Indivior PLC

LSE:INDV

Earnings Call Transcript 2021-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Indivior plc first quarter results 2021. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Mark Crossley, Chief Executive Officer of Indivior. Thank you. Please go ahead, sir.

[Mark Crossley, CEO & Executive Director]

Thank you. Good morning, and good afternoon, everyone. Thanks for joining our Q1 results call. Here with me today are Ryan Preblick, our Chief Financial Officer; Christian Heidbreder, our Chief Scientific Officer; and John Wasserman, our interim General Counsel. I'll start with an overview of the results for Q1 and a progress report against our stated strategic priorities, and then Ryan will discuss the results in more detail. Now turning to the quarter. Our results overall were solid and were within our expectations in a quarter in which we experienced strong growth in net revenue, net income and net cash. What stands out to me, and reflects continued execution from the teams, our firstly, SUBLOCADE net revenue increased 10% compared to the previous quarter to $43 million. This is in the face of continued challenging promotional environment due to COVID-19, where our clinical specialists are still only able to access about 50% to 60% of their platform. In-person calls have increased since fiscal year-end from 40% to about 50% at quarter close, perhaps an initial sign that there is some easing of barriers with the rollout of vaccines. Second, we have growing contributions from SUBLOCADE and SUBOXONE Film share continued to be resilient. This, in combination with our lower OpEx base resulted in solid adjusted net income of $38 million. Finally, our net cash position grew from the 2020 year-end balance, and remains strong. Ryan will discuss this in more detail, but the relatively flat share performance of SUBOXONE has delayed the unwind of government payables due to our negative net working capital position. Quickly, looking at fiscal year 2021 guidance, no change here from what we laid out with our fiscal year 2020 results. We still very much expect the base case view at this point. There's been COVID spike activity and new variants, but we continue to gather expert intelligence, and believe that with increasing vaccination rates in the U.S., the second half of 2021 should see greater health care system access. We're also hopeful that with COVID increasingly in the rearview mirror, attention within the government will accelerate behind the opioid epidemic, which has intensified with the convergence of the pandemic over the past year. We're seeing early signs of momentum in this area, which I'll provide a bit more detail later on. To highlight our progress against our strategic priorities, we're sharing with you our report card. We'll provide this each quarter and augment it with deeper dives into important initiatives that are aligned with our strategic priorities. Starting with our #1 and overriding strategic focus, delivering on SUBLOCADE net revenue of $1 billion plus. We saw continued progress across the board. You've already seen some of these numbers in the press release, so I'll quickly provide some highlights on our organized health system strategy and how we are continuing to expand this important growth platform for SUBLOCADE. In Q1, we activated 22 new parent organized health systems, bringing our total count to approximately 230 against our 500-plus goal. This channel now accounts for over 40% of SUBLOCADE net revenue exiting Q1, and over 70% of our growth. And we continue to expect that by fiscal year-end, it will account for the majority of SUBLOCADE net revenue. While our focus has been on activating new organized health systems, increasingly, our efforts are also turning to driving more depth into those entities that we have gained access to. With the team on track with organized health system KPIs, we continue to prepare for easing of COVID to re-enable engagement with the Criminal Justice System. Data indicates that 65% of OUD patients flow through the Criminal Justice System at one point or another during their patient journey. Daily treatment for many systems pose significant challenges due to the resourcing required to administer a daily program and/or for safety concerns associated with bringing patients to the dispensary. Obviously, SUBLOCADE, as a monthly treatment, significantly alleviates the administrative burden to treating incarcerated patients, and then upon a release provides a month for the patient to access treatment post release. The anecdotal feedback in those Criminal Justice Systems where SUBLOCADE is a treatment option, including some prisons in New Hampshire, New York, California and Colorado, has been encouraging. We're continuing to see positive word-of-mouth spread generally amongst the Criminal Justice treatment community. This gives us confidence that our expanded access team, we can accelerate our progress in this important subchannel once access opens. Looking briefly at how we're progressing on other strategic priorities. We're excited about new product availability in the rest of world markets for both SUBLOCADE and SUBOXONE Film. We're sequencing the launches as we complete the required reimbursement agreements across targeted geographies. And as we've indicated, we expect to begin reversing the net revenue declines we've seen in the Rest of World, based on the success of these new products moving forward. Turning to the last 2 strategic pillars. Christian is here with us to answer any detailed questions, but in summary, our label extensions for SUBLOCADE have been submitted to the FDA and are under review. We anticipate receiving comments in the second half of the year. And our 2 early-stage assets are progressing well, and are on schedule with their respective milestones. Lastly, on this page, in terms of operational excellence, you know we have a strong record of making the required business interventions to ensure we're optimally resource for execution. This quarter, I'm highlighting our net cash position, which grew to $711 million. Additionally, our strategic alignment to organize health systems and the ecosystem model has now been in place and fully resourced for an entire quarter after completing the strategic alignment late last fall. One last item before turning it over to Ryan. We're very aware of the recent developments in the U.S. opioid epidemic, brought about by COVID. You see some of the recent headlines below, but preliminary government data for the most recent 12-month period available that ended in September shows that more than 87,000 Americans died of drug overdoses. This number eclipses the toll from any year since the opioid epidemic began in the 1990s, and represents a 29% rise in opioids over the last year. About 2/3 of drug overdoses involve opioids, which have soared over the course of the pandemic. Significantly, the administration's plan seeks what it says is a historic investment of $10.7 billion directed to the opioid crisis, nearly $4 billion more than 2021. Those funds would be directed to states, native American tribes as well as for federal research into opioid addiction and treatment. Also among the Biden and Harris drug policy priorities is breaking down the barriers to medication assisted treatment. We saw an initial sign of this earlier this week with the new practice guidelines for HCPs who prescribe buprenorphine treatment for opioid use disorder. This guidance allows for obtaining an X waiver via a less burdensome route, which eliminates the previous training requirements, which were 8 hours for doctors and 24 for other primary care providers, such as nurse practitioners or physician assistance. Further supplementing this, we've seen increases in legislative momentum focused on increasing access and reducing barriers to treatment. There have been numerous laws passed in recent years, including CARA and [indiscernible], and there are 4 potential legislative efforts in process now, including the Medicaid Reentry Act, Medication Access and Training Expansion Act, the next-generation of CARA and the main streaming addiction treatment act. We're supportive of policies that advance access to treatment and believe this administration in general will continue to promote an agenda that destigmatize addiction through common sense actions. With a treatment penetration of 20% to 30% in the U.S., we need to do better, and I'm sensing momentum building in broadening access and normalizing the disease space. With that brief overview, I'll turn it over to Ryan.

[Ryan Preblick, CFO & Executive Director]

Thanks, Mark, and good morning and good afternoon, everyone. We had a solid quarter with performance tracking to our full year 2021 expectations. Specifically, we continue to drive SUBLOCADE net revenue momentum, which contributed to our total net revenue and operating profit growth year-over-year. OpEx also benefited from our 2020 cost program. As important, we maintained our financial flexibility, ending the quarter with a higher gross cash position of $945 million. Based on our performance in the quarter and the trends in the business, we are also reconfirming our full year 2021 base case guidance. As a reminder, the key macro assumption in our base case is that the pace of vaccine deployment in the U.S. allows the health care system to open up in the back half of the year, enabling us to benefit from increased in-person promotion. Now I'll quickly provide some detail on the drivers of our performance in the quarter. Starting with the top line. Total net revenue grew 18% versus the year ago quarter, including a 4% benefit from FX. Increase in net revenue was mainly a function of a near 50% year-over-year increase in SUBLOCADE net revenue to $43 million, and continued SUBOXONE Film share resilience in the U.S. U.S. net revenue grew by 25% as a consequence. Rest of World, on the other hand, excluding a favorable FX benefit, was down 8% year-over-year driven by ongoing austerity measures and generic competition in Western European markets. Our focus remains on net revenue diversification with new products. And we continue to expect the erosion rate of recent years to ease in 2021. As a reminder, SUBLOCADE is currently available in Canada, Australia and Israel, and we expect to launch in the Nordics during 2021. We are also awaiting regulatory approvals in Germany, Italy and other EU countries. Meanwhile, we have launched SUBOXONE Film in Canada, Germany and the U.K., and we expect to launch in most of the Nordics next month, and Italy in second half 2021 upon reimbursement publication. Taking a closer look at SUBLOCADE, total Q1 2021 net revenue of $43 million included approximately $3 million from Rest of World. The net revenue was in line with our expectations and consistent with our full year base case guidance of $185 million to $210 million. Sequentially, this represents an underlying growth rate of 11% in the U.S. If we adjust for stocking in the fourth quarter of 2020, this growth is in line with the dispense growth we saw quarter-to-quarter. Moving to PERSERIS. Net revenue of just over $3 million was within our expectations. PERSERIS performance continues to be impacted by the constraints COVID is placing on our ability to promote unique benefits of this important medicine on an in-person basis. Finally, a brief comment on SUBOXONE Film. While you have seen from today's numbers, and from market research data that film share continues to hold up relatively well. We maintain our position that there is no fundamental reason why this over-delivery will continue. In fact, we have seen film shares starting to trend lower in recent weeks. Falling below 20% for the first time. As a reminder, our guidance assumes share erosion after the first quarter as a result of formulary actions, and that share loss will ultimately revert to observed industry analogs. If we now move down the P&L, gross margin of 82% reflects the dynamic we outlined with our base case guidance for mid- to high single-digit percent point year-over-year decline in 2021. The decline of 8 percentage points on an adjusted basis mainly reflects the shifting U.S. channel mix for SUBOXONE Film, the vast majority of which is now less profitable government-related business. We expect this dynamic to reverse beyond 2021 as SUBLOCADE becomes a much more meaningful net revenue contributor. Continuing with operating expenses, here saw a substantial decline versus the year ago period. This primarily reflects 2 factors. First, we were running a DTC campaign in the year ago quarter that has not been repeated. And second, we are capturing the benefits from our reorganization in 2020. And which included a reduction in underlying cost structure, partially offset by increased investment behind further penetration of OHS and focused support of our R&D pipeline. First quarter adjusted OpEx, which we define as SG&A and R&D, was $97 million. In general, the first quarter is typically our lowest level of OpEx expenditure. And we continue to expect underlying OpEx spend for full year 2021 of $420 million to $440 million. This being said, we noted on our fourth quarter call that in the event that we benefit from continued film strength we may choose to make further growth investments behind SUBLOCADE and PERSERIS. Moving down -- moving next down the P&L to adjusted operating income, a combination of the increase in net revenue and lower OpEx resulted in adjusted operating income of $51 million. This represents a very substantial uplift on the $3 million we reported last year on the same basis. After net finance expense and tax, our adjusted net income was $38 million, which compares with a modest loss in the year ago quarter. Turning next to the balance sheet and our capital position. We continue to maintain a robust liquidity position. The net cash inflow from operations of $87 million in the first quarter in part reflected timing differences on cash receipts and payables and government rebates as well as positive operating cash flow. As a consequence, we ended the quarter with a gross cash of $945 million and net cash of $711 million. We continue to caution that any acceleration in erosion of branded SUBOXONE Film will result in a material use of cash as the replenishment rate of government payables would slow. As you would expect, given that we are still in the COVID environment, we are maintaining our focus on cash preservation more generally. Finally, we believe our Q1 performance puts us on track to deliver our full year 2021 guidance, which we are reconfirming today. While film has been relatively resilient, it's still very early in the year, and we currently see no fundamental reason to change our base case assumptions, as I noted earlier. Considering this, we remain confident in our full year outlook, and we look forward to a successful COVID vaccination program, resulting in the health care systems gradually returning to a level of normality.

[Mark Crossley, CEO & Executive Director]

Thank you, Ryan. Let me close the formal remarks by just reemphasizing a few points. Our strategy and strategic priorities are extremely clear. SUBLOCADE is a transformational product in a very attractive market with low treatment penetration. We've reorganized the business, and our structure and strategy are fully aligned to deliver on these strategic priorities and generate long-term shareholder value. In 2021, we are 100% focused on executing on the business, and are holding ourselves accountable. As you saw on the scorecard today, the team is delivering, and I'm confident we will continue to deliver moving forward. With that, I'd like to open the line for Q&A, please.

[Operator]

[Operator Instructions] And your first question comes from the line of Harry Sephton from Jefferies.

[Harry Thomas d'Alton Sephton, Equity Analyst]

Brilliant. I have 3, please. So firstly, just wanted to get your latest thoughts on commercial activities in the second half of the year as we expect lockdowns to ease, and those activities are both SUBLOCADE and PERSERIS piece. My second question is on the $26 million cash benefit from the surety bonds. I just wanted to get some clarity on what exactly that relates to, and if it has any relation to the surety bonds you placed for the doctor readies and the litigation a few years back? And then my third question is on the strong cash flow in the quarter and the continued resilience of the film, I would just like to get a quick update on your thoughts around capital allocation priorities.

[Mark Crossley, CEO & Executive Director]

Thanks for the question, Harry. Maybe I'll take care of questions the first and third questions, and then I'll let Ryan speak to the surety bond. So as it relates to the commercial activity in the second half, the team is very excited to see the progress of vaccines and the potential easing of some of the restrictions and a return to normalcy. We're starting to see some of that through more in-face visits going from 40% to 50%. With the cadence of that as we enter the second half, the way things will work is as we gain new access. You have to remember that there is a certain amount of reach and then frequency with physicians to get them into prescribing habits. And then it takes time for them to get that depth of patients per AHCP as they gain conviction in the medication. So there is a bit of a lag. I know some folks have asked questions of a burst coming out of the easing of the access, but it will take time for that to build. So I think that's appropriate for both SUBLOCADE and PERSERIS in that second half dynamic. With regards to cash and the film resilience and the capital allocation, I hate to be a bit of a broken record here, but nothing really has changed since our fiscal year-end results just a few months ago. We're still here in the transition period from SUBLOCADE to film. The pandemic pressure is still there. While there's positive vaccines, we see numerous other variants. And we see some countries like India, where the pandemic has flared again. So at this time, we don't see a reason to deviate from our current capital allocation approach that's been aligned with the Board, but we will commit to revisiting it with them moving forward. So with that, maybe I'll hand over to Ryan for a little bit of color on the surety bond.

[Ryan Preblick, CFO & Executive Director]

Yes. Yes. So you are correct that the $26 million return of the surety bond is tied to the patent cases, both the DRL and Alvogen. If you recall, the judge did require us to put up in total, across both cases, $108 million worth of bonds. And what has happened is post the DOJ resolution. And with the continued success of our business over the last couple of quarters, we were able to reach out to one of the bondholders and see if we can potentially get back some of the collateral, we were successful in that effort, and that's the $26 million coming back to our cash.

[Operator]

And your next question comes from the line of Max Herman from Stifel.

[Max Stephen Herrmann, Head of European Healthcare Equity Research & MD]

Again, 3 if I may. Firstly, just really on the SUBOXONE Film U.S. performance. Because I know the fourth quarter was pretty strong, and there was some stocking in there. So I'm surprised that the strength, we didn't see it -- doesn't seem to be any unwinding of that. In fact, if anything, we seem to be seeing some continued stocking or strength. So just wanted to understand what's going on underlying that we see, obviously, the prescription trends and the moves there. Is there -- what's the pricing impact or the other impacts? Secondly, just in terms of capital allocation, and the comment about potentially the second half if SUBOXONE strength continues to reinvest some of that excess. I wondered whether there might be potential for DTC, whether we should -- is that something you might consider if the market really opens up post the pandemic easing. And then on SUBLOCADE, I wanted to try and get a better understanding of I guess the rollout ex U.S., and also whether by focusing on the organized health systems you're missing the entire market or whether AHSs are -- you're pulling customers or patients with opioid use to sort of into the system. I appreciate it's a much more efficient system to deliver patient care.

[Mark Crossley, CEO & Executive Director]

Thanks, Max. Maybe I'll handle questions 2 and 3, and then I'll let Ryan speak to the U.S. SUBOXONE Film dynamics. So your first question had to do with the potential for DTC in the second half. And I think absolutely, that's one of the tools in the kit that we would think about for reinvestment in the second half, as we've spoken to before. We have to keep an eye with regards to the market and how open it is, you'd hate to create a bunch of patient demand and still have troubles with those getting into physicians. So we'll keep an eye on that. That is a potential. With regards to SUBLOCADE, and I think you had 2 kind of questions within the question. The first is the rollout ex U.S. And obviously, we're currently in 3 countries: in Australia, Israel and Canada. And we're excited about those launches and the progress we're making. And we're engaged with regulatory authorities in a number of others that are progressing through this year. So excited to get those through, get reimbursement and get into those markets, so we have SUBLOCADE available for more patients around the world. Within the U.S., and I think your question is, are we focused too highly on organized health systems and missing elements for patients that are in the heritage call platform. We focused a lot on this with regards to this question, and we are focused on organized health systems. But we still have a portion of our call platform that goes to the heritage doctors, the heritage doctors that are prescribing SUBLOCADE and reserve the right as we move forward, if the dynamics change and things start to open up to reallocate portions of that platform as it moves forward. Or if there's a major structural change to do a change at that time, something like we've talked about in the past with regards to alternate injection facilities, which could truly change the paradigm for the heritage call platform and enable them to prescribe more freely. So those are those are the types of things we're looking at in that system. But we're very convinced on organized health systems. There are over 20,000 wavered HCPs in that system and over 1 million patients that flow through there also. So a huge opportunity for SUBLOCADE building blocks to get to the $1 billion-plus goal. Ryan, could you talk to the film dynamics, please?

[Ryan Preblick, CFO & Executive Director]

Max, good question on the film. And how I can help you get there is if you take a step back to Q3 on film, film share was around 20%, and you can probably back into the net revenue was probably in the high $70 million at that point. Yes, Q4 of 2020 was inflated because of the stocking, and now you're seeing the results in Q1 of 2021. And there's 2 things at play here in 2021, coming off of the more normal Q3. One, there's been market growth, anywhere between 8% to 10% from that period of time to now. And then the second thing is some favorability that we were able to book in Q1 tied to trade spend accrual adjustments. And what I mean by that is when we book our gross sales in all of our products, we have to make accrual assumptions at that point on trade spend. Because those bills typically don't come in until about 2 or 3 quarters in arrears, and then what we do is every quarter as we go through our audit with PWC is we ensure that those assumptions are updated and are fact-based or supported with [indiscernible]. And what you're seeing is just us simply updating those assumptions. Primarily tied to a channel mix from 2020.

[Max Stephen Herrmann, Head of European Healthcare Equity Research & MD]

By trade spend, are you talking about the rebate accrual?

[Ryan Preblick, CFO & Executive Director]

Yes. Rebates for Medicaid, commercial, coupons, yes.

[Operator]

And your next question comes from the line of Paul Cuddon from [ Humes Security ]2.

[Paul Cuddon, Director for Healthcare Equity Research]

That's the second interesting pronunciation, had a similar one today. Guys, 2 questions, please. Just building on Max's question over the D2C campaign. Obviously, there's been a substantial reduction in OpEx in this quarter. And I would have thought going down the organized health systems strategy. You don't really -- and need is the wrong word, but it's probably not optimal to go down sort of patients directly advertising to them when it's a high science sell to the physician. So if you could just elaborate on your intentions for sort of D2C mix, that would be welcome. And then secondly, on the Rest of the World business. Are you investing sufficiently there? It does seem to be very flat. You've got switch to film happening and SUBLOCADE being launched. But yes, we don't seem to be in the same sort of growth that you may be seeing in the U.S. So if you could elaborate on both of that.

[Mark Crossley, CEO & Executive Director]

Yes. Paul, thanks for the questions. With regards to the fact that we're targeting organized health systems, and are -- is DTC an appropriate sort of marketing lever to pull, absolutely. I mean, listen, organized health systems are large hospital systems often with a parent that is a big medical center that then has satellite campuses around a regional or in some cases, just a local municipality. And those clinics have physicians that work within them that treat patients on a day-to-day basis. So awareness of SUBLOCADE to patients and creating that awareness and having patients fast for it will be helpful with regards to this. So the question for us is when is that the right approach to take based on coming out of the pandemic. So it is a lever, and an appropriate one potentially in the future. With regards to the Rest of World business, I think the issue here is less of investment and has much more to do with where it is in its competitive environment. You have to remember, our Rest of World business has had the heritage tablets available to it in a very high competitive environment for a number of years while we've been working to get new technologies of the film and SUBLOCADE in that market. So through that competitive environment as well as austerity measures that happen over time. What you do is you've seen kind of the trend that we've had over the last 5 years of kind of low to mid-single-digit decline because of those 2 factors compounding. The new technologies are what changed that, and that's why when we gave guidance in Q1 we spoke to an easing of that decline. So I think it's less about investment and much more with regards to about where the market is competitively as we move forward. So thanks for the questions, Paul.

[Operator]

And there are no further questions at this time, sir, you may continue.

[Mark Crossley, CEO & Executive Director]

All right. Well, with no more questions, I'd like to thank everyone for participating in our Q1 results presentation and for your continued support of the Indivior team. Thank you very much.

[Operator]

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.