U.S. Markets close in 5 hrs 11 mins

Edited Transcript of ADVZ.TO earnings conference call or presentation 7-Aug-19 12:30pm GMT

Q2 2019 Advanz Pharma Corp Earnings Call

Sep 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Advanz Pharma Corp earnings conference call or presentation Wednesday, August 7, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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

Corporate Participants

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

* Adam Peeler

ADVANZ PHARMA Corp. - VP of IR & Communications

* Adeel Ahmad

ADVANZ PHARMA Corp. - CFO

* Graeme Neville Duncan

ADVANZ PHARMA Corp. - CEO & Director

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

Conference Call Participants

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

* Antonia Borovina

Bloom Burton & Co., Research Division - Associate of Equity Research

* Emily Field

Barclays Bank PLC, Research Division - Research Analyst

* Philippa Thomas;Barings;Director

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

Presentation

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

Operator [1]

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

Good morning, and welcome to ADVANZ PHARMA's Second Quarter 2019 Results Conference Call. My name is James, and I will 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.

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

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

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

Thank you, operator, and good morning, everyone, and welcome to ADVANZ PHARMA's second quarter 2019 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 expectations 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 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'll now turn the call over to Graeme for opening remarks. Graeme?

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

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

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

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 and 6 months ended June 30, 2019.

ADVANZ PHARMA continued to build on its scalable operating model, unique global commercialization platform and deep expertise within the niche established medicine sector during the company's second quarter. More specifically, we continue to implement our planned strategy to support our aspirations to achieve sustainable growth over the long term.

As a reminder, PLAN is an acronym that stands for P, product expansion; L, leveraged global capability; A, acquire and integrate; and N, new start on vision. With respect to our efforts to acquire and integrate new medicines with support from our new Board and our growing M&A team, led by Guy Clark, we have the right architecture in place to now find, vet and secure new potential opportunities that we believe will build stakeholder value. The team has evaluated 60 different M&A opportunities so far in 2019. We have declined or terminated interest in 36 of these. 6 opportunities are under active process with some as advanced as binding offer decisions, while the rest are in various stages of assessment. We're also pleased to report that our acquisition of the global rights to Panretin and Salagen has performed as expected since we announced the transaction at the beginning of the second quarter, and its integration is ahead of plan.

Going forward, we will continue to be active in the pursuit of additional niche established medicines, be they value-added generics or legacy brands.

In addition to products, we're evaluating potential company acquisitions. Ultimately, these companies will have similar operating models to ADVANZ PHARMA and have a focus on Western Europe, so that we can assimilate them into the strong foundation we have already built in the U.K., Ireland and the Nordics.

With regards to the development and progress of our pipeline, our team, which is now fully recruited, has signed 6 deals in the first 6 months of the year. These were a mixture of in license, distribution and co-developments. We've also received constructive feedback from regulators regarding our generic filing for a long-acting equivalent for lanreotide. Going forward, our team will continue to work diligently on this filing with the regulatory authorities with a goal of a European-wide launch as soon as feasible.

Concerning our operational progress, we're pleased to welcome our new VP of Global HR, Fiona Huzarski. We believe Fiona's deep sector experience will help prepare ADVANZ for the M&A and subsequent integration we envisage. Still with operations during the second quarter, we continued to reduce our costs and increase our efficiency.

As disclosed during our first quarter 2019 conference call, we intend to close our Barbados office next month, which should save the company approximately $2 million annually. I sincerely thank our employees in Barbados for their focus and professionalism as we transfer knowledge and workflow to other jurisdictions.

Alongside our M&A activities, pipeline development and operational progress, we generated second quarter revenue of $131 million and adjusted EBITDA of $60 million. Both metrics are consistent with our expectations and follow a strong first quarter. I'm pleased to report that ADVANZ' first half 2019 revenue of $267 million and adjusted EBITDA of $125 million are marginally ahead of our forecasts.

With that, I'll hand the call over to Adeel, who will discuss our 3- and 6-month results in more detail.

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

Adeel Ahmad, ADVANZ PHARMA Corp. - CFO [4]

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

Thanks, Graeme, and good morning, everyone. My remarks will address ADVANZ PHARMA's 3 and 6 months financial results for the period ended June 30, 2019. My prepared comments will focus on revenue, gross margin 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 second quarter MD&A and second quarter earnings press release.

Second quarter 2019 revenue of $131 million was approximately 3% lower compared to the first quarter of 2019. Second quarter adjusted EBITDA of $60 million was approximately 8% lower versus the first quarter of 2019. Revenue for the 3- and 6-month period ended June 30, 2019, decreased by $8.4 million or 6% and $25 million or 9%, respectively, compared to the corresponding periods in 2018. These decreases were primarily due to lower sales from the international segment, combined with lower foreign exchange rates impacting translated revenues from the international segment partially offset by higher sales from the North America segment.

For reference, the significant average exchange rates used in the translation to ADVANZ PHARMA's reporting currency in U.S. dollars during the second quarter of 2019, was USD 1.29 per Great British Pound compared to USD 1.36 for Great British Pound during the second quarter 2018. Adjusted EBITDA for the 3- and 6-month periods ended June 30, 2019, decreased by $7 million or 11% and $14 million or 10%, respectively, compared to the corresponding periods in 2018. This decline is primarily due to lower sales and gross profits from the ADVANZ PHARMA International segment, combined with lower foreign exchange rates impacting translated results.

Consolidated second quarter gross profit as a percentage of revenue of 65% was down 2% compared to the first quarter of 2019 and 3% compared to the corresponding periods in 2018. These decreases were primarily due to a shift in product mix.

Gross profit as a percentage of revenue for the first 6 months of 2019 of 66% was down 1% versus the corresponding periods in 2018, primarily due to a shift in product mix. The company's consolidated cash and cash equivalents position at June 30, 2019 was $224.3 million compared to the company's cash and cash equivalents position at the end of 2018 of $224.4 million.

Further to Graeme's comments regarding our transition with Eisai, ADVANZ PHARMA paid approximately $33 million from cash on hand for the 2 medicines and inventory on April 15, 2019. On a segmental basis, International segment revenue of $95.5 million for the quarter ended June 30, 2019, decreased by approximately 4% or $3.6 million compared to the first quarter 2019 revenue of $99.1 million due to continued generic competition in the U.K. market partially offset by the timing of other shipments.

International segment revenue for the second quarter of 2019 decreased by $11.2 million or 11% compared to the corresponding periods in 2018. A $5.7 million decrease in product-related revenue declines was further compounded by a $5.5 million decrease in revenue as a result of GBP weakening against the U.S. dollar when compared against the second quarter of 2018.

Declines to revenue attributable to key products during the second quarter of 2019, excluding the impact of foreign currency translation, were a $2.2 million decrease from Carbimazole, a $2.1 million decrease from liothyronine sodium and a $1.8 million decrease from nitrofurantoin. These lower product volumes and revenues are primarily due to ongoing competitive market pressures, resulting in market share erosion in the U.K. These declines to revenue were partially offset by a $4.4 million increase in revenue from fusidic acid as a result of product volume increases.

Revenue for the first 6 months of 2019 decreased by $25 million or 11% compared to the corresponding periods in 2018. A $12.7 million decrease in product-related declines was further compounded by a $12.3 million decrease in revenue as a result of the GBP weakening against the U.S. dollar when compared against the first half of 2018. Declines to revenue attributable to key products during the year-to-date period, excluding the impact of foreign currency translation, consisted of a $3.8 million decrease from Carbimazole, a $3.7 million decrease from liothyronine sodium and a $2.9 million decrease from levothyroxine sodium. These lower product volumes and revenues are primarily due to ongoing competitive market pressures resulting in market share erosion in the U.K. These declines to revenue were partially offset by a $5.4 million increase in revenue from fusidic acid as a result of product volume increases.

Gross profit for the second quarter and first 6 months of 2019 decreased by $10.6 million and $19.3 million, respectively, compared to the corresponding periods in 2018. Gross profit as a percentage of revenue for the second quarter and first 6 months of 2019 decreased by 3% and 2%, respectively, compared to the corresponds periods in 2018. These decreases were primarily due to a shift in product mix with certain higher-margin products experiencing additional market competition compared to the corresponding periods in 2018.

Moving to the North America segment. Revenue for the second quarter of 2019 was $35.6 million compared to $36.5 million in the first quarter of 2019, a decrease of approximately 3%. The decline in revenue is primarily attributable to lower revenue from Plaquenil authorized generic as a result of a decline in volume, lower revenue from Kapvay due to a decline in volume and lower revenue from Donnatal due to continued competition partially offset by higher revenue from Orapred authorized generic and Zonegran.

Revenue for the second quarter of 2019 increased by $2.8 million or 9% compared to the corresponding periods in 2018. The increase was primarily due to a $2.6 million increase from Plaquenil authorized generic due to the timing of shipments in 2019. A $1 million increase from recently acquired Salagen and Panretin brands in the U.S. and a $0.9 million increase in revenue from Photofrin as a result of higher volumes. These increases were partially offset by a $3.6 million decrease from Donnatal as a result of competitive pressures that have resulted in a loss of market share.

Revenues for the first 6 months of 2019 were marginally higher compared to the corresponding periods in 2018. The slight increase was primarily due to a $3.8 million increase in revenue from Plaquenil authorized generic, primarily due to higher volumes compared to the corresponding periods in 2018, a $2.8 million increase in revenue from Kapvay due to higher volumes and lower Medicaid utilization, a $1 million increase from recently acquired Salagen and Panretin brands in the U.S. and a $0.8 million increase in revenue from Photofrin due to higher volumes. These increases were partially offset by an $8 million decrease from Donnatal as a result of additional competitive pressure that have resulted in a loss of market share and a $2.1 million decrease from Orapred authorized generic due to higher product returns in the second quarter of 2019.

Gross profit as a percentage of revenue for the second quarter of 2019 decreased by 4% compared to the corresponding periods in 2018. The decrease was primarily due to a shift in product mix. Gross profit as a percentage of revenue for the first 6 months of 2019 was consistent with the corresponding periods in 2018. The consistent gross profit as a percentage of revenue reflects the positive impact of the Medicaid exit and 340B pricing termination, offset by a decrease due to a shift in product mix.

Looking ahead to the remainder of 2019, we believe we'll continue to face competitive challenges in our U.K. and Ireland business and our U.S. business. However, we remain confident that we'll meet our financial targets for the year. In addition, our team continues to fortify our pipeline. Consistent with prior disclosure, we believe that the revenue contribution from our pipeline will be immaterial in 2019 before making more significant contributions in subsequent years.

With respect to the ongoing competition and markets authority matters involving ADVANZ PHARMA, as we have stated previously, we take competition law very seriously, and we are working cooperatively with the CMA as it assesses all the facts. And we do not believe that ADVANZ PHARMA has infringed on any competition law with respect to any of these matters. Please see our second quarter 2019 MD&A and interim financial statements for a summary of the current status of the CMA investigations.

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

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

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

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

Thanks, Adeel, and thank you to the ADVANZ PHARMA team across the world for all your hard work and dedication so far in 2019. And thank you to our stakeholders for your ongoing support.

We will now open the call up for any questions. Operator?

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

Questions and Answers

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

Operator [1]

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

(Operator Instructions) And your first question comes from the line of Philippa Thomas from Barings.

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

Philippa Thomas;Barings;Director, [2]

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

If I start on the International business and look at its revenue on a constant currency -- sorry, a local currency basis over the last 4 quarters. Obviously, in Q1, you called out Brexit impacts and some wholesaler buying patterns influencing that quarter specifically. But if I compare this quarter with Q3 and Q4 of '18, we're obviously up slightly. So obviously, a lot of the commentary you gave around products is versus Q2 last year when we were seeing a lot of that competition effect. So I guess my question is, if I look at it sequentially on some of those major products, have we actually reached a trough? Are they sort of flat on a normalized basis to what you've been seeing over the last few quarters? And therefore, we shouldn't see further sequential decline. That's my question.

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

Adeel Ahmad, ADVANZ PHARMA Corp. - CFO [3]

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

Philippa, thanks for the question. Again, I think we've talked about this previously. I guess in previous calls, we have seen -- and I think to really address your question, we have to kind of go through the individual portfolios. And I think I've said before, in our Rest of World business, we've always seen that part of our portfolio as relatively stable. And I think as we look out in the future, we would continue to characterize it as a stable business.

In the U.K., whilst we've talked about our quite advanced commercial capabilities in the U.K., and that's kind of what we highlight, our portfolio has been subject to ongoing competition. The impact of that was quite a bit more significant as we looked at our results going from 2016 -- or from 2015 into '16, '16 into '17, '17 into '18. But we've seen a softening of the decline every year and we've seen a reduction in the rate decline. So I think the competition and the tough competitive environment in the U.K. will continue. But certainly, the rate of decline, as we said on previous calls, has been decreasing.

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

Operator [4]

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

And your next question comes from the line of David Martin with Bloom Burton.

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

Antonia Borovina, Bloom Burton & Co., Research Division - Associate of Equity Research [5]

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

This is Antonia on the line for Dave. I just wanted to follow up with the earlier question. Can you just confirm whether there was any distributor stocking for International in the second quarter?

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

Graeme Neville Duncan, ADVANZ PHARMA Corp. - CEO & Director [6]

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

Antonia, this is Graeme. Thanks for the question. It depends which part of the business you are looking at. Obviously, in the second quarter, if you look at our ROW business, it does have fluctuating phasing patterns. And you see that the sum of that phasing in Q2 was positive in ROW -- in our ROW segment. In the U.K., we saw more of it in the first quarter. So it does differ depending on which segment of the business that you're looking at. So Q2 did see some positive wholesaler phasings in the ROW segment of the business but the bulk of the U.K. was in the first quarter.

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

Operator [7]

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

(Operator Instructions) Your next question comes from the line of Emily Field with Barclays.

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

Emily Field, Barclays Bank PLC, Research Division - Research Analyst [8]

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

I was just wondering if you could comment on when you'd expect to see a regulatory decision for your filing of long-acting lanreotide in Finland? I'm assuming you are approved, just how quickly you'd be able to follow on with filings in the other EU countries. And then also, just from your vantage point, if you would expect that you'd be a sole source generic for that product? Or if you expect a more competitive marketplace?

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

Graeme Neville Duncan, ADVANZ PHARMA Corp. - CEO & Director [9]

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

Yes. So we are pleased, we obviously submitted our application in March for lanreotide. To be clear, it was part of a DCP process. So it is submitted in Finland, but it's also submitted across Circa 23 territories. And we are expecting further feedback from all of those territories imminently over the next couple of months. We've had some direct dialogue with the reference member state, which is Denmark already. We're pleased with that dialogue, and we will continue to work hard to go through that approval process. I'm not going to estimate when we would be through it and launched because regulatory processes are obviously flexible processes where you have to constantly have dialogue with those authorities. But as we sit here today, submission went in, in March. We've got the first feedback from the reference member state, we're expecting feedback from a range of other European territories, and it's a DCP process, not just a single country submission.

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

Operator [10]

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

And with that, there are no further questions in queue. I'd like to turn the call back over to Mr. Peeler for some closing remarks.

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

Adam Peeler, ADVANZ PHARMA Corp. - VP of IR & Communications [11]

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

Thanks, James, and thank you, everyone, for your participation today. This concludes our second quarter 2019 call.

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

Operator [12]

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

This concludes today's conference. You may now disconnect.