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Edited Transcript of ORNBV.HE earnings conference call or presentation 17-Jul-19 10:30am GMT

Q2 2019 Orion Oyj Earnings Call

Espoo Jul 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Orion Oyj earnings conference call or presentation Wednesday, July 17, 2019 at 10:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jari Karlson

Orion Oyj - CFO, Senior VP of Animal Health & Member of the Executive Management Board

* Timo Lappalainen

Orion Oyj - CEO, President & Chairman of the Executive Management Board

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Conference Call Participants

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* Jo Walton

Crédit Suisse AG, Research Division - MD

* Sami Sarkamies

Nordea Markets, Research Division - Senior Analyst of TMT

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Presentation

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Timo Lappalainen, Orion Oyj - CEO, President & Chairman of the Executive Management Board [1]

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(foreign language) Good afternoon. Welcome to Orion's Earnings Call First Half 2019. My name is Timo Lappalainen, I'm the President and CEO of the company.

I will firstly have a few prepared remarks. Thereafter, I will invite our CFO, Jari Karlson to join me here to the podium and we are happy to address any questions, comments that you may have.

At this stage, I want to draw your attention to the disclaimer. This presentation contains forward-looking statements, which involve risks and uncertainty factors and Orion assumes no obligation to update or revise any information included in this presentation.

So if we kick off by getting -- reviewing some highlights for the first half of 2019. Of course for the company, the major, major event was the submission of marketing authorization for darolutamide, our prostate cancer agent candidate in the main markets. And those include the U.S., Japan, Europe, and now the role -- the rolling submissions in many other markets are taking place. Also, we've informed during the course of the first 6 months that the compound was granted priority review by the FDA in the U.S.

In terms of the financials, the net sales were approximately at the same level as in the comparable period. The operating profit was lower than in the comparable period because as we have noted earlier, there are substantial investments that we are putting forth in our growth plans. And in part of that, the R&D expenses increased as we are investing more money in the future, however, we maintain our outlook for the financial year.

Now a little bit more on the product sales. The Proprietary Products were approximately at the par. We continue to plow ahead with Easyhaler as well as Simdax. The Specialty Products, there the sales seem to flatten out as we have had the decline for a period a years now, and especially strong growth we had in Scandinavia.

Another important milestone took place early this week when we informed that our REFALS that's the -- our ALS compound candidate was recruited in full -- the trial, Phase III trial in that. And that trial evaluates orally administered levosimendan for the treatment of symptoms in ALS.

Some of the key numbers for the first 6 months. As said, the net sales pretty much at par EUR 493 million. Operating profit was at the lower rate and all of these numbers, by the way with the exception of the cash flow per share, those were -- we have eliminated the divestment of Orion Diagnostica, which took place in the first half 2018. So the operating profit was down, and the operating margin as well down from the previous year.

And then the cash flow in the operating sense was very strong for the first half of the year, but naturally because there was a nonrecurring item last year of the divestment of Orion Diagnostica that is not fully comparable.

And now if we look at the -- how we arrived in terms of the sales and the operating profit this year. When we started out the year from the comparable period, we had actually lower shipments of Parkinson products, Stalevo as well as entacapone and Novartis when comparing to the period before. Seems like now it's tilted a little bit towards the second half of the year. The milestones were also lower in the period as compared to last year. The decline of the prices in the important market for Orion in Finland continued in the generic space. However, seems like there at least a slope is declining. So we are not yet flattened out there but the decline seems to be now striking out here.

We had -- however, we had a nice sales growth in Easyhaler as well as -- and Animal Health business had a strong start for the year. And then as said, in Simdax and we actually had a small gain in exchange rate as opposed to the loss we had last year.

Then the operating profit, the product sales and the mix thereof, that took its toll on the ForEx. We had a small gain there. Royalties and milestones, those flow directly to P&L to the bottom line, and then especially in the fixed cost side, as we have indicated, we are having a fairly substantial investment to our growth plan to the magnitude of order of EUR 30 million this year. And that certainly took its toll for the first half.

No major change in the geographical breakdown of our sales. Finland continue to be the largest country market. However, the Finnish share is one of the lowest for a long time. Scandinavia plowed ahead and of course the rest of Europe as well. And also some of the other markets.

Now in terms of the sales by the divisions. The Specialty Products was pretty close at par for the first 6 months, Proprietary Products was suffering from the shipments of Stalevo to our partner Novartis, but as I indicated, the Animal Health had a strong start for the year. Fermion had a good start as well. And our largest business still continues to be the Specialty Products followed by the Proprietary Products business.

And then when we look at the league table of the products. So Easyhaler now the #1 product for the first 6 months, continuing its strong growth there. Stalevo is the product where we acquired rights back in Europe from our partner in Novartis. And there we are developing as planned pretty well and I'll have a -- little bit more on than that.

Simdax had a nice start for the year with a 17% growth. Dexdor still flat despite that what we've indicated that there is a number of competitors that we understand have received marketing authorizations. Animal Health had a strong start for the growth as we did as well with our biosimilar business, fairly nice start, but as we've indicated several times earlier, the impact of that to the bottom line is of a different magnitude than any of the other product lines here.

So if we first review of the Proprietary Products, there the Easyhaler had a nice start, Parkinson franchise in totality, so that comprises of the Stalevo as well as the anti-Comtan -- Comtess/Comtan products had a decline due to the shipment pattern to our partner. Dexdor, flat, and a nice growth in Simdax. And then the Precedex product, which is actually a Dex more or less same product as what we market as Dexdor in Europe, it's marketed as Precedex outside Europe by our partner, Pfizer, and these are royalties as well as special API shipments to our partner.

And then Easyhaler. Strong growth there especially with our combination product, budesonide-formoterol. The total franchise grew by 20%, but the budesonide outgrew that certainly. As we've have indicated last time, seems like the salmeterol-fluticasone that is facing a little bit tougher times in penetrating the market as what we saw with budesonide-formoterol product. And we continue with a new Easyhaler version for COPD, which is the tiotropium version of Easyhaler.

And here you see the change that took actually place when we look at the mix of our sales of entacapone product. So for the second half that's when our own sales kicked in, in Europe for the acquired territories and then the shipments to Novartis especially outside Europe actually were much lesser than in the quarter 2 last year. And still that the acquisition of those rights and getting the business back that seems to be running pretty much along the plans as what we had early parts of this year.

And as I mentioned, in Dexdor, the sales for the first 6 months pretty much at flat. We are certainly seeing competition out there. There are numerous players who have received marketing authorizations, and there is certainly competition in some markets, not in all. The overall market has grown for this class, but as said, most of these numbers what see here these are actually the phase numbers and not the actual market pricing.

Then if we turn to Specialty Products. So that is the business, which comprises of generic prescription products. It has the OTC products, it has non-pharma products, we sell some of those as well. And then the biosimilar products. And there the main market is the local Finnish market, especially in terms of the OTC and the prescription products. There we still saw a little bit decline there especially in the reference price products. However, the volume growth for Orion seems to be picking up and we are outgrowing the market in terms of volume.

In Scandinavia, we had a good start for the year especially in terms of the biosimilar products. And here you see also the split of this segment by these different product categories. So certainly the prescription products, those are the major part of that and then the self-care products.

So as said, Finland continues to be a main market for our prescription generic products. The reference price products, which essentially are up for bidding, those -- that market actually shrunk by 8 percentage points during the first 6 months and Orion fared a little bit better with our development of minus 7%, but as said, seems like our volume is picking up now.

And in terms of the overall Pharma market here in Finland, the reference price products, we have a very strong position in that with 26%, also strong position in OTC, self-care products with 24%, and in the overall human Pharma, roughly 11%. So that's sort of the split of the Orion business within the market here in Finland.

Then our future, the R&D. Not really changes in this picture as, I guess, it's reasonable to also assume in every 3 months, tough to make a change in this picture because we here show our most important key clinical trials. The tiotropium is going ahead. That development, darolutamide, as said, that is being reviewed for the first indication by numerous regulators around the world, as our partner there continues to submit dossier. Then the next indication, what we have indicated is that, that is fully enrolled and now we are only waiting for it to have the -- actually the results of that trial, that will still take couple of years.

Then the ALS trial, that is now fully recruited. And we expect to have the final results in about a year's time or so. The protocol calls for a 48-week treatment for all of these patients. Then we have some earlier pipeline there as well, mostly today what we are here demonstrating are in the area of oncology, and last time we have included the new 209, which is a CYP11 inhibitor in this, and there we are running that trial as a basket trial including prostate cancer and breast cancer patients.

So the ALS trial was now fully recruited, took about a year in total to randomize all 496 patients, generally a global trial, we had 104 sites participating there, numerous physicians, and of course, patients, their caregivers are all very important part of this. And the objective here is to demonstrate the benefit of oral levosimendan especially in the respiratory function of these patients, and also using the overall ALS scoring system.

Now for this year, when we started out the year, we gave our internal objectives for this year and I promise that we will report the progress thereof, and of course now the #1 is the darolutamide, preparing for that commercialization. Now the marketing authorization are being submitted and have been submitted in numerous markets. It received the priority review in the U.S. and then of course the next phase is then the ARASENS once -- that then will be reported in the next few years.

Then the ALS. Now fully recruited and we have to wait about a year before that is completed and then some more months before that is reported. Then of course the local markets here, the generic, that's an important part of our business and we need to stay competitive there in terms of providing the broad portfolio as we carry here, and today, we are happy to note that our volume share is actually increasing faster than the market.

And then of course the assets that we have online on stream, the Easyhaler is one of the key assets there, and there we are pushing every button to make that grow and seems like that is working. Easyhaler franchise is growing by 20%.

And naturally, we are also evaluating opportunities how to invest and acquire assets to be commercialized, also maybe to augment our own R&D pipeline, but that work is continuing, and we have nothing to report at this time.

We also want to draw your attention to the sustainability report that we published in early part of May. Here's the link to that. So orion.fi, you will find the sustainability report there. And what we've cornered to Orion's sustainability in actually under our 4 pillars: the first one is of course the patient safety and having the products in the market, which is not all that self-evident these days as the supply chains are extremely complex also in the sphere of medicines. Then of course the environment. How we produce, how we test our products. They have to be sustainable methods being used and then of course taking care of our own people. So all the Orionees, the 3,500 Orionees who work every day here. We also want to be transparent in dealing with the numerous stakeholders that are part of the pharma and the healthcare business in overall and want to have a very high ethics as is demanded by us, and also we believe that is the cornerstone of the long-term sustainability.

And here are just a couple of points from our sustainability report. There are some products, API is here taken as an example as methotrexate, which is a very important medicine for rheumatoid arthritis patients and certain cancer indications. So we are a major player in producing that. Of course, the quality that comes with not only by making the quality, but also controlling the quality. So numerous audits are being performed on us and we performed those as well.

Of course there are customer complaints. We have receive those as well and you have to have a very good process to those. Also we are very proud to report that we've reduced our waste actually quite a lot in our production facilities and especially in the wastewater that has been the residuals of pharma products, and those has been reduced considerably.

This was also a year when European Union implemented the serialization and anti-tampering systems and procedures in place. Orion has been one of the frontrunners here and investing over several years, quite a lot manpower as well as finance resources to prepare ourselves for the serialization and those -- that work is now actually bearing fruit as we are in -- very well prepared for that.

And then we've committed ourselves to the climate change, to fight that. And there, the CO2 reduction target for ourselves is reduction of 75%, our emission of CO2 gases by 2025.

The outlook. We continue to maintain our outlook. So the -- in terms of net sales, we expect that the net sales for this year would be slightly higher than 2018. That is including the anticipated milestone to be recorded in our books once the first darolutamide sales in the U.S. take place.

In the similar fashion, the operating profit, we expect that to be at the same level as 2018, again, accounting for the darolutamide milestone. And of course, this includes our substantial investments into the future and in our growth plans.

Today, we also published our quarterly calendar for next year. So here you have those. The AGM is planned to take place March 25, 2020. And next time actually we will report on October 23 of our third quarter events and what took place in there.

Now at this stage, I would like to invite our CFO, Jari Karlson to join me here at the podium. And we are happy to entertain any questions or comments that you may have. Please, go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will take our first question from Jo Walton from Crédit Suisse.

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Jo Walton, Crédit Suisse AG, Research Division - MD [2]

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I have a few questions, if I could please. Starting with the Easyhaler franchise. I wonder if you can tell us what steps you can take, and give us any additional color to increase the adoption of your effective generic to Advair.

Secondly, I wonder if you can tell us a little bit more about the Animal Health business. It's obviously done extremely well in the first half of the year. Is there any phasing of that? Or could we expect to see similar rates of growth in the second half of the year? I wonder if you could give us an update on any more tenders that may have come up in the biosimilar side just so that we get a sense of the full range of products that you're now allowed or able to market. So an update there. And then finally, as we are coming up to a darolutamide approval in the U.S., I wonder if you could help us at all with when we should start to see an increase in your SG&A because presumably you will opt in, and will that be something more towards perhaps the second half of next year when we could start to see your incremental marketing investment in that product?

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Timo Lappalainen, Orion Oyj - CEO, President & Chairman of the Executive Management Board [3]

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Thank you. Very good questions. Let me first address the salmeterol-fluticasone penetration question. Obviously, there what we see are actually the main tools available for us are the -- promoting the full line what we have. So for the course of the asthma, or COPD patient over the course of the disease. So we have a full line of products there. Of course the pricing point is an important element and typically we are priced, our pricing point is lower than the originator. But in quite a few markets, there are one or another way you have to win a tender, I think Germany would be qualify as one of those, also Sweden would be qualifying as one of those, where you have to pass the threshold in order, actually even, to promote your product or in a meaningful sense. So what we are currently doing is of course addressing those and as well as we've indicated in the early part of year, that we have actually increased our sales force capacity especially in Germany, and this we are doing by having a contract sales force organization there to augment our own sales force. Animal Health, do you want to? Because Jari is responsible for -- in our management Board for Animal Health, so maybe you want to address that.

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Jari Karlson, Orion Oyj - CFO, Senior VP of Animal Health & Member of the Executive Management Board [4]

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I mean the year started very well and when comparing the total Animal Health numbers and the top product list, one could notice that the growth has basically been driven by this Animal Health product line, which is, on the other hand, very much driven by sales to our partners around the world. And there last year, we had a relatively weak start for the year and then much more shipments to the partner during the second half of the year. And this year, it's going to be a little bit the other way around. So unfortunately we cannot expect to see the similar type of growth during the second half of the year, which was especially driven by relatively large shipments to some of our big partners.

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Timo Lappalainen, Orion Oyj - CEO, President & Chairman of the Executive Management Board [5]

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In terms of the biosimilars, it is unlikely that we will see any major tenders to materialize to shipments still this year. So pretty much what we now have in hand, they will go on, but any new tenders that would open for shipments this year to have a material impact, I think that would be a high stretch. So I think that is unlikely. Still the largest product there continue to be Remsima in our part and then of course here locally the apalutamide is going to be -- continues to plow ahead.

In terms of the darolutamide, the -- that of course means for us the sales and marketing efforts means Europe. Typically, the European approval tends to take a little bit longer time because you have to also include the reimbursement discussions there, and I think, there will be naturally some startup costs when we start having some visibility on the approval timelines, but I think in terms of any major investments, I think at this stage when we -- based on information we have, I think, the early part of 2020 would be probably too early to see any visual impact of those. So it's probably then tilting towards the latter part of 2020.

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Jo Walton, Crédit Suisse AG, Research Division - MD [6]

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Thank you. And can I just -- final one, can you just confirm whether you're able to market your biosimilar perception yet?

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Timo Lappalainen, Orion Oyj - CEO, President & Chairman of the Executive Management Board [7]

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In some markets, yes.

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Operator [8]

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(Operator Instructions) We will now take our next question from Sami Sarkamies from Nordea Group.

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Sami Sarkamies, Nordea Markets, Research Division - Senior Analyst of TMT [9]

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I have actually 4 questions. Starting from gross margins. These were on quite low sub-60% level in Q2. Can you open up some of the main factors behind this?

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Jari Karlson, Orion Oyj - CFO, Senior VP of Animal Health & Member of the Executive Management Board [10]

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Okay. I can start that. So especially compared to last year, the gross margin is definitely way lower than in 2018, and there, of course, the product mix is the key driver. So last year we had 60 million more shipments of Parkinson's products than we did this year, and obviously, those products could generate higher products than the average of the company. So that was one key driver. So it's more driven by the changes in the product mix and of course the pricing environment. I mean like you have seen in our report, the prices of the reference price -- products in Finland are roughly 10% down from year ago during the first 6 months of this year. So that of course has negative impact also on the gross margin. So it's really driven by the sales mix and prices in the market, not costs as such.

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Sami Sarkamies, Nordea Markets, Research Division - Senior Analyst of TMT [11]

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Okay. And then secondly on Simdax. You did mention that marketing authorizations have been filed for generic Simdax. Can you be a bit more specific regarding which countries we are talking about? And also share your planning assumptions on how you expect the generic competition to eventually ramp up?

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Timo Lappalainen, Orion Oyj - CEO, President & Chairman of the Executive Management Board [12]

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Well, actually the way typically the generics are filed in Europe, you have a so-called mother country where you start the mutual recognition process. That's the country of the -- where you first file and then you subsequently roll that over to the other markets. Now in terms of the planning, we expect that these would have no material impact for this year sales. On the contrary, we continue to -- and our planning assumption is that the Simdax sales continue to grow this year.

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Jari Karlson, Orion Oyj - CFO, Senior VP of Animal Health & Member of the Executive Management Board [13]

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And for next year, it's still a lot of uncertainty. So we really don't have enough information at this stage to be able to calculate the potential impact for us. There probably will be some, but how big, we'll have to wait until we really start seeing the competition emerging.

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Sami Sarkamies, Nordea Markets, Research Division - Senior Analyst of TMT [14]

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Okay. And then thirdly regarding Finnish market. You did mention that price levels have been stable now in Q2 for the generics products. If we assume that this is the case also during the remainder of the year, what sort of pricing headwind are we talking about after roughly EUR 50 million headwind in '17, and '18?

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Timo Lappalainen, Orion Oyj - CEO, President & Chairman of the Executive Management Board [15]

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Yes. I'm sorry if I -- I hope not to mislead you. It doesn't mean that the price level has stabilized. I mean we are still seeing decline but the slope of the curve is actually slowing down. So the secondary one is coming down. The current assumption, we started out I think roughly EUR 15 million, EUR 17 million last year. Now we are probably looking either double digit or high single digit. I think that's an assumption that we are internally using for the fiscal year of 2019.

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Sami Sarkamies, Nordea Markets, Research Division - Senior Analyst of TMT [16]

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Okay, thanks. And then finally, regarding Animal Health. Just wanted to check that did you say earlier that the growth you've been experiencing there is not contributing to margins in a meaningful way?

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Timo Lappalainen, Orion Oyj - CEO, President & Chairman of the Executive Management Board [17]

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No, this was -- my comment was on the biosimilars.

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Operator [18]

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As there are no further questions in the queue, I'll hand the conference back over to your CEO for any additional or closing remarks.

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Timo Lappalainen, Orion Oyj - CEO, President & Chairman of the Executive Management Board [19]

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Okay. Thank you very much for joining us. We wish everybody a very nice summer. It has finally turned to be summer at least for this afternoon here in Helsinki. And we hope to see you all joining us in our conference call on October 23.