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Edited Transcript of HIK.L earnings conference call or presentation 15-Aug-18 8:30am GMT

Half Year 2018 Hikma Pharmaceuticals PLC Earnings Call

London Dec 13, 2018 (Thomson StreetEvents) -- Edited Transcript of Hikma Pharmaceuticals PLC earnings conference call or presentation Wednesday, August 15, 2018 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Khalid Walid Hussni Nabilsi

Hikma Pharmaceuticals PLC - CFO

* Said Samih Taleb Darwazah

Hikma Pharmaceuticals PLC - Executive Chairman

* Sigurdur Oli Olafsson

Hikma Pharmaceuticals PLC - CEO & Executive Director

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Conference Call Participants

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* Amy Walker

Peel Hunt LLP, Research Division - Analyst

* Emily Field

Barclays Bank PLC, Research Division - Research Analyst

* James Alexander Stewart Vane-Tempest

Jefferies LLC, Research Division - Senior Equity Analyst

* James Daniel Gordon

JP Morgan Chase & Co, Research Division - Senior Analyst

* Max Stephen Herrmann

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

* Peter Verdult

Citigroup Inc, Research Division - Director

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Presentation

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Said Samih Taleb Darwazah, Hikma Pharmaceuticals PLC - Executive Chairman [1]

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Good morning, everybody. Welcome to our interim results presentation. I am obviously very happy to be here this morning with Siggi, Khalid and the rest of the Hikma team to share with you these strong set of results that we have today.

As you know, as we've been saying, we've been working very hard the past few years, adding all sorts of talent and, of course, great leadership to the team as well as doing other strategic things and I -- we're happy that this is falling into place now, and you are starting to see some of the fruits of all of that, of this labor.

Of course, Siggi's arrival as CEO has helped us to sharpen our focus on our key challenges and has reinvigorated many of the strategic initiatives underway.

So now, I am going to pass it over to Siggi and Khalid, who will go through the results. And then we'll take questions that you have.

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC - CEO & Executive Director [2]

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So good morning, everybody. Welcome. Great to see you all. Thank you, Said.

Maybe before we get into the results, and of course, I know you're excited about that, I want maybe to tell you a little bit about my experience. It's been almost 6 months since I joined Hikma. Since then, I have visited most of the principal sites at Hikma. I met management around the world. I've reviewed the business operation, visited plants, reviewed the pipeline, reviewed the opportunities. And I have to say, based on what I've seen, I'm very excited about the business. And it has confirmed my belief when I last time met you, I was a guest of honor in the results in March, but really, it has confirmed my belief in the company, and what we can do, and I hope that the results you're seeing today reflects that also, that this is a beginning of a great journey we are taking. The results are really good, but it's only the start. We have a lot of work to do, but it's an exciting start of what we do.

Today, I will give you a snapshot of where we are today and the little bit of the short-term vision towards the end of the year. But in terms of the long-term vision, the overall strategy and what we are going to do, you have to wait to November. We are going to have a Capital Market Day on the 8th of November, where we will highlight our strategic initiatives going forward, if we are going to rejig a little bit where we are going to focus. But 8th of November, we will have more information for you around the business.

But as you can see, the first half results are very good. We took off on a great start. Group revenue was $989 million, up 11%. Core operating profit was $214 million, up 22%, and core operating margin was 21.6% compared to 19.7% last year. I think earnings per shares were up, and we also have a very healthy cash flow from the business.

Looking at the results by segments, you see that we -- again, we benefited our diversified business, to have 3 businesses to grew. Our Injectable business continued to be the exceptional good -- exceptionally good. And it's still contributing the lion's share of the profit, but I am really, really pleased with the contribution from Generic business improving, it's now 12% in the first half versus 5% at the end of last year. So there is a significant improvement in our U.S. Generic business.

But let's take a little bit further look into each of the businesses, so starting with Injectables businesses on Slide 5. This year, we increased our market share by volume by 3 percentage points, remaining the third largest manufacturer of generic injectable products in the U.S. And our market share by value has remained relatively stable, because the cost of our product is relatively low in comparing to the brand companies.

We leveraged our strong position in one of the leading -- as one of the leading suppliers in the U.S. hospital segment, to drive volume growth, launching new products and benefiting from demand from our marketed products. We saw a big uplift in demand from hospitals for pain management products, and we were able to leverage the scale and -- because of the scale and flexibility of our aspiration to meet those demands.

I think this is a very important slide to understand but this is not a one-off event that happened in the Injectable business, but the strength and the quality of the earnings are very strong. We have lagged for some time now increasing competition on our top products driven by new entrants. We saw a very meaningful loss -- meaningful erosion in revenue from these products since beginning of the year. We expect this trend to continue into the second half.

We have been able to offset this with revenue from other marketed product, but also, very importantly, from new launches. Since the start of the year -- since the start of last year, we have had more than 20 new product launches. On their own, most of these product launches are very, very small. But combined, in first half of the -- in the quarter, they contributed in second quarter $10 million in revenue. So on a yearly basis, this is quite significant contribution to the Injectable business.

Having broad product portfolio is a real asset. Particularly when coupled with flexible manufacturing capacity, we are able to prioritize production if market dynamics change, which can turn what was a small opportunity into a large one, as we have seen in the shortages in the market today.

Our flexible manufacturing facilities is another differentiator for our Injectable business. We have 2 large manufacturing sites: one in the U.S., and the other one in Portugal, both of which are FDA-approved. Having 2 sites gives us flexibility. We can be strategic about which site we use for which product, depending on cost and demand. We can also prioritize certain products if market dynamics change, as we did this half to respond to market shortages.

This time last year, we announced a significant capacity upgrade we were making at both sites. Most of this capacity is now online, and we are just putting the finishing touches to our new high containment facility in Portugal, which we expect to be operational at the start of next year. We are now able to produce almost 1 billion injectable units per year.

In Portugal, we had expected initially to use our new capacity for contract manufacturing until we had significant demand for our own products. However, this has not been the case. We are seeing so much increased demand for our products in all 3 of our markets, which is leading to a very high utilization of the facility.

I think this slide tells a great story about our main Injectable business and the value we bring to patients in the region. We have now launched Remsima in 6 market and expect to launch in 2 further market later this year. The total MENA market size at the moment is only around $45 million for this product, but we hope to take a material share of this market over time.

One of the exciting things about our launches today is that we have found that we are bringing this important product to patients that could previously not afford the product. A great example of this is in Morocco. We launched in Morocco at the start of 2017. At the time, around 7,000 vials were sold per year. In 2018, we are expecting the total market to expand to 11,000 vials in that market. While it's important to remember that the total market size in Morocco is small, only about $3 million, this example demonstrates how we grow our business, and we aren't limited to taking market share from the originator.

If we turn our view to the Generic business on Slide 10, we have set out an overview of some of the market dynamics in the U.S. generic industry. You can see on the left, that we have some positive signs for the generic industry. This half, across the whole market, we are seeing an increase in the growth rates for units sold, and we are also seeing some small reduction in the price reduction.

Recently, a lot of people have been asking, have we reached the bottom of the pricing cycle in the U.S.? And honestly, I think we don't know yet. I think there is improvement. We saw improvement in the first half. But we need to take a longer-term view if this is sustainable throughout this year and into 2019.

For example, the graph on the bottom right shows a significant uptick in product discontinuation by the largest generic manufacturers. Generally, companies only decide to withdraw an ANDA if they are sure that the product will never be profitable again. While it doesn't make a difference if you go from 17 manufacturers to 16 manufacturers, it really doesn't affect the market, it's a sign that our competitor are rationalizing their portfolios, which could bring an opportunity for us down the road. However, on the other hand, the FDA has continued to have a high rate of monthly approvals, often on products where there already are several manufactured. And just now in July, we have seen FDA approve 121 ANDAs in total, thereof 96 final approval of ANDAs.

So as I've always told investors, I'm focused on things that I can control. There's very little I can control what my competitors are doing. Our performance in our Generic business in the first half shows that we are starting to benefit from the commercial and operational improvements we have rolled out across the businesses over the past couple of years. But we have a lot more to do given the competitive trend we covered in the previous slide.

Slide 11 provides an update of where we have been focusing our effort since the beginning of this year. Firstly, the team has done an excellent job in driving demand for our marketed products, either through new businesses or by increasing volume. This has been supported by big improvement in our service levels, which has resulted in significant improvement in our ranking with our key customers.

Secondly, we have remained extremely focused on optimizing our cost structure. Sourcing savings and the decommissioning of Eatontown and Memphis facilities are underway and are on target to be completed by year-end.

Finally, we have been working hard to expand our product portfolio through new product launches and product reintroduction.

Rebuilding our pipeline has also been one of the highest priorities

and that is important for the long-term growth of Hikma. Last year, we strengthened the management of our Generics R&D program, hiring a new head of R&D. He undertook a detailed review of the Generic pipeline and decided to discontinue number of products, which we talked about earlier this year. They simply didn't meet our return on investment criteria, as we previously discussed.

To further strengthen our R&D capability, we hired our Chief Scientific Officer, also in the beginning of the year. The team is now focused on bringing the current project in the pipeline to market as soon as possible, as well as adding new opportunities.

In 2017, we only added 7 new products to the pipeline. This is too small of a number. This year, we have already started 9 new projects in the pipeline, and I'm hoping this pace will continue throughout this year. Building a differentiated pipeline is essential to ensure sustainable growth in both revenue and profitability over the medium and long term.

Turning to our Branded business. On Slide 14, we highlighted some economic indicators for the MENA region. Over the past few years, our business has faced significant currency headwind, particularly with the devaluation of the Egyptian pound. But this year, we have seen currency stabilized. As you would have seen in our press release, there's a very relatively small difference between our reported and constant-currency results this half. You may wonder what's the relationship between oil prices and pharmaceutical, and to be honest, I sometimes wonder the same thing, but in some of our largest market, the oil price has a large impact on the economic sentiment. And while there might not be a direct correlation, when the oil price is up, often our business does a little bit better.

Across the 3 businesses, as I've stated -- as I stated before, I am most focused on improving profitability. Anyone can grow top line, but it doesn't matter if you're not seeing a growth in the bottom line. In MENA, we started a review a few years ago of our manufacturing facilities. Working with advisers, we undertook an analysis of our facilities in Jordan, and advised our team how to roll out the analysis across the other facilities in the region.

We are still working through this project, and it will take time to see the full benefit. But I'm very pleased with the results that we have seen in Jordan so far, with overhead and unit cost both significantly down.

We continue to be the partner of choice in MENA. Exactly 1 year ago, we expanded our partnership with Takeda, adding attractive product to our portfolio, alogliptin, azilsartan and dexlansoprazole, in fast-growing therapeutic categories. Already, we are starting to see contribution from these products.

We also have undertaken the necessary upgrades to enable us to manufacture these products and preparing filings to be submitted to the regulatory authorities across the region. We signed our first partnership agreement with Perrigo during the half, giving us exclusive right to more than 30 consumer health products. While the current products are exciting, I'm very pleased that we will have the first right of refusal to their full range of OTC products in MENA.

So quality has been the heart of Hikma since the company was formed 40 years ago. Our commitment to quality has not changed during that period. Having high-quality operation is critical to being successful in this business, but it isn't easy and requires an unwavering commitment.

Over the past year, we have had 5 FDA inspections at our manufacturing facilities in Cherry Hill, Columbus, Eatontown, Thymoorgan and Portugal. I am very pleased that the FDA had 0 critical observations.

As we move forward, I'm asking our team to continue with the progress we have made in the first half. It is not revolutionary. However, we are seeing the benefit of the operational and commercial improvements we are making.

I look forward to providing you with more complete strategic update in November. And with that, I hand over to Khalid to go through the financial results.

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Khalid Walid Hussni Nabilsi, Hikma Pharmaceuticals PLC - CFO [3]

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Thank you, Siggi. Good morning, everyone.

I'm pleased to report that the business has achieved a very strong financial performance in the first half, delivering double-digit revenue and profit growth. Revenue was up 11%, reflecting increased demand for our market portfolio and a good contribution from new product launches.

Core operating profit was up more than 20% due to strong sales and a reduction in the R&D.

Reflecting the group's strong performance this half and the board's confidence in the outlook for the remainder of the year, the board has recommended an interim dividend of $0.12, up from $0.11.

This slide highlights the performance of our 3 business segments. Our global Injectable business, once again, has delivered a very strong performance, with revenue up 14% and operating margin of 42%, demonstrating the resilience of this business.

In the U.S., which contributes around 75% of revenue, sales were up 10%. We continue to see competition accelerating on some of our top products, glycopyrrolate, neostigmine and thiotepa. However, this was more than offset by increased demand for other products and recent product launches. In particular, we saw strong demand for our pain management products due to a market shortage.

Our MENA business grew by 49% in constant currency, reflecting a strong performance in Saudi Arabia, our largest market, and a significant increase in sales of our biosimilar product, Remsima.

Our European business was up 3% in constant currency, reflecting the contribution from recently launched products.

Our high margin reflects strong sales in the U.S., improving margins in the EU and MENA, as well as continued focus on efficient operation, which more than offset additional cost associated with strengthening the management team in the U.S.

As for the Generic business, it was $338 million in sales, up 11%. As Siggi discussed, we are starting to see the benefits of the commercial and operational improvements we have rolled out over the past year, leveling us to offset continued price erosion.

Generic core operating profit increased to $30 million, reflecting an increase in sales and a reduction in R&D spend. As we rebuild our pipeline, we expect the R&D spend to increase.

As for our Branded business, it was up 4%, and on constant-currency basis, Branded revenue increased 5%. Except in Sudan, which is a relatively small market for us, we have seen currencies stabilize.

We saw strong growth in our 2 largest markets, the GCC and Egypt. Egypt was up 31% in constant currency, driven by strong underlying market growth and improvement in product mix and new launches. In Algeria, our third largest market, the market continues to be challenging. However, we expect our performance to improve in the second half as we resume manufacturing in our upgraded general formulation facility and start manufacturing in our newly acquired facility.

In constant currency, core operating margin increased to 19.4%, up 100 basis points, reflecting the increase in gross profit, partially offset by increase in sales and marketing expenses as we invest in our team to drive future sales.

During the half, we continued to invest in our facilities and capabilities as you can see on this slide. Just over half of our CapEx was invested in the U.S., where we continue to expand our capacity and add new capabilities. We are building a dedicated oncology facility in Algeria, which we expect to be completed next year. This will be the only dedicated oncology facility in Algeria. During the half, we also upgraded 2 facilities in Algeria and Jordan. In Portugal, we are finalizing construction of our high containment facility, which will be completed around the end of the year.

As for the R&D and as discussed, core R&D decreased during the half, following the review of our Generic pipeline. R&D expenditure was around 5% of group revenue, down from 7%, and we expect investments in R&D to increase in the second half.

Group operating cash flow was $185 million, returning to more normalized levels, following exceptionally high cash flow at the end of the first half last year.

Our balance sheet remains very strong, and net debt decreased to $500 million, and we maintained our healthy leverage ratios, ending the half at just under 1x net debt-to-core EBITDA.

Finally, the outlook for 2018. As highlighted through this presentation, we have had a very strong start to the year. We are pleased to be able to raise full year guidance for both our Injectable and Generic businesses and reiterate our guidance for our Branded business. Our net finance, CapEx and tax guidance is unchanged.

We are now happy to answer your questions either in the room or on the phone.

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Questions and Answers

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James Alexander Stewart Vane-Tempest, Jefferies LLC, Research Division - Senior Equity Analyst [1]

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It's James Vane-Tempest from Jefferies. Three, if I may please. Firstly, on the U.S. business, on the pricing side, you mentioned it's too early to give a sense of any sense of improvement. I just wondered if you could comment on your portfolio versus what you're seeing versus the market data. And in particular, I know you don't comment on competitors, but some of your competitors haven't seen the type of progress which you're citing, so I'm just curious on some of the different dynamics there. Second question is on the Injectables business, margins of 41% in the first half. What would have to happen for your business to deliver the low end of your guidance for the year, because that would probably imply quite a seismic change in the second half? And then my final question on the Branded business is you mentioned the dedicated oncology facility, just wondering, how material that is if we got a dedicated facility, either a number of imported products which you could essentially take their market share, so some context of that would be helpful.

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC - CEO & Executive Director [2]

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So thanks for the questions, James. So first on the pricing, I think we have talked about that. I think, there's good signs in the market that hopefully, we have reached the bottom of the cycle, but I think it's way too early to call that now. We are seeing high single digit, which goes in line with IQVIA, for example, on the pricing they're seeing. I think for us the differentiation versus our other U.S. competitor, generic competitor in the market, is reflected in really the differentiation in the Roxane portfolio. I think Said and the team highlighted at the time of acquisition that really, there was a differentiated portfolio being bought. There were challenges, there were shortages, there was service-level issue that the company was dealing with in the past. We have dealt with that. I'm very, very pleased with our service level. It hasn't been better in a long time. The team has worked very hard. So we are gaining back business that we lost previously due to lack of service level. And the differentiation, why we have been able to grow in this, is some of these products, even though they're very, very small, they differentiate and they're important to our customers. So we are seeing pickup in that. We focus on the differentiated. We are still offering a wide range of portfolio, but clearly, what the team has done well in the U.S., in the commercialization of the business, is to focus on the differentiated portfolio because even though I have Ramipril in my portfolio in the U.S. Generic business, there are 16 other companies offering Ramipril, and I don't think I can compete on that product. But on the other hand, of some of the older tablets, some of the nasal sprays, I think we really have added the value to our customers, and that is reflected in the numbers. But obviously, also, what the team has done very well is to look to the cost, because when you are managing such a small margin as we have, remember, the Generic business, at the end of last year, only had operating profit of 3.6%, we are up to 8.8%, and I'm not happy with 8.8%, I want to make that clear, but it's a good step forward. And it has to do with portfolio, what products we focus on, our cost infrastructure and how we run the business. So I'm pleased, but I think we have a long way to go to have acceptable Generic business in the U.S. In terms of the 41% margin in the Injectable business, keep in mind that a big contribution to that is the growth in our MENA Injectable business, but also in our Europe Injectable business. So the growth, the overall growth in profit is more coming from MENA and Europe than it is coming from the U.S. because the 3 big products lost so much market share, as you saw on my slide, that it's difficult to compensate that. Because with the shortage products we discussed, yes, there is a big uptick in volume, but these are relatively very inexpensive product that we deal with in the market. So I think your question was how would we end at, at the lower end of the range. I think 3 things probably would have to happen: is basically, we wouldn't have the same acceleration in new product introduction. We have had 9 new products already this year. If that would slow down, clearly, when you first introduce products, that's usually when you get the highest margin. So if that would slow down, that would have a material impact on the overall. That could lead us to the lower range. I think the second thing, but to a lesser degree, if Pfizer would have a full supply, Pfizer Hospira, which is the main reason for the pain management product, which we have been supplying to the market, if they would introduce products as early as third quarter. Although I have to say, those are service products, I emphasize that, but clearly, that -- they are in the average margin of our portfolio, but still could have an impact more on the top line than the margin. And the third thing is basically, our success and growth in MENA and in Europe. Because that has contributed so greatly in the first half of the year, if that wouldn't continue into the second half of the year, and it's very difficult to see. We are off to a great start with Remsima as an example, but really, it is important to continue with that throughout the year. So I think these are the 3 facts around the margin. With regard to the Branded oncology, you're absolutely right, James. You pointed out that when we have the -- when we have up and running oncology plant manufactured fully in Algeria, there might be an opportunity that input will be reduced of -- from companies that can't manufacture locally. Still, Algeria is a relatively small market, so material impact on the overall company is maybe not small, but all these small actions are so important to the business. And this is why I think our Injectable business, there's never any one-off that is leading it, but actions like this. And this is the company. In the past, this has been the culture of the company, to invest in opportunities like this, where it's me as a new CEO, I'm benefiting from. So yes, it will be very material to the Algerian business. It will be somewhat material to the MENA Injectable business, but maybe less material to the overall Hikma business at the end of the day.

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Said Samih Taleb Darwazah, Hikma Pharmaceuticals PLC - Executive Chairman [3]

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Don't be so modest.

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Peter Verdult, Citigroup Inc, Research Division - Director [4]

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Pete Verdult, Citi. I've got 3 questions. Apologies, Said, it's 2 for Siggi and 1 for Khalid. Siggi, just on BD, the balance sheet is fast approaching net cash. Is it likely to see that deployed by the year-end? Or just more broadly, can you just remind us of what your priorities are in using the balance sheet? On Branded, I realize the focus is all about the U.S. right now, but we're seeing relative FX stability, a strong underpin from the oil price and your efforts to improve the portfolio and look at cost. So can you just remind us how you're thinking about what a sensible margin target for that business would be as we move forward? And then lastly, Khalid, can you just remind us, you're tempering our expectations in terms of extrapolating the performance of Injectables into 2019. So just -- can you just tell us was there any stocking in the first half that we need to be aware of? Or could you give some sort of quantification as to what that bonus revenue or profitability was from the Hospira stock-out?

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC - CEO & Executive Director [5]

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So thanks for that too. So on the BD, we clearly have a strong balance sheet. There's no question we have a good cash flow, over $180 million you saw in this half of the year. We are always on the lookout for opportunities, there's no -- per se, we don't want to discuss our strategy going forward. You probably have to wait for our November meeting to give you a little bit thing, but we are in a very, I think, enviable position versus many of our competitors, that we have the opportunity with a strong balance sheet, with a differentiated business where we can grow with BD. Clearly, the company has grown with BD and has been exceptionally good in executing BD throughout the years. And I think in my past life, I have done a few deals myself. So clearly, it's something we look at all the time. It's not that we are going to fix the business 100%, or we are going to sit still forever. But BD is an opportunistic thing that comes up and come up. We have the ammunition to be able to execute when it comes up but in terms of the strategy, I need to ask you to wait a little bit until November. And hopefully, I can give you a little bit more picture, even though I might not give you any names, but maybe where we are heading and what we are thinking going forward. In terms of the Branded and the FX impact, remember, we haven't formerly guided on the margin of the Branded business. This is because we are not guiding on the overall margin for the company as a whole, so we chose the Branded business because that has been the most reliable margin going forward. So I'm not going to discuss the Branded margin. Clearly, this was the best 6 months in terms of FX we saw in the region. I think many of you read The Wall Street Journal this morning that the Turkey's currency is making some impact in MENA. We still haven't seen that in our businesses, as Khalid mentioned. Sudan has been the most difficult currency, but we are very, very small in Sudan. But this is something that we monitor on the FX. But I'm not going to guide on the Branded margin per se, but it has been pretty reliable throughout the years. If you want to talk about the Injectables, Khalid?

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Khalid Walid Hussni Nabilsi, Hikma Pharmaceuticals PLC - CFO [6]

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Yes, Peter, as you know, we are not giving guidance on 2019 at this stage. And as Siggi mentioned, the margin improvement and profitability improvement that we had in the first half coming mainly from MENA, Europe and in the U.S. and there are different reasons for each one of them. In MENA, we have Remsima; we have very strong sales in Saudi Arabia. At the same time, in Europe, we had some product launches. In the U.S., we mentioned and I mentioned in my presentation, there are declines in the top 3 products, declining sales on the top 3 products, but this was offset by the increased demand on pain management products and the new product launches as Siggi alluded earlier. So I would say, margin, if you want to take into consideration what were all of these facts, I would say, a normalized margin, as we said in the past, in the low to mid-30s would be relatively usual. This is what we are -- we've guided in the past. And this is going to be the medium, I would say, guidance for that business, although we are not giving guidance on 2019 at this stage. There are still many opportunities and risks, so it's very difficult to give.

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Amy Walker, Peel Hunt LLP, Research Division - Analyst [7]

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It's Amy Walker from Peel Hunt. I just wanted to follow up on a couple of questions from James and Pete. Can you quantify, Khalid, exactly what the benefit in the H1 was from the Injectables outages in the U.S.? I appreciate what you're saying about the color of the direction going forward, but if you could give us a number on that, that would be helpful. And then also, for the Injectables margin, just following up on James' point, in order to get to the bottom end of your margin guidance, you'd need to be at about 31% on average for the second half. So are you below 35% today? Where have you been in July and August? Because that really does feel like a very pessimistic outlook. And then lastly, I just wanted to get a bit more understanding in Generics about your R&D expenses. I think you mentioned that those were down quite a lot in the first half because of roll-offs, and you expect a step-up in the second half. Can you just remind us, given your ambitions to improve the portfolio there, what do you think second half and going beyond that a sustainable R&D percentage of sales in Generics or however else you set your budgets there is?

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC - CEO & Executive Director [8]

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So if I take the first one and let Khalid deal it with. So we never give revenue numbers on individual products. But to answer this question, I think it's maybe about -- it is less than 10% of our revenue is the opportunity of the shortages in the U.S. of the Injectable revenues. So you put it into perspective, this is more of a service that we are talking about much more than any opportunity. I think the benefit is, in the long term, the relationship. We have been stepping in. We are working hand-in-hand with the hospitals. But the revenue impact, and I highlight this over and over again, these are very inexpensive products. The vials are at the price of a chewing gum at the end of the day, that we are dealing with. Scott Gottlieb, the Commissioner of the FDA, highlighted in his statement 2 weeks ago, and you can look it up, that maybe one of the reasons for the shortages in the market is the low cost of these products in the market. And -- but we have done, I think, extremely good job in executing and reprioritizing, upping shifts to our manufacturing plants, working hand-in-hand with the office of drug shortage at the FDA, working hand-in-hand with the DEA to enable us to get enough quota to service the hospitals, because we see this maybe not as a big upside in our numbers because the underlying growth in the business is from the new launches, is from Europe and is from MENA, but clearly, there is opportunity that came from this in this quarter, which you can never bet on. But what we have seen generally in this business, this highlight our emphasis on quality. Because if we wouldn't have the quality situation that we have in our plant, we couldn't have done this, and the reason for the shortage is blamed on quality, but I want to -- everybody to keep in mind that maybe in revenue terms of this is not such a big upside, but in terms of volume, this clearly is a good opportunity. But the most important part about these shortages is about the relationship that the Injectable team has been able to build with the hospital and the customers, which I'm sincerely hoping that in the long run will help us when we launch new products.

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Said Samih Taleb Darwazah, Hikma Pharmaceuticals PLC - Executive Chairman [9]

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Can I add just a little bit color to this? These are -- as Siggi said, these are not expensive products. But if the hospital does not have this $3 product, they cannot perform the services that they want to perform, which they charge $10,000, $20,000, $30,000 for. So it's very important for them to have these products, and by us stepping up and stepping up production and delivering, we are creating this very strong relationship with the hospitals where they are realizing that supply is much more important than price of these products. And that's the kind of relationship that we are building and hopefully, will strengthen our ability to work together with the buying groups and with the hospitals as we move forwards.

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC - CEO & Executive Director [10]

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Do you want to take the second question?

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Khalid Walid Hussni Nabilsi, Hikma Pharmaceuticals PLC - CFO [11]

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I'll take the Injectable margin for the second half. As we said that we are seeing acceleration and declines in the top-selling 3 products, thiotepa, and this is going to continue in the second half. So we are assuming that sales will continue to go down on these products. At the same time, as Siggi mentioned, the shortages and the demand for these products on the pain management product, we don't know whether these are going to continue. And when Pfizer, they said that they will come back to the market in the second half, maybe in September and October, we don't have visibility on that. So there are opportunities, but there are some risks. So maybe, you could say, our guidance on this is a little bit cautious. But so far, we don't have visibility. And if we see that there will be an increased demand, and we are going to perform better, then there's a room to upgrade the guidance, if we see that.

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC - CEO & Executive Director [12]

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I think on the R&D expenses, the reason for a little bit less investment this year is simply because of the renewal of the pipeline. So by cleaning up the pipeline in the Generic business, you saw that when we took the impairment testing, we took a significant portion out, which didn't meet our requirement for return on investment. And we introduced only 7 new products last year and 9 new products. And the investment in products goes exponentially high, because the biggest investment is in the clinical study in the end. That's the reason why in first half, we were just about 5% investment in R&D. I think long term, I think we as a company, we really would like to be between 6% to 7%. But we -- clearly, we want to be investing in the right product. So this is why this exercise was very, very helpful for the future, it focuses on the right investment, the right opportunity, but it caused us to invest that tiny bit smaller on the Generic R&D this time. I think on the Injectable R&D, we are more or less in line with what we are doing. The injectable R&D are delivering 10 to 15 products every year. I have been very, very successful and the MENA R&D is doing very well. But the shortage is simply that the Generic R&D needs to catch up. And then, of course, you saw in the noncore, where we are still running the generic Advair trial, which is a big investment, but it's a noncore because of it's paid partly by Boehringer in -- as it's explained in the press release. You might want to come a little bit forward, so not only the back gets to answer question.

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Emily Field, Barclays Bank PLC, Research Division - Research Analyst [13]

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Emily Field from Barclays. I was just wondering, on the controlled substances, Fentanyl, hydromorphone and morphine, the IQVIA data on sales and volume would imply that there was like a 70% year-over-year realized price increase. And so obviously, you guys have been pretty consistent that these are very low price products. So I was wondering if you could help me understand perhaps what the data is not capturing. Then in Generics, is there more to come in terms of portfolio rationalization, or is that process largely complete? And then just from a BD perspective, you guys are, in terms of larger companies, one of the only companies really in a good financial position to do some BD, and there have been a lot of assets on the block for some time. So just if you have any thoughts on why assets haven't traded yet. And then if the Perrigo business would be something that you'd be interested in, given that, that is more alternative dosage forms rather than commodity oral solids?

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC - CEO & Executive Director [14]

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So thanks, Emily. I think IQVIA data is very reliable in terms of volume, but you cannot trust the value data in IQVIA. IQVIA, especially in the TPO and the hospital business, because they are doing average prices, Injectable IQVIA data -- and by the way, we had the presentation from IQVIA to the company yesterday, in fact, and they highlighted that the volumes are very important. But there has -- they are still struggling to get the right value because they don't know the net price that we are selling to the hospitals. And their estimation is far from -- and every pharmaceutical company highlights this all the time. But in terms of volume, and we showed the volume in one of our slides, you see the pickup in volume and a portion of the pickup you saw was due to that. In terms of price increases, we haven't -- since the shortages came, we have not touched the price on the opioids. It's very important to us. We see this as a service. We are talking about price between $2 and $3 per vial. We understand that there are shortages in the market, there are patients that need these products. We haven't moved on these products. Previously, there has been a movement on this product prior to the shortages, a little bit, but it's still we need to keep in mind these are very low-cost products at the end of the day. And if you're talking about $2 to $3 products, this is -- as I mentioned before, this is like a pack of chewing gum, or you're talking about the controlled substances that needs to be delivered in a special way, manufactured in a sterile manufacturing plant with a high-quality system. It has to be manufactured in the U.S. It cannot be manufactured in India. And I remind you again what the Commissioner of the FDA, Dr. Scott Gottlieb, said, maybe the reason for the shortages is simply that for a company of a bigger size than we are, is it worth their while continuing manufacturing big volume at such a low cost. But we see that as an opportunity because we think with our flexible infrastructure, with the high-quality site we have, what we have built up in Cherry Hill, we really can service the market better. We're being ready, if that's the case, if hospital changes their strategy. They have just restructured Pfizer, where they put the Injectable business. So we are watching this space very carefully, but I emphasize, this is very important to the patients, to the doctors, but less so to the bottom line. I think in terms of the portfolio optimization, it's a very good question and this has been a little bit of a headline from my old company in Taylor, from Mylan, from -- and Sandoz is optimizing by selling the whole business. So it has been a little bit the main headline after the second quarter results of many of our competitors. The issue for us is we are running, more or less, 2 plants: the plant in Columbus, Ohio; and the plant in Jordan. And both of them are not fully utilized. And while they are not fully utilized, I still need the volume as long as it's profitable volume. So I am looking for more volume, at the moment, not to reduce the volume. Yes, I'm prioritizing, as I mentioned, a product where I have a fewer competitors over products like Ramipril and things like that. But for me to go into any drastic product optimization now doesn't make sense financially or economically because if I reduce the volume in the Columbus plant, I will increase the cost of goods on the rest of the portfolio, which probably will reduce my bottom line. So I need to be more careful than a big company like Taylor that has over 50 manufacturing plants, and they have more flexibility in cutting out products and same with Mylan going forward. Do you want to take the BD question?

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Khalid Walid Hussni Nabilsi, Hikma Pharmaceuticals PLC - CFO [15]

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I forget what that was though. You're doing such a great job.

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC - CEO & Executive Director [16]

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I think in terms of BD, we obviously are not going to comment on individual opportunities, but I think we have flexibility of looking where we want to go. I think we still are undersized in a way in all our businesses. I would love to get more portfolio deals than company deals. I think that is a quicker integration. I'm never shying away from a company deal that is important for the growth, but I think portfolios, and we have seen that in the MENA region, when we take in portfolio and the last -- latest example is the Perrigo portfolio, it gives us an instant better relationship with the pharmacies. So probably, my first lookout is for a good portfolio that would fit into my infrastructure. But I wouldn't shy away from a company if the right opportunity comes, but I can't comment on individual opportunity, Perrigo or anything else.

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Max Stephen Herrmann, Stifel, Nicolaus & Company, Incorporated, Research Division - Head of European Healthcare Equity Research & MD [17]

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It's Max Herrmann from Stifel. Three quick questions. Firstly, just in terms of, obviously, rationalizing the R&D pipeline and reinvesting in new products. I mean, how does your manufacturing and portfolio in general differentiate what products you actually choose to go for? Just so that not everybody is chasing the same products, how do you determine that? Secondly, just in terms of the Injectables business and the portfolio from Bedford, is there much still to come from the products that you got from the Bedford acquisition? And then finally, just on CapEx. Obviously, the first half CapEx was much lower than the sort of full year guidance, so I just wondered whether you're going to spend in terms of the current CapEx guidance. What's the change that's going to accelerate that spend?

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC - CEO & Executive Director [18]

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So in terms of our portfolio selection, I think what we have traditionally done is to look for maybe the smaller opportunity. We haven't been chasing the big blockbusters, which everybody are chasing. And I think that has been the right strategy. We are even looking to an older molecules that is not being serviced in the market that has been successful in the past. We have the most amazing, high containment, solid oral dose facility in Columbus, linked to the manufacturing plant. I had the opportunity of walking that plant 10 days ago, and it really is the best high-containment facility I have seen. We are looking to fill that up with new products. We think there is plenty of opportunity there, because the FDA is requiring more and more products to be manufactured under high containment. So really, we wouldn't be choosing the atorvastatins or Cialis of this world, which is coming off patent later this year; it would be more of the smaller product, maybe where the opportunity is in the tens of millions, but we think it's better servicing in terms of margin. Because at the end of the day, and I've said it and I said it in my prepared remarks, anyone in generics can make top line, but you really need good people to make the bottom line. And that is the essence of the portfolio selection. Talking about how that principle has worked out well is how the Injectable business has done. Keep in mind that over 50% of our products in our product offering in Injectables, we are selling for less than $5 million per year in the U.S. market, more than 50% of the portfolio. And most companies wouldn't even bother with it. We have 96 products on the market, this is a key differentiator. And Riad, who is with me here, he's been building this up over year, and this is where we are getting close to the portfolio offering from Fresenius, where I am hoping to catch them next year?

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Said Samih Taleb Darwazah, Hikma Pharmaceuticals PLC - Executive Chairman [19]

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Hopefully, next year.

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC - CEO & Executive Director [20]

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It's a little bit of a pressure here. But we are getting very, very close on that and -- but that's where the portfolio selection has been extremely good. And the Bedford products are coming to the market. We are -- I think we're at 29 Bedford products, 29, 30 already. There are few left. But we really have delivered the Bedford product to the market that many, I think, of our peers, I was included at that time, didn't believe that the Bedford products could be brought back to the market. But this speaks highly of our Injectable capabilities and what we can do. But this is both an opportunity and a challenge because I have 9 -- you saw from the beginning in one of my slides, I have 20 new product introductions in Injectables since beginning of last year. And I had a $10 million in revenue in the last quarter. So on a yearly basis, approximately, $40 million. So there was no big blockbusters, but what these products have in common, they usually have not more than 2 or 3 competitors because they are so small. So we really have found our niche to maintain the margin that we are seeing in our Injectable business. So maybe, on the CapEx?

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Khalid Walid Hussni Nabilsi, Hikma Pharmaceuticals PLC - CFO [21]

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On the CapEx, I would say it's more related to the spending related to the timing of some of these investments and upgrades. So we invested around $53 million in the first half. As you can see on the slide, we are guiding towards $120 million to $140 million. So mostly, it's the timing of these projects. Half of our spend was in the U.S., there's still some to go as well in the U.S. and in the MENA region and in Europe. So we've guided in the past something in the range of $100 million to $120 million annually is the typical range for our CapEx, which includes maintenance CapEx and new projects.

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Said Samih Taleb Darwazah, Hikma Pharmaceuticals PLC - Executive Chairman [22]

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So I'd like to take back the opportunity you gave me. Obviously, the first order of the day for Siggi and the team is to make sure that all the businesses are running at full speed. I think 2 of the businesses are already doing very well, and we still have some way to go, as Siggi said, with the Generics. It's doing much, much better now than it was, say, 6 months or 8 months ago. But we still have some way to go. But as the business improves and the EBITDA increases and the debt is decreasing, obviously, the ability to do bigger deals is still very much there. And with Siggi's past experiences and with Hikma's past experiences in acquisitions, I think there will be exciting opportunities for us in the future to make some nice moves once we feel comfortable that everything is in the right place and right order. Do you want to add any color to that? No?

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC - CEO & Executive Director [23]

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No, that's good. That's good.

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James Daniel Gordon, JP Morgan Chase & Co, Research Division - Senior Analyst [24]

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James Gordon from JP Morgan. A couple of questions please. One was on the Branded division. So I don't know if it was formal guidance, but a few years ago, I had the idea that margins were going to expand something like 25 to 50 bps per year, and then there was a comment on the slide about taking cost out of Branded. So is there a big margin expansion story there if you've got a top line growth and a cost-savings program? Or where do we stand on the margin expansion potential there? The second question was on cost savings. How much incremental benefit do you already have in the bank from the Eatontown shutdown in terms of what benefit that could provide next year? And what other things are under consideration for further cost savings for the group? Are there lots of other opportunities for more cost savings or have quite a lot of the obvious things been done? And then the third one was just on the M&A. Geographic focus, if I heard correctly, it sounded like lots of the interest is around what you could do for the U.S. business, Injectables and non-Injectables. Are you also very actively looking at doing MENA acquisitions and trying to rebalance geographically to have more of a MENA focus? Or is it fair to assume that more of the M&A focus is actually on the U.S?

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC - CEO & Executive Director [25]

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Do you want to take the margin expansion?

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Khalid Walid Hussni Nabilsi, Hikma Pharmaceuticals PLC - CFO [26]

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Yes, on the Branded business, we always said that we are targeting to increase and improve margins by 25 basis points on an annual basis, and we've been delivering on that over the past 2 years. Of course, this year, we are not giving guidance on Branded margin, but you have seen in the first half, we've improved by almost 100 basis points on the margin. And this will always be -- will continue to be our target. It all depends on the country mix, product mix, the new launches that we are going to bring to the market. And in our plan for the next 5 years, this is something that we focus on, focusing on operational efficiency. So it's fair to say that we are going to target continuous improvement in margin. And shall I take the...

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC - CEO & Executive Director [27]

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Let me take -- so Eatontown, I think, overall, we are on track. Basically, the estimation for next year is to between $20 million and $30 million that the benefit will be in not having Eatontown. The transfers have gone extremely well. We are transferring both to Jordan, and we are transferring to Columbus. We already launched the first product from Columbus of the transfer for Eatontown. So really, the team has done an excellent job in executing on that. In terms of further cost, I think I put it into perspective of our peers. I'm not happy with the gross margin I have on my U.S. Generic business. I'm currently running at about 36%, just over 36%, and that part went a little bit south versus first half of last year. It improved versus second half of last year, don't take me wrong, we are going in the right direction, but 36% plus gross margin in our U.S. Generic business is too low. And we're looking for every opportunity to address that in terms of our suppliers, in terms of our infrastructure because in terms of -- and I mentioned this before, when I think it was Emily that asked me about the portfolio optimization, this is the reason why we want to increase the utilization of the Columbus plant. Because the more volume, the less overhead per tablet and that is very important to my gross margin. So I'm very focused with the team, and the team in the U.S. is really working hard to look how we can improve the gross margin because I think our peers, depends on how you do it, because you cannot just take the Mylan numbers as they are, because they obviously are showing it with Injectables. So you have to be -- when you do an apples-to-apples comparison, you need to do a portfolio that doesn't include Injectables, but I think I would like to see that in the 40s for the long run, because that is what we need to do to be able to compete in the world today, but also, if, in the case that we see a double-digit price erosion again, we need to be ready for that. Because even though we are seeing a sign of things may be getting better, I'm optimistic, I'm always optimistic, I've been doing this for 25 years and I've seen it go down, I think this is my fifth time when the Generic business is in a whole and then it comes up again, so I know this. But the infrastructure, I want to see in the Generic business has to withstand the headwind that we have seen in the last 2 years, when we come up again and we cannot just ride on the tailwind if we get that from products. And maybe on M&A, really, we are very open. We -- today, you have to remember, we are #5 in MENA. And the top 4 companies in MENA are all big-brand companies. We are the biggest local company. We are a well-known brand in the region. We have 2,100 sales reps. And clearly, expansion in MENA, would have a significant synergy because we know how to execute it, we have a big portfolio, we have our licenses for many of our brands, it's for the whole MENA region. So there would be an instant gratification if we make investment in MENA. Clearly, the multiples you have to pay in MENA is significantly higher than you have to pay in U.S. today. So you always have to balance that as when you think about company opportunities, where do you want to invest, where do you think the multiples will go up, what are the synergy opportunities you have, what is the kind of overlap or the negative synergies, but MENA clearly, is and will be in a way the heart of Hikma, going forward. This is where we really know better than anyone else how to run the business. One from the right there. And also, if there is any questions on the webcast or from the phone, please feel free to call in.

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Amy Walker, Peel Hunt LLP, Research Division - Analyst [28]

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It's Amy from Peel Hunt again. Just a few more, if I could please. You've mentioned a lot today about the MENA Injectable activities. And I wondered, do you expect that with these opportunities that you're referencing at the moment, that you expect they can continue to take market share from the rest of your regional exposure in Injectables at the current rate? And how does the margin on the MENA business within Injectables compare to your broader Injectables business? And, then also, just on the Branded business with the Omega Pharma deal, can you just help put that into context in terms of how big that could be once it's hitting the P&L when you think that's going to happen? And again, what sort of margin impact we might see there?

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Khalid Walid Hussni Nabilsi, Hikma Pharmaceuticals PLC - CFO [29]

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I did not hear the last question.

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC - CEO & Executive Director [30]

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I can take the last, if you take the MENA Injectable. So if I start and then Khalid gives you the details. So on the MENA Injectables business, the reason why it is -- it's mostly a tender business in the MENA region our Injectables. And really, this has been an added emphasis by Riad and also by the MENA team to find these opportunities, because we are offering a high-quality product. Some of them are locally manufactured. Like we mentioned, we are building up an oncology plant in Algeria, but we're also importing from our Portugal plant, which is very competitive in terms of pricing. So there is not a sales and marketing cost per se big underline, because this is a tender business. So it's a little bit different than the rest of the Branded business in MENA. We don't give out individual margins like that, but I think we have a reasonably good margin. We have been winning quite good tenders. This is part of our growth in Saudi Arabia. We are seen as a very reliable and high-quality supplier. In terms of Remsima, again, we're not giving the margin. Clearly, in the beginning, we spent a lot on sales and marketing. Sales and marketing, you need to build the trust with the doctors, the interchangeability. The beauty is that this is the same product that is -- has a 100% use in Norway, has a significant use all over Europe. So there's a lot of patients' experience on this, tens of millions of days experience behind this. But still, when you have the first introduction on products like infliximab or Remsima, you need to sell it. You need to. And it's not selling the efficacy, it has to do with selling that the safety, that safety is the same, this is an infusion drug. And we need to build the trust. Clearly, there hasn't been any safety differences. This is a collaboration with Celltrion and the same product that Pfizer is selling in the U.S. market, so we are the partner there, so we have no concern, but it takes time to get doctors used to this. And we have seen a great pickup, but clearly, the margin on that now is not very high, but it will grow over time, simply for the reason that we don't have to have the same sales force behind it, when people get used to it and it start to be a tender business much more than it is today.

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Khalid Walid Hussni Nabilsi, Hikma Pharmaceuticals PLC - CFO [31]

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And even tender business in general has much lower margins than the private business. So as we said in the past, MENA margins are less than the U.S., and Europe are less than MENA. So this is a combination of both, you would come with a strong margin, but usually, MENA is much less than the U.S.

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC - CEO & Executive Director [32]

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In terms of the Omega Pharma deal, so I'm not going to guide on that in any way or form. But for me, this is very strategic. Because how it works is basically by having 2,100 sales reps in MENA, being the face of Hikma, they visit both doctors and they visit pharmacy. And not to have a consumer health business, was lucky. And maybe this is not the biggest contributor to the bottom line especially in the beginning because we are putting a sales force behind it and marketing material, but this is again, building relationship with the pharmacies, opportunities to talk about different things. This is 30 products from Perrigo with the first right of refusal for a bigger portfolio. I think this has a long-term impact on the overall business, but the products themselves, we need to see what the expect -- how are they will perform on an individual basis. But strategically, this was the right thing for the company, because we are taking high-quality products from Perrigo, putting it into a high-quality sales force in markets where we already have a good name and recognition. And so that's how I think about it in the short term. But hopefully, when we get to 2020, I can start about the contribution of the OTC in the business line. But at this point in time, it's too early to say, but strategically very important.

So I think we have come to the end of the questions, if there are no questions on the phone? Nothing? All right. So I just want to thank you all for coming. It's -- and have a great day, and look forward to see you in November.

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Operator [33]

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Ladies and gentlemen, that does conclude today's call. You may all disconnect your lines.