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Edited Transcript of ALK B.CO earnings conference call or presentation 7-Nov-19 12:30pm GMT

Q3 2019 ALK-Abello A/S Earnings Call

Hoersholm Dec 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Alk-Abello A/S earnings conference call or presentation Thursday, November 7, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* 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

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Conference Call Participants

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* 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

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Presentation

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

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Hello, everyone, and welcome to this presentation of ALK's quarter 3 results. Please turn to Slide #2 for today's agenda and presenters. My name is Per Plotnikof, I'm Head of Investor Relations, and with me are President and CEO, Carsten Hellmann; as well as Group CFO and Executive Vice President, Søren Jelert.

During today's presentation, we will take you through the Q3 highlights and regional sales trends as well as results from the first 9 months. Then we will provide you with an update on our 4 business priorities and the full year outlook before ending with the customary Q&A session. And with these opening remarks, I'll hand you over to CEO, Carsten Hellmann for a summary of ALK's performance in quarter 3. Slide #3, please. And over to you, Carsten.

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

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Thanks, Per, and thank you all for joining this call. Let's look at the highlights. Once again, we delivered a broad-based organic growth across all 3 sales regions in Q3, so that revenue was up 11% in local currencies and 12% in reported currency. Revenue totaled at DKK 739 million, which is an all-time high for third quarter. So we're keeping up the growth momentum. And with 11% growth for the first 9 months and efficient cost control, we are also able to update our full year outlook once again to reflect improved earnings.

Tablet sales grew 35% in Q3, and our consistent investment in these products is allowing us to take advantage of both market expansion and the ongoing market transition towards standardized registered products. We are confident that the trend over the past 2 years represents a paradigm shift that will enable us to sustain the high growth in tablet sales. Not least, because our new tree tablet, ITULAZAX has been launched in its first markets. It's a great product, highly efficacious and simple and the initial response has been so good that in Germany, we have been able to deliver ALK's best-ever tablet launch.

Another encouraging trend in Q3 was the further stabilization and recovery of our legacy business. SCIT sales were previously hit hard by supply constraints and portfolio pruning, but our investments over recent years continued to show results, and sales are now on the increase. SLIT-drops sales were down, driven by France and as expected, but the decline was less pronounced than in the previous quarters. We'll detail all of this later.

First, I'll hand you over to Søren for the market trends on Slide 4.

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

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Thank you, Carsten. Let's start with an overview of the sales performance in quarter 3. In Europe, revenue grew by 6%, reflecting growth in tablets and further stabilization of our legacy business.

In North America, we saw revenue growth of 17% overall with 47% growth in tablet sales and higher sales of other products, although SCIT sales were negatively affected by the continuing portfolio rationalization.

International markets saw 80% growth overall, largely driven by tablet sales in Japan, where we continue to see very strong traction, but also by improving performance in Southeast Asia and the Middle East. SCIT sales were affected by work to update our Chinese import license, which has now been completed. To summarize, broad-based growth across regions and products.

Now let's take a closer look at our biggest region, Europe on the next slide, Slide 5. Carsten mentioned the ongoing market transition in favor of registered evidence-based products, which continues to contribute to growth in tablet sales. We're taking advantage of this market transition and actively supporting it as we phase out undocumented and unviable legacy products. At the same time, we are working to promote the increased adoption of our tablets and other registered products.

Tablet sales grew by 18% in quarter 3, which admittedly was somewhat lower than previous quarters. However, sales were negatively affected by fluctuations at wholesalers to the tune of approximately DKK 15 million. And the underlying market trend remains positive, so we remain confident that we will see higher tablet growth in fourth quarter.

Meanwhile, as I mentioned earlier, we have seen a very good early response to ITULAZAX. These are still early days. So its sales contribution to quarter 3 was, of course, modest. Even so, in Germany, it is ALK's best-ever launch, giving us every confidence that our launch strategy has put it on the right track.

Combined SCIT and SLIT-drops sales were up 7%. SCIT sales continued to recover the strong growth in venom products while SLIT-drop sales declined as expected, although the decline was less pronounced than in previous quarters. SCIT sales were also influenced by minor price increases and one-off rebate adjustments in selected markets.

Sales of other products were down 21%. You will recall that Jext sales experienced a spike in demand in 2018 and early 2019 due to supply shortage at other companies. This eased off in quarter 2 and quarter 3 as expected as market supply gradually normalized, although influence here was sales discontinuation as we continue to rationalize our portfolio.

With that, let's move to the 9-month financings on Slide 9 (sic - see slide 6). 9-month revenue was DKK 2.4 billion, up 12% in reported currencies and 11% in local currencies. Gross profit of DKK 1.4 billion yielded a gross margin of 58%, an improvement over last year's 56% and reflected increased sales, especially from the tablets. Gross margin is still subdued by cost of compliance and work in future-proof operations, including the ongoing costs associated with the products and size strategy. We cannot and should not compromise this work. So these costs will continue over the medium term.

Just bear in mind that the gross margin is 59% when disregarding the one-off impairment of DKK 30 million that we recognized in second quarter in relation to the divestment of our part share in the manufacturing line. Capacity costs were up 13% to DKK 1.4 billion, largely due to the planned increase in R&D costs to fund clinical trials. Sales and marketing expenses also rose in support of the buildup in the U.S. product launches and the development of new digital platforms. Admin costs increased as we strengthened selected support functions.

EBITDA was up 54% at DKK 193 million, as we benefited from higher sales and operational efficiencies. We continue to reduce cash burn associated with the transformation of ALK. Free cash flow was an outflow of DKK 184 million versus an outflow of DKK 354 million last year. This was mainly due to an improved earnings, combined with lower-than-expected CapEx, mainly due to the phasing of certain investments linked to our quality upgrade initiatives. All in all, an encouraging result for the first 9 months, and I'll now hand you back to Carsten for a strategy update on Slide 7.

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

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Thanks, Søren. The transformation is well underway, and we continue to see better-than-expected results in most areas. Every day, we see that ALK is in much better shape than 2 years ago. And while there's still much to do to deliver on our ambitions we remain confident that we're capable of transforming ALK and deliver on our long-term financial ambitions.

Let me take you through the latest progress in each of our 4 strategic focus areas, starting with Slide 8 in North America. We continue to target overall sales growth of 10% in North America this year, although we expect some fluctuations for specific products. Sales of allergy products continued to grow in Q3, 47% for tablets and 19% growth for SCIT bulk allergen extracts, when adjusted for discontinued sales of older low-margin products and services. In contrast to the previous quarter, we saw growth in sales of other products driven by PRE-PEN and higher sales of life-science products, which continue to see fluctuating purchasing patterns.

We expect these fluctuations to continue in the short term, especially in the nonallergy field of vials and diluents, and we're looking closely at the market dynamics behind these trends.

If we take a further look at the tablets, North America sales amounted to DKK 22 million in Q3 and DKK 67 million for the year-to-date, which is broadly in line with our full year target of approximately DKK 100 million. We continue to see progress in the U.S. at our planned pace and the number of patients and prescribers are growing and the prescription depth for ODACTRA is improving among targeted prescribers so that we still think that it's achievable to double the number of doctors who meet our benchmark for satisfactory prescription depth.

Focus obviously remains on increasing acceptance of the tablets, mobilizing patients, increasing prescription depth among current prescribers and growing the number of new prescribers. We are also continuously working to enhance sales force effectiveness by upgrading sales force skills, refining tactics and replicating success initiatives across sales territories.

In summary, we remain focused on growing our business in this region, which we still believe has a good and considerable long-term growth and value upside for ALK. And we're looking -- and we are working hard to accelerate this growth. But as we repeatedly remind everyone, this is a long-term journey. And with that, please move on to Slide 9.

The tree tablet, ITULAZAX, was approved in 17 European countries in June, and we are now in progress of launching this product. So far, things are progressing really well with more than 4,000 initiated patients into treatment in the first 2 months.

As mentioned, the rollout in Germany now represents our best-ever tablet launch and is already way ahead of our own predictions. Feedback from doctors is very positive and mostly related to the treatment efficacy and simplicity, and there's a strong recognition of the scientific data among KOLs and payers. We remain excited by ITULAZAX in light of the initial market reception. It is highly efficacious treatment that addresses a significant unmet medical need for many. The tree pollen season is long and challenging due to extensive cross-reactivity with other tree pollens.

With ITULAZAX on the market, we now have a tablet covering all 5 of the most important respiratory allergies, which market -- which marks a major milestone for the company. Q3 confirmed the commercial momentum for the tablet portfolio, and we now expect full year growth to exceed 40%, well above our short-term ambitions of 30% annual growth.

We continue to invest in increasing prescription depth among existing prescribers and securing new indications for children as well as expanding the tablets into new segments and new markets, and as well as engaging directly with relevant patients by leveraging our new developed leadership patient platforms.

Imminent priorities include a pivotal clinical trial with ACARIZAX in adults in China and ACARIZAX pediatric, allergic rhinitis and asthma trials in Europe and North America, which are expected to complete in 2022.

Preparations for all 3 trials are progressing well. Based on the successful Phase III trial in children with the ragweed tablet, which reported earlier this year, we expect to submit pediatric filings in the EU, U.S. and Canada soon. We are also now making this tablet available in selected European countries where it's already approved for adult use. Needless to say that although planned, these activities and investments are an extra burden on the P&L over the next couple of years, but the long-term benefits are obvious, and I trust that you agree with this.

Let's now turn to the third strategic pillar on Slide 10. The third pillar is to launch new services, products and digital platforms to engage with and support many more allergy sufferers. Our digital patient engagement activities in the first 2 pilot markets, German and the U.K., are progressing very well. From the first pollen season in these first markets, we can see clear evidence that our ability to engage digitally with consumers at scales are evident. For example, we estimate that consumers, this year, saw more than 100 million messages from our klarify.me platform, significantly ahead of our full year target of 20 million. There were 158,000 downloads of our prize-winning mobile app klara, well ahead of the full year target of 100,000.

We also registered 143,000 online allergy tests versus a full year target of 85,000, and we saw 50,000 searches on allergies versus a full year target of 45,000. Based on these solid successes, we're now expanding the digital engagement activities into 10 new markets to create multiple touch points within consumers, especially during the pollen seasons.

Further to entering new markets, we will leverage these learnings by launching upgraded versions of klara and additional services and products.

Another opportunity that we're really excited about is our adrenaline auto-injector strategy, which subject to regulatory approval, potentially offers a fast route to the U.S. market, worth more than USD 1 billion annually. We're supporting our partner Windgap to complete the final development work before filing for approval in the next few years.

As a reminder, ALK has secured exclusive worldwide sales and distribution rights for this next-generation adrenaline pen that has the potential to become highly competitive and very profitable for ALK. Meanwhile, we continue our efforts to explore other adjacent products and services.

And with that, let's turn to Slide 11 and at the last strategic pillar. The last component of the strategy is to optimize and reallocate resources to always focus on what matters the most. In Q3, we continued to advance with the wide rating -- sorry, the wide-ranging efficiency program designed to ensure that ALK is fit for growth. A key element is significant investments in our portfolio and site strategy, which are on track. Quality, robustness and scalability remains top priorities as well as a general move to optimize our manufacturing footprint and costs.

Accordingly, we continue to phase out older, uncompetitive products, and as said in our second quarter call as well, we recently decided to accelerate this work. We have also advanced our strategy of investing in key legacy products.

Our -- the recent German approval of shorter updosing for Alutard means that the allergy patients and doctors can eliminate up to 9 injections in the doctor's clinic without compromising the efficacy of the products. This will ensure patient choice, meet prescribers' needs and improve Alutard's competitiveness in the SCIT market.

That's it for me. I hope this update has illustrated how we are progressing with the strategic transformation. We still have challenges to address, not least in North America, and we still have lots of work ahead, but things are progressing. And as I said before, in many areas, progressing well ahead of our plans.

I'll now hand it back to Søren for the full year outlook on Slide 12.

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

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Thank you, Carsten. Based on the year-to-date results and the outlook for the fourth quarter, we have decided to update the full year outlook. Let me take you through the details.

We still expect revenue to be in the range of DKK 3.2 billion to DKK 3.3 billion. We expect full year tablet growth to exceed 40%, and we continue to project higher SCIT sales while SLIT-drops sales, as planned, are expected to decline. Sales of other products are expected to grow by single digit, and we may see continued fluctuations with these products in North America.

Moving to operating profit. We now see EBITDA at DKK 200 million to DKK 250 million versus the previous range of DKK 150 million to DKK 250 million. Positive influences here are obviously larger sales volumes and better efficiencies. In contrast, as you all know, we are in the middle of a transformation process with subdued earnings, where we continue to invest in growth and transformation. This year, we have started to increase allocation of significant extra funds to clinical trials, while sales and marketing costs are still expected to increase modestly over the full year.

Generally speaking, free cash flow is still impacted by the investments to support the strategy, still based on the year-to-date performance, and taking divestments and phasing of CapEx into consideration, we have revised our full year outlook and now expect free cash flow to be approximately minus DKK 200 million, an improvement from previous minus DKK 300 million.

That's our latest view on the 2019 financials with results exceeding initial expectations. We obviously continue to keep you posted of any significant developments during the remainder of the year.

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

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

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

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Questions and Answers

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Operator [1]

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(Operator Instruction) Our first question comes from the line of Michael Novod from Nordea Markets.

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Michael Novod, Nordea Markets, Research Division - Director of Healthcare, Healthcare Analyst & Sector Coordinator [2]

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It's Michael from Nordea. A few questions. First of all, maybe you could try to give a bit more flavor on the launch plans for ITULAZAX. You mentioned it's approved in 17 countries. We've seen the launch in Germany, Denmark, et cetera. So just to get a feeling for how many launches are we going to see in the, say, the coming 12 months?

Secondly, maybe I missed it, but could you talk about the rollout of klara and more broadly, also how many markets are you targeting with klara in the coming 12 months, including the U.S.? And how should we think about this going forward because it seems that it has a clearly beneficial effect on interacting with patients.

And then lastly, on the gross margin, now we did see a pickup in this quarter, maybe you could just elaborate a bit also on the coming, let's say, couple of years, how we should think about the gross margin for the company?

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

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This is Carsten. I will start with the 2 first questions and hand over the gross margin question to Søren, when I'm done.

ITULAZAX is a 3 tablet. And the good thing is they cover all tree pollens. So it's mostly relevant for Eastern Europe, Germany, Nordics and Canada. So that's where we are going to launch ITULAZAX as soon as we get the pricing and the reimbursement in place. And we did -- even though we have it approved, we just last week got the price in Denmark on reimbursement. We're still waiting for [novel] and so forth. So as soon as we get the reimbursement and get allowed to sell, we will sell it.

So apparently, both the efficacy part -- the patient adoption part and the launch preparation that has been done by the teams seems now to be working very well. So we're very encouraged by the uptake of patients right now in Germany, because you know patients we get now is in the season, and that's going to hopefully be a full year, next year. And this is about the full year and compliance and so forth is very important. And that leads to back to the question about klara. Yes, klara, most of the data regarding immunotherapy on klara is apparently, of course, Germany, because there's no really immunotherapy in the U.K. where we also have launched klara. But we will now roll it out in 10 to 11 countries in 2020, actually starting now, including the U.S.

It has different elements. One thing is to become more relevant for the people with respiratory allergies, but also it has 2 other dimensions. One is that when you engage with people, we will do most of our efforts to try to engage with them when they have the pollen season, because one of the things is -- some of the things are that when you have really the trouble in the pollen season, you tend to forget it over the summer and never go to a doctor to actually get immunization for our treatments.

So this is about, one is to get -- find the right patients via the klara app and help them with their daily life and allergy, help them to find out whether they're a candidate or not for immune therapy while engaging them with a lot of help and information while they're suffering. And then make sure that they are sort of helped throughout the summer and being bridged with a doctor. That's why we saw 50,000 search doctors in our CM systems to make that internal loop work better and better and better.

And honestly, I think this is a very efficient and promising lever for us going forward, maybe not in the next quarter, 2 quarters, but over time, can you imagine if we get 5 million to 10 million allergic people on our app, fully engaged in an interactive system with our AI systems behind it, our algorithms behind it. Because remember, we do not only provide individual information where you are, we also have a lot of guidance behind it, but you also tell yourself how you actually feel in that particular situation you're in. And that combination of data makes it a very individualized and personal tool for people. And that's actually what we believe can actually help a lot, both driving patients to understand whether they need immune therapy or not, which is 10%, driving the right patients to a doctor who actually knows immune therapy, and then also helping the doctor to actually prepare for this.

So this is our plans, and of course, it's early days, we decided to test it out in Germany, was positively surprised about the -- how it was received in the market. And we won the prize in Germany as the best app launch in '18, second prize in the world for the best patient engagement tool in the world. I think we lost to WHO or something like that in Barcelona. So it's very well received by patients, doctors and the market.

So let's see, it's just a lever, but it sort of start branching off instead of being reactive, waiting for things to happen, we try also now to engage. And we think this is something we can do whether -- I cannot disclose exactly which 10 or 11 market it is because it can be -- we think it's these 10, but it's going to be these 8 and 2 others. But we are now talking to all the markets and making sure that we are not breaching any legal compliance or data privacy things and so forth and figuring out exactly how to do that. But so far, it's very promising. And with that, I will just -- there was a gross margin question where Søren is going to take you through that.

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Søren Jelert, ALK-Abelló A/S - Group CFO, Executive VP & Member of Management Board [4]

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Yes. I think it's fair to say that gross margin, if you look at it sort of year-over-year, I mean, we've gone up from 56% to 58% now. Of course, with the third quarter here being at 6% -- 60%, sorry. I think, of course, it's a very good quarter. I think we should sometimes look at it in a little broader or longer perspective, and that's why the 58%, of course, underlyingly is still strong. And as we said, there's a 1% in addition to that, so probably a 59% gross margin.

We will be benefited, as we've also said, long-term from the tablets, but we've also said that the recalibration of our quality efforts, both in terms of investments and moving stuff around, will sort of put pressure on the gross margin in a couple of years. So I don't think you should see a dramatic improvement here over the -- in the short term, because we firmly believe that the money we do invest in the quality upgrades are well returned and ensures that we get a stable production. Having said that, we are still on the hunt for gradual improvements year-over-year. And it will go up long term, that's quite evident. But we are -- and the last thing, you could argue that's against us is the -- is basically the Japanese success. In our case, that we are extremely heavy on the bottom line, but it somewhat impacts our gross margin, as we've also discussed. But rest assured, that we're long term aiming for the 70% in gross margin. That remains our long-term target. I don't know whether that gives you the answer you're looking for, Michael?

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Michael Novod, Nordea Markets, Research Division - Director of Healthcare, Healthcare Analyst & Sector Coordinator [5]

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Yes, it's perfect. I just -- can I just add one follow-up. How many patients are on GRAZAX and ACARIZAX in Europe? Can you give those numbers?

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Søren Jelert, ALK-Abelló A/S - Group CFO, Executive VP & Member of Management Board [6]

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Actually, no, not because we don't want, but I don't want to give you a wrong number. I'll get back to you with that, Michael. It's a lot, many-hundred-thousands. It's a lot of patients.

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Michael Novod, Nordea Markets, Research Division - Director of Healthcare, Healthcare Analyst & Sector Coordinator [7]

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To get a feeling for ITULAZAX over time?

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Søren Jelert, ALK-Abelló A/S - Group CFO, Executive VP & Member of Management Board [8]

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Yes, yes. But I can tell you that we -- maybe I put it this way. We expect that ITULAZAX will be bigger than GRAZAX.

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Operator [9]

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And the next question comes from the line of Peter Sehested from Handelsbanken.

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Peter Sehested, Handelsbanken Capital Markets AB, Research Division - Research Analyst [10]

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It's Peter from Handelsbanken. Congratulations on good quarter. I have sort of 3 high-level questions for Carsten. I noticed that you have been talking it out of product pooling, accelerating the process. And in this respect I have one question -- with this regard I have one question. I mean, how large is that -- [how portion] of the market do unregistered products have now in Europe, and are we at a point where this market share is at an inflection point, so to speak, where you can make, let's say, a bold strategic move and completely remove, also potentially [if intelligence], play along with the game, and pull off all products nonrated from the market, thereby squeezing some of these minor competitors out. So you finally are able to -- sort of to capture those 20%, 30% or how much percent there is left to get this piece of the market over and done with in a relative short period of time. And of course, that will probably have an impact on sales blah, blah, blah, but to get your flavor on this sort of high-level strategic thought?

Second question relates to the U.S. I mean, you have registered the only registered product in a large unmet need disease. The U.S. President has said that the industry is getting away with murder. You could actually turn this around and say, the U.S. allergists are actually getting away with murder with treating their patients with unregistered products. Isn't it time for you now to step up and be [tough] with payers in getting that reimbursement for these injections completely also, you can actually do good for U.S. patients by treating them with registered products? That's question number two.

Question number three relates to a comment made by you regarding investment imperative for the company. And then you threw in a remark which made me a bit paranoid, where you said, "We expect that we all agree that these investments are needed." Company make these sorts of comments, it typically means that costs are on the rise. So should we expect for 2020 and beyond, a cost level, which -- or trend in costs which is higher than we have seen, let's say, this year, for '20, some flavor on that?

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Søren Jelert, ALK-Abelló A/S - Group CFO, Executive VP & Member of Management Board [11]

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Good questions, 2 strategic and 1 very concrete. If I start with the very concrete. I apologize if I was unclear in that statement about the cost. The answer is no.

What you will see is that we have increased cost levels because we would like and have to complete the pediatric trials for GRAZAX in Europe and the U.S., period. Nothing else is out of control, increasing and so forth. So I think that's a very clear answer to a very clear question.

So just to affirm on that one. And what I mean -- what I just meant is because I've been talking to a lot of different people, is just to get them to understand, it's not because the company is one big spaghetti and we just hope we suddenly are coming out and suddenly it becomes profitable. We know we have this amount of clinical cost, and that's it.

Then below that, we will do the best we can to make sure that we do the right investments and activities to make sure we are as strong as possible -- as strong as possible to make sure we can also have a stable future growth, and not just a one-off.

I mean, we are not here just to do some quick fixes for 1 or 2 quarters, and I think the strategy plan and the heat we took when we came out of it, actually, documented that. What we do right now is just executing on that one. And of course, it's more than just the 4 pillars, it's most like 1,000 projects and 100 prioritized projects and 10 very important projects.

The sum of all that is something that right now splits out to be better-than-expected and good financial results and which you can actually see that when we sell more, we actually make more money, which I think, is a good qualifier.

Then you have 2 very interesting strategic questions. I agree, actually, on the premise of your question. The issue is the timing and readiness for us. If you look at the first one about the pruning, please bear in mind, that until half a year ago, we lost 20 market share points in Germany because we couldn't even supply the SCIT products. And we pulled off a lot of products in the market. So it's a matter of having the right portfolio of products. And then as soon as we push the button like we did with Alutard and updosing and all the different regimens we do with different types of payers, we are pushing that agenda.

We do, though, have -- especially in Germany, some very strong local players who are also doing a lot of lobbying. And I think there's a little bit of game going on there, but be rest assured that this is something that's very, very high on our priority list. And we will push very hard for these -- about 30%, 35% market shares that are out there for grabs.

I think we are getting better and better positioned to be the one to capture it, which is also why we are saying that we are now returning to growth in the SCIT. I mean, if you take Europe, just this quarter, and you exclude for the drop fallout in France due to Stallergenes return and so forth, we are actually growing 13% in Europe in totality, even though we have a big SCIT business also. So you can be sure that this is really high on our priorities.

For the U.S., I mean, I think I will be in trouble if I went to the U.S. and went to the College of Allergy and called them murderers, but I would, though, say that right now we are seeing good progress, but of course we are working with the big chains and the big payers and HMOs. And there will, of course, be one point in time that where we might have to say that, listen, now the -- we have to recognize that the allergies will never really take it in even though they say they will, or to the level will. And we would have to work with them to find the regimen to really get the market expansion we want.

But so far, with so few patients treated, and many of them are visiting a GP first who then -- remember that even in the U.S., it's micro societies. You will have a city and small city, maybe a small town and you have 1 allergist or 2 allergists and 15 GPs and 3 dermatologists and 5 ENTs, and they talk together about all this allergy and asthma. We have to make sure town by town that we get that ecosystem to work better because many patients will first see the GP, he will call or she will call the allergist, and then we are very dependent right now in even getting acceptance of the tablets that they actually approve on that.

But you're right, it's very frustrating that you have, now when we also can see in the rest of the world how well adopted the tablets are into the market. It's, of course, very frustrating to see here that is money talks more than patient care. I agree with you on that one, but that's a personal comment, not a business strategy.

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Operator [12]

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And the next question comes from the line of Benjamin Silverstone from ABG.

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Benjamin Silverstone, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [13]

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So I have 3 questions. Sorry, can you hear me?

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Søren Jelert, ALK-Abelló A/S - Group CFO, Executive VP & Member of Management Board [14]

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Fine, a little scrambly, but just speak slowly, please.

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Benjamin Silverstone, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [15]

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Right, let me change. Is this better?

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Søren Jelert, ALK-Abelló A/S - Group CFO, Executive VP & Member of Management Board [16]

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Much better.

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Benjamin Silverstone, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [17]

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My apologies. So my first question is for the free cash flow. So I know, as part of the strategic transformation, you start out guiding minus DKK 400 million this year, and now this is minus DKK 200 million. Would it be possible to give a few insight into the major changes that you've seen throughout this year to make this material change. The same question is for launch of ITULAZAX. So we knew that the clinical studies were very strong. So I'm happy this year this has been the best launch, but is it possible to quantify this a bit? Just to give a bit more flavor?

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

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I'll start ITULAZAX and then I hand it over to Søren, so he can talk about the free cash flow. Yes. As I said, we have now just in the initial launch here in Germany, got 4,000 patients on, and we will continue launching, and now we're launching in Denmark, and soon, Sweden and we're still waiting for the Norwegian authorities to approve the price. But as soon as we get that, and then we'll roll out, we have sent the application in for Canada. That will be next year and Eastern Europe as well.

So as I said to Peter before, we expect ITULAZAX in those countries to be bigger than our sales in GRAZAX. So it's -- in those countries affected it's going to be -- some of them, maybe even the biggest product, but at least is bigger than GRAZAX. So it's going to be a major product in those markets. Remember, it's not a product that is broadly relevant as ACARIZAX in every market everywhere as you will need to have the tree pollen, of course, to affect you, but -- so 4,000 patients so far, maybe still counting. And -- which is good, and then if we get -- if you then add on the klara activities and make sure that we would embrace that into 2020, I mean, we are very positive on this one. And with that, Søren, would you comment on the cash flow?

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Søren Jelert, ALK-Abelló A/S - Group CFO, Executive VP & Member of Management Board [19]

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Sure, I will. It's absolutely right that when we sort of started the guidance back in early February, 7th of February, we were at least minus DKK 400 million as you said. At the same time, back then, we also guided a revenue of DKK 3.1 billion to DKK 3.3 billion. We also guide an EBITDA back then of DKK 100 million to DKK 200 million. And basically, you could say, we have, for both the revenue and also our earnings, been sort of lifting the floors, at least close to DKK 100 million. And these DKK 100 million is actually rubbing off directly on our cash flow. So that brings you from the minus DKK 300 million -- minus DKK 400 million to the minus DKK 300 million at least. Then we have actually improved sort of underlyingly, the working capital to the tune of somewhere between DKK 30 million and DKK 40 million. And then investments have actually, together with some divestments also, have yielded an improvement somewhere between DKK 50 million and DKK 70 million.

Bear in mind that some of the CapEx investments is a delay. So you would see them back to some extent next year. But overall, I think this is the explanation of the minus DKK 200 million that we have actually reversed our -- updated our guidance with since February 7 this year.

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Operator [20]

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

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Philippa Gardner, Jefferies LLC, Research Division - Equity Analyst [21]

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I've got a couple of questions, if I could, please. So just coming back to ITULAZAX again. Could you just maybe talk a little bit about what has been different in terms of your launch preparations for that that has kind of generated the best tablet launch that you've had?

And then perhaps a sort of a high-level question, you've talked about having a portfolio of tablets covering all the main allergies as being important. So can you maybe sort of just give us some thoughts around why specifically what's been stopping patients from getting onto some of the tablets, if they didn't have, for example, a tree allergy. So just your thoughts around why the portfolio is so important in terms of the whole tablet business?

And then one question, finally, on the U.S., I guess, where is the biggest, perhaps pushback is the wrong word, but where are you struggling with? Is it improving the depth or on the breadth?

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Carsten Hellmann, ALK-Abelló A/S - President, CEO & Member of Management Board [22]

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Again, good questions. If you think ITULAZAX, I think it's a massive both teamwork preparation and investment. I mean, if you look at the campaign materials, it is actually from hiring some of the best fashion photographers in London and models to do the materials, to do the market advocacy, preparations, the doctors, the KOL engagements and so forth, plus the launch itself.

On top of that, you can add that when you have suddenly 250,000 on a patient engagement tool, and you really have a good dialogue with all these people, you can drive them and give a lot of notifications, and so forth. I think when you bring all that together, I think the level of professionalism on ALK was very high on this one, and we should take those learnings on to all the other markets when we continue that one. So I think it was a mix of that.

And then the final comment to that is that when you have a very, very good product, you are very much better off than if we have a bad product and this ITULAZAX has shown the best efficacy seen in immunotherapy for allergies. So it's a very efficient, good product. The patient and the doctors likes it. So -- which, of course, always helps.

If you think about the tablet portfolio. I think the first part of your question was sort of the halo-effect of having a portfolio, which is, to some extent true, but it's not on a patient level, it's more on a doctor level because you've had other types of treatments throughout the world, predominantly in most markets, SCIT, I mean, injections and some we have drops. And in order to get into a doctor's office and mindset, you need to have a portfolio where it actually are a bigger population of the patients they see that makes them believe that this is worthwhile investing in, we have an infrastructure and so forth to make it happen. And this is some of the things that have been stopping us.

Secondly -- or stopping the tablet regime. The other one is that, there was in many countries in which, you also know about in the U.S., a financial incentive, either in reimbursement to the patient or in -- at the doctors in terms of what treatment method they choose to stay with the old products.

So this market access work we've been doing and getting that [high] or getting the reimbursement, getting a portfolio of products into the clinic. Then you have -- the halo-effect is actually twofold. One is that the doctors have treatment options and when there's 3 options they treat more patients. And because the products are actually good, the patients are coming back to the doctor and saying, "Listen, you gave me ACARIZAX. I have not been sleeping for the last 10 years and I have never slept better the last 3 months since you gave me them, thank you so much." The patients are saying to their friends and families who goes to the doctor, say in the waiting rooms, a lot of things are happening around that.

So that's really important, actually. And now we'll just try to see if we can leverage that even more in the countries where we can see it goes well. And that comes back to the U.S. It is a combination of depth and breadth. But if you ask so directly what I personally prefer, I prefer to have these [250 go to 500] with depth in the beginning than having another 5,000 or 10,000 patients in breadth, which actually I don't find would be that difficult to do. I could just promise my reps $1,000 in bonus to get a script, and then they will run out to every GP in the territory, they will get 10,000 scripts easily.

The thing is, a little bit back to the halo answer, it is important that you get into the clinic and work with the specific doctor about how to visitate the patients and understand which ones are going to be on shot or not, and thereby leveraging the platform they have to treat more patients, and that will be with tablets. Predominantly, those patients they recognize will never go on shots anyway. And at the same time, work with the payer system to make sure that we have an infrastructure that when they do a script and when they go to the pharmacy, the product is there, and the reimbursement is okay, and it's well understood, if they have a co-pay or not.

So this is actually the things we're working on right now. So it's really to get more clinics to understand. There's actually good business. For example, we are running right now. We have the first data already, a big trial with a very large chain of -- this allergy doctor chain, I think you can call it that. And half of the clinics got tablets on top of their traditional business and the other half not. And we do actually see up to 25% better revenue in totality for those clinics who took in the tablets and better patient flows and so forth.

And these type of data, we are, of course, going to leverage with the clinics who have started. We are working very, almost artistically, with data in order to understand the different mechanism between the phases of our adopting ladder -- adoption ladder. For example starting up the adoption ladder, it's when you say, "I don't want tablets, get out of my clinic." And then you move to, "Okay, I'd like to try one." The next level is that, "I've tried 2 to 5. What do I need to do to get more?" and so forth.

So we work very structured with the adoption ladder understanding what moves them up the adoption ladder. And then for us, it's important to have a number of clinics in the local market systems that have more patients because you talk about U.S. as the U.S., but actually U.S. is also consisting, as I said before, of a lot of towns with 2 allergists, 1 dermatologists, 1 and so forth, and we need to make sure that there, they start treating with tablets as an option to all those allergic people who are not getting the shots. I don't want the shots.

So here, it's just to continue pushing our reps, it's a little bit we work with the current methodology where we select and educate and train our reps that to be a little more entrepreneurial and business development like in their approach than a traditional pharma rep because you need to work with the clinic, which sometimes is a shot factory, it's just a money machine, to make them be better at visitating the patients, setting up the call-in systems, making sure they understand that we're not going to take away the old business, but add new one. How to engage with getting patients in local marketing, engage with the rep, engage with the dermatologist, engage with the ENTs in that local area.

So a lot of those things are happening. And then in combination with a significant upgrade of the medical [MLS], medical marketing we have in the U.S., going out and doing all the KOL meetings, 20 by 20 per town and get that system to work. But that's our focus. I mean, getting breadth. I mean, that will be the easy thing, and that will look very good to the stock market for the next 6 to 8 months. But then it will collapse because you will not see the sales. We need to have sales in the U.S. over time, which means that we need to have a lot of doctors with a lot of patients, and that is only coming by having doctors prescribing 10, 20, 30, 50 and 100. Okay?

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Operator [23]

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And we have a follow-up question from the line of Peter Sehested from Handelsbanken.

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Peter Sehested, Handelsbanken Capital Markets AB, Research Division - Research Analyst [24]

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I'm sorry, my question was answered, so I'll jump off again.

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Operator [25]

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As there are no further questions, I'll hand it back to the speakers.

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Per Plotnikof, ALK-Abelló A/S - VP of Corporate Communications, IR & Strategic Planning [26]

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Excellent. Thank you very much for your participation in today's call. We have a Q3 road show lined up this month, and we hope to see you at one of those events. In any case, do not hesitate to contact myself, Søren or Carsten, if you have additional questions or inquiries.

Thank you all, and have a nice day. Goodbye.

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Carsten Hellmann, ALK-Abelló A/S - President, CEO & Member of Management Board [27]

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Bye.