Almirall SA

MAD:ALM

Earnings Call Transcript 2018-Q1

[Operator]

Good day, and welcome to the Q1 2018 financial results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Pablo Divasson. Please go ahead, sir.

[Pablo Divasson del Fraile]

Thank you, Brian. Good morning, everyone. Welcome to the Almirall Q1 2018 Financial Results Conference. This presentation was released earlier this morning and is available on our corporate website. Presenting today we have Peter Guenter, Chief Executive Officer; and David Nieto, Executive Vice President and CFO. Peter will make some general introductory remarks about the quarter and later come back to sum up, and David will provide you the details on the financials. We will then have a Q&A session, and joining us for that will be Bhushan Hardas, Executive Vice President, Research and Development, CSO. Before we look ahead, I would like to remind you that certain statements that we will be make in this presentation are forward-looking statements. These forward-looking statements reflect Almirall judgment and analysis only as of today, and results may differ materially from current expectations based on a number of factors affecting our businesses.So with that, I will pass you over to our CEO, Peter Guenter.

[Peter Guenter]

So thanks a lot, Pablo, for the introduction, and good morning to everyone on the call. You will remember that we showed this slide at the full year results, and I wanted to provide you with a brief update as to where we stand at present around those priorities: first, the building of a psoriasis franchise. To this end, we are very encouraged by the positive launch of Skilarence, and I will provide you with more detail on that in a minute. And of course, we are very much looking forward and expecting approval of tildrakizumab in Europe by the end of this year or early next year and its subsequent launch, and the team here is working very hard to prepare for that important event. Number two, we remain focused on generating value from our existing portfolio, and we are very pleased to see in the quarter that our selective investment behind some of those key growth franchises such as Ciclopoli and Sativex start to pay off. Third, R&D is progressing as expected. We anticipate seeing headline Phase III data for our product in androgenetic alopecia shortly. I'm also pleased to inform you that patients in the Phase III study for KX2-391 for actinic keratosis have now completed their treatments. As mentioned earlier, we expect tildrakizumab EMA approval in Q4 '18 or Q1 '19. Finally, on M&A, this continues to be a key priority for us, and we are actively seeking opportunities that will help drive sustainable shareholder value. As you can see from the next chart, the Skilarence growth continues month after months both in Germany and the U.K. In Germany, Skilarence achieved approximately 50% of Fumaderm volumes in April, which equates to a share in the total conventional market of around 35%. As commented in the chart, growth is coming from both new patients and patient switches with switches accounting for 2/3 in Germany and 3/4 in the U.K.Also very encouraging to see from the next chart is that the launch of Skilarence instills a new dynamic in the fumaric market class as a whole. We can see in this graph that the growth of initiation packs increases gradually, confirming renewed interest in fumarates as conventional treatment. 2/3 of those initiation packs are with Skilarence. So all in all, this underlines our confidence in the future potential of this drug. Going to the next slide. In Europe, we maintained the momentum with products like Ciclopoli. This is a product coming from the acquisition of Polichem. It's a good example of a growth story since acquisition as the charts show. The main reasons are outlined in the chart. First, Ciclopoli has a strong product efficacy versus the competition; second, we have a proprietary nail lacquer technology; and third, an experienced team with an excellent track record.So now I will pass over to David to provide you with some comments on the financial performance in Q1.

[David Nieto]

Thank you, Peter, and good morning to everyone. We delivered strong financials in the first quarter in line with our expectations. The key highlights are on the revenue side, the Skilarence launch performed well as described by Peter and our growth prime Ciclopoli and Sativex continued to grow double digit. On the margin side, we improved our product mix resulting in a sustainable increase of our gross margin, which together with continued strong cost control delivered strong EBITDA of 30.6%. Note that this was achieved despite a decline of other income coming from AstraZeneca. Regarding cash flow, we delivered good operating cash flow of EUR 34 million during this quarter. There are 2 main challenges we faced in Q1: First, we went against a high comparable quarter of 2017, and as most of you will appreciate, the challenging situation of Aqua did not translate into a major impact until Q2 of '17. Second, we continued to experience a slow performance of Thermi driven by the decline in capital equipment sales and Instalift. All in all, we are pleased with our start of the year in line with our expectations, and we are on track to deliver our 2018 guidance. On the next chart, I would like to quickly review the key contributors to net sales evolutions. First, we grew our base business with Ciclopoli and Sativex performing well in Europe and in our export business and we launched Skilarence as already discussed. Then the addition of cash flow distribution to our Spanish affiliate have to compensate for the high Q1 comparable in the U.S. prior to the inventory correction PAP issues and other generic entries that we had later in the year. Finally, we had minor negative impact such as Thermi decline and ForEx exchange rate. Let's look at the next chart on our P&L. So moving to the P&L, you can see that we grew sales by 1% in constant currency, and we improved our gross margin given the positive product mix. The R&D prioritization with the cancellation of Poli program resulted in a low expense on this quarter. However, we continue to target the spending around 13% of net sales so don't use this quarter as an indicator of a trend. Our tight control on SG&A continued resulting in a 4.3% reduction at constant exchange rate. This was mostly driven by the U.S. restructuring we took end of 2017. All in all, we delivered strong EBITDA, up by 6% in constant exchange rate at 30.6% margin driven by the core business given the sharp decline of other income. Continuing down the P&L, I would like to simply highlight 2 elements: First, the net financial expenses significantly went down following the refinancing of our senior note through a revolving credit facility. Together with the low tax rate, this boosted our net income by 59.6% for the quarter.Let's now move to the next chart on SG&A. Regarding SG&A, we delivered about EUR 11 million in savings and productivity during the quarter. About EUR 5 million were reinvested at this point in new product launches but also in capability building. Regarding the building of capability, we are reinforcing at Almirall the medical function in Europe for the roll-out of Skilarence and the launch of tildrakizumab. Note that these investments will accelerate in the second half of the year as we are getting closer to the launch date. In the next chart, we're trying to illustrate how we expect to keep our cost flat in absolute value despite important investment for growth in the future. As we previously told you, we put in place an important savings and productivity program of about 4% of our cost base. We entered the year with a clear execution plan in place and Q1 numbers are demonstrating it. We are planning to reinvest these savings during the course of the year in 3 elements: First, new product launches, mainly Skilarence and Tildra; second, building key capability such as medical function; and third, we invest behind existing product such as Ciclopoli and Sativex just to mention few of them. With this very clear disciplined approach, we expect to improve EBITDA margin, strengthen our financials and build long-term profitable and sustainable growth. Looking at the balance sheet, we continue to have a very strong balance sheet and healthy balance sheet at the end of March with virtually no debt. Regarding the cash evolution for the quarter, we delivered strong operating cash flow and used part of that cash flow to pay for milestone related to deals signed at the end of 2017 such as the Athenex in-licensing of last December. Finally, the Annual General Assembly approved the distribution of a dividend stable at EUR 0.19 per share. It is going to be distributed in the form of a scrip dividend so it can be either cash or share at the discretion of the shareholder. The last day of entitlement is May 30 for payment June 1. We also receive authorization to acquire maximum 5% of the company to be held as treasury shares. This will provide flexibility and option for Almirall in the future. We will execute this purchase program through an equity swap starting today and at attractive condition negotiated with Santander Bank. Today, we are reiterating our 2019 guidance. We expect to grow total revenue at mid-single-digit and EBITDA around 20% growth versus 2017 in constant currency with a strong leverage driven by the core business. Before I close this section, I just want to make a couple of comments to help you model through the quarters of 2018. In Q1, we saw a low single-digit decline in total revenue with very strong EBITDA margin as already discussed. We're anticipating strong growth in total revenue in Q2 and Q3 given last year comparable before the growth normalize around the guided mid-single-digit by year-end. In term of EBITDA margin, our expectation is to gradually normalize our margin rate as we progress through the year given the investment done in the psoriasis launches.With that, I will now hand it over to Peter for his closing remarks.

[Peter Guenter]

Thank you, David. So as mentioned in some detail, the first quarter was a quarter in line with our expectations and obviously allowing us to reiterate our guidance. As you have seen from my slides, Skilarence is really on a very good track, key brands are performing well in Europe, and we are looking forward to the expected approval of tildrakizumab in Europe later this year or early next year, the dividend and treasury share news that David has just mentioned. So I think all is on track in our opinion and I look forward now to be hearing some of your questions.Pablo, let me now -- let me pass it over back to you. Thank you.

[Pablo Divasson del Fraile]

Thank you, Peter. Brian, back to you for the Q&A, please.

[Operator]

[Operator Instructions] We will now take our first question from Trung Huynh of Credit Suisse.

[Trung Chuong Huynh, Research Analyst]

Three questions, if I can. Firstly, can you explain the Thermi 1Q performance, another disappointing quarter? When should we expect a turnaround here? And do you think you're going to invest more SG&A to drive the adoption? On Slide 17, you highlight around EUR 75 million of investments. Can you outline what this is made up of? And finally, you mentioned that you started you dividend swap today. When should we expect Almirall to start buying treasury shares? And what's the trigger for this?

[Peter Guenter]

Okay. Thanks for your questions. There's actually 3 questions, so let me take first the Thermi question. So you will remember we communicated in '17 there was a lot of disruption that we brought in new management and that it took more time actually to see the results of those changes, and the disruption especially in the capital sales took longer than we expected to kind of repair. So I can tell you now that the organization has been stabilized in terms of employee turnover and when you look at execution KPIs other than sales that we see those executional KPIs gradually improving. You will also remember that in February, we terminated the distribution deal on InstaLift in order to better focus resources and energy on the core business. But it's also fair to say that together with lower capital sales, these are the reasons for the negative variance in the first quarter versus the first quarter last year. If you look a little bit more in granularity, you see that it's really capital sales which is down this quarter. Consumable sales are growing. International sales is growing. So we continue to believe that the intrinsic value of this platform is there and that also for the long-term value development, innovation is important. And I'm glad to tell you also that we remain on track to release a new product platform in 2018. Actually, we're testing it as we speak in the market, which would also help our capital sales in the future moving forward. Now having said this, it's true that we are conscious that we should be doing a better job in unlocking the intrinsic value of Thermi of which we continue to believe in. So David, on the 2 other questions on the dividend and the EUR 75 million investment.

[David Nieto]

So on the dividend, as I said, I think the dividend will get paid on June 1 with entitlement on May 30. I think your question was regarding when do we start buying treasury shares. The answer is today. We would start the program today as we needed authorization of the AGM to do so, and we have it last Thursday. Regarding the EUR 75 million investment, this is for intangible assets, and all are linked to the deals that we did last year. And if you go back to our annual accounts, we have given all the details of our deals we did last year and how much value those deals were put on the books. And those are just the cash outflow of those deals and as you can expect mainly related to an important and very strategic deal we did with Athenex, and the EUR 75 million are mainly linked to that. I hope I answered your question.

[Operator]

We will now take our next question from Jaime Escribano of Banco Santander.

[Jaime Escribano, Equity Analyst]

I'd like to ask about this new product, Crestor. Maybe if you can talk a little bit more about it and what could we expect. Since it is making EUR 10 million in the quarter, what would be the run rate going forward with sales and so on? And also second question would be regarding the EBITDA margin. You said that it should normalize in following quarters. What should we consider a normalized level?

[Peter Guenter]

Okay, Jaime. So I'll take the Crestor question, and David can take the EBITDA margin question. So you remember we made the deal, and we announced the deal at the end of last year. So we took over the sales starting in January, and we do not provide, of course, specific guidance for the rest of the year moving forward. You should know that this is a product that is now generified, but it's also fair to say that if you look at many studies, this patent is probably the best patent out there and that our team in Spain is actually very well equipped from an infrastructure standpoint to take on that kind of opportunities at a quasi-marginal cost. We also see in the first quarter that the sales of the molecule appear to increase. And that is, of course, also probably linked to the fact that now the prices have come down of this product that it probably becomes more affordable. So we'll keep you updated, of course, as the next quarters unfold. I think it's a little bit too early to be very certain on what might happen, but it's also fair to say that the first quarter is a good quarter for Crestor and is an encouraging quarter for Crestor. And again, it shows that this kind of deals, if we can do them especially for Spain, we will not hesitate because they create shareholder value from day 1. So the EBITDA margin question, David?

[David Nieto]

Yes. So we provided guidance to increase our EBITDA around 20% so you can calculate what we would call the margin expectation for the year and this is what we expect to be at or slightly below in the next quarters to reach our guidance by year-end, right. So year-on-year we expect the margin improvement of more than 400 basis points and this is what you should put in your model.

[Operator]

We will now take our next question from Peter Welford of Jefferies.

[Peter James Welford, Senior Equity Analyst]

Couple of questions. Firstly, on the U.S. dermatology scrip business. Just wondering that is that business profitable at the current first quarter run rate. And I wonder if you could comment just on the trends you're seeing in volumes at the underlying levels of your business in terms of both the subscription business. And is there are any additional restructuring of steps that have been taken in that business at the moment or if you're happy with its structure? And then just turning to Thermi again. You commented that the U.S. consumable sales was still growing. I wonder if you can give us any sort of visibility in terms of the product lines. Is it still ThermiVa that is driving most of that growth and whether or not there's been any change at all in the competitive environment there? And then just finally on Crestor, and is that contract with AstraZeneca? Does it have a finite life or, if not, for the remainder of Crestor brand's time in Spain?

[Peter Guenter]

So 3 questions, I'll take them. So first, Crestor, very simple, it is for the remainder of the brand. So there is no end term to that contract. So that's clear. On the U.S. derma scrips, I think what we are trying to do here is to really focus and drive the profitable scrips of our U.S. derm organization. And this is in contrast, of course, to what might have been done in the past. It's true that we have to be realistic on the assumptions of the portfolio as we have it today. It's a difficult portfolio. It's a different environment. And you know that in the branded generic space that many players not only Almirall, but many players are kind of struggling into that space. So what we're trying to do and what we are doing I think is very clearly to trim the costs and you have seen on the SG&A line a significant impact of that cost trimming exercise that we did. And again, as I told, focusing on profitable scrips and we do not provide any detail on profits or profit levels for entity, but I can tell you that even with those relatively well, sales of the first quarter that you have seen that EBITDA has improved in Q1 compared to the EBITDA of the last quarters in 2017. Then your question on Thermi. Yes, it's fair to say that ThermiVa remains in consumable sales the most important factor or driver of growth. But it's also very clear that the competitive intensity in that space has increased. So -- but you know that the size of this opportunity remains very significant so there's a lot of value to be captured there in the future. Thank you.

[Operator]

We will now take our next question from Manuel Coelho from CaixaBank BPI.

[Manuel Dias Coelho, Analyst]

I have 2 questions, if I may. The first one is just to confirm if the high investment seen in Q1 was mainly related to the agreement with Athenex signed at last December or if there was something else explaining it and then if you could provide if possible a CapEx guidance for the full year. And then in terms of M&A growth plans, just wondering if this continues to be a strategic for you as it was in the recent past, and if yes, if you could provide some visibility in terms of market segments, geographies or even the time line for it.

[Peter Guenter]

So let me take first question on M&A, and then David, you can take the questions of investment. So to your question, Manuel, yes, of course, M&A remains important for basically 2 reasons: First, you have seen the healthy balance sheet so we have the muscle and the means to do that. And number two, one of the things that, of course, we would expect from M&A is, number one, critical mass in some key markets; and number two, also to further improve the depreciation of our portfolio. And in that sense, for example, the deal that we made with Athenex is not immediately accretive, but we are convinced that this creates long-term value for our shareholders. In terms of segments, of course, we are focused on the dermatology segment, but we don't rule out potential deals if they present themselves to us so -- and I think in that sense, the Crestor deal, for example, is a good example. In terms of geographical segments, honestly, it depends on the opportunity. Of course, if we can further strengthen our portfolio in Europe with a very good operation, we will look at it. If there is more U.S. tropic or U.S. centric opportunities, we will look at it. On emerging markets, of course, we might also look at very selected market, but for the time being, probably not a short-term opportunity or a short-term priority I would say. The questions on investment and CapEx.

[Manuel Dias Coelho, Analyst]

Just a follow-up, if I may. So on this M&A approach, the logic will be something more bolt-on so complementary agreements with relatively limited CapEx effort or besides that could even be something more transformational with a higher impact in terms of your balance sheet.

[Peter Guenter]

Well, Manuel, it depends on the opportunity. You see that we definitely have the capacity to do something transformational, but at the same time, first, the opportunity has to present itself, and number two, we have to make sure that we do it in a disciplined way. And -- but of course, if we think that we can make a transformational deal and it makes sense for our shareholders, definitely we will be looking at that. So David, question on investment Q1.

[David Nieto]

Yes, so regarding the EUR 75 million investment in intangible assets, again this is only to what -- about the deals we did last year that we described every time we did a deal. Not only that, but we also described in the annual report. So I will refer you to the page on the annual report, give very clear details about those deals and again, mainly Athenex, partially [indiscernible] that went into the EUR 75 million. Regarding the guidance on CapEx, I would say that you should take CapEx in the range of what we had last year, I would say a little bit lower than that. I understand your question because the CapEx in Q1 was a little bit on the light side. It is true, but don't take it for granted that we will not invest in our manufacturing side as well. And the number that we had last year is a good proxy. Would be slightly lower than that, but that's what I would advise you to do for your modeling.

[Operator]

We will now take our next question from Ignacio Mendivil of JB Capital Markets.

[Ignacio Ortiz de Mendivil Arrate, Vice President]

I have 2 questions. First one, can you give us some color on the EUR 14 million other income reclassification in the quarter compared to the first quarter 2017 and from which business it is coming? And should we expect it to be recurrent for the next quarters? Then should we look at the 69.8% gross margin at constant currency as an sustainable gross margin for the new Almirall? And finally, regarding the U.S. business, should we expect Aqua to be profitable at EBITDA level in 2018?

[Peter Guenter]

So let me again first take the U.S. question. So as I mentioned earlier, we don't give specific guidance on profitability, but of course, trying to guide you. We are doing a lot -- lots of efforts to bring this segment to profitability or at least neutrality, and we are improving on that road map. But we don't give specific profitability split-outs in business segment by business segment. David, the question on the other income reclass and the gross margin, please.

[David Nieto]

Yes. I would just ask you to reframe that question just to make sure that I understood it correctly.

[Ignacio Ortiz de Mendivil Arrate, Vice President]

Yes, sure, David. Basically, at constant currency, you had -- you reported a 69.8% gross margin. And I just wanted to know if you see this gross margin as recurrent for the new company -- new Almirall?

[David Nieto]

Yes, yes. Thank you. This is -- thanks for that. When I talked about the profit and loss account, I made explicitly a note here that is -- it's an improvement that is a positive mix that we see that is a sustainable one. So the answer is yes. And as we sell more of Sativex, more proprietary product like Ciclopoli, you have to know that those products have growth margin. And Skilarence, of course, has gross margin above our average margin. So the answer is yes, it's going to be sustainable and year-on-year maybe 1 quarter would go up and down, but don't think 1 quarter as a trend. But basically, this is what we expect. And on the other income, I think we had, maybe for this, maybe not, but we have put in the backup a little bit of new accounting rule regarding IFRS 15 on how we have to account for other income. So if your question is the EUR 12.7 million we have in this quarter's P&L is a recurrent one, I mean it's part of our -- most of it is part of our AstraZeneca income and we had mentioned that and gave some guidance around it. So we were not surprised about what we got in Q1, and we expect again other income to decline double-digit for the year. That's what we said when we gave the guidance, and we are comfortable where we are today and we'll have no change in assumption. And maybe a last point, I have to say that we're very pleased with the EBITDA margin improvement we saw because it's part of the core business basically again delivering on the guidance and the quality of the profit that we tried to communicate to you we will deliver with the guidance.

[Ignacio Ortiz de Mendivil Arrate, Vice President]

Just a follow-up. When you say it's related with your business with AstraZeneca, is mostly related with royalties or probably milestone income?

[David Nieto]

This one is mainly related with milestones. The royalty is one that goes more into the net sales according to the new accounting rules.

[Operator]

[Operator Instructions] We will take our next question from Isabel Carballo of BBVA.

[Isabel Carballo, Chief Analyst]

I have 2. The first one is regarding the evolution of the SG&A cost or the, more specifically on the launching cost you are expecting for the rest of the year, if you can provide please -- if you can provide, please, a little bit more color on that. And the second question is regarding the investment of EUR 75 million. You have said that most of it is related to Athenex, but I was wondering if it is including also some payments to Sun Pharma this quarter. That's all.

[David Nieto]

All right. So I'll take both questions, Isabel. On SG&A cost, so this is the quarter where we enter with all our actions in place to deliver savings and productivity, and we started investing in the launches of Skilarence and partially into tildra, right? Having said this, the investment into the innovation and into the growth will accelerate as we go to the end of the year. And I think when we gave our guidance early in the year, we told you that our investment behind Skilarence and tildra are expected to be around EUR 40 million for the full year. So as you can see that we invested about EUR 5.1 million today, we still have a long way to go. So we will continue to deliver SG&A savings and to be able to invest behind our brands and launches. And we are committed to keep our SG&A flat in absolute value. And as the Q1 is showing it, we're able to do this, but there would be an acceleration of our investment behind launches by the second half of the year. If I go back to the EUR 75 million payments for milestone, it does not include Sun payment for the quarter 1. Again mainly Athenex, a part of [indiscernible] and I think ongoing all the normal things that we have that goes through the cash -- the cash flow.

[Operator]

That now concludes today's Q&A. I would like to hand the call back to Mr. Divasson for any additional remarks.

[Pablo Divasson del Fraile]

Brian, could you please take one additional question from Credit Suisse, please?

[Operator]

I certainly will, just one moment. Okay. So we'll take an additional question from Trung Huynh of Credit Suisse.

[Trung Chuong Huynh, Research Analyst]

So you note your financing of your senior notes has come down to 1% now. Your underlying net financials for the quarter was EUR 1.2 million. Is EUR 5 million run rate for the rest of the year a good estimate ex foreign exchange? And then on the EUR 75 million of investments, you noted that you can find that in the annual report. Can you let us know what page that's on?

[David Nieto]

Yes, thank you. So on the note that we redeemed last year, we were paying about 4.6% interest rate as you remember, and the revolving credit facility went below 1%, 0.8% to be precise. And if you read the Annual Report, you can have all those details. And I would let you to go to one of the backup slide that gives -- we have -- we're giving much more detail here when you look at this line on the financial income and expenses. And as you can see our finance cost for the first quarter on Page 30, you will see that it's about EUR 1.2 million. So if you multiply that by 4, I think a EUR 5 million estimate for the full year finance cost is the correct one. And regarding the Annual Report page, I will -- I would send you a separate email after the call so you have it precisely identified. I will give you the exact page so you don't have to read the 200 pages of the Annual Report or Annual Financial Statement.

[Operator]

There are no further questions at this time. So I'd like to hand the call back to Mr. Pablo Divasson. Please go ahead, sir.

[Pablo Divasson del Fraile]

Thank you, Brian. We are now going to close our Q&A session, and with this, we will complete our conference today. We want to thank you all for your attendance. You may now disconnect.