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Edited Transcript of VRT.AX earnings conference call or presentation 19-Aug-19 11:00pm GMT

Full Year 2019 Virtus Health Ltd Earnings Call

Greenwich Sep 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Virtus Health Ltd earnings conference call or presentation Monday, August 19, 2019 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Glenn Powers

Virtus Health Limited - CFO & Company Secretary

* Susan Channon

Virtus Health Limited - CEO, MD & Director

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Conference Call Participants

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* Thomas Godfrey

UBS Investment Bank, Research Division - Analyst

* Greg Hoffman

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Virtus Health Limited FY '19 Full Year Results Conference Call. (Operator Instructions)

I would now like to hand the conference over to Ms. Sue Channon, CEO. Please go ahead.

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Susan Channon, Virtus Health Limited - CEO, MD & Director [2]

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Thanks, Kit, and welcome, everyone, to the Virtus Health Full Year FY '19 Results, and thank you for joining us. As the leading fertility provider in Australia and Ireland, today's results signify our competitive strength and confidence as we continue to invest in this sector. We have made significant investments in our facilities and business operations in FY '19, all of which will support us to drive growth in the coming years.

If we move to Slide #4 and the financial results highlights, Virtus has achieved cycle and revenue growth. However, additional costs relating to key planned infrastructure investments, targeted expansion in the Australian lower-margin segments and a slower-than-expected performance in new assets has impacted the full year FY '19 results. Virtus' overall first cycle growth for the year was up 1.5% with a total of 20,300 cycles compared to 18,496 cycles in the prior corresponding period.

International EBITDA growth was impacted by softer trading in the U.K. and Ireland and doctor resourcing delays in our Aagaard Clinic in Denmark. While revenue was up 6.1% to $280.1 million, EBITDA was down 2.3% to $63.5 million, and EBITDA margin was down 2% for the reasons noted. NPAT attributable to ordinary equity holders was down 7.6% to $28.4 million, with earnings per share down 7.6% at $0.3537. The company has declared an interim dividend of $0.12 per share, fully franked, payable on the 25th of October.

Moving to Slide 5. We have invested in a number of key growth strategies in FY '19. And in the face of some short-term headwinds, we have been able to maintain earnings in the core domestic fertility market. Overall, revenue was flat in Australia, impacted by price pressure and mix change in a competitive Australian market, a decline in our genetic screening revenue following a change in clinical practice and weak performances from our Alexandria and Hobart operations, which were both disrupted by the first half by the relocation to new facilities.

The underperformance of our Tasmanian business resulted in an impairment charge of $5.8 million, offset by fair value adjustments of $8.3 million. A targeted effort to recover market share and the change in revenue mix in Tasmania significantly affected revenue per cycle. While our significant investment in infrastructure, people and technology through FY '19 positions Virtus well for the future, it has had a margin impact.

International revenue increased by 25.2%, supported by a first-year contribution from our new Danish clinic, Trianglen, and continued growth in Singapore. However, the performance of our Aagaard Clinic in Denmark and Complete Fertility in South Hampton were below expectations, with Aagaard suffering a decline in revenue due to doctor resourcing issues noted previously. These issues have been addressed, and we'll have a stronger complement of specialists by December.

We are pleased to announce the progress of our Artificial Intelligence software, Ivy, in April 2019 and the collaboration and further development of our technology partners, Vitrolife, based in Sweden, the manufacturer of EmbryoScope time-lapse incubators and Harrison. AI, an Australian technology company specializing in Artificial Intelligence in health care. This collaboration and its commercialization delivered $4.1 million EBITDA.

We move now to Slide #7 and the Australian fertility operations. Cycle volumes in Virtus Australia clinics increased 1.5% over the prior corresponding period against the comparable market growth of 4.9%, with Virtus' overall cycle activity for the full year at 15,460 cycles compared to the prior corresponding period of 15,235.

In New South Wales, the market was up 2.6%, and Virtus New South Wales was down 1.6%. The Victorian market was up 8.4%, and Virtus Victoria was up 5.9%. The Queensland market was up 5% and Virtus Queensland was up 0.4%. And the Tasmanian market was down 2.7% and Virtus Tasmania was up 8.2%.

Virtus has continued to proactively target the low-cost segment with ongoing service model and pricing review and delivered a volume increase in this segment of 25.6%. The fertility centers now represent 17.9% of Virtus' overall Australian activity compared with 14.5% in the prior corresponding period. Underlying Australian segment revenue, excluding the IP sale, was in line with the prior corresponding period at $218 million despite the overall cycle mix change.

Whilst we experienced an overall decrease in our EBITDA margins as a result of our targeted initiatives, EBITDA margin for the now TFCs remain in excess of 35.8%. Australian segment EBITDA was down 8.6% to $61.1 million compared to $66.8 million in the prior corresponding period. And this was mostly the result of a change in the premium service revenue mix from the high-margin New South Wales and Victoria cycles to lower-margin Queensland premium cycles.

Revenue growth in targeted low-cost services impacting EBITDA margin, a decline in genetic testing utilization and increased compliance costs and additional cost from the planned infrastructure developments and relocations where activity has not returned as quickly as anticipated.

Moving to Slide #8. There have been a number of key projects and achievements delivered in the Australian business during FY '19. This has been a year of holding earnings in our key Australian states in a changing market, combined with planned investment in capacity to deliver the platform for ongoing growth. The infrastructure development completed in the first half of FY '19 resulted in the relocation of IVF Australia's East clinic and lab to Alexandria and the TasIVF clinic and lab to new facilities in Hobart. Our commitment to leading sites for the deployment of the latest time-lapse imaging technologies and the rollout of Ivy, our Artificial Intelligence Technology, across all major laboratories delivering improved outcomes to our patients. As noted previously, the collaboration with Harrison. AI and Vitrolife will allow ongoing development of this technology deliver further patient and commercial value.

This year, Virtus Diagnostics relocated its main pathology laboratory to new premises in the medical precinct of Revesby, introducing a full suite of state-of-the-art diagnostic equipment and an expanded testing capacity. The appointment of additional pathology and genetic specialists during FY '19 ensures compliance to the new supervisory requirements of the NPAAC regulations. And Alexandria and Hobart Specialist Day hospitals are now fully operational.

Moving to Slide 9 and the Australian diagnostic operation. Virtus Diagnostics' revenues decreased 2.5%, and EBITDA decreased 30% on the prior corresponding period as a result of regulatory changes and lower PGT utilization. PGT utilization now sits at 13.7% of fresh cycles compared to 17.7% in the prior corresponding period, and this has had a $1.3 million revenue impact. This follows a clinical practice change in FY '19 which will be addressed through the introduction of new technologies for noninvasive pregenetic testing which is currently being validated.

EBITDA was also impacted by an increase in clinical compliance and resourcing costs as NPAAC introduced new legislation requiring increased pathologists and genetic staff supervision. We will focus on further growth in Diagnostics through the utilization of the increased capacity and expanded testing capability and the relocated laboratory supported by the additional scientific and pathologist resources by exploring new technologies for noninvasive PGT and molecular genetics and focused business development activities to maximize internal and external referrals. Diagnostics remains an important part of our vertical integration platform, and we will continue to invest in it.

Slide 10 just showcases our laboratory investments.

Moving to Slide 11 and the Australian Day Hospital operations. Day Hospitals experienced a difficult year as a result of the planned facilities development which are now complete. EBITDA was heavily impacted by the relocation costs and disruption to non-IVF activities at Alexandria and Hobart. These changes reduced EBITDA by approximately $1.5 million in FY '19. However, business development activities, including the appointment of a business development officer, saw an increase in non-IVF revenue of 2.3% across all Day Hospitals, and we expect this to continue. The emphasis is now on ensuring these facilities are utilized for maximum return, notably we now have an additional 3 operating theater capacity and are able to capture Day Hospital revenue for the first time in Tasmania.

Again, Slides 12 and 13 showcase our investments in those 2 Day Hospitals.

Moving to Slide 15. Our focus on expanding the Virtus model in carefully selected international markets is achieving results with revenue from international operations growing by 25.2% to 21% of group revenue and EBITDA increasing by 9.3% to $10.1 million. This was supported by a first-year contribution from our new Danish clinic, Trianglen, and continued growth in Singapore.

Management continues to work to identify international development opportunities and the delivery of greater synergies across our 6 European sites. International expansion remains key to our growth and diversification strategy, and we will continue to actively and selectively pursue opportunities in Europe and the U.K.

Moving now to Slide 16 and the Irish operation. In Ireland, our clinics remain the market leader and delivered a solid performance of 2,197 cycles performed in FY '19 against 2,227 in the prior corresponding period. Revenue was up 0.7% to EUR 21.9 million and lower cycle volumes were offset by an increase in frozen cycles. EBITDA local currency was down 9.8% on the prior corresponding period as a result of the flat cycle volumes and marketing and finance restructuring expenses.

Slide 17 and the U.K. operations. Our European presence expanded at the end of 2018 with the acquisition of Complete Fertility Centre in Southampton. CFC performed 452 fresh cycles in FY '19 with revenues of GBP 3.1 million. We completed a refurbishment of the facility in order to create additional capacity for growth. However, this did cause some disruption resulting in lower-than-expected volumes for the year. Revenue was also impacted by lower donor cycle activity and a public-private mix issue impacting revenue per cycle.

Looking at our Danish operation, the acquisition of the Trianglen Clinic in Copenhagen achieved our aspirations to have a greater presence in the Danish market. And this acquisition has taken our market share to around 15% and given us a presence in the largest city in Denmark.

The Danish clinics delivered mixed results. Trianglen performed 1,397 fresh cycles with revenue of DKK 39.3 million, and EBITDA was in line with our expectation. Aagaard performed 414 fresh cycles down in the prior corresponding period with 539 cycles performed. This is a direct result of the doctor recruitment issues noted previously, which have now been resolved. The clinic is expected to be fully resourced by December 2019. And the team will now turn their attention to -- for operational synergies between the 2 Virtus Danish clinics.

Moving to Slide 19. In Singapore, we saw a small improvement in cycle volume over the prior year. In FY '19 EBITDA was SGD 502,707 compared to SGD 363,000 in the prior corresponding period. An additional doctor has joined the team, and a new medical director has been appointed. We have achieved stability on the back of high success rates and the growing reputation of the clinic. And as indicated at half year, recovery was achieved as expected.

I'll now pass you over to Glenn Powers, CFO, to provide the detailed financial summary.

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Glenn Powers, Virtus Health Limited - CFO & Company Secretary [3]

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Thank you, Sue, and good morning, everybody.

Turning to Slide 21. Just in with the headline numbers, revenue up by 6.1%, primarily derived from our international activities. EBITDA down 2.3%, and our NPAT attributable to ordinary equity holders was down 7.6%.

I think turning to the next page, there's quite a few things, a few large adjustments in the accounts this year. So if we take the first one or the sale of IP to Vitrolife and our new -- as part of our new collaboration, the EBITDA improvement was $4.1 million there, that's actually the tax on that transaction. So the tax effect there is approximately $1.2 million.

Two fair value adjustments to note. Two -- well, the first one relates to the put liabilities, the financial liabilities due in respect to the settlements of the put/call options for the remaining TasIVF and SIMS shares. We had a write back there of $4.5 million. And on Trianglen, we assumed from the outset a very aggressive growth rate for Trianglen. And that is unlikely to be achieved, but that just results in a $3.8 million write back in terms of contingent consideration.

As Sue mentioned, we also took an impairment on our goodwill in Tasmania. And the Tasmanian impact very much reflects the change in the competitive landscape and recent delays in our business development activities. So some fairly significant changes there. We are also commencing a cost-out program in Tasmania.

If you turn to Slide 23, if we look at the revenue, TFC performance was very strong in Victoria and New South Wales in particular. And we also saw an improvement in our QFG full service. Unfortunately, we did see headwinds in Alexandria, TasIVF, Aagaard and Complete.

If we look at the EBITDA, revenue mix in TasIVF profitability were key factors as we've discussed previously, but one thing to -- one important thing to note is that EBITDA in our New South Wales, Vic and QFG businesses was virtually unchanged in spite of the mix change. So we have added TFCs -- more TFC activity. We've seen a slight reduction in our premium service volumes, but overall, our EBITDA in those 3 territories was virtually flat year-on-year.

The 3 big factors really that we have called out, TasIVF, we served $1.7 million downturn in EBITDA there; Diagnostics, $2.3 million; and the relocation activities and disruption cost us around about $1.3 million. So in looking at the EBITDA number, they are the 3 big factors that we faced in fiscal year '19.

Looking at our cash performance on Slide 24. Last year, we did see high payables at the year-end due to the high level of CapEx that was being undertaken in the business. So the changes in operating assets and liabilities of around about 8.4 over the 2 periods were primarily due to that and the reduction in financial liabilities.

Income tax, bit of a timing difference there. So our tax payments have been higher in fiscal year '19. They will be lower to a degree in fiscal year '20. But again, that's more of a timing issue in terms of how that will roll out.

One thing to note, we, at the back end of the second half, we did repay $7.5 million in debt. And at the moment, we would anticipate making further reductions in fiscal year '20.

Turning to the financial position on Slide 25. Again, you'd all be very familiar with the Virtus balance sheet. No fundamental changes there. Funding capacity has increased by virtue of the recent repayment in debt. The other financial liabilities have reduced and that's the results of the fair value adjustments that I talked about relating to the put calls. And in terms of dividend, we're proposing an unchanged final dividend of $0.12 per share that results in a full year payout of $0.24 per share compared to a prior year of $0.26 per share. And so obviously, we are reflecting the reduced earnings for the financial year.

Sue?

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Susan Channon, Virtus Health Limited - CEO, MD & Director [4]

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Now moving to Slide 27, strategy and outlook. Infertility affects 1 in 6 couples of reproductive age worldwide. And the social and demographic factors that contribute to this global dynamic continues to drive demand for assisted reproductive services. Virtus remains focused on the patient experience and will direct our leading minds and leading science to drive patient outcome. We continue to evolve our approach and model to ensure we remain relevant to patients we treat and the markets in which we operate, expanding services across our networks to meet all patient demographics and market segments.

Revenue growth will be achieved through a combination of service expansion and market penetration, and these strategies are focused on defending and building the premium ARS business. And we remain committed to growing the low price segment. Our Day Hospital strategy will see a focus on the recruitment of non-IVF surgical activity. And our diagnostics throughput will be enhanced through our research into noninvasive, pregenetic testing and the business development activities to maximize internal diagnostic and genetic referrals.

Internationally, we have addressed the performance issues and are focused on maximizing return from our existing international businesses. Our focus on margin improvement is ongoing with efficiencies and cost savings expected through recent management restructures and a greater emphasis on costs. Our ICT and One Lab projects are focused on process reengineering, maybe with some upfront costs in FY '19, these activities will drive medium-term benefits. We have a very clear program of work to drive earnings growth. Some of these initiatives have commenced and others are to come.

Moving to Slide 28 and Virtus innovation. Consistent with our growth strategy, we have remained innovative within the ARS sector, pioneering the Ivy AI technology as noted previously. Ivy AI is tool to assist in ranking and selecting embryos most likely to create a successful pregnancy and deliver a healthy baby. Virtus achieved international recognition for this work with our publication in the world-leading, peer-reviewed journal, Human Reproduction. With Ivy having a higher predictive value for successful pregnancies than any other published algorithm or selection approach. And it's this technically advanced platform that's one of our key drivers of growth and it shows we're able to diagnose and treat a full range of reproductive and fertility issues to maintain our competitive advantage. With a greater use of technology and digital platforms, we will continue to improve the patient experience and drive further efficiencies within the business.

And under the leadership of the internationally renowned Professor David Gardner as our Group Director of ART, Scientific Innovation and Research, we are investing in our One Lab strategy which sets new benchmarks in scientific capability and outcomes for patients.

And just finally, on Slide 29, a summary. Consistent with our strategic plan, we have specific initiatives in place to drive earnings growth. As we have demonstrated previously, market share can fluctuate from time to time as new and small market entrants change the market. We have in place all of the elements of competitive strength, footprint, diversification, leading fertility specialists and science. Our investment in clinical and scientific research, people and infrastructure across Virtus through FY '19 and our early adoption of advanced technology such as Ivy are improving patient outcomes. We remain confident in our competitive position in our doctor model and relationship, and we have the platform to compete in all our geographies and target market segments. This platform has been enhanced through our investments in FY '19. We have strategies to defend and build services in our premium business, grow our low-priced volume in Australia and grow diagnostic services and non-IVF hospital revenue. Effective execution of these strategies will deliver the capacity for transformation and will continue to strengthen our market position for long-term growth.

Thank you, everyone. That's the -- that ends the formal presentation. We'll now hand over for questions and answers.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Denny Chen with UBS.

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Thomas Godfrey, UBS Investment Bank, Research Division - Analyst [2]

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It's actually Tom Godfrey from UBS. If I can just start with your low-cost business here in Australia. It looks like you did 17% cycle growth in the first half of '19. It sort of implies a 34% second half '19 growth. I know you've spoken to an acceleration in activity in New South Wales and Victoria, but can you actually sort of step us through what you did with the pricing strategy there? And whether there was additional doctors brought in? What sort of drove that big step-up in second half growth?

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Glenn Powers, Virtus Health Limited - CFO & Company Secretary [3]

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Well, I think what we -- I mean, really, we started July last year in Victoria where we adjusted our price. We felt we were not competitive in Victoria. And we also changed the way that we actually deliver the service in Victoria. And I think it's -- throughout the year, we really just saw the benefits of that. We gathered momentum continually in Victoria primarily, but also New South Wales. And then in the second half, we did make a slight change to our Queensland pricing. And so certainly in the last quarter, we saw improvements in our 2 TFC activities in the Queensland market. So really a combination of pricing has to be right and we've maintained that continually, but we progressively made changes and continued to make changes in the way we actually deliver the service.

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Susan Channon, Virtus Health Limited - CEO, MD & Director [4]

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And Denny, we've talked previously about the -- or Tom, sorry, we've talked previously about the blended model in the regions. So we've continued to progress that, and that change has encouraged further growth in those regional centers.

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Thomas Godfrey, UBS Investment Bank, Research Division - Analyst [5]

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Okay. Great. Maybe just following on from that. Are you happy to sort of help us out with what the exit rate looks like across your full service businesses? Have there been any improvement sort of through fourth quarter '19 and into fiscal '20 in any of the states across your full service business?

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Glenn Powers, Virtus Health Limited - CFO & Company Secretary [6]

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Look, I think it's been quite up and down, to be honest, in terms of activity. We actually saw a soft June, but we have seen a positive July, an unusually strong July. So it's still quite -- it's hard to see sort of consistency in the full service. I mean we're pretty happy with where we are. We grew in Queensland in full service, which -- that's a tough market. It's got more bulk bill, low-cost price pressure in the Queensland market, but we actually did see growth there. And certainly in New South Wales, which was fairly weak in the first half, we did see some improvement in the second half there. So yes, I think we recognized that it's not an easy market. But I think combining the TFC activity, the blended and the full service, that is something that we believe very strongly today. And again, I'd go back to one of the comments I made in the presentation. If we actually look at the EBITDA from those 3 states, we did actually -- we were virtually unchanged in terms of our EBITDA for those 3 states. So that, I think, we felt, was a pretty good outcome. And it does show that having that blend of service is absolutely critical to what we do.

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Susan Channon, Virtus Health Limited - CEO, MD & Director [7]

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Just remembering, Tom, June, July is when the European Conference was on, and we did see a very large number of our doctors head off overseas over that period.

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Thomas Godfrey, UBS Investment Bank, Research Division - Analyst [8]

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Okay. Understood. Maybe just one more for me. Just looking at Slide 34, it looks like you got 36 Australian IVF clinics today versus 38 back in Feb. Just wondering if you could comment on what's sort of driven that reduction of 2 clinics.

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Glenn Powers, Virtus Health Limited - CFO & Company Secretary [9]

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Look, again, what we've done progressively is we look at the footprint, so we look at consult locations. And so in terms of sort of callouts, that's pretty much unchanged. But where we have -- where we feel that we're not getting the benefit from certain consults and monitoring locations, then we're just the footprint, as simple as that.

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Operator [10]

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(Operator Instructions) The next question comes from Greg Hoffman, private investor.

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Greg Hoffman, [11]

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Sue, you just referred to the advanced technologies for noninvasive PGT that run the scientific evaluation. Is that technology that Virtus is developing itself? Or is that another party that's working on it or that you're working in conjunction with?

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Susan Channon, Virtus Health Limited - CEO, MD & Director [12]

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Yes. We're working in collaboration with an organization called Yikon Genomics. So they have developed the noninvasive PGT, and it has been launched across a number of sites in the U.S. And we're just validating it here in Australia at the moment to get the TGA approval. So yes, that's where we're up to at the moment with the noninvasive PGT.

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Greg Hoffman, [13]

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Okay. So it's their technology and you're just working to validate it, is that right?

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Susan Channon, Virtus Health Limited - CEO, MD & Director [14]

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Exactly. Exactly.

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Operator [15]

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There are no further questions at this time. I'll now hand it back to Ms. Channon for closing remarks.

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Susan Channon, Virtus Health Limited - CEO, MD & Director [16]

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Thanks, everyone, for attending. We look forward to catching up with you through the course of this week.