Coloplast (OTC:CLPBY) released third-quarter financial results and hosted an earnings call on Tuesday. Read the complete transcript below.
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The full earnings call is available at https://getvisualtv.net/stream/register/?coloplast-6bvhu22zhz
Summary
Coloplast reported a 6% organic revenue growth and a 5% EBIT growth in constant currencies for Q3, with notable performance in Chronic Care and Interventional Urology.
The company emphasized strategic focus on innovation, especially in Chronic Care, and expanding its U.S. market share, particularly in Ostomy and Continence Care.
Management highlighted the need for disciplined capital allocation and resource investment towards high-potential growth areas, while maintaining its industry-leading profitability.
Kerecis, a part of the company’s Wound and Tissue Repair division, faces challenges due to reimbursement changes in the U.S. but remains focused on opportunities in the inpatient setting.
A new Chief People Officer, Amanda Rajkumar, was appointed to strengthen leadership and talent development, aligning with Coloplast’s strategic priorities.
Full Transcript
Anders, CFO
Thank you, Gavin, and good morning, everyone. Reported revenue for the first nine months increased by 568 million Danish kroner, or around 3%, compared to last year. Organic growth contributed 1.2 billion Danish kroner, or around 6%, to reported revenue. Foreign exchange rates had a negative impact of 595 million Danish kroner, or around 3 percentage points, on reported revenue, mainly related to the depreciation of the US dollar, the British pound, and a basket of emerging markets currencies against the Danish kroner.
Please turn to slide 7. Gross profit for the first nine months amounted to 14.4 billion Danish kroner, corresponding to a gross margin of 67% compared to 68% last year. The gross margin was negatively impacted by currencies of around 90 basis points, mostly related to the depreciation of the US dollar, the British pound, and a basket of emerging markets currencies against the Danish kroner, and an appreciation of the Hungarian forint against the Danish kroner.
Ramp-up costs in Costa Rica and Portugal also impacted the gross margin negatively. The negative impact was partly offset by lower inflation on freight compared to last year. We are still not seeing any material impact on the gross margin from the conflict in the Middle East. In Q3, operating expenses for the first nine months amounted to 8.8 billion Danish kroner, a 3% increase from last year. The distribution-to-sales ratio for the first nine months was 33%, on par with last year.
Distribution costs grew 2% versus last year, reflecting Kerecis one-off costs in Q1, partly offset by lower sales costs in China and lower logistics costs due to the one-off costs in the US last year. The development and distribution costs were also positively impacted by the depreciation of the US dollar against the Danish kroner. The admin-to-sales ratio for the first nine months was 4%, on par with last year, and the R&D-to-sales ratio for the first nine months was 4% of sales compared to 3% last year.
The increase was driven by higher activity levels in Chronic Care and Biologics overall. This resulted in operating profit before special items of 5.6 billion Danish kroner in the first nine months, or a 2% decrease compared to last year. The EBIT margin before special items in the period was 26% compared to 27% last year, reflecting around 90 basis points negative impact from currencies and around 50 basis points negative impact from Kerecis in constant currencies.
EBIT grew 5% compared to last year. Coloplast incurred special items expenses of 3.1 billion Danish kroner in the first nine months, of which 3 billion Danish kroner relates to the Kerecis impairment loss. Financial items in the first nine months were a net expense of 100 million Danish kroner compared to a net expense of 875 million Danish kroner last year. The net expense included around 500 million Danish kroner in interest expenses, mostly related to the financing of the Atos Medical acquisition.
The interest expenses were largely offset by gains on exchange rate adjustments, mostly related to the US dollar, Hungarian forint, and the Costa Rican colón. The tax expense in the first nine months was 533 million Danish kroner compared to an ordinary tax expense of around 1 billion Danish kroner last year. The tax rate was 22%, on par with the ordinary tax rate last year. Net profit before special items in the first nine months was 4.3 billion Danish kroner, or a 510 million Danish kroner increase from last year when adjusted for the non-recurring tax expenses last year.
Adjusted diluted earnings per share before special items increased by 14%. Please turn to slide number 8. Operating cash flow for the first nine months was an inflow of 5.4 billion Danish kroner compared to an inflow of 4.4 billion Danish kroner last year. The positive development in cash flows from operating activities was mostly driven by favorable development in working capital, in particular due to improved trade receivables. Lower financial items also had a positive impact on cash flows, while higher income tax paid had a negative impact.
Cash flow from investing activities was an outflow of 1.3 billion Danish kroner compared to an outflow of 861 million Danish kroner last year. Capex in the first nine months was 5% of sales, on par with last year, and includes investments related to the new manufacturing site in Portugal, which is on track to be operational here in Q4 2526. As a result, the free cash flow for the first nine months was an inflow of 4.1 billion Danish kroner compared to an inflow of 3.5 billion Danish kroner last year, or a 16% increase.
Excluding acquisition costs this year and benefit from the divestment last year, the free cash flow increased 27% in the first nine months, with a free cash flow-to-sales ratio of 20% compared to 16% last year. The trailing 12-month cash conversion was 91%, and net working capital amounted to around 26% of sales. Now let’s take a brief look at the financial guidance for the year. Please turn to slide number 9. Our guidance for full year 2526 remains unchanged.
We expect full-year organic revenue growth of 5 to 6%, EBIT growth in constant currencies before special items of around 5%, and return on invested capital after tax before special items of around 15%. We continue to expect negative impact from currencies, with around 2 to 3 percentage points impact on reported revenue growth and around 80 basis points negative impact on the reported EBIT margin. We are especially seeing negative impact from the Hungarian forint, which saw a notable appreciation against the Danish kroner following the Hungarian election back in April.
We continue to monitor the developments in the Middle East and the impact on the business, including implications for demand, supply, and cost inflation. With the knowledge we have today, we expect limited impact on sales, and we maintain our previously communicated assumptions around raw material cost inflation, where we expect around 1% raw material cost inflation in the second half of this year and around 2 to 3% raw material inflation next year.
We now expect net financial items of around minus 300 million Danish kroner, based on spot rates as of August 14, down from around minus 500 million Danish kroner previously. Finally, by the end of the fiscal year we expect to reach a gearing ratio of around 2.3 times EBITDA. Thank you very much, operator. We are now ready to take questions.
OPERATOR (Operator)
Ladies and gentlemen, we will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Questioners on the phone are requested to disable the loudspeaker mode while asking a question. In the interest of time, please limit yourself to two questions.
Anyone who has a question may press star and one at this time. One moment for the first question, please. And the first question comes from Hassan Al Waqil from Barclays. Please go ahead.
Hassan Al Waqil, Analyst at Barclays
Good morning. Thank you for taking my questions. A couple, please. Firstly, Gavin, just on some of your reflections on Chronic Care and the next innovation cycle, do you see a need to increase R&D in a material way in order to sustain and extend that leadership? You also talk about the US being a key strategic priority. So could we see some compromise in the margin to drive stronger innovation, commercial execution, and ultimately a stronger top line?
And then secondly, appreciate China has been a drag for some years in ostomy, but it does look to be worsening. So can you unpack the performance here? And how much of the softer growth do you think is market share loss versus market weakness? Thank you.
Gavin, CEO
Okay, thank you, Hassan, for the question. I think, look, it’s really clear that we want to invest more in innovation and, as I shared, you know, our group sales, 75% of our business comes from Chronic, and we feel very, very strong about this platform. So this is an area that we do want to invest more in. You know, my answer would be this is not about committing to an allocated specific percentage of sales to R&D investments. You know, that’s more of a mechanical exercise, you know, where we don’t feel the value is created.
What we need to do is we need to ensure that we have the headroom and the flexibility to invest when great opportunities are identified. And then we need to ensure that we have a system and a structure that, you know, that allows the best ideas to surface. So ultimately, going forward, we want to ensure that we have the best ideas and the most meaningful innovation that’s getting adequate funding, and we need to be disciplined and likely stopping some projects earlier when we don’t yield the desired outcome.
And we need to celebrate more calibrated risk taking. So ultimately, this is what I would say, Hasan, is for the next generation of innovation. Like we feel really strongly in our current innovation and the impact for this is really about investment in innovation, for smarter choices going forward in the next innovation cycle. And then I’ll ask Anders to address your question on China.
Anders, CFO
Yeah, so in regards to China, you’re right, Hassan, that China has—we have had challenges in China for some time. We have seen low single-digit growth, flattish growth, and this year the underlying expectations for our Chinese growth is a low single-digit negative. But on top of that, we have also now a new management in place. We have decided to review our go-to-market strategy, where we are really looking into the number of distributors we are having, etc. And as a consequence of that work, we have decided to reduce our inventories in China as well. And that’s why we see quite a significant one-off here in Q3, and we will also see some one-offs related to that in Q4. In Q3 it’s a one-off of around 45 million Danish kroner. So yes, China is and has been a challenge, but we are optimistic with the new team in place that we are now working on a new strategy for China, and then over time we will start to see us improve the Chinese business.
So that’s where we are.
Hassan Al Waqil, Analyst at Barclays
Very helpful. If I can just follow up, Gavin, you highlight industry-leading profitability in your reflections in the release. I wonder if we should read into the importance of this industry-leading profitability going forwards, given some of these investments that you’ve been talking about.
Gavin, CEO
I’m sorry, could you repeat the question?
Hassan Al Waqil, Analyst at Barclays
Yeah, it was about the commentary around industry-leading profitability in your reflections in the release today. And I wonder if we should read into the importance of this industry-leading profitability going forwards in the future over the medium term, given some of these investments that you’re flagging.
Gavin, CEO
Yeah. So listen, this is going to probably come down to a lot of reallocation. That’s kind of the perspective that I have. But I think when you think of longer term looking ahead, I’ve kind of used the first hundred days to kind of identify choices that were going to help us make longer-term value creation opportunities. And, you know, clearly at the full year 25, 26, you know, we plan to probably give a broader update on the implications of how these kind of play into our strategic priorities, value drivers, and the execution within the Impact 4 framework.
OPERATOR (Operator)
Perfect, thank you. Then the next question comes from Ayesha Noir from Morgan Stanley. Please go ahead.
UNKNOWN Analyst
Hi Gavin and Anders, thanks for taking my question. My first one is on Kerecis, particularly the inpatient business where we’re hearing market volumes haven’t really benefited from a decline in the home care setting. Could you talk about this inpatient business? Did it grow double digit in the quarter as you observed in the first half? What are you seeing competition-wise and where are channel inventory levels today? And then second question is on Intibia.
Would love to hear the reasons for the delay of the launch and whether the hurdle to success could now be higher since we’ve had one more tibial device launch from your US peer in the last month. Thank you.
Gavin, CEO
Okay, thank you for both questions. I’ll let Anders—we’ll start with Intibia and then I’ll answer your first question.
Anders, CFO
Yeah, so thanks for the question. In terms of Intibia, as we said here in our opening statement, we now expect the launch into 27/28 and it’s really driven by the FDA approval process. So we are working hard in order to get the FDA to approve our solution. We are still expecting that the Intibia launch will contribute to our growth within neurology, but it’s coming towards the end of this strategic period. But we still expect that the urology that is actually off to a better start than we had anticipated will continue with the high single digit growth that we have seen also this year.
But it’s really driven by the FDA approval process and that had a consequence on our launch timing.
Gavin, CEO
Okay, and I’ll take your first question and thank you for the question. And this is, you know, this is one that we have addressed before. But, you know, clearly there’s a lot of reimbursement dynamics that have played out in the US biologics skin substitute space. And I’ll start with the outpatient and then move to the inpatient. So in outpatient we see a continued transition rather than a full stabilization. So the USD $127 centimeter square, that’s the fixed payment rate, continues to pressure utilization with providers becoming much more selective and cautious.
And we do see meaningful price competition while everyone is adapting to the new pricing level and some use of traditional lower-cost wound care alternatives where clinically appropriate. However, at the same time, the market’s gradually moving through the initial disruption with greater clarity around the new reimbursement environment and increasing adaptation by both providers and manufacturers. And this is where we see Kerecis as having a distinct advantage.
Because if you start to look at the inpatient, where most of the market has shifted towards, this is the area where Kerecis has the majority of our sales today and our market position, and we have very strong product differentiation, very strong data on our products. So when you look at inpatient, you know, in contrast to outpatient, the inpatient setting remains a much more stable environment with healthy underlying demand and where we’ve had double digit growth to date.
You did ask about the last quarter—that the last quarter was high single digit. But we’re still confident that we’re going to, you know, close the year with double digit growth in inpatient. And that remains our focus.
UNKNOWN Analyst
Perfect, thank you. If I could follow up also on Kerecis. And this is in regards to the change in executive leadership that you’ve announced overnight. What should we be reading from your interim kind of taking over as the interim head of wound? Are more serious discussions being had about the future of this business? And I know Anders mentioned in an interview previous to this call that the outlook is now lower for Kerecis. Is there an outcome here where you’re actually strategically reviewing this business for the future?
Gavin, CEO
No, I think this is more a natural evolution of a business. So if you think of it, we acquired Kerecis three years ago in September. The leadership change is really also about strengthening our outlook going forward. So if you think of it, Fertram had been with Coloplast for three years. He’s now stepping into a technology assessment role. I have very high conviction in the category of biologics and technology going forward. And Fertram’s gonna play in an area to his strengths where he— I mean, he’s incredibly strong at assessing technology and external innovation and brings that innovative mindset that really helped develop Kerecis.
So with his capability focused there, I’m kind of taking an assessment of the business, of how do we kind of professionalize and scale this business throughout the US and globally. And I did come with a background where I worked previously in wound care. So I felt taking this on personally would give me an opportunity to really go in and assess the organization and the talent to develop what’s the right setup for the future.
UNKNOWN Analyst
Perfect. Thank you so much.
OPERATOR (Operator)
And the next question comes from Martin Parkhoy from SEB. Please go ahead.
Marcin Parkey, Analyst at SEB
Yes, Marcin Parkey, SEB. A couple of questions both for Anders and for Gavin. Let’s start with Anders. Anders, of course we talk about raw material inflation. I understand you’re not giving guidance for 27/28, but can you just keep trying to kind of solve numbers of how the impact you expect to see on raw material inflation going into next year, given what you know today? And the second question for you is your dividend policy. You haven’t seen your dividend per share going down for decades.
Is that a firm policy for you, also given the investment you need now and your ambition to go down to a gearing level of 1.5? Do you still believe that you can keep the dividend intact or even go up over Impact4 period? And then just Gavin, it’s one question, maybe in two. Just to confirm again, China— with the change you’re making in China, does that impact also the growth ambitions you have in China in the Impact4 period? And related to that, can you just confirm that with the strategic priorities that you’re doing and the broader review you’re making, are you still comfortable with 7 to 8% top line growth towards 2029 to 2030?
Anders, CFO
Thanks a lot, Marcin, for your questions. Let me start with the first ones. So in terms of the raw material, as I said in my opening statements, we are this year, this financial year, expecting some impact to impact the P&L here in Q4. And when we move into next year, I’m still expecting it will have the inflation related to the Middle East. The crisis will impact our raw material costs with around 2 to 3 percentage points. So that is my current assumptions moving into next financial year.
In terms of your second question, the dividend policy. So last year when we communicated our Impact4 strategy, we confirmed our dividend policy also with the aim to get the payout ratio down to something between 60 and 80%. And we have a lot of focus on improving our cash flow and we have a lot of focus also to reduce our debt ratio from— I’m expecting this year to hit around 2.3 times EBITDA— and get it down below 2 over the period. So we have a lot of focus on maintaining the dividend policy and that of course requires strong cash flow in the years to come.
Gavin, CEO
Okay, thanks, Martin. So I’ll start with your question on China. So the Impact4 assumption was kind of flattish growth over the period for China. So that, you know, that’s an unchanged assumption. We don’t plan that to be any different. Your question on strategic priorities— and I think you’re alluding to impact on future guidance— to be very open, I’m currently evaluating the Impact4 as part of my broader 100-day review. So my focus in the last hundred days has been really on getting to know the business.
As I shared earlier, I now have much stronger view on the priorities for the business looking ahead, which I’ve shared, and also some of the strategic choices that we believe we need to make. So from here going forward I will continue to progress my view on the overall business and as we get to the full-year announcement, I expect to be able to share more about what implications I anticipate as a result of my 100-day review.
OPERATOR (Operator)
Thank you, Cleo. Then the next question comes from Anshal Verma from JP Morgan. Please go ahead.
Anshal Verma, Analyst at JP Morgan
Hi, good morning. Anders and Gavin, a few questions for you. The first one would be just a follow-up on Ayesha’s question around Intibia delay. Could you outline if the FDA has raised any concerns? Have they asked for more data or will you need to do further clinical trials? And then the second one is just when you talk about being more focused on where you invest and making smarter investments, could you give us a bit of flavor on the type of investments you’ll be looking at?
Are there any gaps you’d like to fill? On the contrary, are there any businesses in the portfolio that are potentially disposal candidates? And to that point, how do you feel about the balance sheet position right now and what are your thoughts on financing further M&A?
Gavin, CEO
All right, let me take those questions. The first question in terms of Intibia, we cannot really speak more to the clinical outcome at this point in time. So we need to get through the FDA program process and, as I said earlier, we now expect that to be complete early 27/28. To your second question in terms of M&A, as I understood your question, we are not planning any bigger M&As towards 2030. We are really focusing on executing on the businesses we have.
It might be we will evaluate some smaller tuck-ins, in particular within Urology. As you know, we did a smaller technology investment earlier this year. It’s called Euromedica and it’s a very interesting technology that is really benefiting our men’s health business in the US, and we are actually off to a good start with that acquisition. But you should not expect us to do any bigger M&As towards 2030.
Anshal Verma, Analyst at JP Morgan
And just a follow-up: in terms of potential disposal candidates, are there any that you have identified thus far?
Gavin, CEO
I did not really understand the first part of your question.
Anshal Verma, Analyst at JP Morgan
I’m just trying to understand when you’re talking about reviewing the portfolio you have if there were any areas you think that could potentially be divested or disposed of.
Gavin, CEO
So that is— That’s not the plan. So—
Anshal Verma, Analyst at JP Morgan
Perfect. Thank you.
OPERATOR (Operator)
Then the next question comes from Jesper Ingilson from DNB Carnegie. Please go ahead.
Jesper Ingilson, Analyst at DNB Carnegie
Thank you so much. I have a couple of questions. You’re currently growing 5 to 6% organically. It seems like Kerecis inpatient is at below 10%. TBS being pushed to 27/28. China Ostomy Care continues to decline. I appreciate you’re going to come with a wide outlook in November in regards to the 7 to 8% organic growth you currently have for the Impact4 strategy. But is there anything you can point to in terms of what’s going to accelerate growth in the coming years?
Assuming the renewed focus on the US will take some time to show in the numbers. Then my second question would be around your margins. So your process imply high investments in innovation, US commercial execution capabilities. In addition to this, you have headwinds from raw materials as you just highlighted, as well FX too and wage inflation. How do you fund all of that without further margin pressure? I mean Coloplast already looks like a very lean organization.
Where would you find any savings or potentially relocating from?
Anders, CFO
Yeah, so Jesper, thanks for your question. Let me just start towards 2030 as I understood your question. So actually we are off to a good start within our chronic business. If I exclude China, we are off to a really good start in U.S. chronic, driven by innovation, driven by commercial execution. And we are really satisfied in terms of where that business is. And we are also off to a really good start with our urology business. Our urology business is already now at high single-digit growth.
We actually anticipated that to come later in the period. But that business is also off to a better start than we had anticipated. It’s clear that this year is really impacted by the biologics situation. We have talked a lot about it, but it’s really impacted by this reimbursement reform that came into play from January 1st, and then China this quarter we have taken a decision to reduce our inventory levels. But there’s actually quite a bit of our business that is either at or above the expectations we have towards 2030.
In terms of question two. Gavin,
Gavin, CEO
Thank you. So, you know, I think that one of the big questions is how to fund the journey when we start to make some of these choices. And specifically it’s on innovation within chronic, it’s also looking at other fast-growing businesses, and it’s also looking at geographies. So I think overall Coloplast, if you look, historically we’ve been very strong in driving continuous improvements and we need to continue to leverage this strength. Meanwhile, we’re also reviewing the growth and profit pools across our businesses and we’ll be assessing these against bigger value opportunities.
To be more tangible, we see meaningful opportunities to free up capacity through organizational simplification, operational efficiencies and tech-enabled productivity improvements. And some of these examples include assessing our overhead spend, especially in non-customer-facing areas. I mean we’re going to be really focused on investing in customer-facing roles, commercial productivity improvements and alignment, looking at direct spend optimization.
And this means investing more behind innovation and growth while continuously improving productivity, reducing complexity where returns are diminishing. So ultimately I see meaningful opportunity to sharpen our focus on resource allocation and reallocation, capital deployment and investment governance. And this will ensure that resources are directed towards the opportunities that have the greatest potential to drive growth and create value. And ultimately we’re trying to make smarter choices to drive growth long term.
OPERATOR (Operator)
All right, thanks so much. And the next question comes from Veronica Tuba from Citi. Please go ahead.
Veronica Tuba, Analyst at Citi
Good morning, Gavin and Anders. Thank you for taking my questions. I have two, please. And forgive the bluntness, my first one is just on the priorities. Gavin, if I look at what you’re talking about, it sort of seems very much the same thing as what’s been going on at Coloplast. And I think we can all objectively look at it from the outside and, you know, for a variety of reasons there has been very limited earnings growth through the last period in the business.
So I’m just curious, kind of, you know, what are you actually going to do differently? You know, yes, I know there’s opportunities in the U.S., yes, I know there’s opportunities in wound. Chronic care is a great business, but just looking at it, it doesn’t sound to me like there is a huge amount of change. So maybe you can outline what is going to be different under your leadership versus your predecessor. And then my second question is just on Anders, on your comments around the review of the long-term guidance.
Can I just get your perspectives at this point in time, whether the risks that you see are more to the sales guide or to the EBIT guide, or to both. Thank you so much.
Gavin, CEO
Okay. Thank you, Veronica, for the question. And, you know, I think, look pragmatically, I’m 100 days in and I’m putting out five areas that I think are important for our future. And maybe I’ll give you a little bit more context to it. But I think the real answer is going to come at full year implications. But if you look at it from a practical standpoint, we want to continue to be strong in the U.S. So as Anders said earlier, we’re starting to see momentum pick up.
We’ve put new leaders in place to lead a couple of our top businesses in the past year and a half and that’s leading our chronic business and interventional urology. We’re also making changes in some of our leadership that you heard today on wound and tissue repair, and we’re committing to putting more resources in the U.S. If you look at it from a result perspective, we’re starting to see double-digit growth just in the past quarter in the U.S. So we want to fuel that.
So that’s going to be like a lean-in that you’re going to actually see us start to focus a lot more. And I think that that’s going to be different than the past. The other area is on wound and tissue repair. I think we’ve been very open that there’s been a lot of challenges in the outpatient market. We are actively shifting our resources from outpatient to inpatient. And we’ve just spent the last couple of months doing a strategic review on this business to make sure that we’re much more laser focused on specific accounts and specific specialties where we’re going to start to align our resources to.
And what we believe is that in the coming quarters this will start to drive more growth than we’ve seen in the past in the biologics area. So those are two examples. And what I would say is that as I gain more insights over the next three months and I get to the full year, I’ll share a little bit more about how these come into play with more defined decisions and implications. And I’ll pass over to Anders for the second question.
Anders, CFO
Yeah, thanks, Gavin. So the second question, Veronica, it’s basically that we are, as Gavin just mentioned, assessing a number of things currently in order to move forward. And that is back to this whole resource allocation as one of the key ones. And the next period of time we will continue the assessment of the organization and then we will conclude when we have the full year announcement in November.
Veronica Tuba, Analyst at Citi
Okay. But at this I guess I appreciate that, but I guess is the concern that you have more about the growth targets or is it that you want to allocate more resources to the business and so maybe it’s about the EBIT targets or is it both?
I guess I’m just trying to understand. I know it’s very preliminary, but just trying to understand where you see the risks to the strategy that was outlined about a year ago.
Anders, CFO
Yeah, so that’s what we’re currently assessing, Veronica. As Gavin has mentioned a couple of times now, we have shared Gavin’s 100 days reflections and now we move into the next phase where we will evaluate what are the things we will do in a different way. And we will conclude on that when we announce our full year results.
Veronica Tuba, Analyst at Citi
Okay. I had to try. Thanks, guys.
Anders, CFO
Thank you.
OPERATOR (Operator)
Then the next question comes from Julian Dormois from Jefferies. Please go ahead.
Julian Dormois, Analyst at Jefferies
Hi. Good morning, Gavin. Good morning, Anders. Thanks for taking my questions. And I will give you a break on the midterm guidance. First question is a more short-term one and it relates to Kerecis. I think you have indicated in the release that you expect to bring back profitable growth in that business. So I was just curious how long it would take. Is it a matter of a few quarters or are we more talking in years to bring that business back to a more decent profitability level?
So that would be question number one. And the second question also relates to the five priorities that you have highlighted, Gavin, following your 100-day review. You mentioned obviously great opportunities in the U.S., focusing on chronic care, men’s health, but I could not find any, let’s say, commitments on the wound and tissue repair, while I think previously we were talking about this business possibly being a priority because you’re obviously punching way below your league in that business in the U.S., apart from Kerecis.
So just curious whether that’s more something that we should think more about the next strategic period and maybe not for that one specifically. Thank you.
Gavin, CEO
Okay, so I’ll take your first question and maybe let me give you just a little bit of background. So the answer is we believe that sometime around Q2, 26/27 is when we start to see some true recovery. And why that timeframe? Because if you look at the outpatient and when reimbursement was lost, we plan to see kind of the bleed out where we’re comparing apples to apples beginning in Q2. And that’s when we’re going to be able to compare just our focus on inpatient versus our previous focus on inpatient the year before.
But I think that if I give more context, our conviction—and this answers a little bit of your second question too—our conviction in the long-term biologics opportunity remains intact. So when I made a comment before about growth coming in chronic right now and seeing really good growth in interventional urology, it did not mean I don’t believe in biologics and advanced wound care. They’re just in different places of evolution right now. Why I believe that the long-term biologics opportunity remains intact is, you know, primarily what we’ve seen in the U.S. is a reset which has been challenging, but this has also forced us to learn and we’ve been able to accelerate our learning curve and provide greater clarity on where customer segments, specialties and care settings are best positioned to win. And so what we see ultimately is that the center of gravity in biologics is going to shift towards hospitals and specialist care settings and specifically that’s going to shift into inpatient. So this is fortunate for us because this is a market where Kerecis is particularly well positioned.
We’re supported by strong clinical evidence, we have favorable healing outcomes and clear product differentiation, and a majority of our business sits in this call point. So going forward we’re going to concentrate our resources on priority accounts and specialty-led growth and a clearer focus on deeper penetration by account. And, you know, I think equally important will be restoring profitable growth in the biologics business through improved field productivity and scaling our clinical expertise.
That kind of answers, I think, a little bit of your second question because I do believe that we’re going to see this return to growth. And then we’re doing in parallel a review on the advanced wound dressings to really determine how to win in the U.S., because that is an area that I agree we’ve been a little bit softer, and now we’re going to lean in and put the resources behind it to determine how to win in the U.S. And I’ll come back at full year and share more on that.
OPERATOR (Operator)
Very helpful, thank you. Then the next question comes from Anna Ratcliffe from Bank of America. Please go ahead.
UNKNOWN Analyst
Hi. Thank you for taking the questions. I wanted to pile on the wound questions. It seems like contract manufacturing drove a lot of the strength in the quarter. I saw you called out the phasing in Germany and the Middle East. Would you be able to give us any more detail there? How much of that was maybe catch-up from Q2 disruption? And how do you see that playing out in Q4 and into the start of next year? And then maybe to follow up on Ayesha and Anshal’s interview questions, has that product been a big part of driving interventional urology growth to high single digits from mid single digits?
So maybe with the approval push-out, should we think about next year maybe as more of a mid single-digit year ahead of the approval? Or are there any other smaller catalysts or product launches that we should be thinking about that can support organic growth for next year in this division? Thank you again for taking the questions.
Anders, CFO
Yeah, so thanks a lot. And let me start with the first one around our dressings growth in Q3. You’re right, we saw very strong contribution from our contract manufacturing in the quarter, and we actually expect that, to some extent, to continue into Q4 but not at the same level. We also had good growth contribution in Germany, but that’s more Q3–Q4 phasing. But then, on the other hand, next quarter, we did a big recall last year in China of around 60 million, as I recall.
So we will also see a strong Q4 for our dressings business. But yes, there is quite a bit of underlying movement in our business. Good news, actually, so far this year is also our US dressings is actually contributing to our growth as well. Then question number two, in terms of urology. As we said a couple of times throughout the call, our urology business this year is off to a better start than we thought when we announced our Impact 4 strategy last year.
So we are already sitting with high single-digit growth, in particular driven by men’s health, and we expect this to continue, basically due to the launch of our new penile implant, the Titanium Prime. And we expect to launch a new solution within the next couple of months. And then next year we will also see contribution to organic growth from the acquisition we did back in February. So the Euromedica acquisition will also contribute to growth. So we are optimistic that our urology franchise will continue to drive high single-digit growth, as we have also set in the Impact 4 strategy.
OPERATOR (Operator)
Good. Then we have one more question coming from Graham from UBS. Please go ahead.
Graham, Analyst at UBS
Morning. Thanks, guys. Just ask one, Gavin, on the sort of the timing of some of these changes in terms of priorities. So in terms of investing in innovation, presumably that’s a fairly slow burn. You can’t just double R&D spend or something overnight. So is that something you intend to do through the period over the midterm, or is it something you could ramp up relatively quickly? Then the offset of that is in terms of the efficiencies, are those things that are relatively low-hanging fruit in your view and something you can kind of harvest a little bit quicker as well?
Just to get understanding of those kind of puts and takes in terms of timing, please.
Gavin, CEO
So to answer your first question, it will be through the midterm. As I stated before, we recognize that there’s an opportunity to invest more in R&D and in innovation, and it needs to be meaningful innovation. But you are right, it takes time to do this. What we are committing to is, when you look at the Impact 4 timeline, we actually have very solid innovation up until 2029. So we’re looking like this commitment is now to start the reinvestment into innovation for that time period and beyond.
And that is where we’re going to start to give you better line of sight as we go forward on what investment choices we’re going to make on innovation. But it’s really putting the stake in the ground to say that we’re going to start to invest for the future. But you are right, it takes time.
Graham, Analyst at UBS
And maybe just on the point around US expansion, in terms of prioritizing that, to Veronica’s point, there has been investment in the past, but you’ve come in with a fresh look. What are the things that you see as standout opportunities to really move the dial in the near term there?
Gavin, CEO
I think that, short term, the biggest is commercial execution. Always, it’s really looking at your front line. You come into a company and you’re new and you’re starting to look around, and you start to see pockets of growth. Really, I think the best way to answer this is, when you took a look earlier at the first slide, 25% of our business comes from the US, but it represents the largest market for opportunity in medtech globally. That’s for every company.
And we’re sitting in position number three in ostomy care between 15% and 20%. And we still have a lot of runway in continence care. We’re 5% to 10% in US biologics. So you look at that naturally and you start to say, okay, let’s start to invest more in our commercial execution, our commercial capabilities. Because the runway, if we start to make those investments, we believe with our superior products, we can win. And that will be the short term.
Graham, Analyst at UBS
Perfect. Thank you very much.
OPERATOR (Operator)
Okay. Thank you very much. Okay, well, thanks, everyone. We appreciate you joining today. That’s all the time we have for now, and grateful for your questions. Thank you.
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