U.S. markets open in 5 hours 23 minutes

Edited Transcript of ALM.MC earnings conference call or presentation 11-May-20 8:00am GMT

Q1 2020 Almirall SA Earnings Call

Barcelona Jun 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Almirall SA earnings conference call or presentation Monday, May 11, 2020 at 8:00:00am GMT

TEXT version of Transcript

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

Corporate Participants

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

* Amita Kent

Almirall, S.A. - Senior VP of Legal, Global Chief Compliance & Data Privacy Officer and Member of Management Board

* Bhushan Hardas

Almirall, S.A. - Chief Scientific Officer, Executive VP of R&D and Member of Executive Board

* Michael McClellan

Almirall, S.A. - Executive VP of Finance & CFO

* Pablo Divasson del Fraile

Almirall, S.A. - Head of IR & Corporate External Communication

* Peter Guenter

Almirall, S.A. - CEO, Chairman of Management Board & Executive Director

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

Conference Call Participants

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

* Francisco Ruiz

Exane BNP Paribas, Research Division - Research Analyst

* Jose Maria Canovas Garcia de Blanes

JB Capital Markets, Sociedad de Valores, S.A., Research Division - Analyst

* Krishna Chaitanya Arikatla

Goldman Sachs Group Inc., Research Division - Research Analyst

* Peter James Welford

Jefferies LLC, Research Division - Senior Equity Analyst & European Pharmaceuticals Analyst

* Trung Chuong Huynh

Crédit Suisse AG, Research Division - Research Analyst

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

Presentation

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

Operator [1]

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

Good day, and welcome to the Almirall Financial Results and Business Update First Quarter 2020 Presentation. Today's conference is being recorded.

At this time, I would like to turn the conference over to Pablo Divasson. Please go ahead, sir.

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

Pablo Divasson del Fraile, Almirall, S.A. - Head of IR & Corporate External Communication [2]

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

Thank you, Nadia.

Good morning to everyone on the call. Thank you for joining us to review Almirall's first quarter results. I hope everyone is safe and remaining healthy during these unprecedented times.

As usual, you can find the slides to this call on the Investors page on our website at almirall.com.

Moving to Slide 2. I would like to remind you that information presented in this call contain forward-looking statements that involve known and unknown risk, uncertainties and other factors that may cause actual results to differ materially.

With that, please advance to Slide 3. Presenting today, we have Peter Guenter, Chief Executive Officer; and Mike McClellan, Executive Vice President, CFO. Peter will review the first quarter business performance and later come back to sum up, and Mike will provide you with detail on the financials. After that, we will open up for a Q&A session where we will also have Bhushan Hardas, Executive Vice President, Research and Development, CSO, available to answer your questions.

So with that, I will hand you over to our CEO, Peter Guenter.

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

Peter Guenter, Almirall, S.A. - CEO, Chairman of Management Board & Executive Director [3]

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

Well, thanks a lot, Pablo, for the introduction, and good morning to everyone on the call.

Let's take a moment to look how we're dealing with COVID-19 as an organization first. It's definitely an understatement to say that we are going through a very difficult time. I would rather say that the situation we find ourselves in is unprecedented. I would, first and foremost, want to thank the physicians, the nurses and other health care professionals who relentlessly work so hard and courageously in very difficult circumstances to mitigate the impact as much as possible. I think they are truly a real example to all of us, and they deserve our deepest respect and admiration for what they do.

I think we're also responding incredibly as an organization. I couldn't be more proud of the response of each and every one of Almirall's more than 1,800 employees. Everybody is putting the patient at the heart of everything we do despite the challenges, and we are doing a fantastic job of continuing to produce and supply our medicines. More than ever, we continue to be guided by our noble purpose.

At Almirall, we have a very important responsibility to ensure a continued supply of our medicines to all the patients around the globe who need them. Therefore, we've mobilized our industrial teams and kept 100% of our sites operational and running at full capacity and also increased production capabilities for specific medicines, such as paracetamol, which address symptoms of patients affected by COVID-19.

We have clearly, like most companies, reinvented how we worked during the first quarter. We're fully remote but continue to function and delivering on our objectives. We've had a careful and meticulous business continuity planning, making sure we had no supply constraints to avoid any product shortage. Additionally, we have enabled our sales force to start engaging digitally with physicians and with health care professionals, in general. In fact, during this time, our employees have completed many hours of digital training, which has been a good use of their time during the crisis and will stand us in good stead as we continue to modernize and digitize the company. We thank all our employees for their dedication and for securing the supply of our essential medicines through difficult times.

At the same time, at Almirall, we also have a social responsibility. To that end, we are making charitable contributions to help mitigating the effects of the sanitary emergency through a number of actions across our affiliates. In Spain, we are donating protective clinical equipment and participating with the donation to an exciting project led by the Leitat Foundation based in Catalonia, who are producing 3D-printed respirators. In Germany, we are producing sanitizing gel to distribute to hospitals and clinics. In several countries, we are providing Blastoactiva and Balneum topical creams to hospitals to help professionals reduce dry and damaged skin caused by masks, repeated hand washing and the use of sanitizers. Our actions are focused on our employees and on all those people who have been directly and indirectly impacted by this unprecedented health crisis, and they remain in our thoughts.

I would like now to show you in more detail the trends we are seeing that directly will affect Almirall so you have a better understanding of the different market dynamics.

In Europe, it is evident that stockpile in preparation of the lockdown impacted positively Q1 net sales. The latest data shows that this has now normalized in April. If you look at the details, you will see Europe is not homogenous. There are variations in trends across Europe as each country has acted differently in the way the lockdown has been implemented, and they are easing restrictions at slightly different times and with different limitations. The outcome of this is that we are seeing a variety of different trends relating to this and in addition, it also includes the Eastern holiday period. Our 2 key markets, Germany and Spain, are showing positive prescription trends in the latest week. Similarly, in the U.S., stockpiling is evident. And whilst new prescriptions are down, the latest data shows prescription trends are starting to stabilize. Compared to the pre-COVID baseline, the number of weekly diagnosis visits in both institutions and offices has declined between minus 60% and minus 70%. Oral antibiotic prescriptions relevant to us have decreased sharply over the last month by about 30%.

Now let's take a look at Almirall's performance. The first quarter has been a good start to the year for Almirall, and Mike will take you through the financials shortly. But I would like to point out the 8% plus in net sales, which includes some stocking, as patients stocked up on chronic meds and for specific medicines, such as paracetamol, driven by demand in Europe. These temporary positives outweigh Aczone genericization. We had also strong business momentum driven by our European growth drivers, and we are seeing the stabilization of Seysara prescriptions after implementing the new patient access program. I will give you additional information later in this presentation on the growth drivers.

We continue to work hard on the late-stage pipeline to progress developments to unlock the midterm value. Only just recently, we were pleased to announce in early March the EMA and FDA acceptance of filing for tirbanibulin for actinic keratosis in both geographies. This is a significant step towards its approval. So far in the current COVID-19 crisis, we do not expect regulatory agencies to have delays. Tirbanibulin is now undergoing the regulatory review phase. And as far as we know, the regulatory agencies have not signaled any delays in regulatory reviews not only for our product, but for any product. We will keep a close eye, but so far, we do not have any reason to expect a delay.

With regard to lebrikizumab, consistent across the industry, our partner, Eli Lilly, announced a temporary pause on the enrollment of new patients for the Phase III clinical trials. At this time, it is not possible to assess if this will delay the development and regulatory time lines. Obviously, we have made plans with Lilly to catch up the delays as soon as new patient recruitments will start again. We will continue to monitor the situation.

We remain firmly focused on additional external opportunities to generate sustainable value for shareholders. In summary, we are pleased with the momentum generated by the business during the first quarter.

I will now highlight the performance of our growth drivers, and I know you all will want to hear about how COVID-19 crisis is impacting them. I'll try to address this for you on the next few slides.

First, for Ilumetri, we have seen very strong performance of Ilumetri growing net sales and have seen patient numbers accelerating in recent months, which you can see in the graph, that we are actually tracking very nicely with the uptake. These are February data, so definitely not yet infected by COVID-19. The data is very positive in terms of share of new patients, and we are seeing this in the U.K., Spain, Austria and Germany alike. Ilumetri is in a great position in a growing market offering an absolutely decisive benefit to patients.

Related to COVID-19, we do see a decrease of new patient starts that has been seen with anti-IL-23 class, but I think this will only be a pause before Ilumetri will return to its growth trajectory. This is certainly a very competitive space, but we think Ilumetri offers a great product to patients in the right class whilst being highly favorable and differentiated from other anti-IL-23s. Add to that the best cost-effectiveness ratio and Ilumetri can be considered the therapy of choice for the vast majority of patients that cannot be controlled by conventional systemic therapies. Our thinking continues to be confirmed that anti-IL-23s are going to be the winning class, and being in that growing class, we will continue to grow the product very nicely.

On the next slide, let me now show you the market dynamics in the IL-23 class. You can see from this slide that anti-IL-23s are clearly conquering the market, gaining a 30% market share of new patients within the biologics. There are compelling reasons for that. The anti-IL-23 class has a strong efficacy profile with the key attributes being a proven, lasting efficacy with convenient dosing and with no significant safety concerns. For patients suffering from psoriasis, it's important that any therapy provides long-term control. Patients need a long-term treatment strategy to reduce the disease burden and improve their quality of life. In this context, Ilumetri has demonstrated clinically meaningful disease control by absolute and relative PASI with 8 patients out of 10 staying on therapy for 5 years. Ilumetri's product profile of long-term sustained efficacy data, very good tolerance, delivering maintained control for psoriasis patients and easiness of use are the key attributes that continue to drive its growth within the anti-IL-23 class, capturing market share from competitors to achieve a 30% market share in new patients in the class.

Now let's take a look at Skilarence. We did see an initial and temporary impact in the first quarter from a company that is compounding dimethyl fumarate in the Netherlands. However, adding back those volumes, Skilarence continues to perform in line with our expectations. For those of you unfamiliar with compounding, it is the creation of a drug by a licensed pharmacist to meet the unique needs of an individual patient when a commercially available drug does not meet those needs. This is only allowed in cases where the patient does not respond enough to the registered drug and, in any event, is limited to approximately 50 patients. So you can see it is quite restrictive.

As we have previously outlined, the growth projection will likely be at a more gradual pace as our room to grow additional share above the 80% to 90% share in Germany and the Netherlands is limited. We have achieved a strong foundation in Europe and now continue to work with DMF-naive countries, which we expect will take more time and education to penetrate those markets. Also, bear in mind that we expect impacts from COVID-19 in Q2 because patients on Skilarence need blood monitoring, and on top, new patient starts will drop significantly until the situation normalizes.

On Seysara, as you will remember, in the second week of January, we changed our co-pay card program to improve the gross to net. We have been pleased that at the end of the first quarter, the absolute number of prescriptions started to stabilize, and we started to see a revival of market share. Unfortunately, the impact from COVID-19 will delay this rebuilding of prescriptions. As the acne market is not a chronic disease, the overall U.S. acne market has seen a 45% decline, which is above average versus other therapeutics. Having said this, the Seysara brand has proved to be resilient. Despite being within the launch phase, Seysara maintains market share with TRx volume tracking the overall U.S. oral antibiotic market.

What we are seeing is that refill scripts are starting to stabilize. We expect a bit of a pause before getting Seysara back into a growth trajectory as you will see across many companies in the U.S. for non-chronic treatments. Inevitably, COVID-19 has resulted in slower new patient addition in recent weeks. Overall, we see a reduction for in-person doctor visits resulting in a slower rate of new patient starts. The impact will depend on the length of the lockdown. Q2 will see a decline in the prescriptions as dermatology is more impacted than other therapies. But consistent to what we have seen so far, we do not believe this will affect our market share and that Seysara prescriptions will be in line with the overall oral antibiotic market.

With that, I will pass the presentation over to Mike.

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

Michael McClellan, Almirall, S.A. - Executive VP of Finance & CFO [4]

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

Thank you, Peter.

Now I want to take you through the financial part of the presentation. We have delivered what we believe is a solid start to the year with limited COVID-19 impact on the Q1 performance. The key highlights are total revenue and net sales growing at 6% and 7% on a constant exchange rate, respectively, boosted by our growth drivers, some wholesalers stocking in Europe in the anticipation of the COVID-19 situation and a positive impact in deferred income, which more than offset the expected impact of the Aczone generic in the U.S. Gross margin has been impacted with our generification of Aczone, but this is in line with our expectations.

SG&A, excluding depreciation, was flat at EUR 71 million as increased new product investments were offset by lower promotional activity in late March due to the COVID situation. With this, we delivered good operating leverage with EBITDA growth of 10% and an improvement in the year-on-year margin. And this has helped us achieve a strong operating cash flow of EUR 48 million, which I will expand on later when we address the cash flow statement.

Taking a look at the P&L in detail, you can see this 8% net sales growth, which was 7% on constant exchange rate that I mentioned. In addition to this, we have net sales which were boosted by growth products in Europe, wholesaler destocking and the positive impact from deferred income in the first quarter, which more than offset the decline in the U.S. business related to the generification of Aczone. As you can imagine, we have reviewed in detail our EUR 241 million Q1 net sales performance very carefully for any COVID-19-related stocking impacts, including longer scrips. Our assessment is that the impact is roughly EUR 5 million to EUR 10 million in net sales primarily in Europe. In addition, the deferred income acceleration is related to a change in our participation in an ongoing clinical trial, which resulted in a positive impact that will have a full year range of about EUR 20 million in other net sales.

Other income reduced, as expected and we -- as we've previously communicated, due to the significant reduction in other income as milestone-related income from AstraZeneca decreases sharply and we switched to a predominantly royalty income model, which had a slight positive currency impact in Q1.

Gross margin achieved 71%, which was impacted by the generification of Aczone, as we expected. This is flat quarter-on-quarter while there was a stopping of products mainly coming in Europe and Spain, which are mainly lower-margin products.

R&D shows a marginal decrease in the first quarter, and this is related to minor delays in Phase IV studies. We managed SG&A spending flat versus last year while investing in our recent product launches. We currently anticipate low to mid-single-digit growth in SG&A, excluding depreciation, for the full year to support the launches and to continue the investment in our growth drivers while seeing some savings due to the lower promotional efforts in Q1 and Q2 due to the COVID restrictions. This should help compensate partially any potential sales impacts we will see but are unable to fully quantify at this point. All this led to a good EBITDA growth of 10% as compared to a strong Q1 of 2019 with an improvement in terms of EBITDA margin from 35.7% to 36.6%.

On the next slide, going down the P&L, the combination of growth, improved product mix and limited expense increase provided operating leverage with solid EBITDA and EBIT margin increases. Net financial income of EUR 0.2 million in Q1 is related mainly to foreign exchange gains due to the weakening of the euro and a change in the value of the convertible bond derivative due to the lower stock price. We expect these to normalize during the year and to end the full year in line with 2019's net financial expenses.

Looking at the balance sheet, I simply want to highlight 3 elements. Financial assets outlined the fair value of future milestones and royalties to be collected from AstraZeneca. This is consistent with the previous year. We have a decrease in our accounts receivable related to the collection of a sales milestone from AstraZeneca in Q1. A small increase in our gross debt reflects the repayment of the U.S. revolving credit facility. We finished Q1 with a leverage of 1.5x EBITDA to net debt, similar to year-end, which gives us flexibility in the current environment and also puts us in a good position to look at M&A activity if attractive deals come around.

Let's take a look at the cash flow statement. We delivered a strong operating cash flow generating EUR 49 million aided by collection of a sales milestone from AstraZeneca. We made significant investments during the quarter, including the Phase III milestone for lebri and a sales-related Crestor milestone. We do not expect a significant amount of investing activities again until Q4 where we could have a payment related to the option agreement with Bioniz for the underlying CTCL assets.

And finally, given the ongoing COVID-19 situation, I'd like to highlight that Almirall continues to maintain good financial liquidity. As I've just explained, Almirall has nearly EUR 100 million in cash and an undrawn revolving credit facility of EUR 250 million as well as other avenues of credit with no debt repayments scheduled until the end of 2021. Therefore, our capital allocation strategy priorities are clear and remain unchanged. We'd also like to reiterate our previous dividend payment recommendation for the coming Annual General Meeting, which has been postponed due to the COVID-19 situation, of a gross dividend of EUR 0.283 per share in a scrip dividend modality.

I'll now hand back to Peter for his closing remarks.

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

Peter Guenter, Almirall, S.A. - CEO, Chairman of Management Board & Executive Director [5]

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

Thanks a lot, Mike.

So in conclusion, I have said it already and I will repeat it again, securing the supply of our medicines to patients who need them is our core responsibility. In terms of business, I would just say that we have had a strong start to the year. We are pleased with the momentum from our European growth drivers and including brands such as Sativex and Ciclopoli, which are really growing very dynamically.

Today, I have tried to provide you with as much detail to help understand the current position of our key products. Moreover, in our pipeline, we have created a number of very nice opportunities to create very significant mid- to long-term value. Our late-stage pipeline will provide significant future leverage on our growth profile. Innovation is our main priority, and that is what we have been doing with our in-licensing and our research portfolio while we focus on first-in-class or best-in-class opportunities. The top priority for us is to build a world-class pipeline in medical dermatology.

We are maintaining our 2020 guidance. We can aim at this time not reliably -- we can at this time not reliably quantify the impacts of COVID-19, but we are permanently monitoring the impact on the health care systems and the prescription trends. We will share an update in the half year earnings call. However, we are not looking at any type of end quarter guidance update for quarter 2.

Overall, we anticipate COVID-19 to impact our business in Q2, especially in the U.S., however, at this stage, it is not clear to what extent. Its impact in the coming months will be defined by duration and intensity. As Mike has just commented, our priorities are clear and remain unchanged as we continue to focus on additional external opportunities to cement our position in our key markets and boost our growth prospects.

With that, I'll turn it over to Pablo for the Q&A.

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

Pablo Divasson del Fraile, Almirall, S.A. - Head of IR & Corporate External Communication [6]

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

Thank you very much, Peter. Nadia, back to you for the Q&A, please.

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

Questions and Answers

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

Operator [1]

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

(Operator Instructions) The first question comes from the line of Trung Huynh from Credit Suisse.

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

Trung Chuong Huynh, Crédit Suisse AG, Research Division - Research Analyst [2]

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

It's Trung Huynh from Credit Suisse. Three questions, if I can. Firstly, can I just understand the EUR 20 million deferred income on sales a bit more? Can you just give us some more color here? And what's the impact of this to margins? I assume it drops down the P&L at 100%.

Secondly, on other income, it came in at EUR 6 million. At this level, if you continue on the rest of the year, it should come in at EUR 20 million. But at full year, we had in our models a guidance of EUR 10 million. So where do you think this will go for the year?

And then finally, timing of R&D. When should we expect that to come for the year?

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

Peter Guenter, Almirall, S.A. - CEO, Chairman of Management Board & Executive Director [3]

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

Okay, Trung. Thanks for the question. I'll pass your questions to Mike. Mike, on the EUR 20 million deferred income and the other operating income of EUR 6 million in the first quarter.

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

Michael McClellan, Almirall, S.A. - Executive VP of Finance & CFO [4]

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

Yes. The deferred income impact relates to something that was set up in the original disposal of the respiratory assets to AstraZeneca. We had continuing involvement in some clinical trials, which deferred some of the income of that original deal. We've changed the participation in one of the trials to refocus our resources on internal projects, and that led to a release of the deferred income, which full year impact will be about a EUR 20 million increase. And that was included in our guidance for the year as we did anticipate that there could be some changes in those clinical trials.

The second part, other income. The EUR 6 million for the quarter was aided by a positive currency impact. We revalue that future assets on a quarterly basis. And the strengthening dollar versus euro actually led to a boost of EUR 2 million to EUR 3 million there. So we still think that the full year will come in line EUR 10 million to EUR 15 million. But of course, it is subject to currency swings.

And the third question was due to R&D timing of -- and I'll pass that over to Bhushan, but I'm not sure which product you are looking at.

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

Trung Chuong Huynh, Crédit Suisse AG, Research Division - Research Analyst [5]

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

Just the level of spend when we expect that to increase. For 1Q, it was down; 2Q, I imagine down.

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

Michael McClellan, Almirall, S.A. - Executive VP of Finance & CFO [6]

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

So we'll see it phase in throughout the full year. We still expect the activity on the R&D side to be pretty robust. We know that there could be some slight delays to the lebri, but that's more on a milestone deal and not in our internal R&D. So we would expect you to see a normalization throughout the year of the full year R&D.

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

Trung Chuong Huynh, Crédit Suisse AG, Research Division - Research Analyst [7]

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

Okay. And very quickly, if I've got you. Can I just get the Seysara sales for 1Q?

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

Michael McClellan, Almirall, S.A. - Executive VP of Finance & CFO [8]

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

Yes. It's roughly EUR 5 million, which was impacted I'll say by destocking. As we've seen the prescriptions go down, the wholesalers have destocked the product. So we did see a destocking impact of roughly EUR 1 million to EUR 2 million there as well.

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

Operator [9]

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

The next question comes from the line of Francisco Ruiz from Exane.

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

Francisco Ruiz, Exane BNP Paribas, Research Division - Research Analyst [10]

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

I have some 4 questions and some new ones. So on the deferred tax -- sorry, on the deferred income impact of this EUR 20 million, could you quantify how much was in Q1?

Also, I think Mike has commented that you expect a better SG&A right now than at the beginning of the year. And you mentioned a figure, but I didn't catch it. Could you repeat it for me?

The third question is, at the end of the year, you also commented that there would be some regulatory changes in Spain. Do you still see them in this environment?

And finally, if you could give us a little bit more color on the real growth of Skilarence after the component in Paris is solved.

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

Michael McClellan, Almirall, S.A. - Executive VP of Finance & CFO [11]

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

Yes. So the impact on deferred income has hit in Q1, that's pretty clear. So that helped us in what you're seeing as the growth versus last year. SG&A, I had originally said in the guidance, we expected it to be in the mid to high single digits. We've now put that more in the low to mid-single digits as we do see some lower promotional activities in Q1 and Q2 due to COVID. We do think that will help offset partially any sales downside we might see during the year, though it's still a little bit too early to see what the full year effect is going to be on the top line.

In terms of changes to pricing in Spain, we think that that's unlikely in the first half. Because of the COVID situation, there are other priorities. We don't know what's going to happen later in the year, so we still see that as a potential risk. But as Peter mentioned, we're maintaining our guidance at this point subject to the business coming back to a more normal state by the end of the second quarter.

And in terms of Skilarence, it's hard to exactly quantify, but we think the impact due to the compounding is anywhere between EUR 1 million and EUR 2 million in a quarter.

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

Peter Guenter, Almirall, S.A. - CEO, Chairman of Management Board & Executive Director [12]

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

Yes. I would just -- perhaps 2 comments from my side. First, on the impact on -- of COVID-19 on the behavior of governments. I think you can see it both ways, right? Either you look at it and you see, for example, what happened in -- back in 2008, '09, '10. But I think there is also a silver lining in the whole story is that many governments and many politicians I think start to understand that they need a strong pharmaceutical industry domestically. Because probably if COVID-19 has demonstrated anything, it is that the pharmaceutical companies are part of the solution and not part of the problem. And I think they should look more strategically to having a strong domestic pharmaceutical industry than anything else. So we'll see how that bodes for the rest of the year and in the coming years, obviously.

And on Skilarence impact, like Mike said, we don't have precise numbers, but you can take EUR 1 million to EUR 2 million a quarter. And we happen to have our General Counsel here, Amita Kent.

And Amita, could you provide a little bit of color to the procedure and the timings?

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

Amita Kent, Almirall, S.A. - Senior VP of Legal, Global Chief Compliance & Data Privacy Officer and Member of Management Board [13]

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

Sure. Happy to do so. Good morning, everybody. So you may be aware that with respect to compounding, and particularly in the Netherlands, the Dutch Medicine Act is very clear that if there is a registered product with a marketing authorization, then the compound is only on a very small scale, small-scale preparation. And particularly, in the Netherlands in April 2019, it was clear that such small-scale preparation could lead for approximately 50 unique patients per month.

We have had some litigation ongoing with the company, specifically with respect to their compounding and some stock that was not destroyed under a selling agreement. And we have now entered with respect to a subpoena against this particular company. The subpoena was filed in January of 2020. However, due to COVID-19 and the measurements there with respect to legal proceedings, currently, this matter, we will decide whether we want to go from oral hearing, which will be a longer procedure, or whether we will provide our explanations to the court in writing, which is a shorter procedure, and then weigh what the verdict may be. We're not sure when the court will hear this matter, so we are looking at that.

In addition to the legal proceeding, we have also launched a complaint with respect to the inspectorate in the Netherlands, asking them to take a look at this particular case, and we are expecting a judgment from that inspectorate within the coming days.

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

Peter Guenter, Almirall, S.A. - CEO, Chairman of Management Board & Executive Director [14]

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

Okay. Thanks, Amita.

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

Operator [15]

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

The next question comes from the line of Krishna Arikatla from Goldman Sachs.

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

Krishna Chaitanya Arikatla, Goldman Sachs Group Inc., Research Division - Research Analyst [16]

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

I have a few, please. Mike, I hate to go back to deferred income, but if my understanding is correct, that has always been part of your net sales historically. And if I'm not wrong, it has been around EUR 30 million-ish every year. So is this EUR 20 million on top of what normally would have been recognized in your net sales? Or is that the absolute deferred income in the year? And how much of the deferred income is currently on your balance sheet, please? And what -- how we should expect that being reflected in your income statement going forward?

And two, on core EBITDA, you haven't really mentioned about reiterating the core EBITDA guidance. How should we think about that? Those would be my 2 questions.

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

Michael McClellan, Almirall, S.A. - Executive VP of Finance & CFO [17]

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

Okay. Thanks, K.C. So as for the deferred income, you're right, there has been an annual amount every year, and the EUR 20 million I mentioned is on top of that. So it's a onetime boost for Q1 this year. There are -- there's another trial that's remaining, so there's another amount that will continue throughout this year and into next year. I think the full year impact of that piece is roughly in line with the EUR 30 million that you're talking about.

So in terms of the core EBITDA, we maintain the guidance and the same split to core EBITDA to other income. There was a little bit of an extra other income in Q1 due to a currency impact I mentioned earlier. But we still see the full year coming out to EUR 10 million to EUR 15 million, leaving the core EBITDA as the difference.

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

Krishna Chaitanya Arikatla, Goldman Sachs Group Inc., Research Division - Research Analyst [18]

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

Got it. If I could throw in another question, please. On your M&A opportunities, clearly, we're living in times which are very uncertain, especially from a cash flow perspective. Does this make your M&A opportunity set more conducive? Are you seeing more of them come on your table?

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

Michael McClellan, Almirall, S.A. - Executive VP of Finance & CFO [19]

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

So I'd say in terms of M&A, and I'll let Peter give his comments as well, given the uncertainties in the market, of course, we'll be very, very careful if we look at anything. We are seeing 2 impacts. One is that interest rates are variable. So things are moving in different directions. They've started to normalize from a peak that we saw post-COVID. But we'd have to take that into consideration for anything of a sizable acquisition. And two, you are seeing prices of some assets come down a little bit because of the situation. So -- but before we would do anything, we would be very, very careful and it have to be assets that we felt were important to the future of the business. But I'll let Peter give you his thoughts as well.

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

Peter Guenter, Almirall, S.A. - CEO, Chairman of Management Board & Executive Director [20]

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

No. I think -- K.C., thanks for the question. I think you can look at it from 2 angles. If you would look at, let's say, late-stage in-licensing high-quality assets, they may become available at more interesting prices. So we are definitely looking at certain of those opportunities. And then in parallel, we are still interested in increasing our critical margin in some countries by immediately accretive assets. So it's really -- we're really looking at M&A transactions or in-licensing transactions from both angles. And as Mike said, of course, we'll be prudent. Given the COVID-19 situation, we have a very close eye on interest rates, of course, and they start to normalize somehow. So again, in function of the -- I would say, the quality of the assets and the potential immediate accretion, the predictability and the stability of the cash flows that we may be able to acquire, we will, of course, continue to look at interesting assets.

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

Operator [21]

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

The next question comes from the line of Peter Welford from Jefferies.

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

Peter James Welford, Jefferies LLC, Research Division - Senior Equity Analyst & European Pharmaceuticals Analyst [22]

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

I just got a couple left just with regards to specific products, if you don't mind, please. Just with regards to Skilarence, I wonder if you can go through that. Just with regards to the blood monitoring, how frequently that is needed and what has to happen for patients in terms of renewing prescriptions if they don't have that and whether or not there's any flexibility in that at all or whether or not prescriptions then need to be curtailed and can't be extended in the current period.

And then in a similar vein, on Ilumetri. I wonder if you could just talk about the trends you're seeing there with regards to repeat dosing of the drug, obviously, a relatively infrequent regimen which could be a benefit in the current climate. But equally, could you just talk about I guess the potential dynamics there you're seeing from dermatologists in terms of patients getting their repeat doses of the drug and understanding, obviously, the impact that there is currently on the new patient dynamics?

And then just finally on Seysara, just curious there with regards to -- what you could essentially see happening with regards to longer-term impact from payers in the U.S. We obviously understand that given the current unemployment situation, there's potentially a shift in the payer mix we can see in the U.S. market. Curious to know your thoughts on that. And if you could perhaps update us, I guess, on the current coverage of Seysara in the U.S.

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

Peter Guenter, Almirall, S.A. - CEO, Chairman of Management Board & Executive Director [23]

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

Yes. Thanks for your question. Let me take first the Ilumetri and the Seysara question, and Bhushan will answer you on the Skilarence question. So on Ilumetri, you singled out very correctly, of course, that the once-a-quarter dosing is definitely -- well, is anyhow a very important feature and an advantage of the product. But especially in COVID times where accessibility to physicians is hampered to some extent or even to a large extent in some countries, a once-a-quarter dosing is, of course, a very important benefit. So what we have seen in dynamics is that patients who were on the drug have continued to receive the drugs, even we have anecdotal evidence that some patients have been receiving treatment for 6 months instead of 3 months in some countries.

But we also see in April numbers that new patient initiations have dropped significantly because simply patients are no longer in front of their physician. New patient initiations have been postponed until situation will normalize. And that is, of course, a market phenomenon, Peter. That is not solely limited to Ilumetri. But if anything, if you look at the product profile, we think that the product profile features are even better in a COVID-19 situation than in a pre-COVID-19 situation. So that's my short summary on the Ilumetri.

In terms of Seysara, well, look, we haven't seen any specific impact. So our coverage is around about 40%, 37%, 38% unrestricted coverage, 60% total coverage. So we'll look into that as the weeks go by, but we haven't seen any specific reactions from payers in the positive or in the negative sense. And the name of the game for Seysara is again to drive volume up at an acceptable gross to net equation.

Bhushan, for Skilarence, can you comment a little bit on the blood monitoring requirements and patient initiation?

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

Bhushan Hardas, Almirall, S.A. - Chief Scientific Officer, Executive VP of R&D and Member of Executive Board [24]

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

Yes. Thanks, Peter. Skilarence, which is dimethyl fumarate, every dimethyl fumarate on the market has one -- has an instruction that the patient has to go through blood monitoring once a quarter. In our case, you definitely have to go through blood monitoring specifically for lymphopenia. And if you have low lymphopenia levels, which are very clearly written in our label, then you have to discontinue the drug. But then after 3 months, you can go back once those lymphocytes are high. So yes, there is instruction on the label that you have to monitor on a regular basis. But once you discontinue, it goes back to normal.

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

Peter Guenter, Almirall, S.A. - CEO, Chairman of Management Board & Executive Director [25]

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

I would add to that, Peter, if you allow me, one more background on Skilarence. You know that the initiation and the titration is a little bit cumbersome with the product. It's not like you have 1 shot for 3 months and you're done, which, of course, requires for new patients a bit of a, I would say, an intensive process between the doctor and the physician and the patient. And therefore, we also expect in the months of April, May, June impact on new patient initiations in Skilarence. So you have to take into account both factors actually.

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

Peter James Welford, Jefferies LLC, Research Division - Senior Equity Analyst & European Pharmaceuticals Analyst [26]

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

Sorry. Could I just go back to Seysara? I mean did you say 60% total? Was it 37% to 38% unrestricted, 60% total coverage?

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

Peter Guenter, Almirall, S.A. - CEO, Chairman of Management Board & Executive Director [27]

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

Yes. Yes. That's correct.

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

Operator [28]

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

The next question comes from the line of Jose Maria Canovas from JB Capital Markets.

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

Jose Maria Canovas Garcia de Blanes, JB Capital Markets, Sociedad de Valores, S.A., Research Division - Analyst [29]

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

Actually, most of them have already been answered. Just one left because I didn't get it right. You were commenting on the potential milestone payments throughout the year regarding lebri or any other product in the pipeline or portfolio. I don't know if you gave a guidance for the year of what we could expect as regards to further payments.

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

Michael McClellan, Almirall, S.A. - Executive VP of Finance & CFO [30]

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

Yes. So I did mention that we had a significant amount of investments in Q1. The next large piece could be in Q4 with the Bioniz. We haven't given exact numbers. So we do expect the overall investments for the year to be slightly lower than last year. But we haven't given a precise number as some of these things of course are dependent on actions happening and decisions being made.

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

Operator [31]

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

The next question comes from the line of Trung Huynh from Credit Suisse.

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

Trung Chuong Huynh, Crédit Suisse AG, Research Division - Research Analyst [32]

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

Just a clarification here, please. Can you explain why the deferred income is in net sales given that it's not really related to product sales but a change in R&D funding? And then just -- is this all profit? Or are there any associated costs here?

And on Skilarence, can you give us a bit more color on the rollout in the non-DMF countries? So beyond Germany and the Netherlands, how is the pricing compare here?

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

Michael McClellan, Almirall, S.A. - Executive VP of Finance & CFO [33]

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

Okay. So with the deferred income, the accounting treatment that's been in place for several years is it's -- in the line other net sales in addition to royalties and other things that are not directly sale of products that are considered as net sales in the accounting treatment. There's no costs associated with it, so it drops straight to the EBITDA.

And the second question...

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

Peter Guenter, Almirall, S.A. - CEO, Chairman of Management Board & Executive Director [34]

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

Was on Skilarence. So I'll take that. So Trung, obviously, Italy and Spain have been severely hit. And it's -- in some hospitals, actually, dermatologists have been participating in the COVID mitigation, let's say, efforts. So obviously, the Skilarence efforts vis-à-vis dermatologists in the non-DMF countries, which are, in essence, in our case, Spain and Italy, have also been passed. So the way you have to think about Skilarence in those countries is that we really try to sharpen the pencil and the positioning because you are in front of a big product called methotrexate, which is there since decades. And the way we are now positioning the product is really explaining them that quite a number of people with psoriasis have a certain number of contraindications against methotrexate, and that actually Skilarence is a very good substitute to methotrexate in those patients that either cannot receive methotrexate, either incur a certain number of risks when they are initiated with methotrexate. So that is the line of our positioning in the DMF-naive countries. And of course, we'll renew those efforts once patients are back in front of the physicians and once our reps are back in front of their physicians, too.

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

Trung Chuong Huynh, Crédit Suisse AG, Research Division - Research Analyst [35]

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

And final question from me. Sorry to keep asking. But just a follow-up on Pete's question on Seysara. At full year 2019, it was -- you had over 40% unrestricted access. And now it's gone down to 30% to 35%. So what's happening?

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

Michael McClellan, Almirall, S.A. - Executive VP of Finance & CFO [36]

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

I think we always said 37%, 38%.

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

Peter Guenter, Almirall, S.A. - CEO, Chairman of Management Board & Executive Director [37]

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

Yes. It's around -- yes.

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

Michael McClellan, Almirall, S.A. - Executive VP of Finance & CFO [38]

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

And it's around -- a little bit shy of 40%.

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

Peter Guenter, Almirall, S.A. - CEO, Chairman of Management Board & Executive Director [39]

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

Yes.

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

Trung Chuong Huynh, Crédit Suisse AG, Research Division - Research Analyst [40]

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

Okay. So it hasn't gone down?

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

Michael McClellan, Almirall, S.A. - Executive VP of Finance & CFO [41]

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

No. No, no, no. We got what we had.

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

Operator [42]

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

There are no further questions at this time. I would like to turn the conference over back to Pablo Divasson for closing remarks. Please go ahead.

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

Pablo Divasson del Fraile, Almirall, S.A. - Head of IR & Corporate External Communication [43]

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

Thank you. Thank you, Nadia. We are now going to close our Q&A session. And with this, we will complete our conference today. We want to thank you for your participation. You may now disconnect.