U.S. Markets close in 1 hr 45 mins

Edited Transcript of DIA.MI earnings conference call or presentation 6-Nov-19 2:00pm GMT

Q3 2019 DiaSorin SpA Earnings Call

Vercelli Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of DiaSorin SpA earnings conference call or presentation Wednesday, November 6, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Carlo Rosa

DiaSorin S.p.A. - CEO, GM & Executive Director

* Piergiorgio Pedron

DiaSorin S.p.A. - Corporate Accounting Documents Officer, CFO & Senior Corporate VP

================================================================================

Conference Call Participants

================================================================================

* Catherine Tennyson

BofA Merrill Lynch, Research Division - Analyst

* Maja Pataki

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

* Scott Bardo

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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the DiaSorin 9 Months 2019 Results Conference Call. (Operator Instructions).

At this time, I would like to turn the conference over to Mr. Carlo Rosa, CEO of DiaSorin. Please go ahead, sir.

--------------------------------------------------------------------------------

Carlo Rosa, DiaSorin S.p.A. - CEO, GM & Executive Director [2]

--------------------------------------------------------------------------------

Yes, thank you, operator. And good morning, good afternoon to everybody. Welcome to the quarter 3 conference call. As usual, I'm going to make some comments about the quarter and then I will turn the microphone to Mr. Pedron who is going to address the financials. As usual, I'm going to make my comments in constant exchange rate because of the -- we -- the company enjoys a favorable effect coming from the friendly U.S. dollars.

So first I believe that this was a good quarter, both in terms of growth in the very relevant geographies where we play as well -- certainly as well as for the profitability and I think we hit a record quarter in terms of cash flow generation.

If we look at the overall situation, I think that all the assets that have been developed by the company over the last couple of years are coming to fruition and I'm mainly referring to the availability of new products, the strategic alliance with QIAGEN and the launch of LIAISON XS which I will comment separately during this conference call.

So as far as products are concerned, I think that, as we discussed many times, there has been a clear strategic indication by the company to invest in certain clinical areas and then take these products to what we consider the main market which is the U.S. obviously. And we have now all assets except one which we think will come very shortly, which is the QuantiFERON. We have all these products now approved by the U.S. and ready to go.

As far as the QuantiFERON is concerned, in the U.S. we are waiting the approval. We have fair overall almost 13 products lined up for approval. The first 2 were cleared in the last couple of weeks, one was hepatitis C, which was -- which is the beginning of the hepatitis strategy in the U.S., is one of the most complicated and got approved first. And the second one was Zika which was approved last week. So we expect next to come would be the QuantiFERON and then the rest of the hepatitis menu.

As far as the U.S. is concerned, it's very clear today that the company does have a position in the market, a very good position in the market with the commercial labs and I'm not only referring to Quest, LabCorp and Sonic which are the main 3 commercial labs in the U.S., but we do have -- if we look at the commercial laboratory including regional labs in the U.S. which we estimate to be around 200 with penetration today, which is close to 70% in this segment. Whereas strategically and historically we've always been weaker on the hospital segment.

As we have discussed in the past, we have focused our research and development, and through the strategic alliance with QIAGEN TB to develop a set of products that are actually targeted to support the company in deploying a strategy in the hospital segment. And in order to do so, not only product submitted, but also on organization, so we are in the process of actually reorganizing the U.S. commercial sales force and split our organization into 2, 1 that will continue to serve the segment where we play today and one dedicated to the hospital market. We expect that this investment is going to hit starting from the Q4 and Q1 of next year and we expect that by midyear we're going to have all the resources deployed and necessary to launch effectively all the products in this very relevant segment.

Today the U.S. is doing well. As we have seen from the quarterly result, there has been an acceleration. The growth in the U.S. was 10% and we've a CLIA x-D growth of over 15%. We have molecular that is growing over 30% and we have softer than expected Vitamin D decline. On Vitamin D, again I warn everybody to the fact that reading Vitamin D results on a quarterly basis is crazy and should not be done. A good quarter, a bad quarter for Vitamin D today means really nothing. I keep to maintain my skepticism over Vitamin D as an effect over the fact that this product has been commoditized and pricing clearly has been affected over the last few years and then volumes are [support] to the client in effect of the reimbursement policy. But also then done today in 2019, Vitamin D again was better than expected as far as our projections are concerned.

If we leave the U.S. where again I think we have, as said, a good solid track record, a good product line and a phenomenal future in front of us having QuantiFERON and the rest of these 2 products, and we go to Europe, Europe is fine, clearly is growing 9%. We all know that the European markets today are not growing at all. If not, they are contracting in certain geographies as an effect of higher pressure on pricing as well as consolidation of laboratory testing in large private players that are certainly better negotiator than hospital when it comes to contracting pricing renewal. But notwithstanding that, Europe is doing very good for us.

We certainly have Italy that is doing well. Italy is doing very well because there has been the market. Clearly domestic market is where we launched the CLIA, QuantiFERON. So it should be expected that Italy was over-delivering at the beginning of this and we expect then certainly Italy to go back to a more moderate growth going forward once the first wave of customers have been hit by the QuantiFERON conversion and development of the QuantiFERON business.

Germany is accelerating in the quarter, almost plus 6%, and that's the result of the Siemens conversion. I think we did comment in the past with the Siemens conversion was softer at beginning and that is the result of the fact that customers are very busy and conversion did not necessarily come up as a priority. However, since we are approaching the time when this product line is going to be officially discontinued and this will happen by the end of next year, then certainly there is more urgency on customers to convert and we're seeing more conversions to the CLIA technology which certainly do benefit DiaSorin in 2 ways. One is from a margin point of view; clearly we move from a distributed product which is currently ELISA to a manufactured product, so it's positive. And the other one is the (inaudible) business in the viability, in the accessibility of new customers which is the strategic reason why we decided to buy this dying product line from Siemens.

The only black eye we have in Europe is France and which has declined 4% and that's not unexpected. Lots of companies are not doing well on France and that's the result of the ongoing consolidation and price situation in France. I don't expect this trend to change shortly because again it's structural more than company specific and I think that we will need to learn to live with France which is another contributor for a while, us meaning as an industry until things will stabilize. In Europe, we have seen this in the past, we saw Spain in great difficulties at the time of the 2010-2011 crisis situation and then eventually Spain recovered and now is a positive contributor for the industry. So I believe France is going to go through a very similar cycle.

But overall Europe is fine. It is certainly the first geography where we launched QuantiFERON with satisfaction. And I continue to consider Europe as a stronghold of this organization.

Now let's move to China. China is fine. The growth has been 6.6%, but CLIA sales actually grew 11% and the result, the 6.6% come from the fact that we still have residual ELISA revenues which are flattish, plus we do have instrument sales which do not -- are not a positive contributor, actually they're a negative contributor to the growth due to the raising rental versus instrument sales policy. But overall China is fine. We will end up 2019 installing over 100 XL which is the yearly rate that we have been hitting over the last few years. So we continue to deploy our strategy which is a combination of the 2 and some specialties, especially in the area of hypertension which has been a recent focus of the company with products approved and there is a vast market in China. So China is delivering as expected.

I wanted to comment on export because it's clear now from a few quarters that export is not where the company wanted to be. Let me just qualify definition on export, export for us is where we don't do business with our own commercial subsidiary. Over the last 10 years, we've consolidated a lot of this export business into direct subs and we open up our own commercial subsidiaries in those countries where we thought the geography, the country per MR. SEAT:, was offering a strategic opportunity to the company to grow the business.

Today what we have left in export are basic geographies which are mainly located in South America where we operate through distribution except for Brazil and Mexico. Africa and North Africa and the Middle East which is contagiously becoming more and more complicated and then finally Asia Pacific. So when it comes to Asia per se, Asia Pacific is doing fine for us. So those -- all those economies that are actually somehow connected to China are doing fine and we're not suffering there. We are suffering, clearly North Africa is a problem and we're suffering in South America and that's because in these export country which are less export, I've seen there are a combination of 2 factors. The first one is that we don't sell specialties in these geographies, certainly we sell commodities even on CLIA and we see that the commodity market is becoming -- is very affected by price and by business conditions. You notice that our cash flow is extremely positive also because we manage very well our syllables. We have a DSO to their at good level, which is outstanding in the industry. But this means that quite often we need to -- we make decision in certain geographies not to operate because we feel that the credit worthiness of some of these opportunities is not there. And somehow we pay the price, but by the same token, we don't have problems with receivable and we have a very nice cash flow.

The second problem I'm referring to is that in certain -- in some of these export geographies, I honestly believe that we do have an export network of distributors which belong to DiaSorin 1.0 which is what the company was 10 years ago, some of the distributors are still with us. And I think that we're going to be more strategic about this. We really need to make an investment in the distribution channel, not meaning we don't go there, right, but we find different partners.

We went through a complete reorganization of our export team. Now we've new people, we have delocalized some of these people in the geographies that matters especially in Asia Pacific and Singapore, and I believe that we're going to fix this -- we are going to go through a fix. I believe, next year is not going to be draw any longer and not necessarily sure is going to be a positive contributor. But I think is not going to be a problem for the company any longer. Certainly we spent a lot of time and a lot of resources in the domestic market and again working in the U.S., working in Europe and China, we neglected some of the export and I think it's time to go back and rethink about the distribution network.

So from just the product opportunity, as said, HCV very important, approved by the FDA. Zika is very important and it should not surprise anybody the fact that we had Zika before and it was sold to the U.S. market under a special permit that the U.S. was granting companies because of the fact that there was a national emergency and no kits available. Now what the FDA is asking is to go through official process, we did. Today our major -- we certainly -- the vast majority of this business in the U.S. is left with the 2 big labs and we are very well positioned in these labs with the Zika products.

So we're now -- we're there where there are 2 companies in the U.S. with the FDA approved products. We're the only one we can luminescence through -- the truth of the market is that Zika -- today Zika volumes are relatively small. The epidemic and emergency that was expected did not materialize, but certainly we're there to capture any business opportunity that may present in the future.

Last but not least, as said, is the QuantiFERON. For the QuantiFERON, we are waiting for the FDA to come back and approve. We don't see -- there are no more comments. There are nothing -- there is nothing on the study that has been contested and I literally expect that the approval will come very, very shortly.

All that said, I'm going to leave the microphone to Mr. Pedron who is going to take you through financial and then we start the Q&A session. PG?

--------------------------------------------------------------------------------

Piergiorgio Pedron, DiaSorin S.p.A. - Corporate Accounting Documents Officer, CFO & Senior Corporate VP [3]

--------------------------------------------------------------------------------

Thank you, Carlo. Good afternoon and good morning, everybody. In the next few minutes I'm going to walk you through the financial performance of DiaSorin during the first 9 months of 2019 and I will also make some remarks on the contribution of the third quarter.

As usual, I would like to start with what I believe are the main highlights of the period. We closed September year-to-date '19 with increasing revenues at constant exchange rate of 4.2%. Quarter 3 delivered constant exchange rate by 5.3% mainly driven by the good performance of the geographies where we are there. Carlo has already covered the drivers behind these values.

Q3 '19 gross margin confirm the very good results achieved in H1 '19 with a ratio of revenues of 68.5%, improving versus last year by 140 basis points. This brings '19 year-to-date gross margin ratio at 69.1%, 110 basis points better than 2018. September year-to-date EBITDA at EUR 209 million increased by 9.2% at constant exchange rate compared to the previous year. The EBITDA margin, again at comparable FX rate, is 39.7% vis-a-vis 37.9% of the first 9 months of 2018. The margin of the quarter at 39.9% is confirming the very good performance achieved in the first 6 months of the year.

Lastly, we keep maintaining our ability to generate a very healthy free cash flow, EUR 138 million in the first 9 months of the year, vis-a-vis EUR 101 million of the same period of 2018. Let me please remind you that the net financial position positive for EUR 133 million has been negatively affected by the introduction of IFRS 16, which accounted for about EUR 30 million.

Let me now please go through the main items of the P&L. September '19 year-to-date revenues at EUR 525 million, grew by 6.3% or EUR 31 million compared to last year. The growth at constant exchange rate is 4.2%. The strengthening of the U.S. dollar against the euro is the main reason behind this FX tailwind. Considering where the U.S. dollar is trending now compared to 2018, I believe it is fair to say that the positive FX impact should be less significant in the last quarter of 2019, even if still positive for the group.

Gross margin at EUR 363 million grew by 8.1% compared to last year, closing the first 9 months of 2019 with a ratio of the revenues of 69.1%, 110 basis points better than 2018. Q3 '19 margin at 68.5% is better than Q3 '18 by 140 basis points. This increase, both in the quarter and year-to-date, is a result of the following 3 main drivers.

One, a positive sales mix coming mainly from lower export markets and instrument revenues, offset by a very good performance of our direct market and higher specialty test sales. This effect is particularly material in Q3 '19, where export market sales represented slightly less than 11% of total sales, compared to north of 13.5% of 2018.

The second element is lower manufacturing and distribution expenses coming from the several cost reduction initiatives started in the last couple of years. And just to remind one of them, let we mention the shutdown of the Irish manufacturing site.

And the last, lower royalties coming mainly from the fact that at the end of 2018 some patents and key raw material of our molecular kits have expired. This royalty upside has been more sensible in H1'19.

Total year-to-date operating expenses at EUR 193 million had increased by 6.7% compared to last year. The growth at constant exchange rate is a touch above 4.5%. Year-to-date OpEx ratio of revenues is basically in line with last year at 36.5%. Q3 OpEx ratio is 36.5% vis-a-vis 37.3% of Q3 '18.

Year-to-date other operating expenses at EUR 6 million are lower than 2018 by EUR 1 million. The main reason of this difference is due to the fact that in 2018 we booked some legal expenses related to a litigation with Meridian, which has now been settled. Actually it was settled last year.

Please note that most of this variance has been recorded in Q3. Because of what's just described, the EBITDA in the first 9 months of the year at EUR 166 million or 31.5% of revenues has increased compared to last year by 10.9% or EUR 16 million. The growth in the quarter has been EUR 9 million or 20%. September year-to-date net financial expenses are higher than 2018 by EUR 2 million. This variance, as already said the last quarter, is entirely due to the reevaluation at fair value of the participation in our Indian subsidiary booked in 2018 after the takeover of full control from the Indian partner.

The year-to-date tax rate at 23% is substantially in line with 2018. 2019 year-to-date net result at EUR 127 million or 24.1% of revenues is higher than previous year by EUR 10 million or 8.5%. Lastly, September year-to-date EBITDA at EUR 209 million is better than 2018 by EUR 22 million or 11.7%. The variance at constant exchange rate is positive for 9.2%.

2019 year-to-date EBITDA ratio on revenues is 39.8% at current exchange rate and 39.7% at constant exchange rate, vis-a-vis 37.9% of last year. The year-to-date improvement compared to last year is mainly driven by the higher gross margin we just discussed about and by the application starting from 2019 of IFRS 16, which accounted for about EUR 5 million in the first 9 months of the year.

Let me now close and move to the net financial position and free cash flow. We closed the period with a very positive net financial position of EUR 133 million after the introduction of the just mentioned IFRS 16, which implied the booking of financial liability for EUR 30 million.

In the first 9 months of the year, the group generated a very healthy EUR 138 million free cash flow, vis-a-vis EUR 101 million of 2018, thus recording an increase of EUR 37 million or 37%. This increase is the result of the better economic performance of the period and with positive variance of the working capital, mainly driven by very good DSO coming from a favorable geographical sales mix, as we said, less export sales and more sales in direct countries with lower payment terms such as U.S. and by a very, very disciplined collection policy.

Lastly, we confirmed 2019 guidance which foresees an increase in revenues between 5% and 8%, and an EBITDA margin at the same level of 2018. Please let me remind you that the guidance is, like always, at constant exchange rate.

Now let me please turn the line to the operator to open the Q&A session. Thank you.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question is from Maja Pataki of Kepler Cheuvreux.

--------------------------------------------------------------------------------

Maja Pataki, Kepler Cheuvreux, Research Division - Head of Med Tech Devices Sector [2]

--------------------------------------------------------------------------------

I have 3 questions please if I may. Carlo, I would like to start with the latent TB approval delay in the U.S. At the Q2 call in August, you seemed to be fairly confident or very confident that the approval would come through shortly and you indicated that there was a 3-month timeline during which the FDA would have to approve the test, which would have brought us to October. Now we're in November, we don't have the test approved yet. Could you just tell us why there was this delay and what makes you so confident that we should see it in the coming weeks before year-end?

Then the second question relates to your guidance. You're reiterating your full year guidance for 5% to 8% local currency growth, which would imply to meet the 8% you would have to have a very strong Q4 in the high teens. Do you believe that you can achieve the 8 percentage points and if so, yes, could you tell me what the potential drivers would be for that in Q4?

And then the last question relates to Quest and their streamlining the business to one supplier and the fairly upbeat comments by Siemens about potentially getting that contract. Could you tell us what is in your medium-term guidance, i.e. if Quest were to move to Siemens and would allocate the Vitamin D business also to Siemens, what impact would that have to your medium-term guidance?

--------------------------------------------------------------------------------

Carlo Rosa, DiaSorin S.p.A. - CEO, GM & Executive Director [3]

--------------------------------------------------------------------------------

Okay. I'll take the first and last, and PG I think will take the second. So let me start with TB. You're right, I made a comment saying that the procedure is 180 days, which from the end of August is taking to September, so the FDA -- to November, sorry. So the FDA is on time as far as that we know -- and they have to approve it within that window.

What I think it happened is that there has been an introduction at the FDA level in the last process of the review of a 3 weeks window period whereby there is a newly appointed commission, and don't ask me what the name is, but it's a procedure whereby all PMAs before getting approval are -- there is a final review by a commission that will fundamentally validate what the reviewer does. And so I believe we entered into this phase and this is why we saw a delay over 3 weeks.

The questions that we are getting -- that we got out of it are very formal and not really of any substance in terms of the challenging clinical data and everything else, which would be the one -- are the ones that usually require time extension. So this is why I'm saying, Maja, that as far as I am concerned, we are very, very close now to the approval and us and QIAGEN are gearing up in order to get the benefit from this.

As far as marketing the product, you're not allowed to do much with the exception in the U.S. So you're not allowed to provide pricing to customers, but you're allowed to do some pre-marketing activities and evaluation which we have certainly done. And this is why I expect that as soon as we do have the approval of the product, then we can hit the market quite rapidly. And I know because of the -- from the European experience that conversion and business development activities are relatively fast when it comes to moving from an ancient ELISA to a much better fit which is a clear liaison.

Now let me comment on the Siemens call and Quest and all of that. Look, there is one thing that I guarantee, today we sell 20-some products into Quest and I guarantee you that all these products are going to be assigned to DiaSorin, okay, with one exception which is Vitamin D. And I guarantee you that because first of all the contracts as far as all the other products go into 2021, but second I also see that Quest has fundamentally made a decision which is mainstream consolidation with one supplier and then you've your specialty supplier and I feel very comfortable with the fact that Quest has chosen DiaSorin as specialty supplier. This is proven also by the fact that very recently we got awarded by their calprotectin business which is a specialty, is a multi-million dollar contract. So I have no problems with how we are positioned within Quest.

As far as Vitamin D is concerned, the main driver for this, for the main -- for the selection of the mainstream supplier is the fact that Quest, as you know, is building a new lab in Compton, which will be the one of the largest -- I mean, the largest labs, I believe, in the U.S. They're going to consolidate in Compton some of their operations when it's fully automated. It's da, da, da. So is set for the -- is set fundamentally for what they call Operation 2.0 of the future. And I honestly -- sorry, I said Compton, but it's Clifton.

And I honestly believe that Siemens has a good chance to get the business because of the fact -- or the relationship that they have because of the fact that if you think about all the suppliers, some of those will be excluded because they are also supplying to a competitor lab. So Siemens may have a very good shot at getting this. And I think that if that happens, it's certainly clear that the Vitamin D falling into mainstream may follow that contract.

However, I see that in order to then deploy, change all the suppliers because we're not talking about only Vitamin D and DiaSorin, we're talking about multiple suppliers, clinical chemistry and all that and make all the deployment of (inaudible) if they win and have all the lab ready, which by the way the lab is not going to be ready until 2021. It's going to take time.

So I'm a very pragmatic person. So in my own calculation, I think that there is a chance that when it comes to Quest that we may lose the Vitamin D. But we're quite confident that that loss is going to be partially, if not totally, offset by the fact that we've been chosen as the -- as a good partner for specialties.

You also need to keep something in consideration. I cannot disclose the pricing, but when it comes to the standards and pricing for Vitamin D, Maja, it's getting to a point where it's not even funny because when you look at an overall big for all the Quest business for immunoassay and clinical chemistry, then you go -- there's no differentiation in terms of price concession. So you can allocate Vitamin D whatever you want. And you get to a point where you really need to wonder if that business is still worth it or not.

One more comment. I think that I made -- I mean this company made a decision fortunately long time ago to try to balance the exposure that we have in the commercial labs with a different strategy. And that decision was taken a while ago because when you do that, you start first from product development and you start with getting the product registered and designing a system that fit that space. And it is very clear that when it comes to the U.S. where today we have an -- we have a beautiful business with the commercial labs, but we're overexposed. We need to move the needle toward a hospital strategy. I continue to say QuantiFERON is a tremendous opportunity to move in that space alongside with all the gastroenterology assays that we have and this is the way to balance the exposure and guarantee that in the U.S., we will continue to see growth because as I think we discussed during my presentation on the Analyst Day and now I see the future, I see polarization, I see Quest and LabCorp. They are going to win a good chunk of that market because we're set strategically to be able to be more efficient.

Therefore you need to be at Quest and LabCorp because they will continue to gain market share, but they are formidable negotiators and the price that you enjoy with these accounts, unless you are a few specialist player, it's been okay because they're very good negotiators and they have tremendous volumes that nobody else has. So to make a long story short, in my pragmatic approach, I believe that Vitamin D is at risk. But I'm not losing sleep because I know that we have a slew of products with these specific big accounts that would provide us an opportunity to offset this loss if it comes. But I'm quite comfortable that it's not going to come necessarily next year. This is how we see it.

--------------------------------------------------------------------------------

Piergiorgio Pedron, DiaSorin S.p.A. - Corporate Accounting Documents Officer, CFO & Senior Corporate VP [4]

--------------------------------------------------------------------------------

So I will take the second question, the one regarding 2019 guidance. So when we gave 2019 guidance, I believe we qualified the 5% to 8% range saying that we had a few moving parts, which were kind of difficult to forecast. One of them was the registration of latent tuberculosis in the U.S., which we know is the biggest market for this kind of test. And the other one, I don't know if you recall, was the big tender in the export market, in the Korea market, which we didn't know if we would have been awarded that tender or not. So considering the fact that latent tuberculosis is going to be registered very, very likely in November, so later than our original expectations and that the South Korean tender is unlikely we'll get it, I think that we will be shooting for the lower range of the guidance. So I see very likely, more likely the 5% than the -- than being closer to the 8%.

--------------------------------------------------------------------------------

Maja Pataki, Kepler Cheuvreux, Research Division - Head of Med Tech Devices Sector [5]

--------------------------------------------------------------------------------

Carlo, just to make sure I got you right. So you're saying there is a good chance that you might lose the Vitamin D business with Quest, but you are confident that you will be able to compensate for those lost sales with the specialty menu that you will continue to provide with Quest. Is that correct?

--------------------------------------------------------------------------------

Carlo Rosa, DiaSorin S.p.A. - CEO, GM & Executive Director [6]

--------------------------------------------------------------------------------

Maja, yes, you know me, I'm very -- I'm pragmatic and I never look at the quarter and I look at the development of the business with an account. I believe, if I look in front of me the opportunity that menu provides, viability of TB, which is a significant business in the U.S. and in these big accounts. If I look at the other specialties that we achieved with gastroenteric and so forth, I believe that we do have the possibility to offset that loss with more business coming from the other products we have.

If you're now asking me, but how is this going to play in the next 12-18 months, I have no idea because I don't know about the implementation of Cigna because Cigna is (inaudible) or whoever is going to win. Okay?

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

The next question is from Catherine Tennyson of Bank of America.

--------------------------------------------------------------------------------

Catherine Tennyson, BofA Merrill Lynch, Research Division - Analyst [8]

--------------------------------------------------------------------------------

I just have 2. So my first one would be on China. Can you just give us some color on how you think the sustainability of low double digits organic growth is for your CLIA business fair as we look to 2020? And have you seen any changes in China in terms of market softness as some of your competitors have seen?

And secondly, if I can ask on the rate of conversion from your Siemens clients from ELISA to CLIA, have you seen any pickup in that in Q3 or Q4 or is it likely to still be a H1 issue for next year?

--------------------------------------------------------------------------------

Carlo Rosa, DiaSorin S.p.A. - CEO, GM & Executive Director [9]

--------------------------------------------------------------------------------

Okay. Let me start from the easy one, which is conversion. I've seen a pickup for a very simple reason. We communicated to lots of customers that the product is going to be cleaned come the end of -- mid end of next year. And so even if they don't like it, but they don't like to do conversion because they have plenty of things to do. And so today they have a product that is the ELISA, which is suboptimal, but is a product. And if they're rethinking about the layout of the clinical chemistry, certainly this comes second. But now they are forced to do it. So yes, I see -- we will see a pickup in quarter 4 of the Siemens conversion.

Now let's talk about China softness. I was in China last week, so it's fresh in my mind. I think it is sustainable because the growth, the double-digit growth of our CLIA -- because it's driven fundamentally by 2 factors. One is that we -- is a market that is expanding and we continue to sell mainstream products in China, the thyroid oncology, that stuff, that interestingly enough is still growing for us 7% to 8%. And this is a more mature market, you can imagine, okay.

Then we have a traditional franchise, like what we call legacy, which is prenatal testing where we now have a very significant market share. And that, yes, is soft. It used to grow a lot certainly, 20%, 25%. Now we are really -- the growth is more correlated to the amount of newborns in China because it's prenatal testing. And so that depends on -- it may be a good year and bad year, but fundamentally still is not a drag. It is a product line that is growing 3%, 4%, 5%, but I consider that mature.

Then you have a tactical opportunity and a strategic opportunity. The tactical opportunity, which is tremendous, is hepatitis because it's a big market in China. There are 4 companies with the hepatitis products approved with plenty of ELISA. We have the Beckman relationship. So that is tactically growing double digit. But is not something, again, that strategically is keeping me excited because I believe that as far as China is concerned, there are 3 strategic opportunities.

One is to, again, move away from the high -- the big hospital segment into the mid-size, small hospitals and this is LIAISON XS strategy. So it's driven by the system. The second opportunity is the fact that being -- I mean, it is -- China is becoming a mature market. And when markets are becoming more mature, it's certainly clear that you have -- they turn from mainstream only to mainstream-plus specialties. And as we have enjoyed specialty -- a specialty strategy in all the markets, we are going to enjoy this conversion in China, which today is really an untapped opportunity.

One of the first products that we are using to test the market with is hypertension because hypertension is certainly an issue in China. There is nobody there. We have 2 test approved and we're working with some of the local institution and opinion leader to educate physicians on the use of hypertension. So this is just an example of an opportunity that I see to finally the specialty market to develop.

Last but not least is QuantiFERON. Because today there is a very awkward situation in China where QuantiFERON is approved, but is used for active diagnostic and not for latent diagnosis. And so we -- currently we are going through registration of the DiaSorin and their product with the latent claim. It's going to take 2 years because of the classification of the product. But this, if -- so you ask me, what is going to be your mid- and long-term growth strategy? The guarantee is 11%. That is this mix of different products.

Now last but not least we commented I think in the previous -- in some of the previous calls, we were talking about strategy, that in China we do have an Achilles heel and that's the fact that we are a pure importer, okay. And as part of the strategy to set up a manufacturing site, which we are working on and then become for mainstream products, the local manufacturer, that is giving you advantage versus competition because then you're classified as long-term manufacturer and you apply to certain tenders where today you are excluded from.

To make a long story short, I think it's sustainable, is a combination of these facts that to continue to grow China at double digit as we have done in the past.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

The next question is from Scott Bardo of Berenberg.

--------------------------------------------------------------------------------

Scott Bardo, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [11]

--------------------------------------------------------------------------------

So the first question, please. I wonder if you could talk a little bit about how the QuantiFERON-tuberculosis collaboration is working in Europe. I think historically, if I'm not misquoting you, you had expressed an opinion of around 50% conversion of the test. That's for conversions globally. I just wonder whether some of the early evidence in Europe is pointing towards that and you're a little bit ahead, a little bit below, if you could share some thoughts there as well as how the LIAISON XS platform is initially performing in that market? That would be helpful, please.

Second question is just really following up from Maja's questions surrounding Quest. So I just wanted to make sure I understand your comments correctly. So you're suggesting that you're confident that you are the specialty immunoassay provider of choice over the coming periods because you're still entering into new specialty contracts on your LIAISON XL system and you're still shipping LIAISON XLs, which is evidenced in your minds that you are a continued trusted partner. Is that correct?

--------------------------------------------------------------------------------

Carlo Rosa, DiaSorin S.p.A. - CEO, GM & Executive Director [12]

--------------------------------------------------------------------------------

Listen, let's talk about QuantiFERON and the development. To me, there is a very crystal clear evidence to the fact that ELISA is not a viable technology, okay. It's complicated. Even if you make an effort to automate, as I think QIAGEN has done very well in some very large accounts because then you need to put lots of processors to handle the plate, but also to handle the tubes, I see that ELISA is unsustainable.

And to that extent, I think that the fact that bioMerieux is coming to the market with the VIDAS and certainly the VIDAS is a small system. So they are going after send out markets and so forth, to smaller accounts. But it's very clear that there is lots of pressure to automate, okay. So evidence in Europe is that is more -- is not a problem of the customer to convert, was the fact that we had to work with QIAGEN and gear up our commercial organization and their commercial organization to work together to make sure that we do this in an orderly matter, right. And also we exploit the opportunity of going after the Oxford business. You've seen Oxford reporting yesterday. There is still a hefty -- there is a good chunk of business today is done by Oxford, I think roughly 80 million worldwide.

Certainly there is -- that business is a U.S. connotation, now in the hand of Quest, and then it does more in Japan and China, still some business in Europe, mainly in the U.K., and that business is where strategically us and QIAGEN see the opportunity to increase the -- our overall combined market share after certainly some of the cannibalization or let me say transformation of the existing QIAGEN business from ELISA to LIAISON has happened. And with mutual satisfaction, meaning that it's very clear that on the casual side is a defensive move by them saying by the same token is also move to allow customers to do the testing better and enjoy in several cases better pricing simply because customers are available to pay some more for automation when you provide them automation and efficiency.

So as -- let me also though remind you that when it comes to the U.S., our strategy in the U.S. is different from Europe. And this is because of peculiarity of the U.S. market. The U.S. market is, as usual, highly polarized, meaning that you have a good chunk of business in the hands of a few commercial labs because of the fact that in U.S., as we saw with Vitamin D, everything within U.S.A. starts from the commercial labs because in the periphery the volumes are too small. And especially if you have ELISA that small accounts don't want to use, they send it out, right. So today there is a duopoly or triopoly today in the U.S. of a few large labs that which are dominating testing. In the U.S. what we want to do is to go after the hospital market and stand-out.

And there is plenty of opportunity and financially make a ton of sense because the send-out cost in this case is very high. Okay. So the European model and U.S. model are different. In Europe was defensive posture and opportunity to move exhaustive customers from ELISA to QuantiFERON. In the U.S. is market development going after send-out where you're actually taking existing business done in the commercial labs to begin and turn it into end-user avenues. Okay. Just to make sure that everybody understands the difference.

Access is very relevant in the U.S. in phase 2 because the initial effort certainly is going to go -- is to go after what we call low hanging fruits which are accounted, so they are using ELISA certain volumes and they are fed up with the technology and then they want to move to a new box. But it's strategic certainly on the long term to mid-long term to allow the development of the hospital strategy in the U.S. with QuantiFERON. That's certainly true.

As far as Quest is concerned, I -- Scott, I think I exhausted this with my -- let me repeat it once more. I believe that Quest gave a very clear indication that they're going through transformation. And they're going through transformation in the way they intend to do business, meaning that they're consolidating into a very large lab. Some of their operation, they are investing massively into automation. And when they do that, they need to tackle the mainstream. So the issue I don't think has never been specialties because by definition specialty stay out of that. Adding specialty to a mainstream line is adding an unneeded complexity. Okay.

Now Vitamin D used to be a beautiful specialty as a mainstream. So it's very clear that Vitamin D will go on that line in my opinion. It's going to take time because it's going to be related to the deployment of the full line of whoever is going to win that bid, is going to take a substitution of multiple suppliers with a unique supplier, is going to take software infra, is going to take time. Okay. So if we lose Vitamin D, I would be very surprised if that is going to be a sudden death. I think it's going to be -- there's going to be soft landing. And if I look at soft landing, which again, how long is it going to take, I don't know because it depends on the deployment or who is going to win that bid. Then I'm asking myself, what do I have in my -- what do I have today in my quiver to counter the loss. And I have stuff. I have specialties, I have TB, I have good stuff that I think can counter the business I'm going to be losing in that account. This is it.

--------------------------------------------------------------------------------

Scott Bardo, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [13]

--------------------------------------------------------------------------------

Well, with that in mind, if we could just perhaps just talk high level thoughts into next year. And you mentioned that your export business is a couple of percentage points drag on growth this year that you think you can, if you like, quell next year. You're launching new hepatitis products, you expect to get the QuantiFERON tuberculosis product approved in the U.S. where I'm not sure if there's any pent-up demand or so, if you wouldn't mind sharing some thoughts.

But at the same side, the Quest contract for Vitamin D, which I think is due for renewal at the end of this year, I think is about EUR 15 million or so, 2 percentage points of revenue could act as a headwind. So what I'm trying to understand, in the framework of the group where you have this mid- to high-single digit, high level, is 2020 shaping up to be any different from that sort of trajectory that you have (inaudible) the medium term? That would be helpful

--------------------------------------------------------------------------------

Carlo Rosa, DiaSorin S.p.A. - CEO, GM & Executive Director [14]

--------------------------------------------------------------------------------

Scott, I'll give you -- I think it's very interesting because you pretty much summed up by yourself what I always said. But in order to be more specific, I believe that I wanted to see the U.S. QuantiFERON to kick in because that is what makes it or break it vis-a-vis the speed of growth because we both -- again, we've been discussing this for a long time, the U.S. strategy is a hospital strategy, the U.S. strategy is QuantiFERON and gastroenteric driven. And that is what guarantees the future growth in the main geography. Okay.

So I'm not referring -- just to be specific, it's not that I'm doubting about the approval. I give the approval for granted, no problem. But I want to see the product and the program hit the floor. The customers, us and QIAGEN working in sync to make this happen because what I saw in Europe is that you really have an acceleration of the project, came a lot of success when the 2 companies are working like one in deploying all of these. Okay. And we went through a month where we had to gear up in Europe. We brought many, many countries together, it was a tremendous effort. And still today we have weekly calls between the 2 companies to manage all of this. U.S. is simpler because it's one geography, but it will take to bring everybody in sync and move on.

So to make a long story short, I have no doubt strategically that we have all assets that are necessary to do, to deliver what we said we're going to deliver, okay. To give you more specificities about the good, the bad and the ugly now, whatever is going to be the reality of all of it, I think I need a little bit more time. So we're going to talk about this in I think March and at that point we will have 2, 3 months under our belt of QuantiFERON development in the U.S., and are going to be more specific on the short term. But as far as the midterm is concerned, I'm super fine.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Carlo Rosa, DiaSorin S.p.A. - CEO, GM & Executive Director [16]

--------------------------------------------------------------------------------

Okay. Operator, thank you very much. Bye-bye.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

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