U.S. Markets closed

Edited Transcript of ALK B.CO earnings conference call or presentation 5-Feb-20 11:00am GMT

Q4 2019 ALK-Abello A/S Earnings Call

Hoersholm Feb 11, 2020 (Thomson StreetEvents) -- Edited Transcript of Alk-Abello A/S earnings conference call or presentation Wednesday, February 5, 2020 at 11:00:00am GMT

TEXT version of Transcript

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

Corporate Participants

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

* Carsten Hellmann

ALK-Abelló A/S - President, CEO & Member of Management Board

* Per Plotnikof

ALK-Abelló A/S - VP of Corporate Communications, IR & Strategic Planning

* Søren Jelert

ALK-Abelló A/S - Group CFO, Executive VP & Member of Management Board

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

Conference Call Participants

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

* Benjamin Silverstone

ABG Sundal Collier Holding ASA, Research Division - Research Analyst

* Michael Novod

Nordea Markets, Research Division - Director of Healthcare, Healthcare Analyst & Sector Coordinator

* Peter Sehested

Handelsbanken Capital Markets AB, Research Division - Research Analyst

* Philippa Gardner

Jefferies LLC, Research Division - Equity Analyst

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

Presentation

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

Per Plotnikof, ALK-Abelló A/S - VP of Corporate Communications, IR & Strategic Planning [1]

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

Hello, everyone, and welcome to this presentation of ALK's 2019 results and outlook for 2020. Please turn to Slide #2 for today's presentation and our agenda. My name is Per Plotnikof, I'm Head of Investor Relations. And with me today are CEO, Carsten Hellmann; and CFO, Søren Jelert.

Today's presentation is divided into 3 sections, Q4 and full year performance, an update on our 4 strategic priorities and the full year outlook. And we will end today's call with a customary Q&A session.

And with these opening remarks, I will hand you over to CEO, Carsten Hellmann, and Slide #3. Please go ahead, Carsten.

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

Carsten Hellmann, ALK-Abelló A/S - President, CEO & Member of Management Board [2]

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

Thanks, Per, and thank you all for joining this call today. I know it's a very busy day for all of you. But first, let me just give you a quick update on our 3-year transformation program, which after having completed the second year, we now see a more resilient, disciplined and future-oriented and responsive company. We are increasingly seeing the rewards of the investments we have made since December 2017, and let me give you a few examples.

As promised, we entered the double-digit growth territory in 2019 with 11% organic growth, and we are committed to staying there. Our guidance is for 8% to 12% organic growth in 2020 this year, despite the accelerated phaseout of older products. We assume that these discontinuations will reduce growth points by -- growth by 4 percentage points so that on a like-for-like basis, we're actually targeting an underlying growth of 12% to 16% in 2020, which I believe is a very promising momentum. ALK employees should be very proud.

Tablets remained our key to growth. Sales of these products were up 45% in 2019, and they now account for 30% of group revenue and 35% of our AIT revenue. Next year, we expect tablets to become the single largest product group of -- for ALK with growth exceeding 30%. If successful, this will mean that we essentially have triple sales since 2015 on tablets, and we still have many more growth opportunities ahead of us.

We are also substantially increasing R&D costs in 2020, but we expect the overall capacity cost to revenue ratio to be largely unchanged as we increasingly leveraged our existing sales and marketing platform. One example of this leverage is the digital solutions platform that we developed and refined in Germany and the U.K. It's called klara and klarify.me. We're rolling out this platform in additional markets to more closely link digital consumer engagement to the commercialization of our AIT products and the consumer space. If successful, these activities can fuel our growth for many years to come.

I would also like to highlight the changes within product supply. Do you remember where we were 2 to 3 years ago, where we spent too much time firefighting and we're missing out on growth opportunities because we were short of capacity? I'm happy to report that things have improved greatly. In particular, we have improved quality, which means that we can now spend more time on securing efficiency and standardization gains in product supply, which will help improve margins over the longer term.

Now don't get me wrong, we still have a lot to do. We still need to unlock the U.S. tablet market to become the allergy leader there, and we still need to build new adjacent businesses. But the big picture shows an ALK that is in better shape today and where the transformation is ahead of schedule, as you can see by the cash flow development.

And with these opening remarks, I'll hand over to Søren, our CFO, to cover our performance in Q4. Thank you.

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

Søren Jelert, ALK-Abelló A/S - Group CFO, Executive VP & Member of Management Board [3]

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

Thanks, Carsten. Let me share a few headlines from fourth quarter. Revenue grew by 11% to DKK 883 million, which was our best ever fourth quarter. We saw broad-based growth across our regions, driven by tablets and recovering SCIT sales.

EBITDA finished at DKK 48 million versus DKK 10 million last year, which was at the higher end of expectations. EBITDA also included a one-off income of DKK 15 million from the divestment of the veterinary business, a move designed to further reduce complexity and sharpen our focus.

Free cash flow was better-than-expected at plus DKK 159 million for a number of reasons: the earnings development in quarter 4; lower tax payments; deferred CapEx investments; and various working capital changes, including a timing of a one-off repayment of accrued rebates. All in all, we closed 2019 with another quarter of positive results.

Now please turn to Slide 5 and performance in our sales regions. As you can see, European revenue was up 6% in fourth quarter and 7% for the full year. Growth was fueled by ACARIZAX and GRAZAX as well of the encouraging launch of ITULAZAX. Revenue from the legacy portfolio stabilized in Europe as recovering SCIT sales compensated for the anticipated decline in SLIT-drop sales.

Growth was recorded in most European markets.

In France, however, sales declined slightly as market normalizations continued to have an effect. In Italy, we faced an increase in the challenging market and responded by restructuring and downsigning our presence, which resulted in some restructuring costs in the fourth quarter. Apart from Italy, market and reimbursement conditions were largely stable.

In North America, full year sales were up 10% organically when disregarding the divestment of the U.S. vet business. This was broadly in line with our target for 2019. We had hoped for a bit more, but we are still seeing fluctuating purchases; patterns for non-energy-related life science products; and U.S. tablet sales fell short of expectations, which Carsten will detail later.

International markets saw a 200% growth in fourth quarter and 112% growth for the full year, with strong tablet sales in Japan, Southeast Asia and Middle East and Australia. Double-digit growth was also seen in China. All in all, good progress across our regions.

Now let's take a closer look at the 3 product categories on Slide 6. We have already highlighted the excellent growth from tablets, 48% in fourth quarter and 45% for the full year. Combined SCIT and SLIT drops saw -- sales grew by 4% in fourth quarter and 1% for the full year despite the accelerated phaseout of legacy products. SCIT sales recovered in Europe with strong performance from venom products and an effect from product upgrades. SCIT growth was also recorded in U.S. and China, while SLIT-drops sales were down as expected, due to market normalization in France as well as patients shifting from drops to tablets.

Sales of other products were down 15% in fourth quarter, while full year sales were unchanged in local currencies. On the plus side, sales of diagnostics increased in the U.S., but we also saw the negative trend in the sales of non-energy-related products. In Europe, sales were down due to product eliminations and a normalization of Jext sales, following a 2018 market disruption. Even so, Jext still managed to retain a vast majority of its market share.

Now let's turn to the full year financial on Slide #7. ALK's financial robustness improved further in 2019. Full year revenue was up by 11% in local currencies at DKK 3.3 billion. Reported growth was 12%. Gross profit was DKK 1.9 billion and yielded a gross margin of 58%, an improvement of 2 percentage points, reflecting higher sales but also significant costs to secure robustness and support the implementation of the new product side strategy.

The gross margin was also impacted by changes in the revenue mix. For example, increased shipments of tablets at lower gross margins through our Japanese partner, Torii, which reduced the margin by approximately 1 percentage point.

Capacity cost increased 8% in local currencies to just about DKK 1.9 billion, driven by R&D expenses, which increased due to planned step-up in clinical activities. Sales and marketing expenses grew by 5% in local currencies in support of tablet launches, market expansions and the new digital platform. However, as Carsten has said, we now have the infrastructure in place to better leverage our sales and marketing and administration setup so that in time, we can reduce our capacity cost to revenue ratio.

EBITDA of DKK 241 million was well above our initial guidance of DKK 100 million to DKK 200 million and at the upper end of the November outlook range, which was DKK 200 million to DKK 250 million. Progress was driven by higher sales, better margins, efficiencies and savings.

Finally, free cash flow of minus DKK 25 million was better than expected for the reasons I highlighted on the fourth quarter performance. With these highlights, I'll hand you over to Carsten for an update on our strategic priorities.

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

Carsten Hellmann, ALK-Abelló A/S - President, CEO & Member of Management Board [4]

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

Thank you, Søren. It is important to state that our overall strategic intent remains unchanged. Because remember, for every 100 people suffering from respiratory allergies, 10 are actually potentially eligible for AIT treatment, which is ALK's treatment, and yet only 1% actually ends up receiving it.

So our objective is to engage with these people worldwide and to help them take action on the allergy. We want to identify those who might be benefiting from AIT treatment and help them into treatment with registered, well-documented, effective products. Today, ALK holds a 35% global market share on the AIT market. That's worth about DKK 8 billion, but we want a larger share of a much bigger global allergy market and to capitalize on these opportunities.

So let me say a few words about our progress on our strategic priorities, starting with North America on Slide 9. North America represents a significant opportunity for ALK still, but delivering success in this region is a long-term endeavor as the way the market currently works financially with the allergy doctors makes shift transformation in our favor unlikely. But we have established a foothold with thousands of new doctors and patients with our FDA-approved tablets, and we'll continue to work hard to expand this foothold until our business here is the size it should be. Nothing indicates today that we will not succeed over time.

Last year, total sales grew by 10% organically in the U.S. and tablets recorded 38% growth. It is very important to note that in terms of volumes, the tablet uptake was in line with our targets. But promotional activities, such as rebates and coupons, lowered the effective selling prices, meaning that the actual sales were slightly below equitation, only a few million dollars and the key parameters of building acceptance with the prescriber base.

We succeeded to double the number of prescribers that have become a regular prescriber exactly as we promised. We also managed to increase prescription breadth and acceptance among patients in the major population centers. We are currently focusing all our efforts.

We continue to work with the key opinion leaders, payers and other stakeholders to promote awareness of the FDA-approved tablet portfolios we have in ALK. For instance, we work with the American College of Allergy, Asthma & Immunology to create the first ever decision-making tool for allergy patients. The tool features ALK's tablets, alongside with better known SCIT allergy shot treatments so that the doctors and patient can reach a shared decision together on which treatment best suit the patient preferences and needs, with less risk for the doctor to lose the shot business.

Our 2020 priorities are to deliver 10% revenue growth overall in the U.S., and for tablets, we will focus on further increasing the breadth and depth of the prescriber base, as well as building a stronger case for evident-based treatment among payers. While for patients, we will leverage our European experience to launch our digital platform, klara, in both the U.S. and Canada during 2020.

Slide 10, please. Priority #2 is to complete and commercialize the tablet portfolio for all ages. A landmark event in 2019 was the launch of ITULAZAX, the tablet against tree pollen allergy, now have tapped -- so now we have tablets against 5 of the major respiratory allergies.

Germany was the first market for ITULAZAX, and the country saw ALK's best ever launch as with the first few months sold around twice as many tablets as we did during the launches of ACARIZAX and GRAZAX. Feedback on ITULAZAX's efficacy and convenience has been very positive, and doctors initiated a total of around 10,000 patients in the launch in 2019. It is an outstanding number.

Across all markets, the house dust mite tablet remained a core engine of growth, and we estimated that more than 200,000 patients now have started treatment with ACARIZAX, ODACTRA and MITICURE since the product was launched. Geographical expansion continued, and we made the ragweed tablet, RAGWIZAX, available in Eastern Europe markets, Russia, and ACARIZAX is now approved in 30 countries worldwide.

For 2022, we are targeting sales growth for the tablet portfolio of more than 30%. A successful launch of ITULAZAX in Europe is a paramount -- is of paramount importance, and we expect to launch the product in additional markets in Europe this year, while also securing a regulatory approval and launch in Canada.

Execution of our ongoing trial is another priority. And our Japanese partner, Torii, has seen sales boosted by the addition of pediatric indications for the tablets. And this makes us even more keen to add a similar indications in Europe and North America. So a large transatlantic trials in pediatric allergic asthma and allergic rhinitis will support these ambitions which, of course, cost a lot of money in 2020 and into '21.

Another key trial is the one that will likely allow for launch of ACARIZAX in China. We have agreed with China's regulators to run a so-called environmental exposure chamber trial with 200 patients, which has already been initiated. Subject to approval, we could launch ACARIZAX as early as 2023 in a sizable market, but just 300,000 people are already on AIT today, but which has been potential to become a much bigger market.

And turning to the U.S.A. If the AS agreed that a single new safety trial with 250 patients is sufficient to submit an application for adolescent indication for ODACTRA, this provide us with a faster and more cost-effective route for approval for this important patient group.

With these updates, let's turn to Slide 11. The third strategic pillar is launch of services, products and digital platforms to help ALK engage with many more allergy sufferers, and ultimately, lead those who are suitable towards AAI treatment and other concepts supported by ALK. A top priority in 2019 was to prepare the global rollout of our digital engagement platforms, klara and klarify.me, based on learnings from the 2 pilot markets, Germany and the U.K.

As you can see here, app downloads, online allergy test and searches for an allergy doctor, all surpassed our 2019 hopes and targets. Thanks to our experience in these 2 markets, we're now confident that we can engage digitally with the patients at scale, helping people to both improve their lives and more easily connect with doctors who understand their needs.

So in 2020, we'll be expanding the digital engagement platforms to cover up to 10 markets, including the U.S., Canada and France. We will further develop our digital engagement business model so that it more closely links to commercialization of our AIT products, placing more emphasis on identifying those who might benefit from AIT products and mobilizing them to take action. Another 2000 (sic) [2020] highlight, from last year 2019, was also the partnership with Windgap, which potentially offers a route to the U.S. adrenaline market with a very strong concept. And we will also still continue to explore more adjacent business opportunities, and on top of supporting Windgap in the development of the adrenaline pen.

With this, let's turn to Slide 12 and the final strategic pillar. Optimize and reallocate covers, a wide-raising program to improve quality and robustness and deliver efficiency and standardization gains that will improve margins over the long term.

In 2019, we continued the program of upgrade and specialization of our production facilities, and one example is the consolidation of European SCIT production in Denmark. Progress on quality was highlighted when the French authorities lifted the -- its injunction against ALK, and progress on the compliance was further underlined during 10 routine regulatory inspections in our facilities in 5 countries, and they all went well.

Complexity was further reduced by 2 divestments. We divested the U.S. vet business and a part share in a tablet formulation production line. We also made very good progress on phasing out older, unsustainable products, just as we are also working to strengthen the documentation for selected core legacy products. An example of the latter was the amended approval of our lead SCIT product, which is Alutard in Germany, which is now -- which now allowed for shorter up-dosing period, enhancing its competitiveness.

For 2020, we are continuing that accelerated portfolio rationalization program. We will continue to invest in quality, robustness and scalability to ensure that our 2019 benchmark forms a new baseline from which we -- for which to make further improvements, while also working to improve manufacturing yields and to reduce the number of active pharmaceutical ingredients and manufacturing processes. This will see multiple API replaced by single cross-reaction businesses.

For Alutard alone, we expect to reduce the number by around 2/3, which will benefit efficiency and margins over the long term. Doing all this, however, involves significant work to our development, production and regulatory teams. Just as an example, last year, we submitted almost 1,200 regulatory changes covering 61 products, and we expect a similar number this year, hard but beneficial work. This explains why gross margin improvement is not a walk in the park. It requires patience, but we are progressing, nevertheless. And as I started saying, we have a firm hand. We take the consequences, and we are also reducing the 2020 growth by 4 percentage points killing old products.

That's it for me. I hope this update illustrates how strategic transformation is advancing. We still have a lot of work ahead, but we're making steady progress. And in many areas, I think we are way ahead of schedule.

I'll now hand you over to Søren, and the outlook on Slide 13. Thank you so much.

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

Søren Jelert, ALK-Abelló A/S - Group CFO, Executive VP & Member of Management Board [5]

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

Thank you, Carsten. We expect 2020 revenue to grow by 8% to 12% organically when adjusted for the divestment of the U.S. vet business at the end of 2019. This translate into a range between DKK 3.5 billion and DKK 3.65 billion, which covers both opportunities and a number of uncertainties. The higher end of the range factors could be accelerated tablet sales across all regions, including a fast uptake of ITULAZAX; continued market share gains as a consequence of the market transition towards evidence-based AIT products; further growth in sales of other products; and finally, stable pricing and reimbursement conditions in Europe.

At the lower end of the range factors, pressure on pricing and reimbursement systems, particularly in Southern Europe; a more pronounced effect of European portfolio pruning; fluctuations in the timing of shipments to Japan; and finally, fluctuations of sales of legacy non-tablet products in North America.

Also, please note that we expect growth to be strongest in the second half of 2020, reflecting an expected timing of shipments to Chile and Japan. There will also be an effect related to the timing of the portfolio rationalization during the year.

With this clarification, let's move to the financial outlook on Slide 14. As mentioned, revenue is projected to grow 8% to 12% organically in local currencies based on solid progress in all sales regions, which makes strong double-digit growth in tablet sales and growth for both continuing SCIT products and other products. Discontinuations of legacy products are expected to impact growth negatively by approximately 4 percentage points.

EBITDA is projected between DKK 200 million and DKK 300 million. Now you may -- might be wondering why 8% to 12% revenue growth doesn't automatically transcend to higher earnings. Well, there are 2 main reasons.

First of all, we expect the gross margin to be roughly under level of 2019. The margin will benefit from increased sales, but this impact will be offset by changes in the product mix and increased lower margin tablet shipments to Japan, as well as continued high cost to support the portfolio and site strategy, as just mentioned by Carsten.

Secondly, we are increasing R&D expenses substantially to approximately DKK 600 million. Despite the increase in R&D, we expect the overall cost to revenue ratio to be largely unchanged as we increasingly leverage our sales and marketing platform. Administration expenses are expected to be on level with 2019.

Free cash flow is expected at around minus DKK 300 million, reflecting subdued earnings due to the high R&D cost and increased CapEx, which also include the rephasing of investments from 2019 to 2020. CapEx is projected at DKK 250 million to DKK 300 million. Free cash flow is also affected by changes in working capital, including continued build-up of inventories and one-off repayments of rebates that was accrued in 2019.

Also, when comparing these figures, remember that free cash flow last year included DKK 53 million in proceeds from divestments. When we announced the new strategy in December 2017, we said that the 3-year transformation of ALK would lead to a substantial negative cash flow over the 3 years.

In the guidance for 2020, we are now saying that the cash flow will be negatively, in total over the 3 years, by approximately DKK 600 million. So -- and that should be compared against the DKK 1 billion that we originally said. Hence, almost DKK 400 million better for this 3-year transition period. This also reflect the fact that revenue growth and earnings developed have exceeded their original expectations significantly.

With this, I'll hand you back to Per and the Q&A session on Slide 15.

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

Per Plotnikof, ALK-Abelló A/S - VP of Corporate Communications, IR & Strategic Planning [6]

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

Thank you, Søren, and thank you, Carsten. And this concludes the main part of our presentation, and we are now ready to open up for the Q&A session. And operator, please go ahead.

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

Questions and Answers

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

Operator [1]

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

(Operator Instructions) And our first question comes from Peter Sehested from Handelsbanken.

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

Peter Sehested, Handelsbanken Capital Markets AB, Research Division - Research Analyst [2]

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

It's Peter, Handelsbanken. I have 3 questions. And by the way, congratulations on the -- once again, nice results. First question relates to your 4 percentage points guidance on impact from pruning. That corresponds roughly to DKK 120 million. And also, that translates into a significant drop in SCIT/SLIT sales in Europe, which I suspect is where you'll see the largest hit. But could you just give us some guidance how to think about the purpose at this point relative to the underlying growth that you're seeing in SLIT? That was the first question.

The second question is on ITULAZAX. Great launch here. Are you at this point in time willing to take a hit and out in terms of peak sales over the next 4 to 5-year period?

And secondly -- or thirdly, the launch of Aimmune's peanut allergy product in the U.S. I guess, this is a product that will have to circumvent the usual, let's say, route of sales, i.e., the physicians and their business model. But given that peanut allergy is a sort of big thing in the U.S., does this product -- do you see this product launch change the dynamics in how allergy products can reach the consumer in the U.S., i.e., circumventing the physicians, et cetera?

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

Carsten Hellmann, ALK-Abelló A/S - President, CEO & Member of Management Board [3]

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

This is Carsten. Remember that it's not reoccurring. I mean this DKK 120 million, we're reducing, I'm talking to the 4 percentage point, and something that's happening in '20. And when we reduce our product portfolio, then remember that we have patients in treatment. So it take 2 to 3 years before they actually all drop out. So it's like, it's a process thing.

But if we take net '19 versus '20, we are reducing it on products we had in '19 by DKK 120 million, which is the 4 percentage points. So it's really for real. ITULAZAX' peak sales, we have said that it's more than -- and we have said that it's going to be a better product than GRAZAX, and I think we'll just stay by saying that. It looks good, and let's just stay with that.

Aimmune, I think, is an interesting question. Of course, we are looking into a lot of things in ALK as well. And it's an interesting model they have had with precertified doctors and so forth and the way they wanted to go about it. Whether it's going to change the dynamics from the shot business to tablets? We don't know for sure. But definitely, allergy gets higher up on the agenda and consumers in general. And if you combine that with our launch earlier this year of klara app, together with a lot of partners in the U.S., it could change the dynamic.

It's not something we have budgeted with, that it will. And let's see how successful they will be with Aimmune, they have at least said they will reach $1 billion sales. But I'll remind you that ALK also said that 10 years ago on tablets. It has to be seen how the model actually works. But we're following it closely and it's not a really complicated product, so to speak. It is pretty much peanut powder in a capsule, where they've done some trials and made a protocol of how to administer that. And I think it's going to be very interesting to see because there's also home prove business of peanut in the U.S. So yes, it's going to be very interesting. So it's a good point. Thank you, Peter.

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

Operator [4]

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

Our next question comes from Benjamin Silverstone from ABG.

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

Benjamin Silverstone, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [5]

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

Carsten, Soren, and Per, so I had 2 questions. The first is, if you could please elaborate a little bit on the main drivers of this incredible launch of ITULAZAX in Germany? And do you think that the launch of the klara app and patient engagement might have an impact here?

And my second question is that given the tremendous growth in tablets in the international markets, which include China, do you have an estimate of a potential impact that the coronavirus focus might have?

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

Carsten Hellmann, ALK-Abelló A/S - President, CEO & Member of Management Board [6]

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

Yes. It's Carsten. Thank you for the questions. Regarding China, the growth we have in international markets is actually not really from China. So it has had the impact for certain that we're not holding -- hosting a big sales meeting in town hall in China in 2 weeks from now and so forth. But from the sales and business perspective, it doesn't really have any impact on us.

ITULAZAX and klara, we have not had a full season of ITULAZAX as we speak. And yes, awareness have, of course, gone up. And the whole way we got about the ITULAZAX' launch, I don't know if you saw some of the campaign materials the way we did it, it was a very different type of launch, more commercial, more consumer-like. We hired some of the top models in fashion, including a fashion designer and photographer to redo the campaign materials. We invited all the doctors to a big food market and had a lot of events around it.

So I think the launch campaign itself was very professional. Combined, of course, with 200,000 downloads on klara and so forth brings a lot of awareness to the allergy. But when -- the true efficacy of the klara app can come into play when you have a seasonal product like ITULAZAX. It is, of course, the engagement you have with these people here in the season now and making sure that they stay on the product. And also, those who are not on the product yet, they get reminded throughout the summer, where they do not have the symptoms to be initiated with a doctor and find a doctor and the self-test and so forth, we come to the autumn in 2020.

So the answer on klara is a yes or no. I think we have not seen the full potential yet because we haven't had a full season. But definitely, we should not underestimate the fact that it's more than 50 million [messages] in Germany. And so there's a lot of noise around -- positive noise and sentiment around ALK in Germany, which I do not think have heard of us. I would not say it is the driver because there was a lot of other things done as well. But I think over time, we will -- I believe we will see a further integration and merger between different types of activities from the digital to the physical environment, as 99% of people with respiratory allergies are out there trying to help themselves.

And we -- I think we have, as we said, 1.5 years ago, when we first introduced, we would do this. I think we have demonstrated in our test markets that we are really onto something. Of course, we have also learned a lot ourselves. And these learnings will be implemented now when we launch here, and with a very hard focus also launching in some metropoles in the U.S. with the app. I personally believe that over time, it's not a -- there's no quick fix in any industries. But I think over time, we would actually be a very positive for ALK, and we will keep pushing it. It's -- we are investing more in it and not less in it.

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

Operator [7]

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

Our next question comes from Michael Novod from the Nordea Markets.

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

Michael Novod, Nordea Markets, Research Division - Director of Healthcare, Healthcare Analyst & Sector Coordinator [8]

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

Just on the adolescents trial for ACARIZAX in the U.S. Just repeat the requirement from the FDA? And then secondly, also, when would you expect the data? And then when would that say, sort of enable a launch for that indication or that patient group in the U.S.?

And secondly, in terms of European pricing pressure because it was sort of also a topic for 2019, I would even say 2018. So it's more to get a feeling of how do you judge the risk of these pricing reforms, particularly in France, actually materializing in 2020 given sort of the history in the last 2 years, at least when nothing happened.

And then, lastly, in terms of the markets for ITULAZAX in 2020, how many do you actually believe you will be able to roll out and maybe you can just remind us how long the French pricing discussions took on ACARIZAX, whether you believe this can be done faster on ITULAZAX?

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

Carsten Hellmann, ALK-Abelló A/S - President, CEO & Member of Management Board [9]

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

Thank you, Michael. Good questions. Regarding the U.S., it's about the safety trial for adolescent. So we're down to 250 patients, which means that we have both cut time and cost a lot. Our expectation is second half of 2020, we'll be able to come out with this product, which is actually better than we thought originally. For the pricing in France, U.K. is as good as ours. It's not something we're just waiting for. We are, of course, in dialogue with the authorities. And as it looks right now, given the process itself, we do not at least expect something for the first half. I mean it has to be happening very fast right now. And if it happens in 2020, I don't know, it's a complicated matter for them as well.

For the pricing discussions in France on ITULAZAX, how much you should expect there. ACARIZAX has a lot of back and forth, remember, because we had -- then we appealed and go back and forth and appealed again. Honestly, I don't know. Maybe, Per, you know about that? 2021 is, I think, we should be able to launch ITULAZAX in France. That's sort of our best guestimate today. It's a very good product. It's -- remember, ITULAZAX is a product we're launching with the best clinical data we have had on any tablets. So I -- we don't see much risk here.

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

Michael Novod, Nordea Markets, Research Division - Director of Healthcare, Healthcare Analyst & Sector Coordinator [10]

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

And how many markets for ITULAZAX in 2020 do you target?

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

Carsten Hellmann, ALK-Abelló A/S - President, CEO & Member of Management Board [11]

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

I don't really remember. It's -- remember, we focus on Germany, Denmark, Finland and some Eastern European countries and Norway. So in total, about 10 countries we expect to launch.

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

Operator [12]

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

(Operator Instructions) And our next question comes from the line of Philippa Gardner from Jefferies.

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

Philippa Gardner, Jefferies LLC, Research Division - Equity Analyst [13]

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

I've got a couple of questions, if I could, please. So firstly, I'm not sure if I missed this on the call, but did you quantify the effect in North America from the rebates and coupons? And then, secondly, I was wondering if you could perhaps look into your sort of longer-term crystal ball. When you're thinking about sort of EBITDA margin getting up to above sort of 25%, I think given 2020 is probably the peak year for R&D, especially given what you said about what you now need to do in China and what you now need to do as well for the FDA safety trial. I mean sort of how quickly you may be thinking about getting to EBITDA margins above 25%?

And then my final question is, could you just give us an update on sort of where things are with Windgap and what the next steps are, please?

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

Carsten Hellmann, ALK-Abelló A/S - President, CEO & Member of Management Board [14]

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

Yes. I can start off. And then, of course, we can talk you through the process of getting the profitability up. And nothing has really changed as to what we have told earlier. So we will -- in terms of getting the profitability in, we believe that we are spot on. If you think about the North America, what I did say was that we were slightly below our own sales forecast in the U.S. because the gross-to-net changed a little bit in our disfavor. Meaning, that we were pushing a little harder to focusing on getting patients and doctors, and depth with the doctors in place. So it's not a lot.

So we are talking about maybe $1.5 million to $2 million-ish, we gave in rebates. It is not significant. But remember that our focus in 2019 and '20 is get depth with the doctors and getting the right doctors, the right patients in play. And we were spot on, on all our targets, except that we gave a little more rebate in coupon in the second half of the year, resulting in a slightly lower sales but not much. And then you wanted something about Windgap before I give it to Søren.

Windgap is a work in progress, and actually, no changes to what we said earlier. We are putting all our efforts and resources and a lot of good brains and money behind this one. And still hope, of course, to come out with a groundbreaking, fantastic products as soon as we can. We will not announce to our competition already now, what we're going to do and when. But if we succeed, remember, we're still in development. That's the way we see it here. And if we succeed, we believe this is another good adjacency for ALK. And with that, I will just give it to you, Søren, you could talk to the EP leverage?

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

Søren Jelert, ALK-Abelló A/S - Group CFO, Executive VP & Member of Management Board [15]

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

Yes. Basically, the -- our aim has, of course, been through this -- these 3 years to establish a very solid foundation that is geared to growth. And of course, when looking out into the crystal ball, this is, of course, extremely important that we can continue the top line growth of these 10 percentage points or 10% year-on-year. And then second to that, we've also stated that especially the tablet growth remains important to us because we will be able to leverage our infrastructure, and as such, improve our margins on that alone.

Then second point is basically improving the gross margins would also be the fact that we are currently investing, as Carsten said, in the robustness, and we expect that, that program runs until late '21 into '22, where we'll start to see the margin improvements in -- from '22 and onwards on our legacy, you could say, portfolio. So that's the second driver within the gross margins. That, of course, needs to come up from the currently sort of late 50s and up to the close 70s. That's the gross margin game we are running.

And then here in the short-term, and short-term being sort of 2021, we have the peak of the clinical trial programs, where we say that this DKK 600 million, that is actually the top of the peak in 2020 and that's likely to continue into 2021. From there on, it'll be a more downhill, and that will also improve the margins.

And then the last point is that we are, as we said, also for 2020, looking at leveraging our sales and marketing. So the sales and marketing ratio to sales is actually expected to be improved over this time because we believe we have the infrastructure in place. When all these are clicking at the right time, we say that we are somewhere in '23 to '25 when we hit EBIT margins, and this is EBIT margins around the '25.

But exactly what the timing will be depends a little bit on how much tailwind we'll have in markets like the U.S., or in general, in the tablets or the product gains or the efficiency gains in the production. But that's what you should think of, at least, being the key drivers for this transition. I hope this answers your question.

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

Operator [16]

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

We have a follow-up question from Peter Sehested from Handelsbanken.

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

Peter Sehested, Handelsbanken Capital Markets AB, Research Division - Research Analyst [17]

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

Relating to China. If we are to factor in the potential, I guess, we should also factor in some investments needed to support that growth. Can you point to, if you were to sort of match the sales that Volvo has in China right now, what kind of infrastructure investments would you have to make?

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

Carsten Hellmann, ALK-Abelló A/S - President, CEO & Member of Management Board [18]

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

Remember, we are in China right now, and we are selling our products for their own affiliate and organization salespeople as we speak today. So it's not like we have to build up China from scratch. That's one thing.

Volvo is a very different product than what we're talking about. We're talking about introducing the tablets. We haven't decided yet whether we're going to do it ourself with our own organization or whether we're going to copartner with somebody, local or international, or whether we're going to partner totally with a local or international.

But I show you one thing is that we are not coming again with a big black box and a lot of investment, and you get the money when you're 68. We will do a very solid business case for China, also making sure that this is going to be accretive, both to our growth and our profit, if we enter into the China with ACARIZAX.

What we're talking about right now is that we have most likely called it off up to 5 years from the original plan, '28 through '23. It is the second biggest dust mite market in the world. Also think about why would the regulators allow us to do this type of trial to come faster to market, that's because there's an interest and there's a need.

So I think, actually, we will be able to build a very solid business case, both in profitability and sales growth already from '23. So it's not going to be like the U.S., where it's a slow, slow entrance, then we won't do it. This is another specimen because it's a one product thing. You don't have a structure in China with general practitioners and specialists and so forth. You have a Tier 1, 2 and 3 hospitals, and you have an ability to focus differently with different partners. So we haven't, even ourself, factored in another sales or profit. We're just telling you that, that is actually only a few years from now, where we had the opportunity. So we are, of course, working on what to do right now and talking to a lot of different people, but we haven't come to any conclusions yet.

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

Peter Sehested, Handelsbanken Capital Markets AB, Research Division - Research Analyst [19]

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

Okay. And the -- I mean, I guess, that the enrollment into the study could be potentially delayed due to the coronavirus thing, but I guess it's not something that will materially impact the time line.

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

Carsten Hellmann, ALK-Abelló A/S - President, CEO & Member of Management Board [20]

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

I mean, as we said, that we are running the trial right now, which implies that we were supposed to find the patients in China. We are getting them to hospital. And then we actually fly them to Vienna, and that's not really a plausible business model right now with the coronavirus.

So yes, I mean, if this is solved within some months, a few months, the coronavirus thing, there wouldn't be any significant delays. We cannot believe we can catch up. Of course, if China is locked down for a year totally, we will be delayed for a year.

But I mean, yes, it's a little bit of hiccup in our technical endeavors right now to make this study happen because Chinese don't want to go to hospital. They're not allowed to go to a hospital. They can't get to a hospital. And certainly, we can't fly them out of China to Vienna anyway. So yes, there's a little bit of a hiccup here. But let's get this coronavirus over with in China, and then we will consolidate our efforts and we can maybe do something in parallel and so forth.

It's not something that we've postponed the launch from another year. I don't expect that. Can we give a 2- or 3-month delay? In worst case, maybe. We're not even sure it will, but I assume that maybe. I don't think so.

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

Operator [21]

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

Thank you. And as there appear to be no further questions, I return the conference to you.

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

Per Plotnikof, ALK-Abelló A/S - VP of Corporate Communications, IR & Strategic Planning [22]

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

Excellent. Thank you all for participating in today's call, and thank you for the good questions. We have a roadshow lined up in the coming months, and you're always welcome to contact and reach out to us, if you have additional questions, and we certainly do hope to see you in the coming months. Either way, thank you all, and have a great day. Goodbye.