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Edited Transcript of HIK.L earnings conference call or presentation 9-Aug-19 8:30am GMT

Half Year 2019 Hikma Pharmaceuticals PLC Earnings Call

London Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Hikma Pharmaceuticals PLC earnings conference call or presentation Friday, August 9, 2019 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

* Sigurdur Oli Olafsson

Hikma Pharmaceuticals PLC - CEO & Executive Director

* Susan Ringdal

Hikma Pharmaceuticals PLC - EVP of Strategic Planning & Global Affairs

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Conference Call Participants

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* Brian Templeton White

Cantor Fitzgerald Europe, Research Division - Research 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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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC - CEO & Executive Director [1]

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Welcome, and thank you for joining us today both in the room and on the webcast. I'm Siggi Olafsson, the CEO of Hikma. And I am going to give you a quick update on the strategic progress we have made in the company today. With me today is Khalid Nabilsi, the CFO. And he will then take over and run through the financial results of the first half and the outlook for the full year. Then we will, of course, open it up for Q&A.

So as you know, and see from the results, they are very good. I'm very happy with -- for the start we made in 2019. All our businesses are performing well. Group delivered over $1 billion in revenue, up 7% from last year demonstrating a very strong organic growth. Across the group, we really are delivering more from our marketed products, benefiting from the breadth and durability of our portfolios. At the same time, we are launching new products, making good progress with the pipeline development.

I'll now give a little bit of a strategic overview of all the 3 businesses. So the chart you see on the left shows the performance of our U.S. Injectable business over the last 2.5 years. You can see from that red line how the business has grown over that period. What I think is impressive about this graph is the strength of our base business, the dark blue line on the chart. The base business is doing extremely well and delivered a double-digit growth in the first half. Obviously, this is partly due to product that we launched in 2017, but I think it really shows the benefit of our large product portfolio and scale and strength of our customer relationship. The green line shows that we have also had a nice contribution from new launches this year. The products we've been launching over the last couple of years have predominantly been from the former Bedford portfolio. These products haven't made a big bang at launch, but they are durable products, delivering steady growth over time. These products have helped us to create a very stable and sustainable base business. The strength of the base business has more than offset the significant headwind from the decline in the top 3 products we have historically. Three very large products that made more than 1/3 of the revenue in 2017. These products have gone from contributing close to $100 million in first half of 2017 to less than $20 million in first half of 2019.

You can see that over the last 18 months, we've had the highest sale of our controlled substance products. We were able to respond to a market shortage of these products and provided a secure supply to hospitals and patients. Our incremental revenue from these shortage products was around $40 million in first half of 2018 but has since decreased as more supply has returned to the market. In first half of 2019, the revenue benefit was closer to $20 million. The real benefit to Hikma from our response to the market shortage has been to demonstrate to customers that we are a high quality reliable partner.

In the U.S. generic injectable market, where there are currently around 100 products that are on shortage. So steady and sustainable supply of the products is paramount importance to the hospitals. We are very pleased that our commitment to customers has been recognized by Civica Rx in the recent decision to enter into a long-term supply agreement with Hikma. Civica is a nonprofit organization that was set up in 2018 with the purpose of reducing drug shortage in the U.S. market. We believe Civica's decision to partner with Hikma is a tremendous endorsement of the high quality of our manufacturing capabilities, as well as the breadth of our portfolio and pipeline. This agreement will help to support the sustainability of the business.

Of course, the continued growth of our business depends on the successful pipeline execution and new product development. You can see from the chart on the left that we have been steadily launching new product each year, and in 2019, we launched our 100th injectable product in the U.S. We expect to launch around 15 products in total this year, and we launched some of the larger opportunities in the first half, including vancomycin, mitomycin and norepinephrine. Our U.S. business has a strong pipeline -- around 125 products -- of which 56 are filed and approved -- or approved and 69 are in development. We want to grow our portfolio of higher value, more complex products and much of our R&D focus is on those types of opportunities. We're also looking at other ways to differentiate our product offering, including converting product into ready-to-use formulations and new delivery systems such as IV bags and prefilled syringes.

Our MENA Injectable business is continuing to perform well in 2019 with a double-digit growth.

Our biosimilars program is an important growth driver. Through our partnership with Celltrion, we launched our first biosimilar Remsima in 2017.

It is relatively small market opportunity, but we have been very pleased with what the product has delivered and our ability to take the market share. The next 2 products, Truxima and Herzuma are due to launch and roll out over the next 18 months. Given the large market sizes and the success of Remsima, we are optimistic about the potential for these products. We're also expanding our manufacturing capacity for injectables. We have recently begun commercial production of our new high containment operation at our plant in Portugal. The facility will provide products for our MENA and European markets in the near term and for the U.S. market over time.

If we move to the Generics, manufacturers in the U.S. generics retail market have had an extremely challenging time over the last 2 or 3 years. Structural changes and increased competition has driven a significant price erosion. In the first half of 2019, we have seen an improvement in market condition showing price erosion appears to be stabilizing. Hikma continues to be one of the companies that are growing in the U.S. market. We are really benefiting from having differentiated products in our portfolio. Just over half of our products have 5 or less competitors and around 1/4 have 2 or less competitors. We are also seeing a positive impact from actions we have taken strengthening our commercial team in the U.S. 75% of our Generic sales teams are new hires and -- with strong industry relationship and experience. While our market portfolio continues to perform well, these products will face increased competition and price erosion over time. We need to be able to offset this impact with new product launches. As with Injectables, we are focusing our R&D investment to increase the number of complex products in development. We currently have 69 products in the pipeline, of which 20 are already filed or approved and -- which include some interesting Paragraph IV opportunities as you see on the slide. As I said before, the pipeline we have for this business is good, but it's too small. We will continue to progress our internal R&D program as well as pursuing opportunities to codevelop our licensed products.

And on the Branded business, we are continuing to introduce new products across our markets. We had a good number of successful launches in first half 2019. And this slide shows the key launches in our core markets. In Saudi, this included the launch of the first generic and key in-licensed product. In Algeria, the new plant we acquired in 2018 is in use enabling us being relaunching the cephalosporins in the market. And in Egypt, we launched the first generic of an important MS treatment bringing this medicine to the market ahead of the originator.

As with our other businesses, part of our pipeline strategy is to expand our portfolio through partnership. We signed some important new partnership deals in 2019, including agreement with Melinta, Gedeon Richter and Faez Farma to add novel products to our product offering. We will continue to focus on adding these types of opportunities.

So in summary, I think the strong financial results we saw in the first half and the expectation we set for the full year demonstrate that we are successfully delivering more from our strong foundation. We continue to strengthen and develop our teams. Since I joined Hikma last year, I have overseen a significant number of important new hires across the group. The impressive talent we have added is enabling us to fill the gaps in our capabilities and complement the teams that are already in place. I think we are already seeing the benefit of that. We made an important next step this week with the appointment of our new Chief Scientific Officer, who will lead the execution of our R&D strategy.

New product development and pipeline execution is critical to our future success. Our R&D programs for both Injectables and Generics will ensure we continue to bring more differentiated and complex products to the market and increase our return on investment. Overall, we are making a good strategic progress across our businesses. I'm pleased with how our businesses are performing this year, and the outlook for the remainder of 2019 and beyond is very positive.

I will now hand it over to Khalid to take you through the financial results for the first half.

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Khalid Walid Hussni Nabilsi, Hikma Pharmaceuticals PLC - CFO [2]

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Thank you, Siggi. Good morning, everyone. As you've heard from Siggi and as shown on the slide, the group has delivered a very strong set of results in the first half of 2019. And given this strong performance with core EPS up 18% and the Board's confidence in the outlook for the remainder of the year, the Board is recommending the first half dividend of $0.14 per share, up from $0.12.

Turning to our Injectable business. This business performed well during the first half. Just over 74% of core revenue came from the U.S., which grew at 3%. While we have seen a slowdown in sales of some shortage products, we have been able to more than offset this with good demand for our end-market products and recent launches, as Siggi highlighted. MENA sales were up 20% in constant currency. We saw strong demand for our products across the region, particularly in 2 of our largest markets, Saudi Arabia and Egypt. In constant currency, our European sales grew 6%, reflecting continued growth in our own products and contract manufacturing sales.

We maintained a very strong operating margin at 39%, only a slight decline from the first half of 2018. This reflects the change of the product mix in the U.S. and higher investments in R&D.

Generics. Our Generics business had a very strong half, delivering revenue growth of 11%. We had good demand for our differentiated products and recent launches, which more than offset continued price erosion. Operating profit more than doubled from $30 million to $71 million due to the strong top line and cost reduction, primarily the consolidation of our manufacturing facilities in the second half of 2018. The closure of our Eatontown facility generated around $10 million of cost savings in the second half of 2018 and will deliver a further $10 million to $20 million of savings in 2019. The Generic core operating margin was 19%, up from 9% in H1 2018.

Branded. In constant currency, our Branded business grew 6%. In our largest markets, Saudi Arabia and Egypt, we delivered double-digit revenue growth driven by strong demand for our marketed portfolio and a good number of new launches. We also saw good growth in a number of other markets, including Morocco, Sudan, Iraq and UAE. Our business in Algeria was impacted by an economic slowdown, which led distributors and pharmacists to hold less inventory than normal. Our end-market sales remain strong, and we expect the revenue to improve in the second half. Revenues were also impacted by a fire in one of our warehouse in Jordan, which delayed the shipment of some sales. Our plants are now fully operational. Branded core operating margin was 28%, up 80 basis points.

We continued to focus on growing our pipeline. We invested $58 million in core R&D, up 23% due to higher investments in Generic and Injectables programs as we added higher-value and more complex products. As a percentage of core revenue, core R&D was 6% within our target range. As for our CapEx, our CapEx spend was $48 million, just under half was invested in MENA, primarily in Algeria, Saudi Arabia, Egypt and Jordan. Around $12 million was spent in the U.S., updating equipment and adding new technologies. We also completed construction of our new high [link] containment facility in Portugal during the half.

In terms of cash flow, the group continues to generate good cash flow with operating cash flow of $187 million. Our net debt excluding the impact of the adoption of IFRS 16, which changed the treatment of leases, our net debt position reduced to $314 million. And as you can see on the slide, we continue to have a very strong balance sheet with a net debt to core EBITDA ratio below 1x.

Finally, the outlook for 2019. Given the strong performance of our Injectable business in the first half, we are tightening the revenue range to $870 million to $900 million, and the core operating margin range to 36% to 38%. Our Generic business also had a very strong start to the year and I'm pleased to announce that we were able to raise both our revenue and profit guidance. We now expect Generic revenue in the range of $690 million to $720 million and core operating margin to be between 16% and 18%. We continue to expect full year branded revenue growth in constant currency to be in the mid-single digits.

Thank you, and we are happy to take your questions.

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC - CEO & Executive Director [3]

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Thank you, Khalid. So we open it up for questions. There is some microphone for the webcast. Just put up your hand or maybe introduce yourself when you get the microphone in your hand.

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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 questions if I can, please. The MENA business, particularly Injectables, has done very well. We know that still has lower margin than the U.S., yet the Injectables business overall has still done an impressive 39% margins. So if the MENA business hadn't had that improvement, can you give us a sense in terms of what the underlying sort of profitability would have been just given the profitability of the U.S.? Is it still north of 40%? The second point is the Generics pipeline continues to look well. We've seen a lot of development in terms of products, but the launches have been slower. So I'm just curious in terms of execution between development and launches or where some of those bottlenecks have been? And then the third question is just on capital allocation and M&A. We've seen, obviously, the product you have announced this morning, but your thoughts around that given the balance sheet you have?

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

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Yes. Thanks, James. So in terms of we look at the Injectable business. As we mentioned, the 3 businesses, the U.S. business grew 3% even with the less benefit from the Pfizer shortages with a significant decline in the top 3 product, the base business and the new launches allowed us to grow the business 3%. There was a 20% increase in the MENA business, but the MENA business Injectables has a significantly lower profitability. So we don't give profitability by region, but really there's a significant lower. So the overall profitability in the U.S. drives the profitability of the Injectable business. The lowest parts profitability is in EU. That grew 6% in constant currency, didn't grow as much in reported numbers, simply due to the euro U.S. change and the exchange rate.

On the Generics pipeline. It's a very good question. We have a reasonable number of products there, but we have a gap in basically end -- middle of last year into 2020. For the reason is when we took the write-off of the Roxane acquisition, we took out about half of our pipeline that we were late to the market, that didn't meet our standards to be able to get a return on the investment. That was done in March of last year. Due to that, we have a fewer launches over this 24 months period from middle of 2018 into middle of 2020, and that is reflected. So this year, we will launch probably 6 to 8 products in Generics, which is about half of what our peers are doing. These are fine products. They are delivering well. They are relatively small. But overall, I think going forward, I would assume that this business should be delivering double-digit number of launches every year. So you see in the slide, we have an interesting pipeline. We are working on more products. We now have a very experienced CSO coming in to lead the benefit of working together in all 3 businesses, getting synergies and working together, utilizing the strength of a CRO that we have in Jordan and things like that. So I'm excited about the future, but I've been very transparent we have too few products for the period now to maintain it. That's why it's so important that we need to grow the base business in the Generic part going forward. And maybe I start on the capital allocation. We -- I think as a company, we are ready. We have the right people in place. We have fully integrated our -- the Roxane acquisition. We have, obviously, the balance sheet to be able to execute. Khalid will talk more about what kind of firepower we have. But also M&A is opportunistic. And as you see from the organic growth and the results in the first half, we don't need to make an M&A acquisition to meet our targets like some of our peers need to do. So we can safely look for the right opportunity for Hikma, a strategic opportunity to grow the company into the next phase. What that will be? I think I've talked about I would love to see a product acquisition, different technology that we don't have, and that was reflected on a very small acquisition that we announced this morning. So we bought from the bankruptcy court part of the nasal spray assets of Insys. These were basically the manufacturing for unit-dose nasal sprays, the full manufacturing line on 2 products, naloxone and epinephrine. We did not invest in the opioids assets of Insys in any way or form. We, obviously, didn't take any liability. This is an asset purchase of these assets. But these are very exciting assets. I think these reflect very clearly where we want to take the company. Differentiated, we are the leading producer and supplier of nasal sprays in the U.S. today. This will take us into the unit-dose. Very interesting 2 products. Obviously, naloxone is growing. And if we are able to continue the development and deliver epinephrine nasal spray in unit-dose to the market, what a change that would be versus the EpiPen and all the epinephrine injectable doses from today. But I think -- even though a small acquisition, $17 million, I think it gives you a flavor of what the company is looking for to expand the portfolio. You want to talk anything about the capital?

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

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Yes. Just in terms of we mentioned in the past that our leverage ratios or target to be net debt to EBITDA of 3, 3.25. So looking into the consensus EBITDA, you will see that we can go around $1.5 billion in firepower today. So we have enough flexibility to do a big acquisition or multiple acquisitions. And as Siggi mentioned, we are focusing on the 3 segments being more of a specialty company. So...

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

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Pete Verdult, Citi. Three questions, Siggi. Just on Civica and Insys. You talked about it being very exciting. Could you at least sort of frame for us what you think the revenue potential there is? Secondly, on the CSO, could you just talk a little bit more as to why you've made this move? I mean (inaudible) but I'd like to understand what was missing from your R&D efforts from a personnel perspective before and what the CSO brings to the table? And then lastly to the extent that you want to or are willing to, I wouldn't mind hearing your thoughts on what's going on with Amneal and Mylan and Pfizer?

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

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Last one is a good one. Let's see what to say. I think in terms of the Civica deal, remember Civica, established 2018, a nonprofit organization with a goal of reducing the shortages in the U.S. market at a fair price. We were -- we are so pleased, and I said it in my prepared remarks that Civica chose to work with us. I think that reflects about our reputation in the market of being a high-quality supplier. This is 14 products that we have selected now, the terms of 5 years. Obviously, some of the deals with Civica could be overlapping with other channels that we are selling into today because obviously, these hospitals that are now within Civica -- in fact, they now have 900 hospitals or 30% of all U.S. hospitals within their bandwidth. So it's a pretty large nonprofit organization. But what we have said is we haven't guided on revenue. For 2019, the impact will be very, very little. But overall for 2020, this will be in the single-digit impact on revenue on the U.S. business. So it's not a huge -- because the upside is, part of the thing will come from other customers because we're such a large supplier today. These are not new hospitals. But I want to say the reason why this is important is these are reliable supply. There is a volume and price commitment over 5 years which makes the whole business much more stable. That is why we were chosen. We are happy with it. But it helps us for the future growth of the business. Even though the overall contribution is not enormous, it is an important part to stabilize the business going forward.

In terms of the generic pipeline -- so we're joined here today with Shahin, who joined us on Monday. He came with a 25 years experience, and the reason why I was looking for CSO -- there were many reasons, but the key reason was that today or last week until Shahin came this week, we ran 3 different R&D functions. So we had a R&D function for Generics, we had an R&D function for Injectables and we had an R&D function for MENA and the brand business. And there was very little collaboration between the 2. And I saw the opportunity of getting an experienced executive that understands both brand development, patent product development, the injectables development and generic development to use the synergies between the sites instead of running in a way -- I was running the 3 R&D sites, I'm now running a one R&D budget, focusing on (inaudible), teaching each other, utilizing. For example, we are thinking about how can we utilize the labs in Jordan more. We have highly qualified scientists in the Jordan R&D that could support our U.S. pipeline in stability testing and analytical development and all the things like that. So it's to get the collaboration between each of the sites allowing us to do more with the 6% to 7% R&D budget, which we are committing to. We -- basically, that is what we are aiming for every year, 6% to 7% investment in R&D and we want to get a better return on that investment. That's number 2. The second thing is basically it's to raise the challenge to more complex products. Shahin brings extensive experience in developing complex products. We have been doing those. We need to do more of those to help us to grow. So that's the basic reason why I wanted a global CSO to oversee the R&D business.

And on the Amneal and Mylan and things, obviously, I cannot comment. I think the one thing they do is many of our peers in the market have had a very difficult first half of the year. And that is I think reflected in both their numbers and what has happened. I think due to that, I have been careful in the guidance for the Generics for the second half of the year. You see we delivered 19% profitability in the first half. We are guiding to 16% to 18%, and part of the reason for that is I feel when companies are doing badly that usually leads to more price erosion in the market. So we are guiding to a lower second half of the year for Generics, partly for the reason what is happening to our peers in the delivery towards what they have guided the market. So I can't take out one company over the other, but really it's been a tough market for most of our peers. So I'm very pleased with the execution of the Hikma team.

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Emily Field, Barclays Bank PLC, Research Division - Research Analyst [6]

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Emily Field from Barclays. I was just wondering if you could comment on -- I know it's early days but if the Civica deal has had any impact on your existing relationships with the GPOs because it seems like that's kind of who they're targeting. Also as Pfizer returns to the market and the shortage of products, have you noticed them changing any of their behavior to win back volume, such as are they competing on price? And then how much of the share that they have ceded do you expect them to eventually gain back? And then also just given the strong margins in the Generics segment, do you see any potential to eventually raise your midterm core operating margin targets?

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC - CEO & Executive Director [7]

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Yes, so the Civica relationship with the GPO. So first of all, we have a very strong relationship with the GPOs. More than 50% of our revenue in the U.S. go through the GPO and we -- part of the thing was -- why we stepped into the shortage situation was to work closer with the GPOs. So we have a strong relationship. Clearly, Civica came in the beginning and the GPO felt it was a threat, but you can see it in the announcement in the U.S. today, more and more of the GPOs are working with Civica. So really we haven't seen a backslash for it. Keep in mind, we talk a lot about the Pfizer shortages. But if you go on the website of ASHP. ASHP is American Society of Health Service Pharmacists (sic) [American Society of Health-System Pharmacists]. I think I get it right. They maintain a pretty interesting list of shortage products in the U.S., and we feel sometimes, this is a little bit better list than the FDA list. What this list is, when the hospital pharmacists or pharmacists they report themselves what they are seeing on shortage when they can't get the product in the pharmacy. On that list today are 200 different molecules, 100 of them are still injectables. So even though clearly Pfizer is coming to the market, there's still so much need for high-quality companies to be in the market to step into this. And this is why the GPOs are working very closely with us, no matter what we are doing elsewhere because they see these 100 injectable products to be in shortage in long or a short time. They need a strong supplier to work with over a long period of time. So I feel very confident with our relationship with the GPOs. We have helped them. There are very important part of our business. So I haven't seen a change there.

In terms of Pfizer coming in, as I mentioned, the benefit of the shortage in the first half was about half of what it was first half of 2018. So clearly, Pfizer has come in more, but they basically come in intermediately. What I mean by that is they have the full supply of Fentanyl in February, but they had nothing in April. For a product like that, that usually drives the customers crazy because they want a reliable supply that they can continue going. This upsets a little bit the IQVIA numbers because when they go in and out of a product so that makes the IQVIA volumes, which many of you look at every month, not as reliable because there's not a steady supply. But overall, it's difficult to say. They, obviously, have availability report, Pfizer themselves. Those dates have shifted towards the end of the year. For example, there will be one strength of morphine that will be -- should be available in August. The other 2 strengths are estimated to be available in December. So it's a little bit not a reliable situation. But clearly, they are putting more volume in the market as we see it and that's reflected in our numbers, but also at the same time, as I mentioned to the previous questions, there is still plenty of shortages in the market. They are simply not on the controlled substances. And I tell you going forward, there will always be shortages in the market. I just can't tell you what the shortages will be next year, but for -- to be a high-quality supplier is a good position to be in the U.S.

And in terms of the strong margin of the Generic business of 19.3% in the first half. Do you think there's a chance for the second half to be better than we guided? I honestly don't see that now. I think as I mentioned in my previous answer that there could be a pricing pressure in the market because many of our peers have had a tough first half and people are fighting for market share. So in our estimation where we saw a low to mid-single-digit price erosion in the first half, we are estimating maybe 5% to 7%, 5% to 8% price erosion in the second half. So it's a very volatile market. If the price erosion becomes better than that, if the price erosions will become in the low- single-digit, we are hopeful to be at the top end of our guidance for sure, but overall, there is nothing today that gives me comfort to do anything better than I'm guiding to on the Generics.

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Max Stephen Herrmann, Stifel, Nicolaus & Company, Incorporated, Research Division - Head of European Healthcare Equity Research & MD [8]

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Max Herrmann from Stifel. A couple of questions. Firstly, just in terms of the oral generics, just wanted to understand a little bit more about colchicine and Mitigare and the outlook for that product because I believe that's now quite a significant portion of the Generics business. And then secondly, just -- obviously, you've talked a lot about Pfizer and the impact and how your benefit last year of $40 million in the first half has now gone to $20 million. Are you a little disappointed the way the purchasers have reacted then given your comments about how unreliable Pfizer still is, and how little product that the customers are actually willing to go back as much as they have? Or is it as you kind of expected so just to get a more feel whether your policy that you implemented with those shortages of not gouging, for want a better word, has that paid off in terms of loyalty from those customers?

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC - CEO & Executive Director [9]

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So thanks, Max. So I think on the colchicine market on Mitigare, we are growing that business. I think the number for first half, we grew approximately 10% for colchicine. We have 50 sales reps behind -- and these are rented sales reps in the U.S. So this is our only brand drug that we are promoting in the U.S. market. So as I sometimes say, the damn generic companies will always come and ruin a good story. So obviously, there are challenges to that. We feel very comfortable on our IP position. I am starting to sound like a brand company now, it's amazing how we can switch from one to the other. But we are comfortable that there will be few more years before we see that. We have a good asset there. We are comfortable with that asset, and we are obviously defending the cases. But really we have seen a good growth. The indication for colchicine is gout, so we need a limited sales force. But to be able to grow this product 10% every year is a very significant growth for a brand product. So still small, but a very interesting asset that we hope to maintain for few more years before the generics come to the market.

In terms of Pfizer, I think, Pfizer is exactly -- you have to remember Pfizer is a little bit bigger company than Hikma, a tiny bit. So they have revenue of between $50 billion and $60 billion. The hospitals rely very heavily on them not only on generics, they rely very heavily on them on the brands that they buy from them. So I'm not surprised. I think if you're a hospital, to penalize Pfizer, it's a pretty hard job to do. That's -- and we knew that going into this. But I'm looking at it from the other side. My relationship with the hospital being a relatively, yes, I'm about 70% volume in the injectables space, even though those are low-cost volume. I think my relationship is so much stronger today than before the shortages and that is reflected in the growth of the base business Because we are selling more of the product, where there's a competition. We're selling more of the pantoprazole today. We are selling more of the Ondansetron. These are not per se a shortage product but these are very important products that we manufactured in -- for example, in Portugal. So I think I'm not surprised basically how Pfizer came in or how that is reflected. And in a way, for you and for me, the growth in the injectable business and the sustainability is not just due to the Pfizer shortages, which was a little bit the headline a year ago, it is due to the growth of the base business even with the declined shortages from Pfizer because of what we have done because of the relationship we have built with the hospital, with the GPOs and everybody due to the shortage. So the short-term benefit of revenue was good, but the long-term benefit of the relationship will pay for us for a very, very long time. So I'm really pleased and it didn't -- it's in line with our thinking going into it.

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James Daniel Gordon, JP Morgan Chase & Co, Research Division - Senior Analyst [10]

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James Gordon from JPMorgan. So first was just to follow up on the Generics margin. You said in the second half, you said there is incremental price pressure of a couple of percent versus the first half. And then also there could be an incremental $10 million benefit from the Eatontown closures. So is there anything else in there that may be impacting the margin. Khalid said you had $10 million in the first half from Eatonton, $10 million to $20 million in the second half. That's question 1. Question 2 on the Injectables margin. Again it's been very strong and it's sort of holding up in the high 30s. You said the longer-term margin could be in the low 30s, has anything changed your perception of the longer-term margin given the strength you see in the face of headwinds of the big 3 going down and also the price erosion? And thirdly on R&D, you've mentioned 6% to 7% of sales is your target and that's frozen, but it also sounds like there's a lot to do in terms of the number of products that need to come through, which will obviously require more investment, you're going to be investing in, by the sounds of things, in new formulations as well. So are the synergies from the new R&D organization going to be enough to keep that at 6% to 7% or could we see that creeping up in the future?

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC - CEO & Executive Director [11]

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Thanks, James. So I think on the Generics. So basically there's not an incremental thing. You have to remember Eatontown is fully closed. So we are getting the same benefit through the year. So the benefit for the full year is between $10 million and $20 million, part of it is first half, part of it is second have. But so there's not a step-up in the benefit in the second half because the plant in Eatontown closed in December. So we are getting a full benefit for the year. I think there is so many things that play into the generic area. There is approval by FDA on competing products. It's the price erosion in the market and overall, as I say, if the changes in price erosion can have a significant impact on us. Remember in our Capital Market Day in what, October, November of last year, I said I would be very pleased to be at mid-teens in terms of the profitability. Yes, we've delivered 19% now. But in essence, if we go to the midpoint of our guidance, we are guiding towards mid-teens for the second half of the year, if you do the math. So I wouldn't be surprised. That is not an unusual situation to be in. I think this was a little bit unusual now because we had a good supply. There was some shortages which we could step into. We had a good delivery on our nasal sprays and things like that. So I feel that the strength of the business -- and I'm still standing by my statement that mid-teens is not an unreasonable midterm guidance for the Generics. That's really what we are guiding to in the second half of the year giving us a midpoint in around 17% from where we are in the first half. I think the Injectables, if I remember correctly, I didn't guide to low 30s, I guided to mid-30s. Basically that would be the sustainable profitability of the Injectables. And I know I say it's going to be mid-30s and by the way I heard my colleague at Fresenius, he has started to say that also. It's very interesting how these words get along. So he guided to mid-30s should be the profitability of the U.S. injectable business. So I still think so because when we look at the overall business, yes, maybe if I would bet on that there is always shortages where I can step in, it could be a little bit better, it could be a little bit worse, but I think the long-term guidance around mid-30s is not unreasonable. I know we are delivering better than we thought. Now we are at the high end of our guidance. I think that has to do with excellent execution in the U.S., less backorders than we have ever had, delivering in MENA with 20% growth and things like that, but overall in a normal year, I really feel it's not unreasonable to be around the mid-30s. So I'm not moving from that guidance.

I think the R&D -- just in our business model, I believe that 6% to 7% is the right investment. I think so. And I think we need to be better in selecting the products we take to the market. Because the return on some of our launches are not acceptable versus the investments we put into it. Because certainly -- and ZYTIGA is a great example -- we developed this product, we invest in it, we take it all the way, we have even some IP cost. And then we have 10 companies that get approval on day 1, and 6 of them launch the day after and nobody makes money. And this is basically where we need to be better to find the products that fit our manufacturing, that fit our profile, that fits the differentiation. They don't have to be hundreds and hundreds of millions in terms of brand value, but the sustainability and the tail value of the things -- so I feel with the new global approach to R&D, with the return on investment we're thinking about the products, we need to change our thinking. It's not continue with the same thing, just do more, it's to change our approach. I feel still that 6% to 7% should be plenty enough to enable us because I remind you of the guidance we gave at our Capital Market Day. I feel in 5 years' time -- or it's 4.5 years now -- in 4.5 years' time, we should have 10% of our revenue from new launches. And we are about 6% today. So we really need to step up in getting the right products to the markets. And I don't believe in the case by throwing money at the problem, you will solve it. It's to get the right people to do the right thing and that's part of the reorganization of the R&D.

Any more questions? Anything from the webcast? Okay.

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Operator [12]

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(Operator Instructions) We have a question registered from Brian White of Cantor Fitzgerald.

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Brian Templeton White, Cantor Fitzgerald Europe, Research Division - Research Analyst [13]

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I don't know if you asked -- this question was asked or if you answered it, but just in terms of the Insys acquisition announced today. I can remember my U.S. colleagues getting quite excited by the nasal adrenaline product. And I saw like a fast time designation I think it was a couple of years ago now and you've have had a positive or indices interface to -- positive interface to interaction with FDA. I just wondered in terms of time lines what still has to be done and when can we expect that on the market?

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

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What product was it I couldn't get it.

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Brian Templeton White, Cantor Fitzgerald Europe, Research Division - Research Analyst [15]

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It's a nasal epinephrine product.

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

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So the nasal epinephrine that we are acquiring from Insys?

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Brian Templeton White, Cantor Fitzgerald Europe, Research Division - Research Analyst [17]

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From Insys this morning, yes. Just wondered how long would that would take in terms of getting that out to the market?

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

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Yes. So obviously the asset has only been in our hand for 12 hours. So it's a little bit premature to talk about it. It is still in active development. There is still some way to go on that. I think we are excited about it. I think the naloxone product is under review. So that is much further along. But I think I really don't know the exact status of the development, but an exciting opportunities we feel, but I still think there are -- quite some time until this product will come to the market.

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Operator [19]

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We have no further questions on the phone lines.

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Susan Ringdal, Hikma Pharmaceuticals PLC - EVP of Strategic Planning & Global Affairs [20]

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Siggi, there's just one from the webcast from Rashad. He's wondering will the Civica deal impact the Injectables segment in the long term? And if yes, how much impact are you looking at?

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Sigurdur Oli Olafsson, Hikma Pharmaceuticals PLC - CEO & Executive Director [21]

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So as I mentioned -- I think it was an answer to Peter earlier -- was I think the impact is relatively small in terms of the revenue. There will be some low-single-digit impact on the U.S. Injectables revenue. But really what it gives us is the stability of the supply. It basically keeps our manufacturing plants full. We know how to basically project our manufacturing. It -- that reduces the overhead, the overhead allocation, we can run our business so much better. So to have a fixed volume, that's part of the thing. Obviously, we are committing to Civica to have these products available. So we haven't given guidance on profitability or anything like that. The only guidance on profitability is we have said the impact this year is next to nothing. But really it will be next year. And there will be some small impact next year. But overall I think, it has more impact in round how we operate our business, the stability of the business, and hopefully in the future we can expand this relationship when we bring new products to the market. And when both Hikma has experience working with Civica and Civica has experience working with Hikma, this could expand the relationship. So for the long term, this could be very interesting for both parties. But in the short term, I want to be careful around what the impact is for 2020 or 2021.

So I think that ends the question. Thank you very much for coming here and I'm looking forward to see you soon. Thank you.