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Edited Transcript of CEVI.ST earnings conference call or presentation 5-Feb-20 10:00am GMT

Q4 2019 CellaVision AB Earnings Call

Lund Feb 11, 2020 (Thomson StreetEvents) -- Edited Transcript of CellaVision AB earnings conference call or presentation Wednesday, February 5, 2020 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Magnus Blixt

CellaVision AB (publ) - CFO

* Zlatko Rihter

CellaVision AB (publ) - President & CEO

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Conference Call Participants

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* Ulrik Trattner

Carnegie Investment Bank AB, Research Division - Research Analyst

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Presentation

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Zlatko Rihter, CellaVision AB (publ) - President & CEO [1]

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Good morning, everybody. Zlatko Rihter here from Lund. I'm here together with Maria Morin who is Head of the Corporate Communications and IR here at CellaVision; and also Magnus Blixt who is the CFO. So -- and he, myself -- and I, Zlatko Rihter.

So basically, what I will do today is I'll go through the presentation as I usually do. Just a quick comment initially, as you know that we closed the transaction of RAL Diagnostics, October 1. And that also means that all of their sales and all of their numbers are included in the Q4 report. So it's a little bit of a new CellaVision that emerges now. And of course, we'll try to comment as much as possible on that also.

So my suggestion is that we move to Slide #3. And even if we have a new world up there with RAL included, still the mission we have from CellaVision's perspective as corporation is still the same, we strongly believe that by replacing traditional microscopes, preferably or initially now in hematology labs, we create value, and we create value and improved outcome, but also reducing health care cost, basically the lab costs, by replacing people with automatized workflow and some other means. So it's still our mission, and our mission is to make sure that we step-by-step replace traditional microscopes.

And for those of you that are new, move to Slide 4. Just to kind of put RAL in a perspective, I would say that what happened as of the acquisition of RAL Diagnostics in October. CellaVision is taking a larger part of the hematology lab workflow. Usually or historically, we were very much addressing the digital morphology segment, trying to address what's replaced by microscopes, but now also stepped into the whole kind of slide preparation area. And as you all know, there are roughly 2.5 billion blood samples in the large labs segment, the 17,000 labs in the world that have more than 130 samples -- blood samples per day. 15% of all samples, of the 2.5 billion are seen as abnormal, and they have to be analyzed in a microscope. And of course, what we do now is that we are part of that whole flow. Historically, we only provided the microscope itself, the digital microscope.

End of last year, and this is an update, we have a penetration of 21%. We moved from 18% to 21% penetration in the last year. And that means that we have a little bit more than 3,500 labs running CellaVision now. And of course, our plan is to step-by-step increase that over time, continue to increase that number. And of course, this is a key factor for us. And this is also our kind of historical core business.

If we then move to the next slide, Slide #5. What we also have added is a new segment that was called 100,000 small and medium labs that are labs that have less than 130 blood samples per day. In that segment, we see 1.5 billion blood samples. And also there, we see 15% of those samples need to be analyzed in a second step because there are abnormalities in the sample. And that also means that, that is our market. So together with large labs, it's around 600 million samples per year, that is our target market. And of course, all those samples need to be prepared, and there needs to be a smear and a staining -- stain slide that goes into the -- either the traditional microscope or as of now, the CellaVision DC-1 unit that is addressing that segment, and we launched that during last year. We had a CE mark a little bit less than a year ago, and we're now trying step-by-step to start to penetrate that market. And I'll come back a little bit on that later on.

But of course, the installed base is very small, and the penetration, thereby, is not that big at the end of last year. So that's kind of what we try to do. And I would say that if we historically maybe addressed 5% to 10% of the hematology market, we are now, with RAL, probably addressing 15% or even more of the total hematology market with our solutions. We have opened up new potential market areas that we -- segments that we didn't cover before, both with the DC-1, but also with the RAL Diagnostics offering. So that means basically that in one quarter, we tripled our kind of potential markets that we go for. Now of course, we have a quite a long way and journey in front of us to really increase penetration in that segment, but that's a good starting point. We have that offering in place.

If we look at Slide 6, that's more a little bit of an update on penetration over its fixed base. As you all know, North America, especially, is kind of our most successful markets. So even if we are at 21% global penetration, we are far above 50% in North America. And we are -- today have 32% penetration in all of Americas, which means that, that's kind of probably where we have come furthest in transforming the market from traditional to digital microscopy. This only covers large labs.

Then we have EMEA, 23% penetration. I think it moved from 21% to 23%. We had a few good years there and have now step-by-step increased our presence in different ways, and thereby, penetration. And also the Asia Pacific region now past 10%. I think it was 9% last year, it's 11% now. So that means that we have also stepped up here. And I think 5 years ago, we had nothing here. So been a huge effort to get to this number. And of course, we will do our best to continue that journey.

The total kind of hematology market as such is worth somewhere around SEK 40 billion, and it grows 4%, 5%. So that's the arena that we are operating in mainly today.

Then if we look to the next slide, #7. I think very important to say that our operations are done in an indirect business model, basically meaning that we always sell through partners or distributors. In our case, most of them are global. It's the big players in hematology. And since we have, I would say, agreements with all of them, that means that we can address and reach out to the whole market through them. But it's that type of business model. We've complemented that with, what we call, a market support organization, which basically means that we have a presence in markets with our own application specialist that supports the awareness, creates awareness, supports key opinion leaders and supports training, et cetera, to make sure that we accelerate penetration in each and every market. We've also decided the last quarter to add Russia. So we are right now establishing Russia as a market here as well, complementing the other 17 markets where we are more or less operational already.

When it comes to equipment manufacturing, the traditional CellaVision part of the new CellaVision. And we have a third-party setup. So we have a [Free PM] manufacturing. When -- but when it comes to the RAL part, does produce the stains. The reagents are produced in Bordeaux in France. And totally today, we are almost 200 employees worldwide with the main sites here in Lund, but also in Martillac, outside Bordeaux.

If we then move to Slide #8. And I think also the kind of the business model we had is more or less the same, with a small adjustment now with RAL, I would say that the stains or reagents manufacturing is also a core part of our business. Otherwise, we still focus very much on innovation by constantly hiring and building that team. So we know there are a number of applications still to be developed. We focus on market support to be present with our application specialists out in the field. We have local persons or colleagues out there, supporting the different countries. And I think, by now, we have covered the most important markets where we have direct presence. And then of course, our key area is -- the focus is on understanding how blood analysis is performed and continuously improve and penetrate that market.

Then we work in an indirect business model, so sales and distribution and manufacturing, at least for CellaVision -- former CellaVision part of the portfolio is done externally. With this model, we'll reach more or less all of the large labs, but also a very large part of the small and mid-sized labs, I would say, more than 80%, which basically means that by just acting the right way, we can access the whole market, which is, I think, is key.

Moving to Slide 9. You should say, this is the slide that we've shown many times before, and it remains that, that's kind of our strategic agenda. We have 6 areas that we focus on. Geographic expansion to make sure that we have presence in key markets is one. Segment expansion, which has been an area that we've been extremely active, I would say, 2019. We used to be in large labs segment, then we added the small and mid-sized labs segment, and then also slide preparation with all the reagents, which is the first segment. And I'll come back to it a little bit later. We are also right now launching an upgraded veterinary portfolio that also hopefully will be successful down the road. So we see in 1 year, we moved from, let's say, 1, 1.5 maybe segment because we did have the veterinary offering before through 4 segments where we have a complete offering. And that's, of course, exciting for us, but a lot of work.

Innovation is key as part of the strategic agenda, as half of our investments or spending goes into that, more or less in different ways. And then, of course, supply chain and partnerships and also business development, of which, I would say, RAL Diagnostics is a more concrete example. It's other areas that we spend a lot of time in and that remains. So we'll continue to have a lot of activities in these 6 areas going forward.

Again, for those of you that have not been following us that long, we acquired a company called RAL Diagnostics. I suggest we move to Slide 11. And background there is, of course, that we know that a key part of our success down the road is that we have the right reagents, the right staining, slide preparation, which slide has put in the CellaVision system, we would like to kind of have a control. So that means that we have always aimed towards -- step by step increased our presence in the hematology workflow. And of course, RAL gave us a fantastic opportunity. The company, we closed that transaction on October 1. So that was part of our Q4 activities. It's a company that has a very long history. But I think in current form, it's been operational the last 25, 30 years, focusing on biologic stains for diagnostic use, not only hematology but also in microbiology and some other areas. Located in France, a team of 50 people or 45 people, all employed -- all based in France.

And what they do is they do sample preparation and slide-staining solutions, both instruments, but also reagents for microscopy analysis. So their stains have also historically been used in our systems. They have a unique position, especially in Europe, and they are seen as a very high-quality stain. They have products in process that is really focusing on developing and producing high-quality stains that are specified to the segment where we operate. And they are present in hematology, microbiology, pathology and cytology segments. But I think that more and more their primary focus, the last years, has been hematology.

Historically, they were selling in France, and then they started to internationalize, you could say, their operations. And when they joined CellaVision, end of last year, they had quite good positions in several EMEA countries, especially Western Europe, and also selectively present in APAC and Americas. And of course, a role for us now will be to together globalize that and make sure that the market leadership in France ends up as market leadership globally. So that's a key thing, and you can also see a little bit of revenue development. It's been more or less double-digit growth the last few years.

RAL operates in an indirect model just as CellaVision. So it's the same type of operations, and it's more or less the same type of partners, Sysmex, Siemens, et cetera. So we have a very natural kind of come together point in that sense. And of course, that's what we're also trying to explore.

If we then move to Slide 12, and that also explains a little bit the rationale why we come together and why we believe that there is a very interesting future for us together. If you look at staining, this has been the RAL core, and they are seen as the #1, at least from a quality perspective, provider of stains in the market. And then combined that with CellaVision, where we offer optics and precision mechanics, we offer software and also deep learning algorithms in different ways. We believe strongly that if we bring these 2 solutions together in the same kind of protocol, same offering, and we will continue to increase the most important aspects in diagnostics, at least hematology. And I think it's a standard outside -- to be honest, outside hematology as well. One is image quality, to be able to mimic what the eye sees in the microscope digitally is key. Bringing staining and the CellaVision offering together, we believe that we can increase the image quality. If we can do that, the cells will be easier to classify and recognize. So that will increase the quality of cell classification, which is key in -- when you do AI. And then, of course, also bringing that together means that you improve and standardize, I would say, the lab workflow. So if we can manage to do that, I think, we have a very, very strong offering together. And of course, since CellaVision have historically monopoly in the digital part of the segment or niche of microscopy and hematology, we believe that we can continue to leverage on that.

So I think that's the core argument why this happened, and that we will now, in the coming years, step-by-step explore, both from a product offering perspective, but also kind of globalizing.

If we move to the next slide, and that also shows that the RAL offering has a very natural fit to the CellaVision offering. We got a different step of sample preparation, can be linked to the CellaVision hardware applications, connectivity, the different parts of the portfolio, which means that we together very soon can start to promote RAL and CellaVision products, especially in hematology area.

If we then move to Slide 14. There, you can see a little bit more specifically the components. And what differs, which is -- I think it's important to understand the difference between large and small labs. In the large labs, the global hematology providers like Siemens, Beckman and Sysmex, they do offer automated slide smearing and staining devices as if they want to automatize the workflow in those. So the main area for RAL -- CellaVision RAL there will be to offer reagents, of course, the stains that are used in those systems.

And together with Sysmex, Beckman and Siemens, we will develop the stain protocols that fits the different providers, slide smearing and staining solutions. And then, of course, we will link digital morphology to that in different ways. And when it comes to small and midsized labs, there, we can take an even larger part of that total flow -- workflow because there, Siemens and the other ones do not offer any slide smearing and staining devices, while RAL and CellaVision do. So we have 2 offerings in -- for example, in the slide smearing area. Then we have the stains, then we have stainers, which is the staining devices. We have specific staining protocols, and then they can be linked to the DC-1 that is needed in the offering here. So we have a kind of smear workflow approach in the small and midsized labs. And of course, that gives us a pretty good power. And especially in small labs, staining is a challenge. You have to be skilled, and we know that our systems needs good quality slides to be able to really offer the best analysis at the end of the day. So that's a little bit how it looks like there.

To complement that, and then if we move to Slide #16, we have also now -- we're also now in the middle of launching -- offering into new segments. And basically, what we have done is that we have taken our hardware, but customized the applications to fit to animals, basically. So we have a complete veterinary offering coming out now. Historically, we only offered veterinary applications in 2 of our systems. It was the DM1200 Vet and the DM9600 Vet. But now as of Q1, we will also offer a DC-1 veterinary version, and also we have this DI-60, which is the integrated OM solution together with Sysmex, where there'd also be a veterinary offering. And on top of that, we will also offer avian -- birds analysis on top of that, for the DC-1 Vet. So there, we also -- for the other systems, it's mainly dogs and cats. But for DC-1, we can also -- DC-1, that's avian analysis. And that's valid, especially in some markets like if you just take UAE, like Dubai area, it's a lot of falcon analysis, we have lot of zoos (inaudible). We will see what happens here. We'll take a little bit of an opportunistic perspective here because we know that the veterinary segment is much more segmented and fragmented, sorry not segmented, fragmented in the human, and it's also nonregulated. And it's a little bit different type of challenges there. So -- but we will give it a try and see what happens. And of course, we'll give feedback during the year how we proceed here. But this is, again, 2 out of 4 products are new, and also that we can do bird analysis is new. So we're moving in with that to the market also. So I would say that we complete our offering in the 4 segments. Now we have small lab -- large labs, small labs, the whole slide preparation area and also veterinary labs where we have, I would say, complete offerings today for -- to do routine blood analysis.

So that's a little bit of a background, some new stuff, some old stuff. Let's move into the financials for 2019. Again, as I said, RAL was closed as a transaction, October 1. So they are integrated full quarter financially. And then I'll try to conclude that in different ways. And of course, as you all know, it's a little bit more -- maybe more complicated this quarter to -- or complex of a the case than it's been in the past because we have more segments.

So basically, if we go to Slide 18, we had what we call structural growth. If we have RAL on top of everything else, of 35% in the quarter, reaching almost SEK 150 million, organic growth in the traditional CellaVision business, if I may say, so was 7%, and there was also 5% FX. So 12% nonorganic, so to speak.

If we then look at the different regions, Americas had another very strong year -- quarter and year, I would say. As you know, Americas is a big part of our sales. And especially in the U.S. and Canada, we're continuously very successful, and we are continuously penetrating that market. And as we said a few times before, we are now seen as the gold standard in these 2 markets. And I would say that very few, if any, labs today would go for traditional microscopy in those 2 countries, which basically means that, that's kind of the gold standards for us as well. So we're trying to push every country towards that direction. They are really good benchmarks.

We have also a lot of activities in Southern America -- South America. Brazil is, of course, a great success for us. And we also have presence in Mexico and other parts of South America. So we hope that step-by-step, we will also bring South America to the same level as we have in North America. We did launch DC-1 in Canada and also some South American markets, and then we have very high activities right now on the FDA 510(k) submission. We plan to do that in the first half of this year. And then, of course, FDA needs some time to assess and analyze before they give feedback. And if we're successful, which we hope we are, we still count to have a clearance during this year. So that would be specifically a note that we can commercially start to sell DC-1 in U.S. at that time. And as you all know, U.S. is a big part of our business. So that's an important milestone for DC-1.

APAC, a little slow -- lower, negative growth in the quarter. I think China had a very good quarter 4 the year before and that had an effect, and they had 4% growth full year. Still see over time that we have very good activities and penetration in China and Japan. And we also have a lot of activities in other APAC markets. We invested a lot the last few years in Southeast Asia and India and South Korea, Australia. And of course, as we always said, it takes a few years for those teams to really get going and to see sales coming. And I hope that -- or count that that will happen in the coming years, but it's still from the low levels, so to speak. But I think we have a strong plan there.

EMEA again, as you see, more or less, all of the RAL sales is in EMEA region. So that's why you see that high growth number. And on top of that, we also started to -- we installed quite a lot of DC-1 units in Q4. So when you combine that, you have a high growth. So it's not fully, I would say, organic, as you might understand, but we have a continuous high level market activities. And as of Q4, we have done the integration of RAL Diagnostics so that's reported in EMEA. And of course, this is the big part of the historical sales here, that's also where we started to focus from an integration perspective.

Then the installation of the DC-1 unit. We talked about the controlled ramp up during 2019. And I would say, the last few months of '19, we are now more in, I would say, industrial stage. So we are more or less able to be -- to meet or come back to that customer orders, and there's a lot of focus on Europe right now. And I think the first feedback now, it always takes some time from that you start to offer something, you have to produce it, then you have to ship it, and then it has to be installed in the labs before you get feedback. But so far, it's being really positive. And especially, on image analysis, which is core for us, we've got a really good feedback.

Now, this is net tax. This will always take some time to build up -- to build up sales, but we've got a good start. And then as I mentioned before, we're also right now establishing a market support organization in Russia that we hope will be operational during 2020.

If we then move to Slide 19 and look a little bit more on other items. Operational items, as said, we closed RAL, October 1. So they've been integrated, at least from that perspective, from an ownership perspective since then, and the focus has been very much to start now to co-promote CellaVision and RAL offerings in, especially Europe, but also outside. We are also in parallel looking into validating protocols so that there is sustained protocol of how to use the different CellaVision instruments together with RAL, and in some cases, also our partners, especially in the automatized areas, automatized smear-making or staining devices. This is, of course, going to take some time because to find the right protocol you also have to run some clinical studies that is basically to prove that this protocol is better than other protocols, so that we hopefully make customers replace other stain manufacturers with RAL. It takes some time. So first step is to co-promote. Second step will be to try to offer validate via protocols. And I think that is an activity that will take a year or 2 to really fully land in all aspects.

And at the same time, what we also spend a lot of time in the last few months is to kind of globalize the RAL offering and make sure that the CellaVision market support team -- former CellaVision market -- historic CellaVision market support organization gets training on stains and can start to push that in the different markets. And that's been done to some part. So that's an activity that is undergoing, and of course, will be a focus for the rest of the year. We spend a lot of time also for financial integration. So that's why we can show this report where we have a combined approach, of course, that's also been a key activities -- key activity in the first -- the last quarter. And then, of course, there is an opportunity, but that's maybe next step to look possibly kind of outside hematology to explore further areas like microbiology, pathology, cytology, together with the RAL team because they have presence there historically.

So that's that part on a high level. Other key events in Q4. Of course, we are moving our DC-1 from kind of, what we call, a controlled ramp up into industrialization, which basically means that we are now in a stage where we can meet customer expectations regarding order lead times. So we will now move in from managing a controlled ramp up to more of a pushing -- trying to push sales basically. So we'll move on to a more kind of aggressive approach on the commercial side for DC-1. I think the CellaVision team, I have to say, has done an astonishing work to make sure that it's really high quality. So we have a lot of internal controls, and I'll come back to that a little bit on the next slide, but what we ship to customers really works. So that's really encouraging to see. So we still have a strong belief in that. But of course, things takes time.

Focus on DC-1 is now moving over to finalize clinical studies and submit FDA 510(k) for DC-1, which we hope will happen, first half of this year. Then if everything goes well, we have a good chance to have a commercial clearance in U.S. during this year.

China, I think, is a little bit further down. Maybe a few months later, we'll -- from now, we'll start to do submissions, and I think, commercial clearance for China, which is, of course, also a big market during 2021. And by then, I would say, DC-1 is globally available from a commercial perspective in all markets. As you already know, we have EU approvals and Canada, Australia and many other markets where we can already go ahead.

And then of course, the third key area in Q4 is now that we are just about to launch the -- just as I mentioned before, an upgraded veterinary version, a complete new portfolio, going into the veterinary side, which also, of course, will be exciting to follow.

So all that being said, I think we have a pretty lot of activities on our table right now. And of course, focus now will be -- I think we did all the beginnings now in Q4 with the launch -- with the year '19 launching DC-1, acquiring RAL Diagnostics and whole veterinary. Now it's all about operational activities to get the portfolios moving in the market basically.

So to summarize that, and I move to the financials on Slide 20. I think we had a strong quarter. We should remember that Q4 '18 was a very strong quarter for us. It was the old kind of CellaVision where we only offered to large labs, and now we have more components in our portfolio. And thereby also, and I'll come back a little bit on that, a little bit higher cost situation. But all in all, we had a 35% structural growth, a little bit lower gross margins coming back on that. We will also focus a little bit more to the new structure of the company, more on EBITDA going forward as well as a KPI for profitability.

And then if we move to 21 where we'll try to explain the financial parts a little bit more, so you understand that. So basically, if you look at and compare the Q4 with Q4 19, 18 -- '19 versus '18, you can see that, again, we had 7% organic growth, some FX in that. And then 23% structural effect from the acquisition, basically. So the round numbers of sales is somewhere around SEK 25 million, you can say, for quarter 4, and the rest is former CellaVision, you can say.

We have a high expense increase in Q4. What you have to understand there is that we had a number of external costs for covering the DD, the due diligence, for acquisition that all came in Q4. Lawyers, tax and financial consultants and support to make sure that we could go through appropriate due diligence. So we made sure the DD was a big activity for us. And that was, I would say, external costs were somewhere close to SEK 4 million in the quarter, and then you have to add a few other kind of more internal type of onetime-related expenses where we have to beef up the organizations here and there and also improve IT support, for example, in some areas. So all in all, it was couple of millions kind of onetime activity that affected the Q4 from a cost perspective.

Then we also have to understand that the DC-1 now was kind of the first quarter where it was really kind of released and launched, and we started to depreciate that project. And on top of that, we are not like -- when you have small volumes in the beginning, you still have some way to go before you have that kind of the end COGS for the product. So the Q1 -- the Q4, which was the first quarter for DC-1 in real life is, of course, a little bit of a challenge also from this perspective. That will, of course, improve step-by-step as we ramp up volumes and also fine tune the production. And we also took extra measures to have extra test and control so that the DC-1 units that left the building were in a perfect shape. And of course, that also there is an increased incremental cost for that. So that's kind of, I think, what we spent quite a lot of focus on and also that this is seen in the cost side of the CellaVision P&L.

We're also in a situation where the DC-1 project, of course, was finished. We started to depreciate that and also the capital expenses related to development were slightly lower. And this will, of course, increase now as the team moves over to new projects that we can capitalize. So that will also -- that also had an effect.

On the cash flow side, of course, we acquired RAL so that we had to pay for that. So the total cash flow was pretty negative. But if you take out the RAL part, it looks better. And then also, we -- the Board decided to propose a dividend of 1.5 -- SEK 1.50 for 2019.

So if we then move to the last slide, just to show you the overview, and of course, in the 2019 numbers, RAL is only included in Q4. The other 3 quarters are more traditional CellaVision. As you can all see now is that CellaVision are moving into a new area, of course, and a new context. We are a different company that we were just a quarter ago. And of course, our focus now will be to continue to drive sales top line, but then also step-by-step make sure that we continue to have a very strong core business or historical core business of large labs business and complementing that by step-by-step improving the DC-1 component in this, but also integrate RAL and step-by-step also scale up that business down the road, basically. So that's kind of the targets we're having in front of us and continue the performance we have done in the past basically in different ways.

So by that, I would open up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Ulrik Trattner from Carnegie.

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Ulrik Trattner, Carnegie Investment Bank AB, Research Division - Research Analyst [2]

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I have a bunch of questions, if I may. Zlatko, we can just start off with you. You seem quite bullish on the RAL offering. Just on a conservative side...

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Zlatko Rihter, CellaVision AB (publ) - President & CEO [3]

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Sorry, Ulrik, I request you to repeat.

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Ulrik Trattner, Carnegie Investment Bank AB, Research Division - Research Analyst [4]

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Yes, sure. Yes. You seem quite bullish on the competitive side on the RAL offering. We know a lot, at least the feedback I've gotten from labs is that they seem quite happy with the products provided by Merck, and Merck actually have a price point, 10% to 15% below RAL. And they have quite a wide product offering in this field. So just how do you think your RAL's product offering could position itself and compete with Merck, essentially having a lower price point?

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Zlatko Rihter, CellaVision AB (publ) - President & CEO [5]

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Yes. And I think that's a very good statement. I mean just to be clear, just as for CellaVision, traditionally, the key competitor is traditional microscope. For RAL, the key competitor, more or less globally, will be Merck. So we were up against Merck here. So that's correct. If you look at Merck, I think, it's a gigantic and a very successful company. I think our angle on this will be that we will, together with our partners, be able to customize the hematology part. So we will focus on that niche. And the advantage we have, first of all, is that we can combine RAL stains with our digital microscopy offerings, so we can develop protocols. And the other part, which is, I would say, as important going forward is that if you take Sysmex or Beckman or pick any of our distributors, today, when Merck sells their stains into the hematology line, Merck has a direct sales channel. So Sysmex and Beckman cannot get access to that. If they sell RAL in that context, they get incremental sales, basically. So we can help Sysmex and Beckman and ourselves, of course, to get the incremental sales. So a part of the strategy here will be to challenge Merck through Sysmex, and thereby, create incremental sales and a stronger protocol together, the kind of the whole workflow protocol. So that's the approach where I think RAL already has been partly successful in some markets in Europe, but we'll globalize that.

When it comes to pricing, I think that's very hard to say because it depends on where and who you ask. I think you have numbers. You said 10%, 15% higher price compared to others. You have to go to -- then you have to make a really global assessment on pricing. I think globally, I would say, there are about -- but the big thing here is that we can help Sysmex with incremental sales just as we've done. When they transfer a traditional customer, traditional microscopy customer into CellaVision, they also get incremental sales. So we give them 2 sources of incremental sales now, which I think is, one of the arguments why they should go with us instead of Merck, that they push us instead of giving it to Merck. And the other part is, of course, that with the stain protocol, we can validate our offering and drive it that way as well. So there are at least 2, but of course, we need to work on that, but that's the 2 key arguments we have.

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Ulrik Trattner, Carnegie Investment Bank AB, Research Division - Research Analyst [6]

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Okay. I just heard the feedback on Sysmex that said it's still quite a hurdle for them to push RAL's product offerings that they've been distributors of the products. But let's just move on to the next question. We note that there is some increasing competition in the field, especially with Abbott's new Alinity line. And it seems like they have paired up with a company called 77 Elektronika, which seems to have the same type of morphology analyzer as you have and actually been winning tenders in the Nordics. Do you have any sort of recognition of their presence in the market and at all?

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Zlatko Rihter, CellaVision AB (publ) - President & CEO [7]

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Yes, absolutely. 77 Elektronika is a company that is addressing the urine analysis market, not the hematology. So -- and we have a global agreement with Abbott. So when they offer Alinity to the hematology part, they usually offer CellaVision systems going with that. But then -- sometimes, they have -- because Abbott is a big company, so sometimes they take the kind of a complete -- they can offer a complete solution where Alinity is a part of that. So they probably have an agreement with 77 Elektronika on the urine analysis side because urine analysis is usually done in hematology lab as well. So -- but 77 Elektronika do not have digital morphology for blood.

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Ulrik Trattner, Carnegie Investment Bank AB, Research Division - Research Analyst [8]

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All right. So the initial feedback has been that they're actually looking into going into the hematology side and actually a few placements in the hematology labs, not for just urine also for blood as well.

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Zlatko Rihter, CellaVision AB (publ) - President & CEO [9]

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Yes, but if they would like to offer digital morphology for -- if they want to replace the blood analysis microscopy perspective, they need to offer CellaVision because 77 Elektronika only offers urine analysis equipment.

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Ulrik Trattner, Carnegie Investment Bank AB, Research Division - Research Analyst [10]

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Okay. Can we just then move over to sort of the gross margin development? If I've done my calculation right here with sort of RAL having 90% of the reagent sales, they came in at SEK 25 million, SEK 26 million in sales with a 51% gross margin. That means that the underlying gross margin of your core business, i.e., sort of the old is around 70%. And that is quite a significant sequential drop in gross margin. And you still had 5 percentage points positive FX. And I do understand that you had some depreciation effect from capitalized R&D. But could you please help me sort of break down the numbers because it seems like quite a substantial drop in gross margin. Is that related to lower gross margin for the DC-1? And just you shed some light on that, please.

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Zlatko Rihter, CellaVision AB (publ) - President & CEO [11]

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Yes. I mean I'll do it a little bit on a high level. But of course, the first quarter shipments of DC-1, where we have a pretty high depreciation, we have quite still low volumes, you could say. All that together had some effect. So the DC-1 gross margin in the first kind of quarter that it was really shipped wasn't that high. So that has an effect on the total gross margin. And I think it's part also on the -- we have some excess value that we depreciate from the RAL acquisition that also had kind of a small impact on that. So that would be the main 2 sources for that without going into exact whole numbers.

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Ulrik Trattner, Carnegie Investment Bank AB, Research Division - Research Analyst [12]

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Yes. You might be able to help me out here because what I've seen is like -- it's SEK 30 million that's going to be appreciated over 5 years, which indicates SEK 1.5 million per quarter that will be depreciated goes into the gross margin, which still seems like a substantial drop. And that could only then be related to the DC-1. So when do you think that the DC-1 should be at least on par on the gross margin compared to the base business, ex RAL, of course?

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Magnus Blixt, CellaVision AB (publ) - CFO [13]

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Ulrik, this is Magnus here. Could you please repeat the question?

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Ulrik Trattner, Carnegie Investment Bank AB, Research Division - Research Analyst [14]

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Yes. So according to my calculation, it seems like it's SEK 1.5 million per quarter depreciation that goes directly into the gross margin. And then just on the basis of your presented gross margin for the base business today, which is according to my calculations, 70% in Q4. It indicates that the DC-1 has a significant negative effect on the gross margin. So when do you expect the DC-1 gross margin to be on par with the group level, ex RAL?

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Magnus Blixt, CellaVision AB (publ) - CFO [15]

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Yes. Now I see your question. Well, you have captured most of the effect that goes into the gross margin. Of course, there is some other effects -- there could be some other effects regarding inventories and things like that. And we have had a few items that, let's say, we're not -- they were not all favorable to us in this quarter. But -- so the biggest effect, then if you say, the DC-1 -- with volumes, you get better gross margins, of course, when you can run larger batches and so on. And when it comes to the quality control that we put into place, we think that we will run that -- we will evaluate gradually based on statistics, but at least for another 6 months or so is what we plan to run.

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Ulrik Trattner, Carnegie Investment Bank AB, Research Division - Research Analyst [16]

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Okay. So what volume of the DC-1 is necessary for you to have the same gross margin as you had for the DM9600 and the DM1200?

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Magnus Blixt, CellaVision AB (publ) - CFO [17]

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For the -- to answer that question, I think it will be kind of a gradual step up, but it will take a year or 2 before we are really up to the same gross margins. So this year will be -- I think, it depends a little bit on how fast we can grow the volume, but a year or 2, then we should be on the same levels. Because when we procure the components, I mean, the larger batches you buy, the lower COGS you get basically. And the first batches we acquired again to have control were smaller. So then -- and then, of course, the assembly time and all that will also improve. And I think if you look back at large labs systems, you go back 10 years when we launched those, it's been the same development there basically. What I think now with a more aggressive ramp up than we had 10 years ago, we should come to a reasonable, I would say, COGS quicker. But I think we have a year or so where we have to ramp up. That's for sure.

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Ulrik Trattner, Carnegie Investment Bank AB, Research Division - Research Analyst [18]

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Great. That helps a lot.

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Zlatko Rihter, CellaVision AB (publ) - President & CEO [19]

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I think Q4 was really the starting point. So that was the, I would say, the toughest quarter for us from that perspective (inaudible).

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Ulrik Trattner, Carnegie Investment Bank AB, Research Division - Research Analyst [20]

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Yes. I do hope you will reach higher gross margin than Q4. Can you also talk a bit about sort of what you expect for the OpEx growth. And like I want to disregard sort of the M&A-related effects. So just looking at this organically, you had 27% organic obvious growth in Q4. Is this something that seems resilient for the next few quarters?

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Zlatko Rihter, CellaVision AB (publ) - President & CEO [21]

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No. I think, over time, of course, we always plan to grow profitability faster than top line. So the OpEx growth should be -- if we have a target of 15% top line, then the OpEx growth should be lower than that.

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Operator [22]

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(Operator Instructions) And as we seem to have no more questions registered, I now hand back to our speakers for any closing comments.

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Zlatko Rihter, CellaVision AB (publ) - President & CEO [23]

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Okay. So thank you all for calling in. And as I said in the beginning, it's a little bit of a new CellaVision as of Q4, and we'll take on the journey and all the challenges we have. And see you soon and maybe if not before then the next quarterly report we have. So take care, everybody. Bye-bye.

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Operator [24]

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This now concludes our call.