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Edited Transcript of CLIN.L earnings conference call or presentation 27-Feb-19 9:30am GMT

Half Year 2019 Clinigen Group PLC Earnings Call

London Mar 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Clinigen Group PLC earnings conference call or presentation Wednesday, February 27, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Martin Abell

Clinigen Group Plc - CFO & Director

* Shaun Edward Chilton

Clinigen Group Plc - CEO & Executive Director

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Conference Call Participants

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* Amy Lucinda Walker

Peel Hunt LLP, Research Division - Analyst

* Christian Glennie

Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

* Max Stephen Herrmann

Stifel, Nicolaus & Company, Incorporated, Research Division - Head of European Healthcare Equity Research & MD

* Stefan John Hamill

Numis Securities Limited, Research Division - Director of Equity Research

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Presentation

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Executive Director [1]

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Good morning, everybody. Nice to see a full house. So it feels a bit like this is a monthly update because we seem to be doing quite a lot. So actually, it's quite a good time to take stock, I think. I and Martin will talk briefly about the last 6 months, but pretty quickly get to the future and the forward look. I think, I would -- I've spoken to a couple of investors recently. The common theme coming out from people is pretty stark now. So they're saying to me and us, this business looks completely different to where it was 2 years ago. And I think functionally that's true. So hence why, using the expression international platform you'll see as a theme to this presentation because I genuinely think we have now built a platform that should be capable of delivering sustained organic growth. The strategy, in some ways, hasn't changed an awful lot. We have refined it and I will go through some of that through the presentation. But I think executing on that strategy and building the right things, putting the right blocks in place is definitely happening now. All predicated on the mission of the business, right medicine, right patient, right time. So that's the quick agenda. I also say, I'll try and get through the front half with Martin very quickly and then leave as much time for questions after the business strategy and outlook is -- as we -- as time allows.

So the highlights. Left-hand side, the key financial KPIs, if you like. We will talk about organic growth. Entirely appropriate because of the things that we've added over the last couple of years. And I know from you and investors, it is a key question. So we should focus on it and we will give you more information on that.

I think importantly, cash flow, because people forget how cash generative Clinigen is, was really quite good in the first half. So it's a key KPI of the business. It will always be the key KPI of the business and that was really quite a good performance.

Another theme on the right-hand side will be balance, which is when you add Proleukin U.S. and fast-forward quite quickly, we have done a really, really good job of diversifying risk into the business. We're not really over reliant anymore on a product, on a region, on a company. And I think that's, again, a significant step forward in the last couple of years. So we started half 2 well, and I think we are well placed to deliver continuing on against the strategic aims. So pretty pleased, frankly. Martin?

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Martin Abell, Clinigen Group Plc - CFO & Director [2]

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Thank you, Shaun. Good morning. The financial highlights shown on the slide are adjusted to exclude amortization of acquired intangibles and products and other non-underlying items relating to our acquisitions. A reconciliation of adjusted results to reported results and the non-underlying items are included in the appendices. The growth in revenue and gross profits on a reported and constant basis are as disclosed in the January trading updates, and the EBITDA is as disclosed in the U.S. Proleukin acquisition announcement earlier this month.

Gross profit, which we view as the best measure of top line growth, increased 27% on a constant-currency basis driven by full period's contribution from Quantum, 3 months contribution by CSM and iQone and a strong performance from Unlicensed Medicines. Growth on an organic basis was 2%. Adjusted EBITDA increased by 24% on a constant-currency basis to GBP 41.8 million. The growth in EBITDA is lower than the growth in gross profit due to the change in business mix following the acquisitions.

Adjusted EBITDA on an organic basis increased by 8%, benefiting from a reduction in underlying overheads reflecting the continued focus on driving efficiencies across the business. Adjusted EPS increased by 9% to 23p, and the dividend has been increased by 11% to 1.95p.

Here, we have summarized the key components of our cash flow. Cash flow from operations was GBP 37.6 million after a GBP 4.2 million outflow from working the -- working capital. The increase in working capital reflects the effect of new early access program starting and acquisitions. We then deduct tax and interest, add noncash share-based payment charge to provide a free cash flow of GBP 29.3 million, underlying that Clinigen is a highly cash-generative business.

On the right-hand side, we show how we've used the cash that we generated. The main uses were GBP 119.3 million for the CSM and iQone acquisitions and GBP 23.2 million for product acquisitions. As a result of the acquisitions, net debt at 31st December 2018 increased to GBP 192.4 million, representing a net debt-to-EBITDA ratio of 2.2x. Net debt in the second half will increase following the completion of the U.S. Proleukin acquisition announced earlier this month. Leverage is expected to be around 2.4x on the completion of the U.S. Proleukin acquisition in April, which is the same leverage we had on the completion of the CSM acquisition in September. This leverage is expected to fall towards 2x by December 2019.

In summary, we've achieved a strong cash flow performance to go alongside the good P&L performance.

I'll now hand you back to Shaun, who will take you through the operational highlights. Thank you.

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Executive Director [3]

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Thank you, Martin. Okay. So there's a lot of information on this slide. It's almost it's like a historical Clinigen slide, lots of white space that we fill with lots of words, which isn't my preference, but there is, I guess, a reflection there's a lot going on. So let me just tell a couple of things by division.

So the actual gross profit in real sterling terms went up plainly. It went down with on an organic basis. So why was that? A couple of reasons. I guess one is obviously, it was really a tough comparator. We have talked about Foscavir and competition for a while, competition in 2 ways, generic, which we haven't seen yet, but also any impact of Merck's letermovir. We've always said there will be some effect. We said it wouldn't be material, and I think that's true. Essentially, the effect of letermovir in the half, you could localize to the U.S. and Japan. When you talk to the guys in the U.S. and Japan, certainly in Japan, it seems as if that has been a limited effect and it's coming back a little bit. So I think as we said before, it was always going to happen. It was a question of timing. Still stand by what we said before was that it's not material effect. And frankly, if you go back to the point about Proleukin U.S., one of the benefits of adding Proleukin is that on a pro forma basis, if you fast-forward quickly to including Proleukin, Foscavir will be less than 10% of the group's profit. And you think about that from even 3 or 4 years ago, that is a significantly different perspective. So we still work to look at protecting Foscavir. It's not gone away. It's not going away. We are looking at things like the HHV-6 indication and also, the Foscavir bags. So we are taking sensible steps to mitigate further issues with Foscavir. But we had flagged it.

And the other piece, frankly, is the U.S. So disappointed with what's happening in the U.S. outside of Foscavir. I think, again, Proleukin is the trigger to being able to take control of our own destiny in the U.S., and that's what we intend to do.

On the other side, there are some positives because the Commercial Medicines piece is of 3 areas, just to reconfirm. So acquired or may be owned is a better description where we own the global rights.

Licensed where we're using the platform to get involved earlier and take the marketing authorizations in parts of the world where the owner doesn't want to do it themselves. And developed is where we're utilizing the capability from Quantum to bring products through where we have some exclusivity over a period of time. So there are some good positive indicators in performance and for the future in both the licensed and the developed piece. And let's not forget that the acquisition of CSM and iQone will benefit this part of the business. So there's lots of good things going on. And I think the graphics on the right-hand side, again, point to balance. If you look at the gross profit by region, half-on-half, it is more balanced between essentially how I look at the world, frankly, which is in 3 unsurprisingly, because 3 things to be the magic number for Clinigen. But if you look at the Americas, Europe, Middle East and Africa and Asia-Pac, then you're seeing some balance. So I think there's good momentum for the future, good things going on.

Unlicensed, strong organic growth, double digit. You met James Winterman about 5 months ago, who's the gentleman I brought in to run Unlicensed. I would suggest he's having a good effect. Lots of different parts of this business, but essentially, you distill it down into 2 parts: the Early Access managed access piece; and then everything else, which is essentially global access, a long-term on-demand global access.

We're signing more agreements. We are interestingly winning more contracts. So the win rate, which has been historically pretty stable, has jumped by about 25%. And I think that's probably big for one factor, I think. There is more competition, to a certain extent. Lots of private companies claim to do increasingly what we do, but they can't. And it certainly helps I think when there's more people talking about the issues, talking about the unmet need. You have regulatory bodies and regions like the U.S.'s Right to Try and the 21st Century Cures Act, and it all helps. So I think we're doing a better job of executing, and I think people are starting to understand the overall offering better.

And I think the other important thing is Cliniport, the digital platform, significantly more users year-on-year, and it is responsible for a good level of activity. Simon Harper, who you saw at the Capital Markets Day, is putting the finishing touches 2- or 3-year business plan for that, so I'm pretty happy with the capability we're developing there. So I do think there's good momentum and continued organic growth in the future.

Clinical Services is an amalgamation of the capability now of CSM and CTS. So am I disappointed with CTS, didn't grow particularly, while it says 3% organic down, it was pretty flat. It's about GBP 100,000 difference half-and-half. Yes, I am a bit disappointed. However, it's under one management now, which is important, and I think there is good evidence of cross-selling. We are well underway, if not already realized cost synergies of that order. And Scott Houlton and I are very confident of the revenue synergies. There's evidence of it already. Importantly, it gives us a massively bigger client base. And I think the critical part for the forward-look is the quality of the revenue. The view of the pipeline and the increased profitability when you amalgamate the CSM piece with CTS.

CSM, when we acquired it, I know that there were some eyebrows raised at the multiple, and people said that might be a little expensive, sure. If you remember at the time, we historically, the number we had was 6-point -- $7.6 million of EBITDA in that calendar year '17 because their -- sorry, financial year '17 because their calendar year is their financial year. We'd said the trajectory they are on in October when we acquired it was they were looking like potentially doing about $9 million of EBITDA in 2018, and that was really the number we were looking at in terms of the basis of our valuation. Well, I'm pleased to say, it's going to do $9 million or $9 million-and-a-bit in 2018, which is significant growth year-on-year. They have -- what Scott looks at is what they call the book-to-bill ratio, and anything over 1 is a good indicator of the future. So 1.6 is pretty decent. So I think we highlighted at the time the forward order book and their view of the future predicted continued strong double-digit growth, and I don't change my opinion of that. So I think while CTS is the -- has been the core business, you put them 2 together, and there's lots of reasons to be very hopeful for the future.

So let's just pause for a minute because I just want to talk a little bit about what I mean by an international platform. Some of this we presented at the Capital Markets Day. There is no doubt that there are continued unmet certainly underserved needs in global pharma. So the platform that we've built allows us to engage early and gain insight and engage with senior level people in large and small pharma and biotech, get involved with the products at early phase and then follow that product, all those products, through the business. So we have exclusive access to all the world's most innovative medicines, pretty much most of the oncology drugs you've seen that are very high-profile that we've -- now we've managed in the last couple of years. And then we are able to help the medicine get to market earlier; potentially get to peak sales quicker, which is an interesting claim, but we'll see whether we can prove that in the future; and essentially, if you boil the world's pharmaceutical markets down into 2 variations, licensed or unlicensed, we can manage both. So we've got a huge bolus of clients now early, a large number of exclusive supply agreements that we can then transition into the Commercial Medicines piece.

And I genuinely think we're pretty much there in terms of what that compelling combination of capabilities is, if you are a pharma company with a logical partner. If you're a health care professional, we're increasingly becoming the go-to company if you can't find the medicines you're looking for. Big markets, strong growth potential, ability to follow the drug. You all have seen this before, which is the traditional life-cycle curve of a medicine.

The white piece above the traditional different shades of gray line is the Clinigen effect. The parts we've called out there are the parts where Clinigen interacts across the 3 businesses. So whether it'd be supporting IITs early, providing Early Access in the unlicensed state through to solving drug shortage and managing unlicensed markets, we deal with the challenges that industry will continue to face over the next 5 years. We are uniquely positioned.

So what does that mean? How can I show you that why I believe it's going to happen? So on the left-hand side is more of, if you like, raw numbers of both pharma and biotech companies and health care professionals we work with. The right-hand side, the graph I'd like to have shown you was top 25 pharma in ranking order with the 3 columns for Clinigen with the bits grayed out is to where we're working with. I can't show you that because it's probably not a good idea for lots of good contractual reasons. So I have to show you in different way, which is numerically.

So on the right-hand side, you have the companies in the top 25 that we're working with either across one part of Clinigen, 2 or 3. So 3 out of 25, which is what about 15%? We are currently working with. It is not an easy thing to do, but we're starting to demonstrate the power of the platform and starting to show a flow of companies that start working with us in one area and follow through to 2 and 3. So I expect those numbers to flow towards the top. And not just the top 25, if you look at the top 100, then plainly, there's other metrics to look at. But the top 25, by definition, are the biggest with the biggest pipelines and the biggest number of assets. So it's all sensible to look at that view first. But there is some evidence now that the model is working, the platform is working, and we're starting to see it flow through the business.

And this, I'm not going to spend too long on this, but it's worth just stressing again what does that platform look like? Where are we located? What do we have? I think interestingly, bottom left-hand side does show the balance of gross profit by region starting to change. Again, diversification and balance is the theme. The headcount is spread across the world, increasingly. We have now more people outside the U.K. than we have in it. So we're always accused of being a very U.K.-centric company. We just aren't. And I think the only point I've mentioned in the headcount by role is to show you that in order to develop the platform, you have to have multidisciplinary capabilities, not just about sales, but it isn't really about sales; it's about technical regulatory, logistics, supply chain, legal, customer service, and again, there's a good distribution of those functions across the headcount. So briefly each business.

And in terms of the vision for the 3 parts, that hasn't changed markedly either, I guess, unsurprisingly. In clinical services, we're shifting to a more multiservice mix. Comparator sourcing, which is the core business clients still want, but increasingly they want that as a bundle of services. They want it as part of a continuum of services. The other services are provided by CSM.

I can't stress enough that diversity of client base is really important so we've jumped considerably, and it was quite a neat fit. We were concentrating as Clinigen with comparators in mostly medium-to-large pharma. CSM focus very much on small specialty biotech so it's quite unique fit. And again, the key theme here is the quality of the revenue, we've always slightly struggled. CTS has performed a very valuable function, and we'll continue to do so. It generates cash, and it's a service that clients want, but we've always talked about visibility of pipeline being somewhat limited. We've always talked about exclusivity is not really there. So it's a step-change in terms of the service offering.

The sourcing capability that CTS brings is important, it really is. And we will and do start to deploy that across other parts of the business. And importantly, to demonstrate synergy, we're starting to feed into Unlicensed Medicines in a more meaningful way. So introductions have been made already from the CSM BD guys out on the road digging up opportunities. So I do think CSM itself will grow strongly. I do think in remarkably short period of time, 3 months. The business is under one leadership, is cross-selling, and we're starting to see synergies, and we'll continue that in the second half. And that's why I think we've made the comment that the business will progress, CTS will recover, but you need to think of it really as a broader offering there. Hence, why we call it Clinical Services.

Unlicensed Medicines. Fundamentally the first protocol for health care professionals were difficult-to-find, hard-to-access unlicensed medicines. We have been market leader. We continue to be market leader in that Early Access space, and there's been a strategy behind it, which is to expand the service offering. The iQone piece gives us MSLs, gives us visibility on the ground to talk to physicians about this service, which is important. Cliniport is the other important thing, making progress with that.

Forward-looking view pipeline is always the best indicator. So the lifetime profit value has increased decently. The number of products in the pipeline on the right-hand side, whether you're looking at Early Access or managed access or the global access piece is increasing. So I think I'm really pleased with what's being done in really bringing disparate parts of that business to be one business.

As an aside, one of the comments, which is entirely appropriate, is you've made a lot of acquisitions and the organic growth is mixed. So does that mean -- or what does that mean from execution going forward? It's still top of people's minds. And I completely understand and I completely agree with it. You saw a little bit of it at the Capital Markets Day, but there are 3 businesses and they've got 3 leadership teams each run by a very capable individual now. That's what started to change. So I think from an integration and execution perspective, the reason why I'm very confident that's going to happen is because it's being managed more efficiently, more directly, and those 3 guys do work together well. Underneath that, you got an operational platform, logistics, supply chain, legal, finance, HR, all the things you'd expect that are deployed across those 3 pieces, and it really is starting to come together. David Bryant joins the dots. So you've seen some of those people, you haven't seen all of them, but that's my comment about execution, is that the businesses are much more aligned and much more focused in the leadership and the management.

Commercial Medicines. As I say, we continue to do 3 things. So we will continue to look at, can I say we look at more Proleukins now rather than Foscavir. Can we move on from the Foscavir piece, but we'll continue to look for those. I think interestingly, the Proleukin piece, because of the nature of what it is and its importance almost within oncology therapy, almost has put us in a different shop window in terms of some of the incoming that we get, that we've had, I've had and David's had since the notice of acquisition. But we'll continue to look at them. So that acquired or owned piece, we're always going to look at, but the licensed piece, we'll increase the number of agreements. We are looking at more BMS contracts or like BMS contracts, like Eisai contracts. And we are continuing to focus on bringing products through the pipeline from that Quantum technology, glycopyrronium has done very well. We've added another indication to it, and we are looking to bring through the next product in the pipeline, which could be in the same order of magnitude financially this year.

So again, focus and integrated strategy using the platform. Not sure I necessarily need to go through this, but in case anybody has been living under a rock for the last 2 weeks, we acquired a product called Proleukin. So here's a refresh of what we acquired and what it does. But I think it's worth just reiterating the point about the U.S.

Plainly, it was a sensible step to partner in our formative years. And I was somewhat looking for a trigger to decide what to do with the U.S. ourselves, and that trigger is the rights to Proleukin U.S., plus the acquisition of CSM. So that's what we're going to look to do. We're going to look to take control of our own destiny, and we're going to look to transform our own U.S. operation, and the trigger for that importantly is Proleukin. So in the next few months, that's what we'll be working towards. Doesn't actually require that many people to support Proleukin, Ethyol and Totect. But the interesting about those 3 medicines is they're all geared towards oncology or oncology support, so it's similar centers, similar physicians. And actually, if you look at Prometheus, who were the previous U.S. rights holders, they actually only had about 12 people supporting Proleukin in the U.S. So it just shows you don't need that many. It's not hordes of people. It's a very focused product and there are very specific targets for it, which allows us to build our own capability. We're looking at recruiting our own MSLs anyway, potentially some people come with Proleukin. Can't force them. We are going to offer them jobs. They've been working on the product for a while. They seem to love the product, and plainly, we love the product. So we'd like to think they will be a good fit there. So I anticipate, in fact, it will bring people over with it, so we got to kick start to be able to do this ourselves. So that's why it is significant.

So I know the word transformed is used a lot. I genuinely feel like we have gone a long way to transforming the business, and why do I say that? Look, we plugged the gaps in the platform. We have invested significantly in the infrastructure that drives that platform. We will focus on organic growth. We've given you the numbers. They are mixed. I accept that. That doesn't change the focus on it, and it doesn't change the capability of the platform going forward to deliver it. So I'm actually really pleased with what we've done, I'm really happy with the team, and I think we are well positioned to deliver another year of progress. Thank you. Over to you.

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Questions and Answers

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Executive Director [1]

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That was quick, Amy.

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Amy Lucinda Walker, Peel Hunt LLP, Research Division - Analyst [2]

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It's Amy Walker, Peel Hunt. A lot of people have asked me around these 80 combination trials from Proleukin that you mentioned. Are there any that you would highlight as being particularly important or meaningful to the revitalization strategy? And what sort of time line do you expect those data points, the meaningful ones that is to start coming through?

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Executive Director [3]

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Yes, they're really good questions. I'm not sure I'm going to give you a concrete answer at this point, but that might not will be a surprise because it's probably just slightly too early. We will answer those questions in short order but plainly, it's pretty early days. We've got a view, but we do need to qualify that view as we take control of it. So I'm not -- I'm just heartened by the number of trials. And it's almost a breadth of activity. So for me in the short term, that's going to benefit numerous parts of Clinigen. It's difficult to entirely predict what the effect of any of them might be by definition. So I'm not going to give you a specific answer, except I think that's the step-change for Clinigen though is that it's an asset and a product that's being actively studied, which is departure really, and certainly over time and in the relative short term, we will answer those questions, but we have to do with a bit more evidence than sort of feel at this point, we got a view but it is early.

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Amy Lucinda Walker, Peel Hunt LLP, Research Division - Analyst [4]

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Okay, one more before I hand it over to somebody else. I think you mentioned that you still expect the single biggest pipeline product from QP to come out this year maybe. I noticed in the press release that you mentioned that there was a managed access program is likely to be an important driver of operating profit over the next few years amongst the -- I think it was the 11 from the first half of this or from the second half of this year, this one is name checked. Can you give us any more color on what that is? What area it's in...

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Executive Director [5]

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No, not at this point.

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Amy Lucinda Walker, Peel Hunt LLP, Research Division - Analyst [6]

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Nothing?

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Executive Director [7]

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I'd love to be able to, but it's quite -- as you can appreciate, it's quite commercially sensitive, but I'd just think it reinforces the point about why the model fits together and how it works, but I will answer that at some point, but it is a little...

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Amy Lucinda Walker, Peel Hunt LLP, Research Division - Analyst [8]

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Can you say whether there's anything in that agreement because I'm sensing Early Access is one. Is there anything to keep that within the stable if the product transition...

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Executive Director [9]

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Potentially, yes.

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Max Stephen Herrmann, Stifel, Nicolaus & Company, Incorporated, Research Division - Head of European Healthcare Equity Research & MD [10]

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It's Max Herrmann from Stifel. Just a question on dexrazoxane franchise and Cardioxane, obviously, it's kind of one of the programs where the Article 31 removal that we expect to maybe see a bit of rejuvenation from. Clearly, that's not coming through in these results. So my first question is kind of why? And what can you do about that?

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Executive Director [11]

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Yes, I mean plainly dexrazoxane, Savene, Totect and Cardioxane. So the Totect part plainly benefited last year on a comparator basis because of the drug shortage in the U.S. So that's not in effect this year, so the comparator is different. We are looking at with Totect -- the key to Totect, frankly, in the U.S. is more indications because at the moment, it's only indicated for extravasation which is a smaller market than the cardioprotection piece. So we are looking to add the cardioprotection indication to Totect. It's going to be 2020, but I think at that point, if we're able to achieve, it would be the only diabetes product in the U.S. with 2 indications. So that's quite important. The Cardioxane Savene piece, Savene trots along and does a decent job of incrementally growing Cardioxane. It is still somewhat saddled by the Latin American piece because plainly, Latin America or particularly Venezuela isn't any particularly good place at the moment, so we are affected by that. We're still looking at growing the product on a broader basis post Article 31. It takes a little bit of time. But undoubtedly, some of the impact to that, Max, is the Totect piece and it was artificially inflated by the U.S. drug shortage, but we're still working on beyond post Article 31 communication piece.

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Max Stephen Herrmann, Stifel, Nicolaus & Company, Incorporated, Research Division - Head of European Healthcare Equity Research & MD [12]

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So the other aspect obviously, you've talked about Foscavir. I'm just trying to understand a bit more about the Commercial Medicines business. Let's call it the old link business had a phenomenal first half last year. So you've got very tough comparator period, but what's going on in that -- in this sort of, I guess, the emerging market element, the South Africa and Asia part of that business? And what's the outlook for that business?

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Executive Director [13]

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Yes, interesting question. So I sat down with Yoshi Nakamura, unsurprisingly the general manager of Japan, about 4 weeks ago. And if that's a marker of Asia-Pac, which is partly is, he's got a really good 3-year business plan. He is working on licensing some products into Japan. So I think the same is true of Singapore. Australia actually has been performing pretty well. It had some tough times in the last couple of years. But actually, it's starting to get back on its feet. So -- and I think we will look at areas like South Korea, Taiwan, where we've traditionally had a sort of arm's-length relationship with that pretty compelling markets to get into. Again, I think we've got ideas about how we can do that in a really low cost way without dropping a huge amount of infrastructure into it. So I actually think there's quite a lot of good things going on in the regional component. Africa continues to perform well. So I think they've all got strong potentially future looking business plans.

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Stefan John Hamill, Numis Securities Limited, Research Division - Director of Equity Research [14]

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Stefan Hamill from Numis. Quite a few questions. So you spoke about the platform having critical mass, and I guess, you've just seen the acquisition of Proleukin. I'm sort of interested in how the services platform drives your products business. Is it fair to just say that you spot most of the opportunities to acquire products from within your services business? I guess part 1. Part 2, does that -- the services, the channel position that you have the trusted position there, does that help vendors pick you guys as the eventual acquirers for these products?

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Executive Director [15]

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The answer should be yes and yes. I think we're in a much better position now than we ever have been to be able to do that. So that's one of the positive effects, I think, of the change in leadership in the last couple of years. That's one of the things I've been focusing on. If you look at James Winterman for minute, who runs the Unlicensed piece, was a client, worked for big pharma, so understands market access in the big pharma world. So he looks at it in a way it should be looked at, not just as a pure-play service business. So I think and Benjamin plainly, who runs Commercial, came out with the regions. So you saw it come out in the 2 different ways that needs to be done, so you can take a broad view, and you can understand what global pharma is thinking about and what regional pharma is thinking about and put the 2 together. But I mean David Bryant talked a lot about this in the Capital Markets Day and you just summarized it, which is the jewel in the crown, if you like, should be what the Early Access to managed access piece, because you're in early, you've got an exclusive agreement and you've won a very few external parties touching that product. If you can't turn that into something longer term with our platform, then we really wouldn't have executed properly. So that's where we're at I think. Now we're in a much better place to be able to do that.

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Stefan John Hamill, Numis Securities Limited, Research Division - Director of Equity Research [16]

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Just sort of following on from that. Does post-CSM, does Clinical Services actually add something into the mix there, particularly in the IIT area?

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Executive Director [17]

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Yes, I think it does. I think it's and plainly, the proof will be in some of the stats because I'll try and refine those stats and KPIs further as we go, but the green shoots are already there. There is now opportunity being handed from interactions with CSM into the unlicensed piece. So it's happened out at least 3 occasions in the first 3 months. Because it's the same physicians working on the IITs that also want the medicine from the Early Access perspective and it's often the same product. So I think that's the piece that sure is to be proven, but I think it's obvious that's the benefit. That's the reason why rightly, I'd spend quite a lot of time when we made the acquisition of CSM talking about that point because people said, well, is this just a tactic to shore up CTS? That's why it's not because it's an adjacent part of the clinical trial scenario, but it feeds into the Unlicensed piece, and we're starting to see that.

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Stefan John Hamill, Numis Securities Limited, Research Division - Director of Equity Research [18]

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Okay. And you clearly highlighted the critical mass on the platform. And I guess we've seen the U.S. come through, I guess, a lot sooner than we previously envisaged. But I guess from the sort of U.K. perspective, we were a little bit worried about execution versus pushing a lot of U.K. companies go to the states and some of them have been successful.

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Executive Director [19]

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Yes.

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Stefan John Hamill, Numis Securities Limited, Research Division - Director of Equity Research [20]

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And can you just give us some comfort because it seems like there's 2 phases, transitional phase and then what to do next. Can you give us some comfort in the execution risk?

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Executive Director [21]

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Yes. I mean, I think in the U.S., we've had the unlicensed team that runs the Early Access, managed access piece for a long time. We've had it even before we acquired Idis in a very small way. So that's been long established. The CTS business was the first piece of Clinigen into the U.S. And plainly, with CSM, we've now got 200 people in the U.S., warehousing operations and capabilities. So we've gone from about 40 people, 240 like that in the services piece. But the CSM business is long established anyway. So those 2 parts are pretty stable, frankly. The new bit, if you like, is the Commercial Medicines piece. But as I said, it's only a handful of people. So even with -- and I think people wouldn't always see this, even if you look at Totect and Ethyol, Cumberland might be the partner, but we're still the marketing authorization holder, not them. So we deal with the FDA. We're responsible for the regulatory upkeep so that piece still has always been there. So really, it is if you wanted to be simplistic about it, the sales marketing distribution piece, that's the piece we built again as well as the MSL piece. So it's not very many people and even with Proleukin, if we take some of these people over, they've been working on the product for a long time. So they might new to Clinigen, but they're not new to the product. And of course, if you through them extra products to work on, it's beneficial for them. So I'd say the point about additional risk, but ultimately, the majority of the people are localized to Malvern and Yardley in Pennsylvania, which are about 40 miles apart. So we've got critical mass, so if you want to drop people into it at least they are coming into something that's sizable, rather than anyone based in the middle of nowhere. So I think we've got the wherewith always. If we try to do without any of that then it does become difficult because you're recruiting a small number of people in an isolated place. Well, actually, that's not the case now.

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Stefan John Hamill, Numis Securities Limited, Research Division - Director of Equity Research [22]

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And then just one on Cliniport and then one quick financial one. And on Cliniport, is it too early to say that there's some recurring traction here? It looks like the activity has picked up quite meaningfully.

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Executive Director [23]

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Yes. Some of the feedback from the Capital Markets Day on the presentation that Simon gave was interesting. It wasn't -- people were saying it was okay. Now it's slightly unfair frankly, because I said 15 minutes can you talk about how you transform Clinigen into a digital animal and by the way talk about Cliniport, it's quite a hard gig. I think it was definitely the right resource to bring in to run it because it needed that specialist attention and I think there's no getting away from the fact that now it's got that attention, we are seeing a pickup. I think Simon is working very hard to genuinely turn it into the Amazon piece, but there is broad momentum for sure. Yes?

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Stefan John Hamill, Numis Securities Limited, Research Division - Director of Equity Research [24]

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I mean, you mentioned the sort of business plan, 3-year plan is coming into place. Will you sort of be setting market KPI targets at some stage from that?

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Executive Director [25]

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Yes.

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Stefan John Hamill, Numis Securities Limited, Research Division - Director of Equity Research [26]

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And then just on financials. So the CapEx in H1 was pretty high versus, I guess, full year expectation. Was there something lumpy in there, specifically in H1 or...

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Martin Abell, Clinigen Group Plc - CFO & Director [27]

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The only thing that skewed it towards H1 is we had to spend some money on serialization. They came into force in February and that completed during H1 and you won't have that in H2. Beyond that note, there's nothing specific in there that brings to mind.

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Stefan John Hamill, Numis Securities Limited, Research Division - Director of Equity Research [28]

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Are you still confident that that's sort of a rising peak that will then drop off as the ERP spend goes away?

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Martin Abell, Clinigen Group Plc - CFO & Director [29]

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Yes, agree, as we talked about it before. The main bit that's elevated in the last year or so is ERP, and that's scheduled to complete during 2019. So you'll see that tail away as you go into the next financial year.

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Stefan John Hamill, Numis Securities Limited, Research Division - Director of Equity Research [30]

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So will you start amortizing that piece from FY '20. Is that the plan?

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Martin Abell, Clinigen Group Plc - CFO & Director [31]

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It will start amortizing during FY '20, agreed, and during calendar year 2019, yes.

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Amy Lucinda Walker, Peel Hunt LLP, Research Division - Analyst [32]

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I just have a couple left, if I may. I wanted to ask Shaun about your appetite for further acquisitions now.

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Executive Director [33]

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Am I loud, Amy?

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Amy Lucinda Walker, Peel Hunt LLP, Research Division - Analyst [34]

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Well, you keep signaling your cash generativeness and highlighting the expectation 2x leverage by the end of the year. I mean, is that a signal that you have significant appetite for more acquisitions very short term?

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Executive Director [35]

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No, that's probably hopefully a point to instill investors in confidence that we still are cash generative. We are looking to pay that debt down. We will, of course, and I suppose the evidence of the Proleukin reaction would support it. If we can find more assets that fit the model, that they're going to drive growth then, I think people would expect and want us to do those. But they take a long time to incubate because even Proleukin has taken 4 years, Ethyol took 4 years. A bunch of these things have taken a long time, which is why you have to keep looking. From a corporate perspective, I don't see anything. I think it's an entirely reasonable expectation for people to say, look, if you say you've got platform and you put the parts together, then you need to make them work and I get that. So it's more, I think, reassurance as opposed to a signal that we're going to bring anything more in, but we'll continue to look at assets, for sure.

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Amy Lucinda Walker, Peel Hunt LLP, Research Division - Analyst [36]

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And does the number of assets that you're looking at today significantly different from where the number was 6 months to a year ago?

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Executive Director [37]

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No, not necessarily. I'm happy with the level of activity. We're looking at the right number, but I go back to my point, which is, it's really, really difficult to predict when or if they come on. All you can keep doing is keep pitching for them and keep working away and it will pay off like as did with Proleukin. I think that may change in the next couple of years because like I say, I do think acquiring something like Proleukin means we've acquired 2 from Novartis, 2 from AstraZeneca, proven to be a very good divestment partner and I think Proleukin, just because I say about the interest level in it certainly potentially put us on some radars. So I think it might make it slightly easier to identify the opportunity than bringing in any plainly dependent, but I do think that it may change, yes.

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Amy Lucinda Walker, Peel Hunt LLP, Research Division - Analyst [38]

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And then on the Bristol-Myers deal in South Africa, I think I noticed there was a bit of a delay mentioned. When -- firstly, do you think we will see it move the needle at some point? And if so, what's the time line for that?

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Executive Director [39]

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Yes. So absolutely, and I'm not being flippant, the regulatory authority in South Africa is shot, was shot, bolted with a padlock on it literally closed down because of everything that's going on politically in South Africa. So it's an entire delay outside of our control. It still will go ahead. It's just delayed. So we expect it to kick in a bit late in 2019, but it's still very much going to happen, yes.

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Amy Lucinda Walker, Peel Hunt LLP, Research Division - Analyst [40]

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Okay, and very last one. You mentioned quite a number of growth rates for various acquisitions and parts of the business, I may have missed it, but Quantum Pharma growth, are you able to tell us what the growth on that acquisition is at the moment?

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Martin Abell, Clinigen Group Plc - CFO & Director [41]

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Getting harder to pull out Quantum versus the wider group because we've absolutely put their unlicensed into our unlicensed division and their licensed into our license, but in terms of direction of travel, if you remember, last year, I think we said it was a GBP 10.1 million EBITDA contribution for the 8 months annualized that as well ahead of the year before when we bought it and there was GBP 1 million-plus of cost synergy in there. If I look at this 6 months, they've stepped up again nicely on that front, and that's the Commercial Medicines portfolio and particularly Glyco. Glyco has just got a new indication, which I think will step up Glyco again, it will make it easy to internationalize that product. And then the second piece that will come through during -- as we said in the Capital Markets Day during the calendar year 2019 is that largest products sitting in that pipeline, which will be larger than Glyco, and that will be a very meaningful step up again for Quantum. So if we look back on that acquisition at this stage in terms of what it's doing there and what we can see the pipeline near term for it, it's doing very well.

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Christian Glennie, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [42]

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Christian Glennie with Stifel. Just on Proleukin and just in terms of managing expectations and setting it in the right context in terms of the performance of that product, I think you've mentioned obviously you're round about sort of $60 million product in U.S. A context for how that's been tracking in recent months? And how we should then interpret the performance of the product over the next 12 months or so?

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Executive Director [43]

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Yes, I was asked the question in a slightly different way in the last couple of days which is can -- are you going to revitalize it and do a Foscavir on it? The answer to that is no. So you can't expect it to grow 3, 4x. The point about because if you remember, we acquired the Rest of World rights where the sales are single digit millions. We always said part of the price was the U.S. because it is the dominant part of sales. That $60 million is pretty stable, frankly. I think we might be able to improve a little bit on the overall profitability of the product. It's around the usual 80s percentage gross margin. We normally do better when we own the medicine, so that's why -- that tells me I think we probably can. The reality is when you've got the entire rights, so you can look at a number of things. So we can manage the unlicensed markets more effectively. We can certainly control the medicine more effectively and as they do better from a profitability perspective. The one piece we will look at, and I think David even said that this on the day of the deal announcement, is that there are what you might call revitalization activities like the low-dose formulation interest because that then potentially mitigate some of the side effect profile of Proleukin, which can show side effects of the dose -- high doses level. And we've had some incoming about people want to collaborate on that. So because again, that type of thing we wouldn't do ourselves, but if there is a demand, and we think there might be, then we would look to develop something like that. So I think there are certain things we will do, but in the context from looking at the notes I've seen and where you guys are modeling it, I think expecting it pretty -- to be pretty stable at $60 million is probably a sensible approach. I don't think there's any cause to significantly inflate those sales at the moment.

Thank you, ladies and gentlemen, for your time.