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Edited Transcript of ADVZ.TO^C20 earnings conference call or presentation 13-May-20 12:30pm GMT

Q1 2020 Advanz Pharma Corp Ltd Earnings Call

May 13, 2020 (Thomson StreetEvents) -- Edited Transcript of Advanz Pharma Corp Ltd earnings conference call or presentation Wednesday, May 13, 2020 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adam Peeler

ADVANZ PHARMA Corp. Limited - VP of IR & Communications

* Adeel Ahmad

ADVANZ PHARMA Corp. Limited - CFO & Interim Director

* Graeme Neville Duncan

ADVANZ PHARMA Corp. Limited - CEO & Director

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Presentation

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Operator [1]

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Good morning, and welcome to ADVANZ PHARMA's First Quarter 2020 Results Conference Call. My name is Joanne, and I'll be your conference operator today. (Operator Instructions)

At this time, I'd like to turn the call over to Adam Peeler, Investor Relations and Corporate Communications on behalf of ADVANZ Pharma. Please go ahead, sir.

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Adam Peeler, ADVANZ PHARMA Corp. Limited - VP of IR & Communications [2]

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Thank you, operator, and good morning, everyone. Welcome to ADVANZ PHARMA's first quarter results conference call. Before we start, we'd like to remind you that all amounts discussed on this call are denominated in U.S. dollars unless otherwise indicated. Please note that statements made during this call may include forward-looking statements and information and future-oriented financial information regarding ADVANZ PHARMA and its business and disclosure regarding possible events, conditions or results that are based on information currently available to management, which indicate management's expectation of future growth, results of operations, business performance and business prospects and opportunities. Such statements are made as of this date hereof, and ADVANZ PHARMA assumes no obligation to update or revise them to reflect events, disclosures or circumstances, except as required by applicable securities laws. Such statements may involve significant risks and uncertainties and are not a guarantee of future performance or results. A number of these risks or uncertainties could cause results to differ materially from the results discussed today.

Given these risks and uncertainties, one should not place undue reliance on these statements and information. Please refer to the forward-looking statements and information and future-oriented financial information section of our public filings without limitation, our MD&A and our earnings press release issued today for additional information.

Joining us on the call today are Graeme Duncan, ADVANZ PHARMA's Chief Executive Officer; and Adeel Ahmad, ADVANZ PHARMA's Chief Financial Officer.

I will now turn the call over to Graeme for opening remarks. Graeme?

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Graeme Neville Duncan, ADVANZ PHARMA Corp. Limited - CEO & Director [3]

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Thank you, Adam, and good morning, everyone. We're pleased to be with you today to review recent developments at ADVANZ PHARMA as well as our financial and operating results for the 3 months ended March 31, 2020. Building on the momentum we generated in the latter half of 2019, the company delivered strong financial results in the first quarter of 2020, reporting higher-than-anticipated revenue of $130 million and adjusted EBITDA of $63 million. We believe that these financial results demonstrate the essential nature of many of our niche established medicines and our ability to respond to changes in demand caused by the current coronavirus pandemic.

Our first quarter results also lay a strong foundation for the year and are another step towards ADVANZ PHARMA achieving its stated corporate goals. The M&A we announced recently, including the acquisition of the rights to a portfolio of our Aalprostadil products in 20 countries around the world and the signing of an agreement to acquire specialty pharmaceutical company, Correvio Pharma, have progressed as expected since our last update when we hosted our fourth quarter 2019 call on March 25.

On April 1, we announced the closing of the transaction to acquire the portfolio of our Aalprostadil products from UCB. The integration of these complementary medicines into our global commercial infrastructure is proceeding as anticipated. The acquisition of all of the issued and outstanding shares of specialty pharmaceutical company, Correvio Pharma, continues to progress with an anticipated closing time frame before the end of the second quarter. We believe this transaction upon closing will be transformational to the company. Correvio's highly experienced European team provides us with a direct commercial and medical presence in France, Germany, Spain, Italy and the Benelux region, while further strengthening our existing presence in the Nordics and the United Kingdom. Furthermore, Correvio's niche portfolio consisting of an established brand, 2 growing patent-protected brands and a pipeline of potential product launches are highly complementary to our current priorities and future focus.

We're not stopping there. We are actively assessing a number of potentially attractive product acquisition opportunities. We're encouraged to see that the M&A pipeline continues to be robust and are confident that we will be in a strong position to compete for attractive assets going forward as a result of the increased capabilities and reach the Correvio's platform will supply. With the acquisition of Correvio moving ahead and the continued focus on our own pipeline, we determined that it was an appropriate time to further strengthen our medical capabilities. We're pleased to share today that Dr. Nick Warwick will join ADVANZ PHARMA's Executive team on June 1 as our Chief Medical Officer. Nick will bring to the company deep and diverse global experience with innovative, value-added and branded generic companies, including nearly 5 years as Chief Medical Officer with Sandoz, and 16 years of experience in various senior roles with Abbott. On behalf of the executive team, we are really looking forward to working with Nick.

ADVANZ PHARMA also expedited its commercial infrastructure build-out in the first quarter to drive the launches in the company's pipeline. In the first quarter of 2020, ADVANZ PHARMA submitted for approval or received approval for 5 medicines. We are also seeing strong progress in our early stage pipeline with more than 10 potential in-licensing or co-development deals in late-stage negotiation. Furthermore, we continue to have normal course dialogue with regulators regarding our generic filing for a long-acting equivalent of lanreotide. Looking ahead, our team will continue to focus on this filing with the regulatory authorities with the goal of a European-wide launch as soon as it's feasible.

While our financial results, M&A and our pipeline progress have been positives for the company, the most inspiring development for me during the quarter and year-to-date has been the collective results that our workforce and business partners have demonstrated when facing down COVID-19. The work-from-home and connectivity initiatives that we put in place at the onset of this pandemic have kept our employees safe, which, in turn, are supporting patient access to the important medicines we provide and allowed us to continue to execute on our corporate strategy plan as evidenced by our 2 recent M&A transactions.

In addition to the admiration I feel towards our employees for their commitment during these challenging times, I'm also inspired by the companies and their employees who make up our external supply chain. The work we are doing with our suppliers, our contract manufacturing organizations and our distributors, among others, during this pandemic has taken on a heightened level of collaboration in order to help mitigate the impact of this disease. While the long-term impacts of COVID-19 and the time it will take to contain the disease remain somewhat unclear, I can say with certainty that our focus on the well-being of patients will not waiver in the face of this adversity.

With that, I'll hand the call over to Adeel, who will discuss our 3-month results in more detail.

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Adeel Ahmad, ADVANZ PHARMA Corp. Limited - CFO & Interim Director [4]

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Thanks, Graeme, and good morning, everyone. My remarks will address ADVANZ PHARMA's 3-month financial results for the period ended March 31, 2020. My prepared comments will focus on revenue, gross profit and adjusted EBITDA, because we believe they are important metrics in assessing the performance of our business. Adjusted EBITDA is a non-IFRS financial measure, and we have included a full reconciliation of adjusted EBITDA to IFRS measures in our first quarter 2020 MD&A and earnings press release.

ADVANZ PHARMA'S first quarter 2020 revenue of $130 million was approximately 7% higher compared to the fourth quarter 2019 revenue. Revenues in our first quarter were positively impacted by higher-than-budgeted sales of Plaquenil and its authorized generic due to COVID-19 and a strong performance in our U.K. and Ireland business. Revenue for the first quarter of 2020 decreased by $6 million or 4% compared to the corresponding period in 2019. This decrease was due to lower sales from our international and North America segments, combined with lower foreign exchange rates, impacting translated revenues from the international segment.

Adjusted EBITDA of $63 million for the first quarter of 2020 was approximately $11 million higher than the fourth quarter of 2019. The company believes that while a portion of the sequential increase was due to the COVID-19 pandemic and the corresponding increase in customer demand and wholesaler buying patterns, a significant portion of the adjusted EBITDA improvement was due to the underlying strength of the business, particularly in the U.K. and Ireland, which had exceeded our expectations prior to the global onset of the pandemic.

First quarter 2020 adjusted EBITDA was 2% lower compared to the corresponding period in 2019. This decline is primarily due to slightly lower sales and gross profits from both segments, combined with lower foreign exchange rates impacting translated results of our international segment. Consolidated first quarter 2020 gross profit as a percentage of revenue of 67% was 2% higher compared with the fourth quarter of 2019 and in line with the first quarter of 2019. The sequential change in gross profit percentage is due to a shift in the mix of product sales within our North America and international segment.

The company's consolidated cash and cash equivalents position at March 31, 2020, was $266 million compared to $261 million at the end of 2019. Given that the company holds cash in various currencies, including in GBP and euros, the company's reported cash position in U.S. dollars as at March 31, 2020, was negatively impacted by a significant weakening of the GBP and the euro during the first quarter.

On a segmental basis, international segment revenue for the first quarter of 2020 was $97 million -- of $97 million was 3% higher compared to the fourth quarter 2019, driven by the increase in revenue attributable to key products, including levothyroxine sodium, fusidic acid and erythromycin. Revenue for the first quarter of 2020 decreased by $2 million or 2% compared to the corresponding period in 2019. Approximately $1.8 million of the decrease in revenue was a result of the GBP weakening against the U.S. dollar.

Gross profit for the first quarter of 2020 decreased by $4 million or 6% compared to the corresponding period in 2019, primarily due to foreign exchange and product mix. Gross profit as a percentage of revenue for the first quarter of 2020 decreased by 2% compared to the corresponding period in 2019. The changes were primarily due to a shift in product mix with certain higher-margin products experiencing additional market competition when compared to the corresponding period in 2019.

Moving to the North America segment. Revenue for the first quarter ended March 31, 2020, was $33 million, an increase of $5 million or 19% compared to the fourth quarter of 2019. The increase was primarily a result of $5 million of higher revenue from Plaquenil brand and authorized generic due to higher volumes from an increase in customer demand; $2 million in higher revenue from Orapred due to an increase in product volumes; and $1 million in higher revenue from Salagen, partially offset by $2 million in lower revenue from Dyrenium and $2 million in lower revenue from Photofrin.

Revenue for the first quarter of 2020 decreased by $3 million or 9% compared to the corresponding period in 2019. The decrease was primarily due to a $4 million decrease from Dyrenium, a $2 million decrease from Photofrin as a result of COVID-19 and a $1 million decrease from Donnatal due to continued competitive pressures impacting market share. These declines in revenue were partially offset by a $2 million increase from Orapred, $1 million increase from Salagen and a $1 million increase from Dibenzyline.

Gross profit for the first quarter of 2020 decreased by $1 million or 3% compared to the corresponding period in 2019. This decrease was primarily due to the net revenue decreases that I previously mentioned. Gross profit as a percentage of revenue for the first quarter of 2020 increased by 6% compared to the same period in 2019. This increase was primarily due to a shift in product mix combined with higher sales from high-margin products. Looking ahead, we expect our Q2 2020 results to outperform our budget expectations.

With regards to our liquidity, the impact of the acquisitions Graeme mentioned will reduce the company's cash on hand and cash equivalents by approximately $180 million. Management have assessed the impact of these 2 acquisitions, including the cost of integration and other payment obligations on the company's liquidity and believes that the cash on hand and the cash flows expected to be generated from operations will provide more than sufficient liquidity to support ADVANZ PHARMA'S ongoing business and financing cash flow requirements for at least, but not limited to the next 12 months.

With that, I will now hand the call back to Graeme for closing remarks.

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Graeme Neville Duncan, ADVANZ PHARMA Corp. Limited - CEO & Director [5]

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Thanks, Adeel, and thank you to all our employees around the world for your focus and professionalism during the past few months. Despite the challenges in the world's economies, ADVANZ PHARMA has been able to navigate the storm so far in 2020, posting strong financial results, expanding our pipeline, executing on M&A and fortifying our executive team.

Operator, we will now open the call up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of [Michael Murphy] from PIMCO.

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Unidentified Analyst, [2]

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Can you hear me?

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Graeme Neville Duncan, ADVANZ PHARMA Corp. Limited - CEO & Director [3]

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Yes, we can.

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Unidentified Analyst, [4]

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Great. Just a couple for me. Obviously, I could ask a few more, obviously. In terms of your suppliers, could you tell us how much of them are in India? And just generally give any comments about the effects of kind of lockdown that that's had in Q2 so far? It clearly hasn't affected very much in Q1, which is very good. And then second, could you just tell me what the gross debt figure is at the moment, please?

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Graeme Neville Duncan, ADVANZ PHARMA Corp. Limited - CEO & Director [5]

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Michael, this is Graeme. I'll take the first one. The vast majority of our contract manufacturing organizations are based in Europe. We work with approximately 75 CMOs and around 90% of them are based in Europe. We have just a small handful of CMOs that are based in India.

And following on to the second part of your question around stock. As per my prepared remarks, I have huge admiration for the supply chain and the resilience it showed during COVID-19. We have seen peaks in demand for a number of our medicines. We have a very broad range, around 200 molecules around the world, and many of them are essential medicines for ICU units, including some products that have been in the press, and we've been able to respond to that increase in demand as a result of the resilience flexibility of those contract manufacturing organization. So it's -- I'd like to publicly say a huge thank you to our contract manufacturing organizations and our employee base that work within our supply chain team, because we have had no stock out issues and we've actually been able to respond where others have during that time period.

Where we go in Q2, I think what I would say there is the COVID-19 pandemic is unpredictable. And we're hearing many experts talk about potential second peaks. And therefore, trying to forecast and predict both the sales and the supply over the rest of 2020 is obviously somewhat more difficult. We have continued to see strong demand in the early part of Q2, but I'm not at a stage where I could speculate where that will go the rest of this quarter and certainly into the latter part of this year. And I'll ask Adeel to pick up on the gross debt figure.

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Adeel Ahmad, ADVANZ PHARMA Corp. Limited - CFO & Interim Director [6]

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Sure. Thanks, Michael. So from a gross debt perspective, at the end of Q1, it was $1.3 billion. And just as a reminder, our U.S. dollar term loan is approximately $775 million. We have senior notes, as you know, in U.S. dollars of $300 million. And then the euro-equivalent term loan is approximately $238 million. So overall $1.3 billion total.

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Unidentified Analyst, [7]

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And just a little housekeeping one. Bottom in the release, the corporate costs, the $2.7 million, are they already in the adjusted EBITDA or does that need to come out for the cash flow? Just trying to do a quick one before the full MDA release?

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Adeel Ahmad, ADVANZ PHARMA Corp. Limited - CFO & Interim Director [8]

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So the corporate costs are included in our operating expenditure. So they do form part of the adjusted EBITDA.

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Operator [9]

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(Operator Instructions) Your next question comes from the line of [EL Monies] from Boundary Creek.

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Unidentified Analyst, [10]

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I had a couple of questions. So I want to make sure I heard this right. So Adeel, I think you mentioned $180 million, 1-8-0, leaving the balance sheet for the 2 acquisitions. Did I get the number right?

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Adeel Ahmad, ADVANZ PHARMA Corp. Limited - CFO & Interim Director [11]

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That's correct.

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Unidentified Analyst, [12]

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Okay, cool. And so also, one other question on the cash balance. So there was $45 million of cash flow from operations during the first quarter. But I noticed that the cash balance went up sequentially by only $5 odd million. Was there any payments made for one of the acquisitions during the quarter?

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Adeel Ahmad, ADVANZ PHARMA Corp. Limited - CFO & Interim Director [13]

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No, it's a good question, good observation. So I think I'll answer in a couple of ways. If you look at the exchange rates that we had on our underlying cash, we obviously hold cash in a variety of currencies, including GBP and euro. There was a significant decline in both of those currencies relative to the U.S. dollar, not throughout the quarter, but particularly towards the end of the quarter. So it had an impact on our translated U.S. dollar cash number. So if I -- for example, if I translate by ending cash as at the end of Q1 at the year-end rates at December 31, you would see cash balance that was about $10 million to $11 million higher than what we presented here. And then otherwise, the financing cash flows were pretty much in line with normal, so I think that should probably reconcile for you. And then we'll also have obviously a full detailed cash flow that you'll see in the financials that will be released probably in the next few hours.

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Unidentified Analyst, [14]

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Okay, great. And a couple of other questions, if I may. So would you be able to say, so I noticed that Correvio delayed their Q1 '20 earnings, so I think COVID-19, so I was curious whether this in any way, shape or form changes the acquisition plans with respect to that company?

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Adeel Ahmad, ADVANZ PHARMA Corp. Limited - CFO & Interim Director [15]

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No, not at all. We are proceeding with the acquisition plan and whatever integration planning that we can do as we move ahead. We're obviously quite bullish on the acquisition. That's a key part of our strategy and transformational to the company. So we're looking to close it in the coming weeks.

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Unidentified Analyst, [16]

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Okay, great. And one last one for me. So pro forma for the 2 acquisitions, how does the revenue mix of the company change? And then is there any plans to rebalance the capital structure if it's going to get more skewed towards Europe? Is there any plans to rebalance it for the pro forma revenue mix of the company?

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Adeel Ahmad, ADVANZ PHARMA Corp. Limited - CFO & Interim Director [17]

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Sure. Good question, [El]. So I think, as you can imagine, with the impact of the 2 acquisitions, we will see a greater shift into euros than we have currently. So that's actually -- that's the kind of the long-term trend that we'll see in the business. From a cap structure perspective, we were closing out a very successful 2019 and looking ahead to 2020. At that point, one of the key objectives that we have set for the business was to look at our overall cost of debt and also the sort of the currency mix of the debt. So we are looking to -- for the right opportunity, the right window to look at a partial or refinancing. Obviously, with the onset of the pandemic, the first quarter hasn't been the right time to access the markets currently, but we continue to monitor it closely and look for the right window.

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Operator [18]

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There are no further questions at this time. I will turn the call back over to Adam Peeler. You may go ahead, sir.

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Adam Peeler, ADVANZ PHARMA Corp. Limited - VP of IR & Communications [19]

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Great. Thank you, Joanne, and thank you, everyone, for your participation today. This concludes our first quarter 2020 call.

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Operator [20]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.