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Edited Transcript of ALK B.CO earnings conference call or presentation 13-Aug-19 11:30am GMT

Q2 2019 ALK-Abello A/S Earnings Call

Hoersholm Aug 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Alk-Abello A/S earnings conference call or presentation Tuesday, August 13, 2019 at 11:30:00am 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

* Thomas Schultz Bowers

Danske Bank Markets Equity Research - 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 2 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'll take you through the Q2 highlights and regional sales trends as well as the results for the first half year. Then we will provide a brief update on our 4 business priorities, followed by the full year outlook and 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 2.

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 broad-based growth across sales regions in Q2. So the revenue was up 9% in local currencies and 10% in reported currency. Revenue totaled at DKK 785 million, which is an all-time high for the low season that is Q2. Like-for-like growth in the quarter was 11%. So we are certainly keeping up the momentum from Q1. And with 11% growth for the first half year, we are on course to deliver 10% or more growth for the full year, and we have, therefore, updated the full year outlook accordingly.

CapEx sales grew 42%, and our persistent investments in these products are allowing us to take advantage of both market expansion and the ongoing market transition towards standardized regulated products. We are increasingly confident that the trend of the last 18 months represents a paradigm shift that will enable us to sustain short-term growth of 30% or more in the tablet sales. We saw a new tree tablet ITULAZAX approved in the EU. It's a great product, highly efficacious and first launches are imminent. This product will start contributing to growth in the second half year, but we expect ITULAZAX to leave a more significant mark on tablet sales from 2020.

And now the encouraging trend in Q2 was the further stabilization of our legacy SCIT business. SCIT sales were previously hard hit by supply constraints and portfolio pooling, but it seems reasonable to conclude that our investments in SCIT over the past years are showing results. SLIT-drops sales were down, as expected, but comparative figures were blurred by the extraordinary fulfillment of backorders in Q2 last year. We also succeeded in consolidating Jext sales despite supply of adrenaline or auto-injectors to market are getting back to normal. And a few days ago, we announced our new adrenaline strategy based on the partnership with Windgap, another great product and opportunity. And if it is successful, tried and launched in the U.S. within a few years, it will become a significant growth driver for ALK. We'll detail all this later.

First, I'll hand 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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Let's start with the helicopter view of Q2 sales performance. In Europe, revenue grew by 7% or 10% when disregarding last year's extraordinary fulfillment of SLIT-drops backorders, which will persist after we completed a series of quality upgrade to our production facility in France. The injunction -- injunction on this facility was put against ALK in 2017. Most recently, it has reasonably lifted by the first authorities following the Q2 inspections, certainly, an important milestone in our efforts to upgrade our legacy business.

In North America, we saw revenue growth of 5% overall as double-digit growth from the AIT products was partly offset by a somewhat unexpected decline in sales of nonallergy-related products, most likely linked to fluctuations in customer-purchasing patterns.

International market saw a 42% growth overall, driven by development of tablet sales in Japan and other markets, and we were continuing to see very strong traction.

To summarize, Q2 store growth in all regions with both Europe and International markets performing slightly ahead of plans, whilst North America was impacted by this sales development of the aforementioned nonallergy-related products.

Now let's take a closer look at our biggest region, Europe on Slide 5. Cost and trust on the ongoing market position in favor of our registered evidence-based products. To add some color to this development, registered AIT products continue to outgrow sales of unregistered products in many markets. For example, registered products now account for 60% of AIT sales in Germany, Europe's second-largest market, and this trend seems to be increasing.

We are taking advantage of this market transition, and we're actively supporting it as we face out undocumented legacy products and promote increased adoption of our tablets, and our other registered products by medical professionals and payers.

Tablet sales grew by 36% in quarter 2, due to a continued strong uptake of ACARIZAX and GRAZAX across the markets. Combined, SCIT and SLIT-drops were down 6%. SCIT sales, in general, continued to recover driven by the other products, while SLIT-drops sales declined as expected when compared to the figures impacted by the fulfillment of the backorders in quarter 2 of last year. Disregarding these backorders, sales were flat quarter-on-quarter. Sales of other products were down 2% after a minor decline in sales of the adrenaline auto-injector Jext. Jext sales had experienced a spike in demand in recent quarters due to their supply shortage at other companies, and this has led to high double-digit growth in Jext sales, most recently 46% growth in quarter 1. But the spike in demand eased off in quarter 2, as expected, as modest supply gradually normalized, we are nevertheless encouraged by the fact that Jext consolidated its market share gains during quarter 2.

Model wise, we saw double-digit growth in Germany, in Nordic Countries, Eastern Europe and the U.K. Sales also picked up in other markets and in France, we retained all market leadership, thanks to high growth in tablet sales.

With these main market trends, let's move to the half year financials on Slide 6. First half year revenue was DKK 1.65 billion, up 30% reporting in the total currencies and 11% in local currencies. Growth exceeded expectations slightly due to the performance in Europe and International markets.

Gross profit of DKK 931 million yielded a gross margin of 56% and minor improvement over last year. But please note that this includes a DKK 30 million write-off related to the divestment of the production assets, which Catalent -- Carsten, sorry, will detail in a little while. Disregarding this one-off impairment, the gross margin was 58%, reflecting higher sales with increased tablet volumes, easily absorbed by our existing manufacturing capacity. The gross margin also benefited from production efficiencies, partly offset by cost of compliance and were to secure robustness, including ongoing costs associated with the product and site strategy. Capacity costs were up 12% to DKK 917 million, largely due to planned increases in R&D costs to fund the clinical trials. Sales and managing experience also rose in support of the buildup in the U.S., forthcoming product launches and the development of the new digital platforms and consumer care activities.

Administration costs also increased as we strengthen the selected support functions. EBITDA was up 54% at DKK 157 million as we benefited from higher sales and operational efficiencies. We continue to reduce cash burn associated with the transformation of ALK. Free Capital was an outflow of minus DKK 149 million versus minus DKK 201 million last year. This was mainly due to an improvement of the cash flow from operating activities, which was an inflow of DKK 67 million versus an outflow of DKK 108 million last year. This improvement was driven by higher profits and was partly offset by planned changes in working capital.

All in all, more encouraging and better-than-expected results for the first half year, and I'll now hand you back to Carsten for the 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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Thank you, Søren. We are halfway through the 3-year strategic transformation of ALK. The transformation is well underway, and we continue to see better-than-expected results in many areas. Every day, we see that ALK is in much better shape than 18 months ago, and while there's still much to do, we are increasingly confident that we are on track to transform 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 sales growth of 10% in North America this year, although we did experience lower demand for nonallergy-related life-science products in Q2. Sales of allergy products continued to grow in double digit, 19% for tablets and 13% for SCIT bulk allergen extracts. But this growth was partially offset by the decline in sales of life-science products, most likely linked to fluctuating customer purchasing patterns. We're obviously keen to get sales on these prospects on the growth track. If will take a further look on the tablets, North American sales amounted to DKK 25 million in Q2 and DKK 45 million year-to-date, in line with our full year target of approximately DKK 100 million. We continue to see progress in the U.S., although at a rather slow pace. The number of patients and prescribers are growing and the prescription debt for ODACTRA is improving among target prescribers. So that we still believe that we can double the number of doctors who met our benchmark for satisfactory prescription debt.

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

In summary, we remain focused on growing our business in this region, while we still believe to hold a considerable long-term growth upside for ALK, and we're working hard in different areas to find pockets where we can accelerate the trend. That's a long-term journey, we're on and with this, let's move to Slide 9.

As we mentioned, our tree tablet ITULAZAX was approved in 17 European countries in June, and we're now working to secure national authorizations and market access. So far, things are progressing well, and first launches are imminent with the initial focus on Germany and the Nordic countries. We have also submitted the tree tablets approval in Canada in June. European launch preparations have been underway for several months now, and there is a strong recognition of the data among KOLs and payers. We are also leveraging our newly developed digital patient platforms to support a successful launch for the first time. We are truly excited about ITULAZAX. It's the highly efficacious treatment that addresses a significant unmet medical need for many -- because for many, the tree-pollen season is long and challenging due to extensive cross-reactivity to other tree pollen and the pollen-food syndrome.

ITULAZAX is important for ALK because it means that we now have tablets covering 5 of the most important respiratory allergies, which is a major milestone in ALK's innovation efforts. ITULAZAX is indicated for adults suffering with moderate-to-severe allergic rhinitis induced by pollen from the birch family of trees, which also includes alder, peach, hazel and hornbeam, oak and chesnut.

We believe that 15 million to 20 million Europeans are sensitized to birch pollen, and we estimate that 10% of these have a condition, which cannot be controlled by symptom-relieving medications. For some of these, ITULAZAX could be the relevant treatment option.

Q2 confirms the strong commercial momentum for the tablet portfolio. Sales of house dust mite tablets doubled by sales of tablets against pertinent allergies grew in double digits as we continue to benefit from a structural shift in favor of documented clinical improving products, especially in Europe and Japan, but also in markets outside, such as Australia.

In Japan, we're witnessing a phenomenal development in tablet sales. Our partner, Torii is doing a great job in serving the market and positioning the tablets towards mainstream treatments of severe allergies. In-market sales were up 700 percent and Torii maintained close to 90% market share. We estimate that they currently treat more than 100,000 patients in Japan. We have not -- we have no doubt that this development is linked to having a full portfolio for all ages, good infrastructure with many prescribers, good reimbursement conditions and support from doctors. Japan has now become our top 5 market for ALK. We continue to invest in increasing prescription debt among existing prescribers and securing new medications for children as well as expanding the tablets into new segments and new markets. Other imminent priorities besides further solidifying sales growth is a pivotal clinical trial with the GRAZAX in adults in China where the preparations are progressing very well. As is planning for the ACARIZAX, pediatric allergic rhinitis trial in Europe and North America, while the parallel allergic asthma trial has been extended to allow for the inclusion of an additional cohort of patients. Both pediatric trials are expected to complete in 2022.

Let's now turn to the third strategic pillar on Slide 10. Third pillar is to launch new services, products and digital platforms to engage with and support many more allergic sufferers with ways to back considerably with our patient engagement activities. In the 2 pilot markets, Germany and the U.K., we see that first part in season data clearly confirm our ability to engage digitally with the consumers at scale that we share a couple of encouraging half year highlights. We estimate that consumers saw more than 100 million messages from our klarify.me platform, significantly ahead of a full year target of 20 million. There were 125,000 downloads of our price-winning mobile at klara, well ahead of the full year target of 100,000. And based on these great experiences that we have already decided to accelerate the launches of klara in additional markets. We registered 110,000 online allergy tests versus the full year target of 85,000, and we saw 40,000 searches from allergist. These results exceed the expectations and demonstrated that we are able to create multiple touchpoints for consumers, and thereby make ALK relevant to more people. We would plan to leverage these emerging digital ecosystems further during the launch of the tree tablet ITULAZAX and with our other tablets as well as in the future, new product categories.

As you know, we've been working -- as we know, we have been working our adrenaline auto-injector strategy for some time. A few days ago, we announced that we had finalized our strategy based on our partnership with Windgap medical to launch a next-generation epinephrine pen. This pen is designed to be small, easy to use, heat-stable pen with a long shelf life and has the potential to become a highly competitive and very profitable product for ALK.

So subject to regulatory approval, this partnership potentially offer a fast route to the U.S. EpiPen market, worth more than USD 1 billion annually. ALK will support Windgap in completing the development work and securing the necessary product stability data, and we have exclusive worldwide sales and distribution rights for the pen in exchange for milestone payments, royalties and shared profits for pens sold outside with USA. This strategy provides ALK with potential leverage of its existing U.S. commercial investments as the market and customers for auto-injectors are well known to ALK, and we estimate that 25% of all U.S. prescriptions of pens are issued by doctors with whom ALK already has a relationship. We build on these relationships as well as our experience with our existing adrenaline auto-injector pen, Jext, which we will remain a key product in this category in Europe and selected international markets.

Meanwhile, we continue our efforts to explore other adjacent products and services and with this, let's turn to Slide 11 and 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 Q2, we continue to advance the wide-ranging efficiency program designed to ensure that ALK is fit for growth. A key element is our portfolio and side strategy, which is on track. Quality, robustness and scalability remain top priorities, along with a general move towards reducing supply chain costs. Accordingly, we continue to phase-out older, uncompetitive products, and we recently decided to accelerate this work and move forward the phase out of additional products. Robustness continued to improve, as underlined by the recent decision by the ANSM authority in France to lift the 2017 injunction against us in ALK.

To further simplify our production setup and free up cash, we've entered into an agreement with our tablet-manufacturing partner, Catalent to sell ALK's part share in a production line dedicated to formulation of ALK tablets. The sale price of DKK 95 million will be paid by offsetting royalties that ALK pays for using Catalent's technology and is expected to be paid over a period not exceeding 3 years. Søren clarified the P&L impact a couple of minutes ago. This sale ends my ALK obligation -- this sale end any ALK obligation to cofinance maintenance or capacity expansion of this production line, while at the same time, given ALK access to Catalent's wide capacity whenever needed. So it's a good deal for both parties, and we look forward to continuing cooperation with Catalent.

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 our release in North America, and we still have lots of work ahead, but we are on track and in many areas, ahead of plans. I will now hand you 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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Thanks, Carsten. Based on the year-to-date results and the outlook of the second half year, we've decided to update the full year outlook, and let me take you through the details. We now expect revenue to be in the range of DKK 3.2 billion to DKK 3.3 billion, we expect tablet sales to accelerate the growth well past 30% year-on-year, and we also project higher SCIT sales. SLIT-drops sales are expected to decline while Jext sales will normalize in the second half year.

Moving to the operating profit. We now see EBITDA at DKK 150 million to DKK 250 million versus the previous range of DKK 100 million to DKK 200 million. Positive influences are obviously largest sales volumes and better efficiencies. In contrast, as you all know, we are in the middle of a transition process with subdued earnings, while we continue to invest in growth and transformation.

This year, we are allocating significant extra funds to clinical funds, while sales in margin costs are expected to increase modestly over the full year. Free cash flow is also impacted by the major business investments, we are making to support the strategy, store-based on the year-to-date performance and changing the divestment to Catalent into considerations, we've raised our full year outlook.

We now expect free cash flow to be in approximately minus DKK 300 million, an improvement from before minus DKK 400 million or better. This outlook includes a DKK 200 million in CapEx investment related to the new site strategy, technology upgrades as well as capacity expansions.

That's our latest view on the 2019 financials with results exceeding initial expectations. We'll, obviously, continue to keep you posted of any significant developments during second half 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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Thanks, Søren, and thank you, Carsten. And this concludes the main part of our presentation, and we're now ready to open up the question-and-answer session. And operator, please go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Thomas Bowers from Danske Bank.

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Thomas Schultz Bowers, Danske Bank Markets Equity Research - Analyst [2]

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I have couple of questions from me. Just to kick off with the tablet growth in Europe, high growth due to continued spikes on some tougher comps. So I'm just wondering, whether you please do -- maybe actually also start to tap into the, let's say, 50 million so that it makes 10% market opportunity rather than the 5 million patients that currently are being treated with AIT. So it's not only cannibalizing on current SCIT and SLIT-drops treatments. And then second question on Jext. You hold onto the market share gains. But I'm just wondering how much would you say is related to the continued shortage from Mylan. They did mention some supply issues back in early July. So any color on the current marketing environment would be appreciated. And then just my third question, final one here, just on the tree tablet, how much impact do you actually expect from the initial market launch? I know it's difficult to give any prediction. But I'm just -- if you want to compare to the ACARIZAX trajectory in Europe, you would say, you may have some increased awareness now and also, of course, the strong clinical data and maybe getting better acceptance of the tablet concept. So any color on this? And maybe also just to finalize how should be France, that's still, you can say, usual 2 years from approval to launch in France with tree tablet?

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

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Thomas, this is Carsten. Part taking for one end. The tablet growth is mostly market expansion in our opinion. If you think about it, it's still 90% of those who should have been using that who are not getting it. I cannot say there's not any cannibalization, if we, for example, take the launch in France, that it has some effect on the drops, but if we then compare to the actual growth, we do have the factor growth, both in money and volume, we are getting a lot of new patients on tablets. So it's definitely a market expansion, and it's also a confirmation of the trend we have been expecting happening for many years now, it looks like it's happening. Therefore, in our opinion, we don't believe that the high-growth rates will slow down in the distant future from now on. If you look at the -- there was a 50% what was that about question, the second question?

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Per Plotnikof, ALK-Abelló A/S - VP of Corporate Communications, IR & Strategic Planning [4]

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It was on Jext.

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

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It was on Jext.

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Thomas Schultz Bowers, Danske Bank Markets Equity Research - Analyst [6]

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I was talking about Jext.

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Carsten Hellmann, ALK-Abelló A/S - President, CEO & Member of Management Board [7]

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Yes. On Jext, of course, a lot of the market expansion we did with Jext in Europe was relating to a shortage from the competitors. I -- we don't see a lot of shortage happening here in July, and we believe this is why we see not necessarily a slowdown, but what we do see and that's what we're just trying to say, but what we do see is actually stabilization of our market shares, which is making us happy. And also for all listening in, please remember that we have pretty much doubled our sales in Jext, which was just a few years ago, very difficult area for us with very big supply issues and problems with the product and so forth. So one of the things on the fourth pillar on recognizing being fit for growth and stabilizing the core was also including Jext, and I think a lot of the results we see in Jext is also effect of that because we did a short ability to double the productivity and thereby supplying the market. They will come back now and the next phase we'll see is when we going to launch in the U.S. and then we'll take it from there.

Tree tablets, it depends a lot of when we get the prices. We have imminent -- we are waiting eagerly by the phone, so to speak, for, in particular, Norway and Denmark right now. And as you know, we're just in the initiation season right now. So of course, why do we gain a month more or less now actually has an effect in 2020. So I don't expect a lot of financial effect in 2019 from a ITULAZAX. But of course, our ability to get new patients on ITULAZAX in '19, we will significantly benefit from in 2020. Our expectation is for 2 reasons. One is, of course, as we mentioned, the acceptance of tablets, but also the efficacy and the relevance of the product, that this is going to be a launch that have a faster take-up in ACARIZAX. So -- and it's also going to be a bigger product in ACARIZAX over time. So that's going to be a big product for us.

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Thomas Schultz Bowers, Danske Bank Markets Equity Research - Analyst [8]

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Great. And maybe just a follow-up on ACARIZAX. You previously have given some color on the split between asthma and allergy prescribers. I think it was around 50-50 split, at least in Germany, if I can, is this still the case? So put some more color on that.

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

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I'm not sure. 50-50 split, that is no doubt that ACARIZAX and the studies we're making right now, and of course, confirming the children part of the asthma. And if you look at the market today in Germany that we have the GINA guidelines recommending ACARIZAX as a part of an asthma treating. We know we benefit from, and we know that we have a very, very good traction with pulmonologists in Germany, but whether, I cannot confirm exactly where those 54% or 30% of the sales come from them, but what we do see is that these new indications allows us to go in both with the ENTs and with the pulmonologists. So it's not only a matter of having more depth in the straight population of allergist patients, but also an ability for us to go out in a broader scope and a motor -- a market expansion. So asthma for us is in Germany confirming that that's one of the reasons why we believe we can go out to more segments, and thereby also accelerating the sales.

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Operator [10]

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Our next 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 [11]

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This is Michael from Nordea. I have just 2 questions. So first on Windgap. Maybe you could just elaborate a bit more on where you see the risks here and the technology of the year, the dry to liquid technology they have, and see, we can see their device, obviously, on the website. And -- but how firm are they actually on the entire production? I know it's outsourced and on the devices. So just so we get some more feeling around what are the actual development and potentially regulatory risks in this or whether this can be quite easily taken to market. And then secondly, just for housekeeping purposes. So when you announced your initial strategy, 18 to 20 also guided for free cash flow of minus DKK 1 billion accumulated. That has improved a lot. Maybe you could just help us to get a feeling of where you're standing now on the accumulated basis on the cash flow side?

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Carsten Hellmann, ALK-Abelló A/S - President, CEO & Member of Management Board [12]

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I'll take the first and Søren will take the cash flow thing. So regarding Windgap, I've tried to be very, very cautious in actually promising too much because the numbers are very thankful regarding this market. However, and let it put some words to it, that is a production partner and it's Phillip Medical, and they can produce it, and that's our niche. We have the device. We have worked on it, and we know what we have in the hand. So it's not a PowerPoint slide for the biotech company who had a great idea, and so do we think. So it is for real. Of course, that there is some -- there has always been a risk when you have looked at other devices trying to combine a dry liquid combination in other areas, other indication areas, we believe that we -- and you know I've been talking about this for some quarters now. That's because we know what we are looking at. And we are only announcing this because we think, actually this is firm now. Otherwise, you could have ounce that 1 or 2 or 3 quarters ago, but we don't. We believe we have something that if things works out, that can be filed within the next few years. That's what we're saying. And you know the numbers. I mean, we have market access. We have the customers. We have not a big hit and trial in front of us. It's really something that could materialize and it could be very significant for ALK. But again, numbers are thankful. But I think your question was, is this a theory or is this in practice? So yes, we have the device, we have the production set up. We are very much involved. We have the best people. We know what we're doing, and we have targets to actually go and do exactly what we say we will do. Is there risk in that? Yes, there is. But we are down to what I say things that we as adrenaline manufacturer for many years have not been able to see. But we, of course, there's always risk in a project, but this is not an idea. This is a product that needs to be finalized and fined. So I think that's the closer I can get to not say too much. And Søren, will you talk about the cash flow?

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Søren Jelert, ALK-Abelló A/S - Group CFO, Executive VP & Member of Management Board [13]

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Yes. Michael, of course, you're right that once we announced the Australia, originally we said that we brought in approximately DKK 1 billion and it's clear that we have very consistently been ahead of that in our reporting out both in '18 and now also with our outlook in for '19. So in that sense, yes, I think we are ahead of the plan, as also cost and serve. It's not only cash flow, but it's actually broad-based fact that we are ahead of our plan. Of course, you would ask for how much then and I think it's a little bit early days, too early to try and predict what 2020 will deliver, but I think overall, given that we've had now likely 2 good years that we are ahead of that plan also.

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Operator [14]

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Our next question comes from the line of Philippa Gardner from Jefferies.

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Philippa Gardner, Jefferies LLC, Research Division - Equity Analyst [15]

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I just had a couple of questions, if I could. So firstly, just on your adrenaline strategy for the U.S., I mean, I guess, it was interesting because there was someone else that's find a deal on the same dose for enabled (inaudible). I was just wondering if you had looked at other routes of administration rather than just an auto-injector. And then my second question, I think there was a comment in your statements about expanding the penicillin diagnostics business in North America, which is awaiting outcome of the discussion with the FDA. Could you just give us a bit more color on what's going on there, please?

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Carsten Hellmann, ALK-Abelló A/S - President, CEO & Member of Management Board [16]

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Yes. And the answer is a big yes. We spent a considerable amount of time, money and efforts to really start for putting the right product on the table for a U.S. strategy. And yes, we did look at nasal technologies and other technology as well. We also had in-house projects for our new vehicles to actually go out and conquer this market. And we believe, and of course, it's our opinion, and we also announced nasal will probably mean something different, but in our opinion, this is by far the strongest project that's out there. And we've been involved and we are involved with this one. So both in terms of probability of succeeding in terms of getting it to the market, the device and how far it is, we think we are light years ahead. But that's, of course, my personal and my team's personal opinion. So that's sort of one thing. Yes. So that's why we have talked about we will come out. During that process, we worked very hard on that when from developing our own devices to whatever is out there. So this is our opinion about that one. Penicillin, there's 2 things in it. We do have PRE-PEN launched on the market, doing very well, and we are working on a -- what something called PRE-PEN Plus with a partner and the PRE-PEN Plus was supposed to be launched late this year, beginning of next year. We think that's going to be delayed because the manufacturer of those products, they are facing some FDA issues on the PRE-PEN Plus part of it, which is the new product. We haven't really encountered the number for that product yet in any of our plans, but there was some sort of a project we do have. The PRE-PEN we have right now for penicillin testing, and we still have on the market, and we're still focusing on it and is still doing very well and growing fast.

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Michael Novod, Nordea Markets, Research Division - Director of Healthcare, Healthcare Analyst & Sector Coordinator [17]

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And can I just ask a follow-up on the adrenaline pen in the U.S. So when you think about your sort of your longer-term aims to grow the business to 10% on the top line, is that already assumed that you would have a solution for the U.S. or is this additive to that?

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

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Absolutely no. And this is going to be on top of period.

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Operator [19]

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Our 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 [20]

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This is Peter Sehested. Just a couple, if I may. First one is on the gross margin. You can adjust for the DKK 30 million write-off. It appears a bit weakish consensus for the quarter. I know you said that Q1 was high. So Q2 should be a bit lower, but just some flavor on that? And if you still expect a moderate or constant development in cost of goods sold for the next couple of years? And second question, related to R&D costs and there are 2 subquestions to that. Should we still expect R&D costs to increase significantly in the second half of the year? And secondly, I think most people are expecting R&D cost to come substantially down when the (inaudible) study ends in the U.S. in 2022. Does the adrenaline pen strategy in the U.S., implying anyway that our outlooks for R&D cost declined after 2022 should be, that's the question.

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Carsten Hellmann, ALK-Abelló A/S - President, CEO & Member of Management Board [21]

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Yes, I can just start with the last one and then give it Søren, who can take you through the -- both the R&D and the gross margin. The adrenaline project, we have had with this -- we wrote-off text for the U.S. in our annual report last year, and we've been working on a new concept. We have been -- we do not expect now the cost of sales in the plans we have right now, and we don't expect significant customer from this adrenaline project into our plan. So we don't have a ticking bomb of suddenly shoot R&D cost coming out of this adrenaline project at all. So don't expect that. And with that, I'll give it to Søren to give you some more details where the gross margin was?

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Søren Jelert, ALK-Abelló A/S - Group CFO, Executive VP & Member of Management Board [22]

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Yes. This is Søren. It's absolutely correct that we have said -- and we could also reconfirm that our clinical trial costs will go up year-on-year, '18 to '19. And it also means, of course, that we'll have a higher burden here in the second part of 2019. And we've also said and still reconfirm that it's peaking next year. And then gradually from there, it will go somewhat a little bit flushed and then down, eventually towards the 2022 mark where we, yes, actually do expect that it will come down as we are completing the archived (inaudible) ODACTRA trails. So there is absolutely same as far as we have said so far, and that's also what we will be showing in the numbers when we close the year. When it comes to gross margin, then, you're absolutely right that we came out of a strong first quarter with 60% -- 61% in gross profit. And it's also right that we would pull out here a 51% gross margin, adjusting for the chesnut, we are sort of at 50, 55, I would say. And actually, that is better than the same quarter last year. So we are consistently improving our underlying margins. I will, of course, and I do understand why you would have expect it to be a little bit higher, but we still have to remember that the first quarter was a high, very high sales quarter and the second quarter is still our lowest quarter. So to your question, should we expect it should grow better than in the subsequent quarters, that's at least what we do expect that it will come up, as we see increased trajectory of the tablets. The tablet is actually more profitable for us. And it is improving underlying, at least with 1% in margin points. So it's a good year. And again, underlying to that, Japan is fantastic. We like the sales, but actually, sometimes it's also impacting our gross margin a little bit negative. So if you disregard, actually the Japanese impact of our gross margin, then actually, the tablets are contributing by almost 1.5% improvement in margin points. And again, this is the core strategic asset for us. So it's a truth and a focus for us in long-term profitability on gross margin of the company. Hope better explains the situation.

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Operator [23]

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(Operator Instructions) Our 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 [24]

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So I have a question regarding the driver of the significant change of the free cash flow guidance. So we see a great revenue growth here, primarily driven by the tablets in Europe and Japan. But as you also mentioned before, we are expected to see more R&D expense in the next half year, suppose in 2020. So what I'm thinking is that we will see, if everything stays the same, a decrease in the EBIT and net profit, and also, as I mentioned that the free cash flow will primarily be driven by the operating activities. So I'm assuming that it's not going to come from a more positive net profit. So would you be able to put a few words on which aspects, I think are going to drive this guidance quick in the free cash flow, please?

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Carsten Hellmann, ALK-Abelló A/S - President, CEO & Member of Management Board [25]

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Yes, sure. Well, it's edge -- I mean, currently, half year through, while we had minus DKK 149 million, and we actually -- we have a first half year, that -- I mean, if you double that, actually the sales in the second half, if you're sort of the mid guidance at least, you will see a little lower sales, i.e., we also expect a little less impact from our top line and actually taking down the cash flow a little bit. But -- and then secondarily, in -- I think we have seen also that our CapEx expenditure, we actually do expect that that is postponed a little bit into quarter 2, but actually will end up a little lower than what we initially expected. And then, of course, what's possibly impacting it is also the sales of the Catalent, although it's spread over 3 years, it has, of course, a positive impact. A little bit depending on how the tablet sales pens out, but probably a third of that is attributed through this year. So I think it's a little less CapEx, [sort of] half of the year, and then we will see the positive impact of the Catalent sales, and that's actually what made us change the guidance from being minus 400 or better down to approximately 300. So that's the accuracy currently that we are looking at as the main points. When it comes to the clinical trials from a cash point of view there, that's mostly been impacting the first half of the year as prepayments are not anticipated to have the same impact in the second half of this year.

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Benjamin Silverstone, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [26]

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All right. I have another question for the Windgap if that's okay?

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

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Yes.

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Benjamin Silverstone, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [28]

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So my question is that, I'm sure, you know a lot about this, and there are sort of things tight. That's not been disclosed properly. My question is that given that this is a start-up from 2011, I am seeing a few risks associated to this one. I do see the quick market potential. As you also mentioned, it's a huge market. It's been historically dominated by Mylan. People are probably wanting a new and more improved product, which is what Windgap and you are coming with here. My concerns are though, however, that Chris Stepanian had before mentioned that the product would be ready to go into market within a couple of years, and he's mentioned this in 2016, for example, and we still haven't seen anything from them on the market. So I'm assuming that right now, you had a collaboration that is going to radically change this. So they are actually going to be ready now to market something. And my second question is the credits risk, given that they are in, I think, through C-financing right now. Is there any continuity plan. If they were to lack financing and liquidity model, they still haven't gotten the NDA approval.

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Carsten Hellmann, ALK-Abelló A/S - President, CEO & Member of Management Board [29]

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I think it's good question. And I think this is -- you're probably taking off for the 10 items that I was looking at when we actually started talking with Windgap. They've been working on it, yes, since 2011, but you should imagine that if ALK had been working on a project for 8 years and I wanted to go to market, you will say that seems okay. We have, of course, for the last 1.5 years, really been looking at them, doing our due diligence, talking to the partners being involved and so forth. So whatever he says is, of course, something you probably alter those in terms of getting his funding of his company or whatever that is in '15 or '14, we were not involved in that back then. However, what we have been looking at is solids, and we have also for the last 2 quarters, not been doing anything because we have been doing the due diligence and did not come out before we think is something that holds water. And yes, they are fantastic and energetic people who have -- has built a platform now that can maybe scale out to other areas. We don't know. We've been focusing on this market, where we have market access, where we have channel, a market we know, which we have been doing very well in Europe recently. We have the team in place. We have the technologies. We have the engineers. We have the chemist and everything already in-house. So of course, the difference is that this is not somebody in the U.S., who theoretically see something working, you are also dealing with a combination with ALK who actually knows the stuff. And it's a combination of these 2 combinations, you should see in the context of Windgap.

And whatever they do with the technology and other areas and promising so forth will be fine. And regarding financing, you shouldn't worry.

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Operator [30]

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Our next question is a follow-up from Peter Sehested from Handelsbanken.

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Peter Sehested, Handelsbanken Capital Markets AB, Research Division - Research Analyst [31]

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Just a follow-up sequential sales -- solid sales in rest of the world. Should we expect sequential increase in sales here in Q3 and Q4, looking at the numbers from Torii. I mean, the momentum is very strong, but you're also saying that you're sort of delivering a bulk and before pushover, perhaps 1 year or 2 years of cash, just a bit broad, some clarity so some flavor on how to relate the Torii sales to your own development in rest of world tablet sales?

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Carsten Hellmann, ALK-Abelló A/S - President, CEO & Member of Management Board [32]

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I'm not sure, I 100% understand the question. I think you have -- could you ask the question about Japan just in 1 or 2 sentences so I'm sure, I really understand what you're asking?

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Peter Sehested, Handelsbanken Capital Markets AB, Research Division - Research Analyst [33]

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Well, I think I basically just asked, whether we should expect sequential sales in your tablets, rest of world sales.

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Carsten Hellmann, ALK-Abelló A/S - President, CEO & Member of Management Board [34]

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What means sequentially?

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Peter Sehested, Handelsbanken Capital Markets AB, Research Division - Research Analyst [35]

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I mean should we expect a sequential increase in sales, i.e., should we expect the Q3 sales are higher than Q2 and Q4 higher than Q3.

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Carsten Hellmann, ALK-Abelló A/S - President, CEO & Member of Management Board [36]

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Okay, got it. I don't think we will tell you right now, but we have just given our guidance for the year. We also said that we want -- we believe that we have very high growth in the tablets in the quarters to come. And it is a mix, and I think one of the things, everybody should remember that we have now broad-based growth. We did not make another adjustment of financials because we had a good Japan, or good Eastern Europe, or a good Germany. Is actually everywhere, we're doing well and with a significant growth in Japan, it of course, has a little bit disturbance is some of the numbers in terms of gross margins and how we calculate the royalty versus the sales income and so forth. But I think we are pretty firm on the results we are providing right now and will be promised for the next quarters. We are not trying just to milk the cow dry for '19, and I have not anything in '20. We believe that we will continue to stay accompany with 10% growth in the years to come. And that's our 100% focus right now.

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Operator [37]

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As there are no further questions registered at the moment, I will hand the word back to the speakers for any closing comments. Please go ahead.

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Per Plotnikof, ALK-Abelló A/S - VP of Corporate Communications, IR & Strategic Planning [38]

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All right. Well, thank you all for your questions and for your participation in the call today. We have a Q2 roaster lined up, and hopefully, we'll see some of you on the road during the next couple of months. Please do not hesitate to call me, Søren, or Carsten, if you have additional questions. Thank you to you all, and have a nice day. Goodbye.