, KBC Securities NV, Research Division - Financial Analyst [4]

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Okay, very clear. Yes, my second question actually also alludes to a part that you also covered. Indeed, your U.S. client base is, of course, split between players already doing in-house testing and which should be somewhat experienced in implementing these new operation -- operational procedures and then, of course, the ones that are effectively transitioning from models outsourcing to in-sourcing. And I can imagine that these 2 groups are very different in terms of onboarding, fluency and implementing these processes. And I was indeed wondering as well, the challenges you face today, how do they really differ between these 2. Of course, switching these habits can be quite difficult. But then for the client base that is already doing this in-house, is there also some specific challenge there to be tackled? Or is that not the case?

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Herman Verrelst, Biocartis Group NV - CEO & Director [5]

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Well, there's still 2 ways I can address that question. On one hand, we've -- as already mentioned, it's not dissimilar from what we've seen in the European market space. But also, certainly, when we initially launched the Idylla platform, we neither had brand recognition nor a lot of proof points from the platform.

There was a lot of enthusiasm about the performance and the technicality and the promise of the platform. We had to go through a rather long learning process as well, where we had to build confidence in the customers to ramp-up to the volume. And to an extent, we're seeing the same happen in the U.S. Perhaps we would have thought that us having had built that experience in Europe and rest of world, we could just take that into the U.S. market. But apparently, that U.S. market is pretty specific and needs to be convinced on local data, local performance studies and so on and so on. And that takes more time.

I think that is the mismatch that we're seeing here that we thought we could take an accelerated market introduction and market adoption in the U.S. by having the broader platform and so on and the broader menu already. But apparently, we still have to go through that adoption curve in the U.S. as well, yes.

Taking a step back, what we're looking at is also perhaps in terms of market requirement, something that we need to learn and adapt to that the European customer base is different than the U.S. customer base. Always you have to look at 3 dimensions in the go-to-market strategy. Without going into too much detail, we look at market readiness, is the market ready for this? And clearly, we're now seeing that different segments have a different readiness, and that's what we've learned. So we have to adapt to that.

There is product readiness. And also there, we have to make some smaller changes to the platform, mainly on the software side, how reporting is done and expectations there, how security is handled.

In Europe, you have the GDPR. In U.S., you have HIPAA regulations and so on. So these are all smaller, minor changes we have to do to product configuration.

Again, these are not structural, but something that we need to solve through time. And then the latter is a the third component of go-to-market is channel readiness. And I think that is where we make the biggest move now, is that we say we would just take a fundamental different approach to what channel we used to go into that segment and bring that product to market. So that's the learning we've taken and a strategic realignment of how we go about.

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Operator [6]

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The next question comes from the line of Alex Cogut.

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Alexandru Cogut, Kempen & Co. N.V., Research Division - Analyst [7]

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I just have a couple. Are any of the issues you experienced in the U.S. related to the limited size of the menu you have? Or does your current menu not fit market practice? That's one.

When do you expect the operational issues in the U.S. commercialization to be largely addressed and the sale cycle to shorten? And just the final one on average price per test. I see it's slightly lower in H1. Can we expect that trend to reverse in H2 as U.S. volume ramps up?

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Herman Verrelst, Biocartis Group NV - CEO & Director [8]

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Thank you, Alex. Three good questions. The first about menu fit for the U.S. market, and I think we addressed this already in previous calls and updated that. Indeed, the U.S. requirements for menu are different than one in Europe.

In Europe, we have been able to get a good installed base, customer base and market share based on our colorectal cancer testing menu. And I just recall, the adoption of these targeted therapies in this field is quite broad in Europe and also in rest of world, where in the U.S., colorectal cancer testing is less penetrated and there's a strong reliance or desire basically for lung cancer testing. And that is obviously still part of the menu, where we're still in the midst of development, yes.

So that I think has indeed partially contributed as well. The richer the menu, the faster the market adoption. So that is clear. But that is not new from what we knew before. What is positive for the U.S. market is that there are a broader adoption of immuno-oncology therapies and immuno-oncology diagnostics in the guidelines and in reimbursement. So that would be -- once we have the FDA approval for an MSI assay in collaboration with BMS, that will be clearly an upside again for the U.S. market. So again, yes, there is different appetite for different components in the menu in the U.S. and in Europe. And this is what we're addressing through our development activities and collaboration activities.

And the second question was about the operational transition and the time frame that we think we need. As indicated, I think we are fortunate that from the start, we have decided for a more hybrid approach and that we have at least the nucleus of a direct sales force and that, that team can now further expand. We've already taken action to look at the composition of that team and the skills mix of that team because shifting from supporting Fisher to doing only direct sales that requires some redirecting of resources.

We've also looked into, let's say, the organization structure in the U.S., looking more at regional sales management a bit more. Yes, on -- more feet on the ground with local management and also, we have a clear model of how we want to do that. And that needs to be set up.

So on top of that, of course, you now also need to be very careful about managing the transition from customers that have been serviced by Fisher to now be serviced by Biocartis, and that's an operational changeover. The termination of the collaboration agreement with Fisher is effective today.

Our U.S. customers are also notified today of all contracts transitioning to Biocartis. So we have to take responsibility to provide the right continuity to our customers, both in terms of supply and in terms of continuity of them using the system. So that clearly is the main focus of the team on the short term is to provide continuity of service and supply to the existing customer base. And then linked to that, obviously, is to continue and handhold the customers towards the ramp-up on volume. Yes, that I think is on the short term, the focus. We really want to protect that because the customer base is there. It's a very good customer base, it's with excellent feedback. And yes, the collaboration is good there. We want to really preserve that as a start from expanding our activities there.

So basically, what we're saying is we need to go through that transition, that requires focus and attention, and we hope that by the end of the year, we can really pick up again with -- of course, we will continue to sell in the sales pipeline that we have. But I think that we should be in a new set of -- a new stage by the end of the year. And that also links to us being a bit more cautious on guidance for instrument placements. To date, we're quite pleased with instrument placements globally, but we've lowered guidance slightly in reflection of that caution that potentially in the U.S., attention might be drawn elsewhere on the very short term.

Your last question about ASP. Indeed, there's a slight downward trend that we've seen in first half of the year, and that has to do with mix, regional mix and product mix. We've been very active in the U.S. with helping people in onboarding, in integration, implementation activities and so on. And that -- we typically we do at reduced charge, that we do not do at the full charge of the cartridges in that period, and that has also been a slight drag on the average sales price of the cartridge in the first half of the year. That might continue to an extent in the second half of the year as we're still in the transition phase. But fundamentally, we still believe that, that U.S. market still has a higher ASP potential that we will tap in as and when we will ramp the volumes there.

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Alexandru Cogut, Kempen & Co. N.V., Research Division - Analyst [9]

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Yes. And just one more, if I may. Can you quantify a little bit for us what percentage of volume comes from Europe and the rest of the world in H1?

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Herman Verrelst, Biocartis Group NV - CEO & Director [10]

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We are careful providing that level of granularity at this stage because there's still a lot of variability in those numbers. But obviously, the bulk of the volume is now realized between Europe and rest of world, with Europe still taking the lion's share of the achieved volumes. It's there that we launched initially, it's there that we now have the largest installed base and customer base, it's also there that we've seen that transition from what you call second line to first-line testing. It's a journey that we now need to go through in the U.S. as well.

We've gone through that or are going through that now in Europe, and that really drives the volume pickup that we see in Europe there as well. But I do have to reiterate that also in rest of world, we found the sales approach and go-to-market strategies to our distributors then, where we see an acceleration in installed base and also a pickup of routine use on the Idylla platform. So also that really contributes to the volume growth of this. So the bulk of the volume is in Europe and rest of world with the lion's share still in Europe.

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Operator [11]

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The next question comes from line of Hugo Solvet.

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Hugo Solvet, Bryan Garnier & Co Ltd, Research Division - Equity Research Analyst [12]

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Maybe first one on the actions that have been initiated or will be initiated in the U.S. to stimulate the utilization rates for existing customers.

How should we think about the catch-up maybe in 2020 in the context of the larger menu of tests that will be available? Second one, regarding the termination of the Fisher partnerships. The high end of the new guidance of 325 to 350 instruments placed in 2019 is similar to the previous one.

Should we assume that the difference in between the high end and the low end represents maybe what Fisher should have been delivered in the second half or less than that, as you have assumed in the new guidance that your current sales force will be able to compensate for at least for partially of it? And obviously, your sales will be busy in the linked Fisher account in the short term. So maybe can you give more detail on how long this should last? I trust you've already managed to go through these with some of your customers. And once this will be done, could you share your thoughts on the penetration and market adoption of context -- in the context of an evolving competitive environment?

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Herman Verrelst, Biocartis Group NV - CEO & Director [13]

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Okay. Many parts to that question, Hugo. Perhaps, the first thing I would like to pick out is the guidance and the numbers.

The overall number that we quote -- our guidance is, of course, a mix across the regions, yes. We've seen, as indicated, we are kind of slightly ahead of target in Europe and rest of the world. And, of course, we are behind target in U.S. And the combination of the 2 results in the bracket that we show and that bracket is indeed dependent on can we continue the growth rate in the Europe and rest of world, will the sales force that have a decent pipeline of opportunities in the U.S., can they indeed close these accounts before the end of the year?

So it's really a mix between the 2, and it's pretty much unrelated, I would say, to exactly what the targets would've been for our distributor, for Fisher Healthcare here. Asked the question about the transition of the current customer base asset. I think I pretty much laid it out, what the focus of the team will be in relation to that. Again, I want to iterate that the most important thing here is to protect and preserve relationship with existing customers because our customers really are our best salespeople, I have to say. Many of them are on the podium very often on conferences with their peers talking about the performance of the platform and so on. So we really want to preserve that, they are our best ambassadors and that's how we've always worked with our customers. We want to protect and preserve the relation. So the focus should really be there.

And then, yes, what are we doing in terms of shepherding them towards that use is listening very carefully on a one-on-one basis with the customer, what exactly the needs are and how we can assist them. Also bringing customers in contact with one another, that's also something that we've seen. Our first customers or the largest customers are very open to discuss how they've gone about doing this with the other customers that have recently come on board.

So creating that community of users on Idylla platform is something that we want to focus on as well. And I think you can understand that doing that one-on-one directed customers is a much better approach than doing that in a more hybrid structure, where there is also a distributor in between, where you have less control over what they say, what they prioritize in message and so on. So I think that kind of also explains why we believe that the new strategy is better tailored for how we want to go about. And then the 2020 ramp-up, I'm -- have to recollect what the question there was.

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Hugo Solvet, Bryan Garnier & Co Ltd, Research Division - Equity Research Analyst [14]

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It's -- as ramp-up and the utilization rate is being delayed in the U.S. primarily, how should you think about that ramp-up in 2020 in the context of a larger menu of tests that will be available for existing customers?

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Herman Verrelst, Biocartis Group NV - CEO & Director [15]

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Yes. Yes, that's a good question. That's indeed also what Alex kind of referred to in his question about what menu is better fit for the U.S. market. And clearly, when we have our GeneFusion assay launched, that will, of course, cater -- that will then complete or make our lung cancer menu much stronger. And that we indeed identify as really something that will be unlocking quite some potential in the U.S. market as well.

So that indeed, not just for Europe, also for other countries and other markets, that would be an important addition to the menu. Now that is slated, not certain, not for the beginning of 2020. So I want to be realistic there, but it would -- it's something that we're looking forward to. Also our customers have given feedback that they also are keen to look to that -- looking forward to that launch of that product. But as said, the focus in the short term is go to war with the weapons we have, yes, and more focus on learning what it takes to help our customers go through those operational changes and how we can help them accelerate all that. That will be the focus, and that is something that we will be able to influence in the sales approach that we've defined.

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Operator [16]

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The next question comes from the line of [Trevor Hogan].

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Unidentified Analyst, [17]

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I just wanted to ask you a question actually related to the build-out of the U.S. sales team. As I'm understanding it, you're looking at trying to have a more direct sales team and strategy. And with that, I was curious if you have a target in mind of how you will try and go forward with that. Will you try and build it out gradually over the next quarters? Or are you still looking at and speaking with other potential distribution partners? That's my first question. I'll stop there for the moment.

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Herman Verrelst, Biocartis Group NV - CEO & Director [18]

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Thank you, [Trevor], and pleasure meeting you, the first time that you attend one of our webcast as well.

Yes, we are going to carefully look at how we scale the team, yes. I already hinted to kind of the emphasis that we put there, of course, shifting from supporting distributors to taking direct sales is something that we are already in the midst of. We have already taken action once we saw some earlier signs of a potential weakness in the U.S. to change the composition of the team slightly. We've recently onboarded a number of new sales executives in the U.S. with specific experience selling into pathology laboratory in a direct fashion and so on. So I think that just through recruitment, we want to get more mature competence onboard as well. We've also -- and that's something I've personally taken charge of now since. As we indicated at the end of Q1, we separated ways with our then commercial -- Chief Commercial Officer. I've now started working very closely myself with all the regional managers and sales managers. So one of the things that I'll be working on with our U.S. General Manager, Vishal, is to make sure that we have a good substructure there, support of the people on the ground, working on providing good visibility, a more accurate forecasting within pipeline and so on. And also, and that's how you take the learnings onboard is prioritizing resources and being more conscious of, okay, if you approach a customer that is new to molecular testing, you do that with a different story than when you approach a lab that has experience with molecular testing.

So kind of steering and segmenting our go-to-market strategy is also something we're implementing. I could go on. There's a long list of actions taken there. But it's a mix of that. It's what you do when you go direct basically and that is something that we are implementing.

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Unidentified Analyst, [19]

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No, I appreciate the clarity and adding some additional information, that helps me. And just a quick second question, going back maybe to the cartridge volume growth. You guys decreased your guidance quite significantly there. And I was just curious as far as do you see -- do you have a view on how that might recover over the second half of the year? And then maybe trend-wise, moving into the early parts of 2020, if you could add a little granularity there, I'd appreciate that.

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Herman Verrelst, Biocartis Group NV - CEO & Director [20]

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Yes, it's too early for us to speak about 2020. I think we've always been subject -- and I think that is no surprise to any of you. We've always been subject to many driving parameters here for forecasting. There's the regional mix, there's a product mix. So we've always been subject to a lot of variability and volatility, and that's what's showing. Yes. I mean a delay of a quarter -- a couple of quarters in the U.S. has a material impact to the numbers. And that is just where we are in terms of the growth of our company. The guidance that we now gave is based on our best forecast to date. A combination of the momentum that we're seeing in Europe and rest of world and what the team is now saying in the U.S. they can deliver in the second half of the year.

There's still a lot of variability, volatility and uncertainty around that to the usual risk factors as always, yes. But it's to the best of our ability, the forecast that we have made to date. And as we approach the end of the year, perhaps in our Q3 guidance, when we can give you an update on that and also inform you about how business is picking up in the U.S. and rest of world and in Europe. And then we'll see how we formulate guidance for 2020.

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Operator [21]

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(Operator Instructions) As there are no further questions in the queue. That will conclude today's Q&A session. I would now like to turn the call back to Mr. Verrelst for the closing remarks. Please go ahead, sir.

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Herman Verrelst, Biocartis Group NV - CEO & Director [22]

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I will keep it brief. I would like to thank, as always, especially today, all our shareholders and stakeholders for their continued trust in Biocartis and look forward to continuing our journey together. Renate, over to you.

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Renate Degrave, Biocartis Group NV - Manager of Corporate Communications & IR [23]

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That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.