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Edited Transcript of BIM.PA earnings conference call or presentation 26-Feb-20 1:30pm GMT

Full Year 2019 Biomerieux SA Earnings Call

CRAPONNE RHONE-ALPE Mar 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Biomerieux SA earnings conference call or presentation Wednesday, February 26, 2020 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alexandre Mérieux

bioMérieux S.A. - Chairman & CEO

* Guillaume Bouhours

bioMérieux S.A. - Executive VP of Purchasing and Information Systems & CFO

* Sylvain Morgeau

bioMérieux S.A. - IR

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Conference Call Participants

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* Alexandru Cogut

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

* Catherine Tennyson

BofA Merrill Lynch, Research Division - Analyst

* Delphine Le Louet

Societe Generale Cross Asset Research - Equity Analyst

* Hugo Solvet

Exane BNP Paribas, Research Division - Research Analyst

* Maja Pataki

Kepler Cheuvreux, Research Division - Head of Med Tech Devices Sector

* Peter James Welford

Jefferies LLC, Research Division - Senior Equity Analyst & European Pharmaceuticals Analyst

* Rachel Marie Vatnsdal

Piper Sandler & Co., Research Division - Research Analyst

* Scott Bardo

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

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Presentation

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Operator [1]

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Welcome to the Full Year 2019 Financial Results Presentation on the 26th of February 2020. (Operator Instructions)

I will now hand over the presentation to Mr. Sylvain Morgeau. Please go ahead, sir.

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Sylvain Morgeau, bioMérieux S.A. - IR [2]

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Thank you, Molly. Good day, everyone, and thank you for joining us to review bioMérieux performance for 2019 and our objectives for 2020.

Before I give the floor to Alexandre Mérieux, Chairman and CEO; and Guillaume Bouhours, CFO, I will make a very short introduction to provide you a couple of information. So first of all, our press release was published this morning at 7:00 a.m. This press release can be found on the homepage of our website, www.biomerieux-finance.com. In addition, please note that the slides of this meeting are also available on the homepage of our website or can be downloaded directly from the webcast. And so promptly, after the end of the meeting, the webcast and the call will be available in replay on our website.

Now going to the presentation contents. After reviewing our 2019 performance and 2020 objectives, we will hold the Q&A session, and questions can come from the conference call and from the chat of the webcast. (Operator Instructions)

Very last word before starting the presentation. I will not read the slide, which is currently projected about the disclaimer, but I recommend you to take note of this content to remind the usual disclaimer about the forward-looking statements.

And so with this, I hand the call over to Alexandre Mérieux.

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Alexandre Mérieux, bioMérieux S.A. - Chairman & CEO [3]

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Thank you, Sylvain, and good day, good afternoon to everyone. I will start with the key takeaway messages regarding '19. So we announced this morning our results for '19. So we announced the sales reaching EUR 2.675 million (sic) [EUR 2.675 billion] for bioMérieux. This brings a growth of 7.2%, which is one of the highest growth, if not the highest growth in the IVD industry. We announced the profitability of 14.5%, with a CEBIT of EUR 389 million, in line with the guidance. On this, I would say, with a solid underlying performance that Guillaume will detail further after.

The key growth driver for bioMérieux in 2019 has been molecular biology with the continued success of BIOFIRE. Microbiology, doing very well, also the dynamic in the AsPac region. During the year, we announced a few M&A deals, the first one being -- having been Invisible Sentinel in the field of food, beer and wine testing on quality. And also we increased stake in the Chinese company in the field of immunoassay, Hybiome. If you notice also, I would say there is the lower debt level of bioMérieux that we are displaying.

So we had a -- we reaffirmed our leadership in that space. And I would say diagnostic is more and more recognized as a key weapon to tackle this major, major threat. Know that 80% of our sales and 75% of our R&D investment are directly or indirectly linked to the fight against the AMR. Our clinical sales at this stage of growth of 7.7%, I want to insist, I would say on the complementarity of our offering on that space. Also, bioMérieux was selected last year by the Fleming Fund to strengthen the diagnostic capacity on tackling AMR in low and middle-income countries in Africa and ASEAN.

BIOFIRE having continued success, we are now having more than EUR 600 million sales linked to FILMARRAY. The installed base has increased now to reach more than 10,000 instrument sold at least worldwide. Worth noticing also that the sales outside the U.S. are increasing to be close to 19%, in line with our expectation to make it a worldwide success.

I would say that the future growth driver of our BIOFIRE remains the fact that we want to grow the installed base and the consumption through enriching the menu of FILMARRAY, growing international markets, also working on upgrading the BIOFIRE instrument.

Last year, we announced the launch of a new panel which was pneumonia. Now we announced that we have -- we are going under FDA regulation for BIOFIRE BCID 2, which is a new version of the BCID, which was very, very comprehensive panel with more than 43 target in 1 test, including 10 resistant genes, and this is totally in line with our strategy to fight AMR, but also to be a key player in the field of sepsis. And it will be also very complementary with the VIRTUO solution we have for blood culture, as BCID will be tested after positive blood culture. So clearly, very innovative on the unsophisticated panel.

Looking at the immunoassay activity, more and more contrasted situation there. As you know, our positioning is around the high medical value markers, but also growing the needs of the faster-growing market. What we are seeing this year is an increasing demand in regions such as Middle East, Africa and Asia Pacific, decreasing volume in Europe linked to the lab consolidation and still some price pressure on PCT in the U.S., even if the volumes are growing in the U.S. market.

We have a busy pipeline to reinvigorate and strengthen the menu on the immunoassay. First, Hybiome, which is a Chinese-based immunoassay company, which, despite a nice growth in '19, with the expansion of its market access to the Grade 2 hospitals in China, we're also preparing the launch of VIDAS NEPHROCHECK for the active kidney injury, ongoing trials for VIDAS Latent tuberculosis based on the IGRA method and also working on the development of VIDAS Dengue.

Moving to Industrial Microbiology. We displayed organic sales growth around 5%, a bit below our expectations, with good performance in Europe. We were impacted on a worldwide basis by the slow instrument sales in Q1. But suffice to say that we have solid fundamentals, both in the food and pharma application with our portfolio of solutions. The fact also that we are pushing forward the key account worldwide strategy. Our expectations are to bring back Industrial Microbiology to higher growth than what we displayed in '19.

With this quick overview of '19, I will now leave the floor to Guillaume who will detail our financial results in '19.

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Guillaume Bouhours, bioMérieux S.A. - Executive VP of Purchasing and Information Systems & CFO [4]

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Thank you, Alexandre. Hello, everyone. So let's review our financial and operating performance. We start with the total sales growth of 10.5%, which includes EUR 53 million of positive FX impact, especially with the strengthening of the U.S. dollar; 1% growth, EUR 27 million, coming from acquisitions, Hybiome and Invisible Sentinel; and the bulk being 7.2% of organic growth that we are going to detail in the coming pages.

So by application, organic growth by application. Microbiology grew by 5%. Solid growth in a market that is growing around 4%, 5% and when we have solid leadership positions. This growth is driven by blood culture with the success of our VIRTUO instrument and also by ID/AST with our VITEK range performing very well.

Immunoassay, as you can see, stable sales of our VIDAS immunoassay range with all the, let's say, contrasted effect that Alexandre mentioned, negative on U.S. PCT price and volume in Europe, and positive solid growth in Middle East, Africa and Asia Pacific. All these coming together in a combined stable overall.

Molecular, as Alexandre detailed on FILMARRAY, very high-growth at 20% for FILMARRAY, 18% overall molecular. And the growth of FILMARRAY, interesting to note, was very balanced on all our major panels of BIOFIRE FILMARRAY.

Industry, plus 5%. We can mention that we were stronger in health care and pharma than food. Pretty solid in Europe, but as already mentioned, more mixed performance in Americas and Asia Pacific.

Now coming to organic growth by geography. Americas, our first region, grew 7.7% driven by FILMARRAY with 14% growth in the U.S. for FILMARRAY. Also interesting to note, a very solid performance in Latin America with a good year for Brazil who was coming from a difficult base in '18. So good recovery in Brazil.

EMEA, of course, our core region, 4.4% growth driven by a very high growth of FILMARRAY. Very good performance in Middle East, Turkey, Russia overall for the year. And a solid performance of the industry's business. And Asia Pacific, highest growth region at 12%, fueled by China, India and Southeast Asia cluster, all at very high-growth levels.

Coming now to the P&L. The gross margin improved from 53.8% to 54.8%. That was thanks to positive product mix, especially coming from FILMARRAY, but also some operational improvements in terms of quality, productivity and our freight mix improving to more sea versus air freight.

SG&A. SG&A are up 13% on a constant exchange and scope. And this totally reflects our sales and marketing efforts and investments for BIOFIRE growth worldwide, as well as a few, let's say, specific provisions linked to the termination of a few distributors in certain countries.

R&D. R&D was up 9%, reaching now 14% of sales with majority of the R&D increase being dedicated to BIOFIRE, especially on the instrument as well as the panels and the enriched menu, as Alexandre mentioned.

So overall, we have a like-for-like CEBIT growth of 9% on a like-for-like basis, improving -- improved margin when we exclude the scope and the FX effects.

We can look at that on the next page in a bit more detail. So coming back to bridge, yes. So you see on the right of this page the slightly positive effect of FX '19 compared to '18, plus EUR 3 million. The negative effect of the scope, the contribution of Hybiome and Invisible Sentinel are negative in '19. So overall, a pretty dilutive impact of acquisitions. But excluding these effects, you can see that our margin grew from 15% in '18 to 15.3% in 2019. Again, at the same scope, same exchange rates, despite very negative effect of the phantom share plans. As you might remember, this phantom share are actually cash-settled plans that are actually linked to the share price. So as our share price increased a lot in '19, the provision for these cash-settled plans had to be booked for significant amounts. So the EUR 36 million was booking in '19 as compared to a positive EUR 7 million on phantom share in '18.

Now coming below contributive EBIT to the net income, flat acquisition price amortization from BIOFIRE at EUR 18 million. Slightly improving net financial expense at EUR 23 million. Income tax was pretty good at 22%, we will see on the next page. And so all in, our net income group share reached EUR 273 million, up 6% for the year.

Coming back to a few explanations on the tax rate. Our recurring effective tax rate is up 24%, pretty stable, and this reflects our mix of countries. And we have this year a few nonrecurring items, positive, favorable, the major one being the FDII U.S. part of the U.S. tax reform with a catch-up on 2018 that we consider nonrecurring. So bringing overall the tax rate to 22% -- 22.4% for 2019.

Last subject, important is our free cash flow. So to read this slide, we actually start from an opening net debt of EUR 365 million, which includes -- EUR 365 million, which includes the IFRS 16 restatement of EUR 98 million. We generated an EBITDA of EUR 578 million. Working capital was, this year, a consumption of EUR 69 million, mainly due to inventory increase. And this inventory increase was linked to our growth, of course, but also to the rebuild of our inventory on some critical raw materials. This is the main impact on the working capital. Income tax and financial charges overall, about EUR 100 million.

CapEx. CapEx reached, as we guided, about 10% of sales. The major increase of CapEx was for the new plant that we are currently finishing for BIOFIRE in Salt Lake City to increase capacity. And so overall, we generated free cash flow of EUR 150 million for the year, which even with acquisitions and divestitures of EUR 48 million and dividends of EUR 41 million, helped to reduce our net debt to EUR 317 million at the end of December, reaching a low leverage of 0.5x EBITDA. So with a very solid balance sheet as a consequence.

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Alexandre Mérieux, bioMérieux S.A. - Chairman & CEO [5]

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Thank you, Guillaume. Now we'll move to the 2020 outlook. So regarding the revenues for 2020 and taking into consideration, I would say, the current complex and uncertain context related to COVID-19 and the recession in China, but overall taking also into account the fact that the flu this year is higher than the one last year. We project the guidance revenue to be between 5% to 7% for 2020 at constant exchange rates and scope of consolidation, which we believe to be higher than the market dynamic.

Regarding the contributive operating income, we foresee -- project an increase of the CEBIT to be between EUR 399 (sic) [395] million to EUR 415 million. This will include a negative ForEx impact between EUR 5 million to EUR 10 million and also negative impact related to the externalization of the U.S. pension plan. The tax rate, should be the same as the previous year, between 23% and 25%, while we maintain CapEx around 10%, as usual, to prepare to continue to support BIOFIRE growth of this project relating to capacity and automation.

Regarding the coronavirus situation. The current bioMérieux tests, whether they're on FILMARRAY and ARGENE, test for some coronavirus but it do not detect the COVID-19 even if it can be used to rule out other causes of respiratory infections. But we have an ongoing R&D work to develop specific tests to detect COVID-19, both on the ARGENE solution range and also on the FILMARRAY range, which will be specific test. At the same time, today, we are facing a situation in China. That we are facing reduced hospital traffic in the hospital, reduced access to field forces, and I think we're also assessing the impact on the supply chain. So all in all, that's the situation today. We are preparing plans to develop new tests on ARGENE and FILMARRAY on COVID specific.

We have also announced today a new organization for bioMérieux aiming at leveraging our unique value-based offer that we have both in clinical applications also in the industrial application. So it's a new setup, new setting to tackle the next growth cycle of growth for bioMérieux, and we see moving from the 13 people to 9 people. The idea is to first, agile decision-making and also keep on driving commercial and operational performance for the company.

So all in all, that was our message for '19 and 2020. So still that we are more and more convinced of the value of what bioMérieux is doing. I think the fight against infectious disease is recognized as being extremely important, and we believe we are well positioned to continue to impact positively patient care and also consumer care.

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Sylvain Morgeau, bioMérieux S.A. - IR [6]

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Okay. Thank you, Alexandre. And Molly, can we start the Q&A session, please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take our first question from Catherine Tennyson of Bank of America.

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Catherine Tennyson, BofA Merrill Lynch, Research Division - Analyst [2]

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I have two, if I may. The first one would be on the organic growth guide. It was perhaps a tad more muted versus Street expectations for 2020. How should we think about the levers that brings the organic growth for 2020 closer to the upper range versus the lower? And just so I'm clear. What assumptions for the impact of COVID-19 are already factored into your current guide? And then my second question would be, could you just give us a little bit of color on why the molecular division saw a slight step down in organic growth in Q4 relative to Q3? And of the 600 new BIOFIRE units placed, how many of those were placed outside of the U.S.A. in this quarter?

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Alexandre Mérieux, bioMérieux S.A. - Chairman & CEO [3]

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Okay. Your first question regarding the organic growth. So the range is between 5% to 7% for next year. I would say, with our current assessment of the Chinese situation, you can see that maybe the lower range is also linked to our estimation of the impact in Q1 and potentially Q2. Just to remind that we remain displaying, I would say, a growth that we believe is higher than the market growth in the field of in vitro diagnostic. I forgot the second question.

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Sylvain Morgeau, bioMérieux S.A. - IR [4]

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It was about BIOFIRE slowing down in Q4 and the installation outside of the U.S.

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Alexandre Mérieux, bioMérieux S.A. - Chairman & CEO [5]

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I believe, first, if you look at the -- I think we have this at this slide where you see the BIOFIRE for this recently, the continued growth, I think will increase this year, the revenue of BIOFIRE by EUR 120 million, I believe. So it's a very nice and steady growth.

We are growing in the U.S. We are growing strongly also internationally. I would say the point around the placements, maybe there were more placements in Q2. But for us -- in Q4, I'm sorry. But for us, more placement, it also means the fact that we are linked to volumes and that's more consumption of the test. So maybe it's a trend in the market, not only linked to BIOFIRE, but I believe it's a good signal for consumption.

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Sylvain Morgeau, bioMérieux S.A. - IR [6]

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And regarding the...

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Catherine Tennyson, BofA Merrill Lynch, Research Division - Analyst [7]

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The split.

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Guillaume Bouhours, bioMérieux S.A. - Executive VP of Purchasing and Information Systems & CFO [8]

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Yes. And regarding the split, your question about the installations in Q4 of 600. About 35% are outside of the U.S. on the last quarter.

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Alexandre Mérieux, bioMérieux S.A. - Chairman & CEO [9]

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Which is quite stable as compared to the rest of the year and even the year before.

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Operator [10]

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We will take our next question from Bill Quirk of Piper Sandler.

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Rachel Marie Vatnsdal, Piper Sandler & Co., Research Division - Research Analyst [11]

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This is Rachel on for Bill. There are two questions. What is the latest with your new PLA codes for respiratory and GI assays? And if you have any colors on pricing. And then next, also, we appreciate the comments on coronavirus. Can you just give us some more color on what you're seeing in China and walk us through your exposure from a revenue standpoint and supply chain standpoint.

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Alexandre Mérieux, bioMérieux S.A. - Chairman & CEO [12]

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Okay. I'll start with the point regarding China. So China is important to us. And China is 10% of the sales of bioMérieux, and this is a fast-growing market for us, displaying this last year's double-digit growth. So clearly, it's important in the dynamic of bioMérieux.

What we see today, as we see, I would say, I believe in every -- for every type of business today, I know it's over to say, the patient traffic in the hospital is very limited. So it has an impact, of course, on the consumption of tests. So it has an impact on the overall activity of bioMérieux in China, which is not growing, I would say.

And in terms of what else are we facing, I think we are facing also difficulties like other companies in terms of sometimes servicing the customers. It's not easy to -- we have to take care of the installed base. Sometimes our field research engineer, they cannot move easily from one province to the other. So these are the type of thing that we are being impacted with. We have a close look to our supplies -- the stock of supply that we have. As you said, we're doing the assessment. I believe we are fine for the months to come. And as you know, this is a very evolutive situation. So we will keep monitoring this very, very, very closely. But -- and of course, and firstly, what we take care about is the safety and the health of our people.

In terms of exposure to China, it's 10% of our revenues. From a manufacturing point of view, we have 1 plant, which is actually Hybiome plant in China that manufactures for China. We have no, let's say, local plant manufacturing for exporting.

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Guillaume Bouhours, bioMérieux S.A. - Executive VP of Purchasing and Information Systems & CFO [13]

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On the other question on the PLA cost. So we were granted a proprietary PLA cost for BIOFIRE in the U.S. that we believe are showing or recognizing the value of BIOFIRE and the syndromic testing. As you know, and this is concerning mainly the outpatients which is today, a population but not the majority of the patient we are serving with FILMARRAY. But the PLA costs are recognized and I think further value of what are doing.

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Sylvain Morgeau, bioMérieux S.A. - IR [14]

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Okay. Maybe we can take the next question.

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Operator [15]

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Our next question comes from Maja Pataki of Kepler Cheuvreux.

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Maja Pataki, Kepler Cheuvreux, Research Division - Head of Med Tech Devices Sector [16]

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Alexandre, just a quick question. You're talking about product in development. You mentioned the Latent TB test where you say we're in clinical trials. And you mentioned the COVID-19 tests for ARGENE but also for BIOFIRE. I understand you're not going to give us the exact timing, but could you give us an overall range and say where the tests are on the respective time horizon approximately? Is it -- the COVID-19, is that something of a couple of weeks or is it something like 6 to 12 months? And the same for Latent TB, is it 12 months or further out?

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Alexandre Mérieux, bioMérieux S.A. - Chairman & CEO [17]

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Okay. Latent TB, we have started end of December, I believe, the clinical trials. So it's an ongoing process. We'll launch it -- I don't think we should expect an impact on the sales or even on the launch in 2020. It's more for 2021, I believe.

Regarding the development we have on ARGENE and FILMARRAY for COVID-19, the expectations for us is to be ready in Q2, but I don't know yet. I think we'll launch it. We'll make it available. This is without the formal regulatory approval or recognition that some regions might want to do. But that's our plan to have it around this timing.

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Maja Pataki, Kepler Cheuvreux, Research Division - Head of Med Tech Devices Sector [18]

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Great. And then a follow-up question on the guidance. Did I understand it right? So the 5% growth guidance implies basically an impact from China in Q1 and Q2, and 7% would be no material impact? Or is the 7% also seeing some impact, but not like full lost sales in China? Just to know whether we are mixing some impact into your guidance.

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Alexandre Mérieux, bioMérieux S.A. - Chairman & CEO [19]

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No. There -- it's a very volatile situation. I think the 5% is really the impact. That's what I can say. And that's what I can say at this stage. I'm not sure -- the 7% is at the high range of the target. Which is -- and again, things are evolutive. So -- and as we said, if 5% was the impact that we would potentially see for H1, it's so difficult to see beyond H1 that we factor the potential, let's say, to continuing through H1. Then the impact in our accounts, we have to be careful. It might be -- in China, we are active through distributors, regional distributors, local distributors. So there are effects between the final sales and our sales of a bit of a timing and time line. So the effects we mentioned is for the full year then it might be delayed between our sales and the distributor sales and sales that finally adjust, of course, in terms of quarter. So...

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Maja Pataki, Kepler Cheuvreux, Research Division - Head of Med Tech Devices Sector [20]

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Okay. So more Q2 impact rather than a Q1 impact for you? And that's it. Is that what you possibly...

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Guillaume Bouhours, bioMérieux S.A. - Executive VP of Purchasing and Information Systems & CFO [21]

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Might say it's a full year...

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Maja Pataki, Kepler Cheuvreux, Research Division - Head of Med Tech Devices Sector [22]

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Full year, of course. And then just the last question, if I may. In your previous presentations, you were talking about other tests in the pipeline with the vector-borne diseases for immunoassay and some additional panels coming to BIOFIRE. You're not saying much about that. Is it because it's 2021, 2022? Or is it just because you were focusing on something else this time around?

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Alexandre Mérieux, bioMérieux S.A. - Chairman & CEO [23]

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No, because we like to announce things when they are close to be ready. So today, we announced the clinical -- sorry, the FDA filing for the BCID 2. The -- I think this is going to be a very important launch for this year. And I think on the previous communique -- on the previous slide, I think we announced the work on TB-IGRA, Dengue.

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Guillaume Bouhours, bioMérieux S.A. - Executive VP of Purchasing and Information Systems & CFO [24]

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Dengue, which is a vector-borne disease.

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Alexandre Mérieux, bioMérieux S.A. - Chairman & CEO [25]

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Yes, dengue. And the idea, I think, we said at end of this year is the target and also VIDAS NEPHROCHECK. So important pipeline also in the field of immunoassay.

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Operator [26]

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Our next question comes from Hugo Solvet of Exane BNP Paribas.

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Hugo Solvet, Exane BNP Paribas, Research Division - Research Analyst [27]

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I have three. On molecular diagnostics and the increased number of placements compared to sales in Q4. I understand this is mainly driven by Europe. But could you share with us the impact of the U.S. and all that? And potentially also update us on the competitive situation. Also just a quick one on TB. Can you repeat the time line for the filing of the test? I'm not sure I got it right. And last on profitability. What are the main drivers for the 100 bps difference in between the high end of the sales and EBIT growth guidance for 2020?

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Alexandre Mérieux, bioMérieux S.A. - Chairman & CEO [28]

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So I'll take the TB question. So TB what we announced is that we entered into -- in clinical trials, wherein VIDAS Latent TB. So now it has to go through the process of clinical trials and validation and that we don't see, I would say, sales impact in 2020. The other question do you want to answer, Guillaume?

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Guillaume Bouhours, bioMérieux S.A. - Executive VP of Purchasing and Information Systems & CFO [29]

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On placement, and the placement of molecular in Q4 were 600. As we said earlier, 35% of this was outside of the U.S., meaning mainly Europe and somehow Asia Pacific. So I'm not sure -- okay. That's it. If it's not clear, let us know if it's different from your questions.

Coming back on profitability. So I think your question is on the 2020 guidance. The first key element between the high and the low range for the profitability will be the sales clearly. And as we said earlier, the major -- of course, there are other things, but the major elements between the low 5% and the high 7% is the COVID impact and the potential lower sales in -- especially in China. So again, sales driving CEBIT. Then on the CEBIT, it's also an opportunity to discuss other elements. We have the FX impact potentially between 5% and 10%, and FX are moving quite a lot these days with all these French market issues with the crisis. That's one.

The other element is that we have these phantom shares impact. So just to re-explain, these schemes are going on for already 2 years, and we will still have 1.5 years of schemes for the phantom shares with significant tranches to be paid in April and June this year and the very last one in June 2021. For this year, we still have a significant volatility in our P&L, as EUR 1 of change in the share price is about EUR 1.3 million change in our EBIT. So that -- we factored a certain charge with a certain share price, which is, let's say, in line with our increase in EBIT. But of course then things can move. That's a significant effect on potentially the EBIT. Another element, just to mention it, but that's more certain, is the impact of our U.S. pensions termination that is scheduled for H1, and that will be minus EUR 10 million in our EBIT when we settle, meaning that we sell to insurance companies externally our U.S. pensions.

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Operator [30]

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We will take our next question from Del Le Louet of Societe Generale.

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Delphine Le Louet, Societe Generale Cross Asset Research - Equity Analyst [31]

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Yes. Different type of question, if I may. First, Alexandre, can you come back into the internal organization? Because, to be frank with you, it wasn't really clear to my mind in the press release how that's going to be more agile apart from having less people around you, but should get a clarification on that.

Second question would deal with the R&D incremental cost that we've seen over the year. I was trying to understand how much of this incremental growth is dedicated to the immunoassay franchise and so to the tests that are going to be launched and planned for H2 this year.

And thirdly, I know there is a lot of volatility regarding Chinese situation, but most of your peers are impacted already. I mean nobody has seen anything mostly in Jan. February is a very different situation, and some of your peers are communicating to low sell as 10% of what they've seen last year, so meaning a 90% decline. I tried to understand if you can give us firstly an idea about February. And also, regarding possibly more precision on previous comments. Meaning that do you expect the trend that you see rolling over, let's say, at the same path up to H1? Or before that, to come back into, let's say, a normalized situation?

And finally, because I think there is a lot of unclarity even if it's getting clearer and clearer, thanks to the Slide 19 of your presentation. But if I'm correct and if I'm taking a normal situation regarding the phantom plan with, let's say, EUR 20 million, EUR 25 million cost for that, that would mean a 15.6% core operating margin. So quite an increase compared to last year. And I'm just trying to understand, considering that concept, why you have a guidance which is just EUR 415 million on the top-ish side of the core operating profit? Because that was more or less what we could have achieved in a normalized situation. Any comments? Do you have more expectation regarding the scope, next scope dilution to come or regarding ForEx? Or am I wrong in interpreting that?

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Alexandre Mérieux, bioMérieux S.A. - Chairman & CEO [32]

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Okay. I will start with this. The R&D -- the increase in R&D spend in bioMérieux, the increase in immunoassay especially this year, it's mainly linked to the strong focus and effort we put on molecular, I would say, rather than immuno. Molecular has been driving the increase in our R&D investment.

Second question around the organization. What is changing, in fact, is we are doing this organization to leverage the full global offer of bioMérieux (inaudible) I would say the complementarity of our offer, whether it is in the immunoassay, microbiology and molecular. So this is, I would really say, the key driver of the new organization regarding the creation of the clinical operations.

Sorry, the question? China. China, I know it's a very low start of the year. I think in January, I believe, I said are flattish so far. I will have to get the figures for February. As mentioned by Guillaume, we have the sell-in, sell-out dimension in China, so we will not have a clear full visibility. But clearly, we are impacted like Guillaume says, under close monitoring. I cannot say more at this stage, I would say, I come back in saying it's a very rigid situation that we're actually monitoring. But clearly, we will be impacted and this is part of the guidance that we give today.

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Delphine Le Louet, Societe Generale Cross Asset Research - Equity Analyst [33]

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So you agree with me regarding the timing? The timing would say -- in your forecast today you've include a sort of a slowdown up to H1 or, let's say, sort of an impact until the end of H1?

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Alexandre Mérieux, bioMérieux S.A. - Chairman & CEO [34]

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Yes. Yes, it was what we know. Yes. Guillaume, will you take care of the piece of it, the profitability piece of?

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Guillaume Bouhours, bioMérieux S.A. - Executive VP of Purchasing and Information Systems & CFO [35]

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So profitability. So again, yes, the high end of the guidance includes an improved margin when you exclude this FX impact. The major elements are the one we mentioned. Again, just to repeat. Pensions impact is a negative EUR 10 million. Just on pensions, U.S. pensions, is to be compared to a positive EUR 10 million in 2019. Both are one-offs. They will all disappear after that. But it's really a 2-step, let's say, externalization of our defined benefit U.S. pension plans. And from an accounting point of view, the first step in '19 was generating a plus EUR 10 million, EUR 11 million positive in the P&L. The second step in 2020 is a negative EUR 10 million. So that's also to be considered when you do a year-on-year.

The other key element, again, is piece up. As you saw, as I said earlier, we have minus EUR 36 million expense in our 2019 P&L from the piece up. The -- let's say, the midpoint of the guidance includes approximately minus EUR 15 million, so to be included in the way you look at that. And just looking forward, because, yes, we are mid-long term, and I'm sure you are looking at us as well, mid-long term. I repeat that this piece up impact will still be slightly present in 2021 until mid-2021, and after that will totally disappear. And the schemes are actually replaced internally by more, let's say, usual schemes of free shares, performance shares that are less cost and more visible cost, meaning that they don't vary every month or every quarter with the share price, of course.

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Operator [36]

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We will take our next question from Peter Welford of Jefferies.

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Peter James Welford, Jefferies LLC, Research Division - Senior Equity Analyst & European Pharmaceuticals Analyst [37]

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A couple. Firstly, just on BIOFIRE again. Just with regards to the respiratory panels. You obviously made some comments about flu. Curious though, do you think you will see any increased placement of both instruments during the fourth quarter and also respiratory panel during the fourth quarter? Or is this very much -- do you think still to come during the early part of this year?

And secondly then, just with regards to the coronavirus or COVID-19. Are you seeing at the moment any change in respiratory panel, potentially, either stockpiling or similar due to this to eliminate obviously the virus as a negative test, if you like, goes? Or at the moment, would you say the volumes you're seeing are very much in line with expectations?

And then just on the financials, just with regards to cash flows. Just curious on free cash flow. And obviously, you've made comments and gave a very helpful explanation of what's happened with the free cash flow this year. But it might seem a silly question, but are there a lot of internal assets at the moment going on to improve your cash flows? Because it does seem as though perhaps your cash flow conversion is tracking well below perhaps where it could be. Is this a focus for management? Or at the moment, the focus more on the operational and the top line growth side?

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Alexandre Mérieux, bioMérieux S.A. - Chairman & CEO [38]

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Regarding respiratory panel, so yes, we indicated that the flu season is stronger than last year. So yes, it should have an impact on the dynamic of the RP panel.

Regarding Q4, I believe it will depend when it starts as the year, if starts and about the intensity of the dissidents so that -- I think we'll have to wait for this. On your question around -- is BIOFIRE used to rule out coronavirus, I believe that's something we see. You have to know that FILMARRAY is not approved in China yet, but it's being used in Taiwan and Hong Kong and some other Asia Pacific country. And yes, we see -- since the beginning of the COVID-19, we see that in some cases, yes, people are using the RP panel to rule out different type of infection. But not so much significant at this stage, but at least it's already a tool to help for the diagnosis. Question on cash flow.

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Guillaume Bouhours, bioMérieux S.A. - Executive VP of Purchasing and Information Systems & CFO [39]

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Cash flow, coming back to the cash flow, so yes, good question as well. So the main levels on the cash flow are, obviously, the CapEx and the working capital. On CapEx, as we said several times, I think we basically have investments that are aligned with our strategy and our growth, especially to build additional capacity for future growth. So again, for BIOFIRE, especially, we need to have significant investments for the future that we are happy to do and to support. So that's why also we have this level of CapEx.

Also to mention, we didn't discuss, but yes, part of our CapEx is linked to placements slightly increasing. Actually, the placement part reached EUR 55 million in our CapEx in 2019 as compared to approximately EUR 45 million the year before. So we are increasing, but we believe these are very profitable investments actually to place instruments to rightly selected customers. So that's for the CapEx.

On working capital, we have, I think, a very good follow-up on receivables. We didn't discuss today, stable to slightly increasing, but not much today on the receivables ratio, well under control. On the inventories or inventory part, we mentioned a major, major increase. Clearly, we wanted to have -- to rebuild of inventory on some critical raw materials, some sole sourced and we needed to increase this raw material for -- to make sure that we are secure on the manufacturing process. But we also had increase on some product lines, especially on BIOFIRE. And there are probably areas where we can improve. We need in our industry to make sure that we don't have back orders because that has really a very tough effect and long-lasting effects when we have back orders with our customers, not even to mention the public health in some cases, issues. So we need to have the right inventory to avoid back orders. But we also think that there are maybe some place for improvement there, some optimization of our inventory in some places, and we will be on that.

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Operator [40]

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We will now take our next question from Scott Bardo of Berenberg.

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Scott Bardo, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [41]

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Sorry to stick with China and coronavirus. But

(technical difficulty)

for how you expect any potential impact to operate or to spread across the business? So is there any one particular division that is more sensitive, if you like, to the fallouts here? Or do you see this potentially across the board impact?

Also just like to understand a little bit with respect to the BIOFIRE utilization for this outbreak. My understanding is that there are other competitive multiplex systems that are being tested in China that have also now the relevant target for coronavirus. My understanding is that's not the case yet for bioMérieux, and that you still don't have the right pathogen on your panel. So the question is, is there any consideration for your limitation for approval or use in China? Is there any historic military connection with BIOFIRE which is causing some prohibition into China, given the U.S. military backdrop? Just a little bit of discussion there about your ability to introduce BIOFIRE in China with the right pathogen.

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Alexandre Mérieux, bioMérieux S.A. - Chairman & CEO [42]

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Okay. Your first question, I believe, the impact is across the board. It's not a department of users because of a known -- more clinical than industry, I believe, if that's your question. I believe, Hybiome is impacted there. It's both bioMérieux impact that we have in China.

Your question about the FILMARRAY, and I know it's a longer registration process. I don't think this is not linked to coronavirus. It's a longer registration process in China. No -- there is no -- I believe no connection between military and history on the -- on China. I don't see any impact on this. I'd say it's a matter of [critical care]. It has nothing to do with it, and that's it.

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Scott Bardo, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [43]

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Okay. That's helpful. And actually, I think it's pleasing to see that you continue to commit to invest in the business despite anticipated softer dynamic. And obviously, you're trying to position the business for the longer term. But my comment really just relies -- relates to -- there has been various one-offs and currency moves and impacts over the last 5 years. But the reality has been that your operating margin has been flat over the last 5 years, which on paper may be somewhat of a surprise, given strong growth over that period. So what I'm trying to understand is are you satisfied with the margin today? Do you think this is the right level? Or is there any particular driver that we can actually start to see some operational leverage in the business, which we haven't seen for the last 5 years?

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Guillaume Bouhours, bioMérieux S.A. - Executive VP of Purchasing and Information Systems & CFO [44]

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To your question, I don't think we have been flat. I think -- I don't give a [fairly alternative] guidance. I think what we said a few years ago that we'll steadily improve the operating performance of the company. And I believe that this is what we have delivered because I believe we were at 13.2% in 2015, 14.2% in 2016 and 14.6% in 2017 and 15% last year. And this year, we have underlying operational. With that, we'll keep investing to improve the platform.

Am I satisfied? We are progressing. I think what matters is to also to rest -- but what matters is to progress and to prepare the future because -- I'm going to look a bit naive, sometimes, but I think the value of what we're doing, the impact of what we have, I believe, is only the beginning of the value of diagnostics, the way it is recognized today. So we'll keep on investing. At the same time, my goal is to keep on improving the performance of the company.

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Scott Bardo, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [45]

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Makes sense. And maybe just quickly, you historically commented on your interest to move into rapid antibiotic susceptibility testing and identification, which is a pocket of a market which is growing today, I think you've been working on this area. Can you maybe give us some sense of how far along you are with this initiative, whether this is something that you think could contribute to growth in the near term?

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Alexandre Mérieux, bioMérieux S.A. - Chairman & CEO [46]

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I think this is part of the DNA of the history of bioMérieux. With the investment we are doing in R&D are also holding, of course, to opportunity in the fight against the antibiotic resistance. So we keep on investing with the menu. We're working on time to result. You have seen also that maybe we have made some agreements or strategic investments in companies in that field. I think the idea for us, it's a key topic and there's still a lot of unmet needs in the field of AST, mainly linked to time to result of the application. So we'll keep on working on this.

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Operator [47]

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We will take our next question from Alex Cogut of Kempen.

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Alexandru Cogut, Kempen & Co. N.V., Research Division - Analyst [48]

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I have two questions on immunoassays. Could you share a bit the launch strategy for NEPHROCHECK in H2, whether it's global or certain geographies? And is there any meaningful revenue baked into the guidance from that? And then the second one on the PCT assay. How would you classify the pricing pressure maybe in H2? And do you see that developing over 2020?

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Alexandre Mérieux, bioMérieux S.A. - Chairman & CEO [49]

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Okay. So for NEPHROCHECK, it will be -- the goal is to do a CE marking. And I don't see an impact on the sales for certain geographies this year. Regarding PCT, we still see some price pressure on PCT, but I need to say also that it's a high medical value marker. So even if we are not alone, as we were a few years ago, there have been price pressure. But this test is still positioned by us and by our competitors as a high medical value markers. And I think it's not a commodity test, and I think the value is recognized by us, by the physicians and by the competitors. So some pressure, but much more pressure, which I would say, not drastic.

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Alexandru Cogut, Kempen & Co. N.V., Research Division - Analyst [50]

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Would you say there's still room for the price to fall? Or are we now seeing the bottom?

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Alexandre Mérieux, bioMérieux S.A. - Chairman & CEO [51]

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It will depend on market dynamics, I would say. I don't know.

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Operator [52]

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We will now take a follow-up question from Maja Pataki of Kepler Cheuvreux.

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Maja Pataki, Kepler Cheuvreux, Research Division - Head of Med Tech Devices Sector [53]

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Yes. Alexandre, could you give us a bit more information about your noncontrolling interest in specific diagnostics? I'd be more -- I'd be interested how it fits your portfolio and how you think it differentiates from other technologies in the market. And then on NEPHROCHECK, it's very helpful that you gave us a timing on CE mark. When do you think you will have the FDA approval?

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Alexandre Mérieux, bioMérieux S.A. - Chairman & CEO [54]

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So specific diagnostics, it's very smart innovative companies. So we have a partnership on taking these companies. That's part of our, I would say, our focus on AST. And I think that these companies working on the solution to have a faster AST after also positive. But -- so this is in line with our flagship, which is a fight against AMR.

Regarding NEPHROCHECK, so I mentioned we are filing for CE marking end of this year. FDA should start -- we have just started with the CE first, and we'll work after on the FDA. So I have no indication date for the FDA approval at this stage.

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Sylvain Morgeau, bioMérieux S.A. - IR [55]

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Okay. So we don't have any more questions from the call, but we have a couple of questions from the webcast. So that, I read to you.

So first of all, but I think we already gave a bit of an answer on that, is how long would you need to develop the test active on the current coronavirus strain, the new coronavirus, time line for the...

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Alexandre Mérieux, bioMérieux S.A. - Chairman & CEO [56]

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We said that the goal is Q2 for research, Q2.

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Guillaume Bouhours, bioMérieux S.A. - Executive VP of Purchasing and Information Systems & CFO [57]

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For research use in EMEA.

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Sylvain Morgeau, bioMérieux S.A. - IR [58]

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Okay. And then we have a question maybe more for you, Guillaume, is -- so to be clear, the phantom share impact is a provision, as such it is included in the EUR 578 million EBITDA?

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Guillaume Bouhours, bioMérieux S.A. - Executive VP of Purchasing and Information Systems & CFO [59]

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Yes, it is.

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Sylvain Morgeau, bioMérieux S.A. - IR [60]

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Yes, it is.

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Guillaume Bouhours, bioMérieux S.A. - Executive VP of Purchasing and Information Systems & CFO [61]

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For EUR 36 million impact negative in 2019.

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Sylvain Morgeau, bioMérieux S.A. - IR [62]

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And so last one is about IFRS 16. Can you give us more color on the impact of IFRS 16 on EBITDA 2019? So it has been restated in terms of...

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Guillaume Bouhours, bioMérieux S.A. - Executive VP of Purchasing and Information Systems & CFO [63]

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So the restatements are all available in our press release and in our appendix. Basically, to make it simple, it's a significant impact on our balance sheet. As you have seen it, IFRS 16 increases the net debt by EUR 98 million. And this is, of course, the discounted value of the future rental expenses. But it has a minimal -- very minimal impact on our P&L. It was actually slightly positive, about EUR 2.5 million on the CEBIT in 2019. And that was restated. So when all the figures we commented today are all comparable at restated IFRS 16 for the previous year or for the balance sheet so that we compare apples-to-apples.

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Sylvain Morgeau, bioMérieux S.A. - IR [64]

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Okay. And then last question from the webcast. Would you consider to buy a company which already has an approved coronavirus test?

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Alexandre Mérieux, bioMérieux S.A. - Chairman & CEO [65]

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No. We are the largest on the -- no. We have our ongoing work, and the answer is no.

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Sylvain Morgeau, bioMérieux S.A. - IR [66]

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And I think that with that, we've cleaned all the questions, both from the call and from the webcast. So thank you, everyone, for your participation. And then we look forward to meeting you in the several meetings in the next month. And then the next formal presentation will be mid-April for the Q1 results.

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Alexandre Mérieux, bioMérieux S.A. - Chairman & CEO [67]

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Thank you.

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Guillaume Bouhours, bioMérieux S.A. - Executive VP of Purchasing and Information Systems & CFO [68]

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Thank you. Bye.

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Operator [69]

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This will conclude today's conference call. Thank you all for your participation. You may now disconnect.