Indivior PLC

LSE:INDV

Earnings Call Transcript 2021-Q3

[Operator]

Good day, and thank you for standing by. Welcome to the Indivior Q3 Results 2021 Webcast. [Operator Instructions] I must advise you that this conference is being recorded today, Thursday, the 28th of October 2021. I would now like to hand the conference over to your speaker today, Mark Crossley, Chief Executive Officer. Please go ahead.

[Mark Crossley, CEO & Executive Director]

Thank you very much. Good morning, and good afternoon, everyone. Thanks for joining us. With me today to discuss our third quarter results are Ryan Preblick, our Chief Financial Officer; Dr. Christian Heidbreder, our Chief Scientific Officer; and Jon Wasserman, our Interim General Counsel. For today's call, I'll provide an overview of our strategic progress, after which Ryan will detail our financial performance and our updated guidance. We'll then move on to Q&A.Moving to Slide 3. I'll assume everyone's read the forward-looking statements, and I'll move on to key messages for the third quarter. Let me start by saying how pleased I am with our Q3 performance and progress. We continued to face a complex operating environment with the pandemic, but through maintaining our dedication and focus on executing our strategy, we've delivered better than expected financial results. And most importantly, we've made further good progress with SUBLOCADE, our key value driver and top strategic priority.Over the past year, you've heard us articulate our go-to-market strategy centered on organized health systems. This strategic pivot in 2020 has really driven our momentum and the proof point is now 5 consecutive quarters of double-digit increases in SUBLOCADE underlying net revenue and patient dispenses. On the back of this momentum, we're again raising our full year 2021 guidance for total net revenue, largely on the strength of SUBLOCADE and continued SUBOXONE Film resilience. Ryan will take you through the details shortly.Looking more closely at our organized health systems strategy execution, as we learn more about engaging and activating these large customers, we're increasingly confident that we've established the right commercial strategy that we believe will drive us towards our $1 billion peak revenue goal for SUBLOCADE. It's taken time, patience and investment, but we're starting to see the fruits of our labor come through across a range of KPIs that point to continued momentum. To illustrate our progress, the organized health systems category is already the main growth driver for SUBLOCADE, now generating about 70% of our growth and accounting for 55% of our net revenue. This is faster than our stated target for exiting 2021 at 50%.We're also pleased with the increasing pace of activation of organized health system customers. At the end of the quarter, we'd activated over 300 organizations, up from around 250 at the end of the second quarter. As a reminder, our goal is to activate 500 priority organizations, so we're well over halfway towards achieving our target. As I outlined in July, we continue to invest where we see the biggest opportunities. This includes the criminal justice system, where we're building a dedicated commercial team. Our efforts here are well-timed as legislation centering on medically assisted treatment for either incarcerated or newly released patients or both gains momentum.In addition to the Medicaid Reentry Act, which is being considered in Congress, New York state just passed legislation establishing medically-assisted treatment in all state prisons and jails. The legislation goes into effect February 2022 and is a major intervention on behalf of patients. In fact, 65% of incarcerated patients suffer from SUD, while only 5% actually receive treatment. Meanwhile, despite the complications posed by the delta variant in the quarter, our commercial organization continues to see improving levels of healthcare professional engagement. In-person access was up to 70% in Q3, up from around 65% at the half year. This improved access is helping SUBLOCADE patient enrollments to continue to reach new highs and is also benefiting PERSERIS, as I will touch on shortly.I want to close my opening remarks with our report card that demonstrates the progress we're making against these strategic priorities. Starting with SUBLOCADE. We delivered Q3 net revenue of $65 million, nearly double Q3 2020. When we look at this sequentially, this compares with $61 million in the second quarter, but I remind you, that included a large $7 million order from a criminal justice system customer. If we set that aside, sequential net revenue growth would have been around 20%. And with year-to-date net revenue reaching $169 million, we're pleased to again raise our full year guidance for SUBLOCADE.Among the KPIs we track, you can see from the slide that the growth in SUBLOCADE net revenue is being driven by strong double-digit growth in U.S. patient dispenses and in the total number of patients under treatment as well as by increasing net revenue contribution from ex-U.S. launches, which brings me on to the next strategic priority, revenue diversification. On this measure, I'm pleased to report we've made further progress with launches in new geographies for SUBLOCADE and SUBOXONE Film. Net revenue for SUBLOCADE in international markets was $4 million in the quarter. We're also pleased with initial SUBOXONE Film net revenue from new markets in the European Union, and we expect its contribution to grow as we move forward.The combination of these product launches is helping us offset the declines we continue to see in the legacy tablet product. We also saw a welcome return to growth for PERSERIS, our monthly risperidone injectable, targeting schizophrenia patients in the U.S. This reflected the progressive reopening of healthcare systems in the U.S. that I referenced earlier. We're seeing renewed month-over-month growth and are now increasing the investment behind this important asset to enable us to reach the $200 million to $300 million net revenue potential that we believe this differentiated product can deliver. Toward this end, we will be investing to double the PERSERIS sales force to achieve full national coverage in fiscal year 2022. The our net revenue goal has always been predicated on national coverage and with the U.S. health care system continuing to open now is the right time to make this investment.Regarding the pipeline as well as strengthening our evidence base for our long acting injectables, we continue to progress our innovative early stage approaches to a range of addiction disorders. In particular, we're looking forward to the early 2022 start of the Phase 2b study of AEF 0117, the promising asset for cannabis use disorder, on which we have an exclusive license from Aelis. Finally, on our operating model, we maintained our focus on prudent cash management and asset optimization so that we can balance investment in the business with returning value to shareholders.By the end of the quarter, we had bought back shares for a total of $31 million as a part of the $100 million share buyback program we announced in July. Even after this outflow, we ended the third quarter with a strong cash position of over $1 billion and net cash over $750 million. This leaves us strongly positioned to pursue our strategy, both organically and potentially inorganically as we see the right opportunities. To quickly summarize, the team has delivered another strong quarter of execution and delivery against our strategic priorities, which exceeded our expectations.I'll now hand over to Ryan to take you through the financials in more detail.

[Ryan Preblick, CFO & Executive Director]

Good morning, and good afternoon. Looking at the Q3 results in more detail on Slide 8. We had another solid financial performance. What stands out to me and what I will cover in more detail in just a moment is, first, Q3 -- strong Q3 net revenue growth of 18%, which brings overall year-to-date net revenue to $568 million, an increase of 23% compared to the year ago period. Our growth continues to be led by SUBLOCADE's strong performance in the U.S. SUBLOCADE Q3 and year-to-date net revenue growth was 97% and 86%, respectively, versus last year. And as you have heard, this performance, along with SUBOXONE's continued resilience is allowing us to raise full year 2021 guidance.Second, we are beginning to see the step-up in operating expenses from the sales and marketing investments we are making behind SUBLOCADE to accelerate its leadership position in U.S. OUD treatment. And as Mark discussed, we have also approved a significant investment behind PERSERIS to drive this treatment towards our stated peak annual net revenue goal of $200 million to $300 million. Our OpEx in the back half of 2021 will reflect these growth investments. And as such, we do expect to be at the higher end of our $470 million to $480 million OpEx range for full year of 2021.Third, we have maintained our strong financial position. Gross cash at the end of the third quarter stood at over $1 billion. This has allowed us to deliver on our #1 capital allocation priority of investing in the business while also returning value to shareholders in the form of our share repurchase program.Now, looking at the P&L in more detail on Slide 9, starting with net revenue. We continue to be pleased with the progression of our overall net revenue in the third quarter to $187 million. The principal drivers of the strong year-over-year increase were the continued outstanding growth in U.S. SUBLOCADE net revenue and SUBOXONE Film resilience in the U.S. Q3 SUBLOCADE net revenue of $65 million represents growth of 20% sequentially when you exclude the large criminal justice system order of $7 million from last quarter's net revenue of $61 million. On the same basis, dispenses in the quarter increased 13%. The difference versus the net revenue growth rate being the initial stocking from some new CJS customers and rebate accrual adjustments.Touching on PERSERIS, net revenue was $5 million, up slightly compared to $4 million in the previous quarter. As Mark said, we are seeing renewed sequential month-to-month growth with the reopening of the U.S. healthcare system. Quickly turning to U.S. films performance, net revenue remained resilient at $77 million, which was essentially unchanged versus the year ago quarter. This was primarily due to mix as volume from a small number of non-contracted payers remained steady in the quarter. U.S. share was relatively unchanged compared to the previous quarter at 20%. Looking ahead, while the resilience of film remains a welcome positive both for our net revenue and cash position, we continue to caution that there are no strategic actions we are taking to maintain current share that we expect share erosion towards industry analogs over time.Closing up the net revenue discussion with rest of the world, third quarter net revenue of $44 million on an actual basis decreased 8% compared to the year ago quarter. The sale of the TEMGESIC/BUPREX business impacted net revenue by about $2 million in the quarter, while continued competition in the legacy tablet market was the other major factor. These items were partially offset by net revenue from SUBLOCADE of $4 million and modest sales of SUBOXONE Film. As our new products become more widely available and health systems normalize across the EU, we expect to reverse the net revenue declines we have historically seen in the rest of the world business and to return to growth.Looking at gross margin, Q3's 86% level was ahead of our low-80s expectations. This was due to better productivity and some onetime supplier credits we received in Q4. Also in Q4, we expect gross margin to be in the low-80s. And as such, our gross margin outlook for full year 2021 overall remains in the low-80s range. Proceeding to operating profit, we saw a year-over-year improvement in Q3 on an adjusted basis of 27% to $38 million. This result includes incremental growth investments behind our LAI technologies. Q3 OpEx, which redefined as SG&A and R&D, was $123 million. This compares to adjusted OpEx of $101 million in Q3 last year.As we previously indicated, the growth investments we are making in full year 2021 are primarily focused on SUBLOCADE, including search engine marketing and the deployment of a dedicated team focused on criminal justice system customers. We've also begun this year to invest behind increasing the U.S. sales force of PERSERIS. Our goal is to achieve U.S. national coverage in full year 2022 in line with the expected broader reopening of the U.S. healthcare system. As Mark indicated, we will essentially plan to double the sales force.Continuing down the P&L, net revenue was $27 million, reflecting a tax rate of 13%. While substantially ahead of the prior year, net income was down versus the prior quarter, mainly due to the increased investment levels we expect to see for the remainder of 2021 and a modest step-up in net interest expense. Finally, in the quarter, you may have noted some exceptionals, the result of which is a wash between the items. First, we had a technical adjustment to our ANDA litigation provision amounting to $24 million, which is non-cash and includes modest interest. This adjustment is based on our most up-to-date expert judgment of the potential value we would owe.I would, however, like to call out 2 important points here. First, we continue to believe strongly in the validity of our 454 patent; and second, that we had already posted cash collateral totaling $82 million that exceeds the revised total provision amount of $73 million. As such, we feel well covered should our litigation efforts prove unsuccessful. Fully offsetting this $24 million item are proceeds from the sale of the legacy TEMGESIC/BUPREX business outside the U.S. for net 19 and $5 million of DOJ related accrual reversals.Turning to the balance sheet on Slide 10. We exited the quarter with just over $1 billion in cash. The main cash movements during the quarter were the sale proceeds of approximately $19 million net related to the disposal of the TEMGESIC business and an outflow of approximately $31 million relating to share repurchases. With regards to the share repurchase program, at the end of Q3, we had repurchased and canceled approximately 11.7 million shares at an average price of approximately 190 pence.Finally, to wrap up on guidance on Slide 11. We are pleased to raise our total net revenue expectations to $750 million to $770 million. This is based on our expectations for continued sequential net revenue growth of SUBLOCADE and an essentially unchanged U.S. share position for SUBOXONE Film for the remainder of the year of around 20%. The midpoint of our revised total net revenue guidance, $760 million, would represent an approximately 18% increase versus full year 2020 net revenue of $647 million.Within the total, we have raised and narrowed our expectations for full year 2021 SUBLOCADE net revenue to between 235 and $245 million from $210 million to $230 million. This reflects better than expected business momentum we have seen so far this year, including with CJS customers. The midpoint of our new SUBLOCADE net revenue guidance would represent a year-over-year increase of 85%. The other elements of our guidance, including gross margin, OpEx range are unchanged. However, given our increased net revenue guidance, we are now also expecting our pretax income to be higher than we previously forecasted.With that, we are happy and available to take your questions.

[Operator]

[Operator Instructions] And our first question today comes from the line of Max Herrmann of Stifel.

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

Congratulations on a strong quarter. 3 questions, if I may. Firstly, just wanted to understand a little bit about the SUBLOCADE performance. Obviously, benefiting a little bit. I think, you mentioned from additional criminal justice systems revenues in the third quarter, I wondered if you could kind of give us a bit of a clearer idea of how significant those were and what the trends are with this new sales force and also the SUBLOCADE rollout in ex-U.S. seems flat quarter-on-quarter. So, -- but obviously, at just $4 million, it's hard to see exactly what the movement was. That's the first question. Secondly, just longer term, what do you think the business can do in terms of the margin? And how will that evolve over time, particularly given where you historically were? Obviously, those have dipped over the last few years with generic competition, but then as SUBLOCADE gains traction. And then finally, just a little bit more detail on the patent litigation increase in provision, if you may.

[Mark Crossley, CEO & Executive Director]

Thanks, Max. Appreciate the questions. Maybe I'll take the first 2, and then I'll hand over to Ryan to talk a little bit about the provision. I think when it comes to the SUBLOCADE performance, we're really excited about the continued progress there, 5 quarters in a row of double-digit growth. And it is uniform across the organized health systems. If you think about the dynamics versus the second quarter to third quarter, with the $7 million that was in Q2, actually, criminal justice was probably less than that in the quarter. Now, we don't carve that out. But what we have seen is just continued strategic progress across all of our organized health system KPIs and continued momentum moving forward. So, I think an exciting testament to the strategy that we pivoted our organization behind last year. On the ex-U.S., listen, we're in Israel, Australia and Canada and continue to make good progress in those markets with regards to increased HCP engagement, increased patient usage. Unfortunately, we have seen in Australia, where they're continuing to deal with COVID at a higher level maybe than the rest of world, they've gone back down into a countrywide lockdown, but that obviously impacts some of the mantra there, but continued great progress on SUBLOCADE in the rest of world business, too. When I think about margin over time, listen, we've made a number of, what I would call, working investments in increasing the strategic elements of the sales force with the criminal justice with getting PERSERIS up to a full national sales force we've added in medical science liaisons to help with the new science that Christian and his team have created behind SUBLOCADE and the disease space in general. And as we look to move forward, some of those will obviously annualized next year and I think you'll see T&E kind of come back to normal levels in 2022. And then from a business standpoint, we're relatively scaled absent pipeline sort of investments as they move forward. So, we'll guide on that when we get to February, but I think those are a few of the moving pieces with regards to that. So, Ryan, could you help Max with the -- regards to the provision?

[Ryan Preblick, CFO & Executive Director]

Yeah, the change to the provision is simply a change to our management's best estimate that's required by accounting standard, IAS #37. And all it really is, is during the normal case proceedings over the last couple of weeks, the damages experts from both sides had the chance to testify. And coming out of that, we were able to use this new Intel to form the basis for this update. It doesn't change our position on our patent defense, and we will continue to fight this in court as we previously communicated. It is a non-cash event because if you recall, we have posted the cash collateral sometime last year up to $82 million.

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

Sorry, just to follow-up. I thought the surety bond had been returned or something, just to clarify on what the collateral is.

[Ryan Preblick, CFO & Executive Director]

So, I think it was about a year ago or year and a half years ago, we were required to fund the full cap amount of $108 million I think it was. During the proceedings, one of the bondholders did return close to $20 million, $25 million back to us, but that still leaves us outstanding cash of $82 million.

[Operator]

[Operator Instructions] Your next question today comes from the line of Paul Cuddon of Numis Securities.

[Paul Cuddon, Director for Healthcare Equity Research]

I've just got, I think, 3. The first one was just on the environment for SUBOXONE, just the pricing environment, the Q2 to Q3 revenue number for U.S. SUBOXONE seems to have declined slightly. So, I'm just wondering if that's a gross to net type situation. And I suppose it also kind of feeds into the market environment where we sort of hear of increased funding and from an adjusted system kind of focus on medical assisted treatment and yet global market growth is a bit slower. And then just also on the Aelis Pharma collaboration and funding for the Phase 2b study, means how well are they supported to run that study?

[Mark Crossley, CEO & Executive Director]

I'll start maybe with the market growth things and I'll hand it over to Ryan on some of the film dynamics, and then we'll ask Christian to comment on Aelis Pharma. From a market growth standpoint, I think we have seen a bit of slowing of that market growth in 2021 to kind of mid to low single-digits. But I think we have to think a little bit bigger picture with regards to the market dynamics. We're still in a tremendously underserved disease space, only about 20% penetration of treatment with overdoses that have grown over 30% year-over-year and are in excess of 70,000 per year, which is just an amazing stat in developed countries such as the United States. Behind that sort of environment where, for whatever reason, stigma knowledge is such a low penetration of treatment we're seeing unprecedented sort of funding, legislation sort of activity to bring this to the forefront. HHS just put out an overdose strategy yesterday, and we talked a little bit earlier with regards to what's happening in New York state and the criminal justice. So, while this year was a little bit low in market growth, the base year or the year before was mid-teens or maybe a little higher. And we think that that kind of average of those, as we move forward, thinking to mid to high single-digit sort of market growth still is where we see the market going. So, with that, maybe, Ryan, talk about the film dynamics.

[Ryan Preblick, CFO & Executive Director]

I'll break your question down into 2 parts, if you don't mind. So, A, you had a question about Q3 versus Q2 of this year. So, fundamentally, the share did remain flat at about 20 share points. The decline versus Q2 was just a result of having some trade spend releases in Q2. Q2 is one of those quarters where we really began looking at our balance sheet accruals from the previous year to see how we did versus our assumption. So, there were some trade spend releases in Q2 that did not recur in Q3. But there was no external factors that would change that. And then part B of your question was the total film dynamic. So, we are certainly pleased to have the share remaining at the 20%, and we believe that it will remain there for the balance of the year. And because there has nothing changed in the marketplace since Q2, there's still 3 generic players. We haven't promoted the product since 2018 and still believe that COVID has had an impact on the share, as we discussed over the last couple of quarters due to patient continuity concerns and the benefit of telehealth. And one data point in the state of New York in Q4, they decided to put the film back on their formulary as a preferred agent. That was their decision. So, you may see a small uptick in the film in Q4. But net-net the current film situation may or may not roll over in 2022. That will come as a result of the state's formulated decisions as they begin to ramp up. But as usual, we continue to caution that we believe there's no structural reason in the market that the share with the 3 generic players should not revert to analogs over time, and we will certainly give guidance in February at that point.

[Mark Crossley, CEO & Executive Director]

Christian, could you just talk about the partnership with Aelis and where we're headed on that asset?

[Christian Heidbreder, Chief Scientific Officer]

We have a very good partnership with Aelis Farma. As you probably know, we established a joint committee on a monthly basis to really discuss the overall strategy with the main focus right now on the clinical Phase 2b protocol, which has been finalized, and this is a key collaboration with the New York State Psychiatric Institute with Dr. Frances Levin as the principal investigator. We also nailed down the non-clinical strategy that is all the toxicology studies that need to be performed prior to the start of the Phase 2b as well as before the completion of the Phase 3. So, altogether, very nice progress there, protocol finalized, ready to go in first quarter 2022.

[Paul Cuddon, Director for Healthcare Equity Research]

And if I could just make one quick follow-up on the -- on SUBLOCADE. To what extent the Sentinel claim has opened up an opportunity for you within sort of ER sort of discharges and whether you can put some investment in there?

[Mark Crossley, CEO & Executive Director]

I think Sentinel claim, obviously, is quite pertinent given what is happening with overdoses. With overdoses over 70,000 a year and about 75-ish percent of those the data says are synthetic opioids, fentanyl and other types. So, it is quite pertinent. It is a buprenorphine-based claim, not a SUBLOCADE claim, but we think it is quite pertinent. And listen, we think it's created some discussions within the medical community with regards to broadened use of buprenorphine and SUBLOCADE, which is a buprenorphine product to address this.

[Operator]

There are no further questions at this time. Back to you, Mark.

[Mark Crossley, CEO & Executive Director]

Okay. Thank you very much. Well, listen, that concludes our Q3 results. I'd like to thank everyone on the call -- both on the call and on the web for their continued support of Indivior, and we look forward to seeing you at the various conferences and one to one. Thank you very much.

[Operator]

That does conclude our webcast for today. Thank you all for participating.