Almirall SA

MAD:ALM

Earnings Call Transcript 2019-Q1

[Operator]

Good day, and welcome to Almirall Quarter 1 2019 Financial Results Presentation. Today's conference is being recorded. At this time, I would like to turn the conference over to Pablo Divasson. Please go ahead, sir.

[Pablo Divasson del Fraile, Head of IR & Corporate External Communication]

Thank you, Petra. Good morning, everyone. Welcome to the Almirall Q1 2019 Financial Results Conference Call. This presentation was released earlier this morning and is available on our corporate website. Presenting today, we have Peter Guenter, Chief Executive Officer; David Nieto, Executive Vice President, CFO; and Bhushan Hardas, Executive Vice President, Research and Development, CSO. Peter will make some introductory remarks about the first quarter and later come back to [indiscernible]. David will provide you with detail on the financials, and Bhushan will update you on our pipeline. After that, we will open up for Q&A session. Before we move ahead, I would like to remind you that certain statements that we will make in the 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]

Thanks a lot, Pablo, for the introduction, and good morning to everyone on the call. I'm pleased to say that we have had a very encouraging start of the year driven by key brands and the launch of our new products. David will take you through the financial details shortly. We continue to see good momentum in our European psoriasis franchise with strong Skilarence growth and a good initial uptake on ILUMETRI in its first country, Germany. I will provide you with some additional details on both in a moment. As you know, we launched Seysara in the U.S. in January, and we have been very encouraged by the strong initial data, having achieved both good coverage and sales volume. I will also elaborate on this shortly. The late-stage pipeline is progressing well with positive top line Phase III results for ALM14789 in actinic keratosis, which we presented at the AAD. As you also will be aware, we signed an option agreement for lebrikizumab. The top line Phase II data are in the public domain. And we have recently received from Dermira the full Phase II data, and we will make our decision by early June. Bhushan will discuss both of these interesting products later. In summary, we are very pleased with the momentum generated by the business during the first quarter and therefore are confident in meeting our 2019 guidance. You see this slide before, but I think it's an important one because it enables you to see how we are moving forward in executing our strategy and transforming our portfolio with innovative products in medical dermatology. We have launched and are continuing to roll out Skilarence and ILUMETRI across Europe and relaunched Seysara in the U.S. in January and not far behind, we have ALM14789, for which we have positive Phase III clinical trial results for 2 studies in actinic keratosis. But the main reason why I'd like to show this slide is to remind you of the leverage potential these products will provide to Almirall. These 4 key growth drivers combined could generate peak sales in excess of EUR 650 million. When you consider that our product sales in 2018 were a little over EUR 750 million, you can see just how transformational these products could be for the business. This excludes our option agreement for lebrikizumab, a potentially differentiated biologic and atopic dermatitis, a large and growing market, which could become another significant growth driver for Almirall. In this slide, you can see the sequence of the launches. These 4 key growth drivers combined will be transformational to Almirall, plus the potential of having lebrikizumab. We are increasing our portfolio with a series of innovative launches with incrementally larger product opportunities to drive future growth. Let me now provide you with some comments on our launches. First, Skilarence. As you can see from the chart, Skilarence continues to progress well with an impressive year-on-year growth and excellent quarterly momentum. Growth in Germany is coming from both switched and new patients, and we are very pleased with the demand in The Netherlands, which is an important market due to the significant previous DMF experience there. Furthermore, this quarter has seen good unit increase in Spain, adding to overall unit growth as we continue the excellent momentum in Europe. A strong foundation has been set, and we continue to roll out across Europe, having launched in Italy in the first quarter. Moving to ILUMETRI. Since the launch of ILUMETRI in Germany at the end of last year, we have been very pleased with the good initial uptake, having achieved a solid sales performance during the first quarter. These initial signs are encouraging and give us confidence that ILUMETRI will be another important growth driver for Almirall. In terms of launch planning, we are on track with the subsequent launches across Europe, having recently received approval by NICE for the U.K. market and Swissmedic in Switzerland. This year will be a very busy year for our teams with a number of key market introductions and with more to follow in 2020. This graph compares the first full -- the first 4 full months of patient uptake since the launch of ILUMETRI versus the 3 most recent launches in Germany, which were 1 IL-23 and 2 IL-17s. The common time is 0 with month 1 representing the first full month of patient's uptake for ILUMETRI that was December last year. You can clearly see how well the launch was received with patient uptake surpassing most recent IL-17 launches. Let me remind you about the profile of ILUMETRI and why we are excited about the potential of the products. Psoriasis carries a high disease burden, and patients can have a very significantly impacted quality of life. It is therefore important that any therapy provides long-term control to reduce the disease burden and improve the quality of life. We believe that ILUMETRI has a strong profile with the key attributes being a proven, lasting efficacy with only 4 injections per year during maintenance and with no significant safety concerns. The combination of an excellent safety profile and lower dosing frequency will encourage long-term patient adherence to the treatment. Now moving to the U.S. This quarter marked an important milestone with the successful launch of Seysara in the U.S. Seysara was launched in January with a focused plan, and we are very encouraged by the initial data, having achieved 50% payer coverage by the end of the first quarter, of which 35% is unrestricted. If you recall from our full year 2018 presentation, this was our expectation of market coverage for the end of 2019, which we now anticipate at the 60% level. We foresee additional upside by gaining market share in the non-branded segment, where there is a high volume of products lacking innovation. KOLs and patients alike continue to give excellence feedback both on the utility and effectiveness of having an oral antibiotic approved for a wide age range of patients. Seysara's launch brings us a major opportunity, which we expect to contribute to overall revenue growth, benefiting from our strong selling capabilities and specific knowledge of this market. I will now pass on to David to run you through the financials.

[David Nieto]

Thank you, Peter, and good morning to everyone. Today, we delivered solid financial results with total revenue growing 13% and net sales 17% driven by the acquired portfolio in the U.S. and the product launches such as Skilarence, ILUMETRI and Seysara. Gross margin at 73% had a very positive evolution, improving about 400 basis points as a result of product mix. SG&A remained flat in absolute value despite important investments in Europe and U.S. launches. We continue to exhibit strong control on the cost side. With this, we delivered operating leverage with the EBITDA at EUR 80 million, growing 34% versus Q1 2018. During the quarter, we successfully divested ThermiGen and continued to execute on our capital allocation priorities. Finally, we experienced some challenges with a sales decline in emerging markets, which we expect to recover later in the year, and lower-than-expected operating cash flow driven by U.S. accounts receivable timing collection. On the next chart, I want mainly to highlight 2 things. First the contribution to Q1 growth from our launch brands, Skilarence, ILUMETRI and Seysara, as they start gaining momentum in their respective market. Second, the acquired product portfolio in the U.S., which importantly contributed to our growth in Q1. This is the portfolio that we acquired from Allergan. Turning to the P&L. Allow me to briefly highlight a few things. Net sales increased 17%, benefiting in particular from the performance of our medical dermatology portfolio. Other income was lower than last year. However, we expect a sharp increase in the coming quarters driven by 2 milestone achievements. In R&D, we continue to invest in order to build our pipeline with the goal to remain within 12% to 13% of net sales by year-end. All in all, we delivered good operating leverage as all financial indicators are going in the right direction and EBITDA margin reached 35.7% of net sales. Regarding the P&L below EBITDA, we continue to manage each element very tightly. The increase in depreciation and amortization line is coming from Allergan acquisition and the additional amortization, which represent about EUR 50 million a year. Our net financial expenses represented EUR 6 million in Q1 and were mainly driven by exchange rate differences, which details are available in the back of -- on Page 33. Thermi was treated as discontinued operations and represented a loss of EUR 3.2 million for the quarter. Finally, we achieved normalized net income of EUR 32.6 million, representing normalized EPS of 0.19 per share. Looking at the balance sheet, I want to highlight an increase in the intangible asset mainly driven by: the Dermira option fee for lebrikizumab; a sharp increase in accounts receivable, which is related to the timing of U.S. collection that will be resolved by the end of Q2; a decrease in our financial debt due to the partial cancellation of our revolving credit facility. Overall, we continue to have a healthy balance sheet and a good cash position. Taking a look at the cash flow statement. The operating cash flow generation was EUR 29 million, below our expectation, given the timing of accounts receivable collection in the U.S. Also, we are going back to normal level of corporate income tax following last year important benefits. The investment line includes the Dermira option fee paid during the quarter. The interest payment were about EUR 1 million for the quarter. All in all, our free cash flow was negative by EUR 8.2 million, given the important investment done during the quarter. I will now pass it over to Bhushan for an update on the pipeline.

[Bhushan Hardas]

Thank you, David. As you know, we announced positive results for the Phase III clinical trial in actinic keratosis with ALM14789. This data was also presented at AAD this year. In addition, we are pleased to announce in March FDA approved Duaklir for chronic obstructive pulmonary diseases, COPD. It is a combination of aclidinium and formoterol, which was a part of our agreement with AstraZeneca. Though for obvious reasons, we only talk about late-stage pipeline here, we are fully committed to highly innovative dermatology product development internally. This quarter, we also strengthened our early-stage pipeline by announcing a new research collaboration between Almirall and HitGen. This strategic partnership will identify new molecules with the potential of becoming a new oral for atopic dermatitis for patients suffering with atopic dermatitis. Regards to regulatory submissions, in Q3, we plan to file ALM12834 for the treatment of onychomycosis. And in Q4, we plan to file ALM12845 for treatment of androgenic alopecia. Both filings are for EU. Now let us take a look at lebrikizumab. Lebrikizumab is a monoclonal antibody humanized developed, which points with a high affinity to IL-13 cytokine. It is developed primarily for moderate-to-severe atopic dermatitis. Lebrikizumab has potential to be truly differentiated therapy for patients with atopic dermatitis. As you are aware, we acquired an option to develop and commercialize the product in EU with an upfront payment of $30 million. And most of you know that in late March, Dermira released positive top line results for the Phase IIb trial in atopic dermatitis. Now we have received the Phase IIb data package from Dermira. It will take us sometime until early June to make our decision whether to execute or not execute the option. To be very clear, there are no prespecified parameters in the term -- in terms of clinical trial results in the option agreement. If we do decide to execute an option, we will pay additional $500 million. And as you see in the figure, the clinical trial of Phase III will start in Q3 this year. With this, I hand it over to Peter for closing remarks.

[Peter Guenter]

Thanks a lot, Bhushan. And so as you have clearly heard from us this morning, we have delivered a strong Q1 with the business performing well within our expectations. Solid business momentum has been driven by key growth brands across Europe and the U.S. We therefore are confident on our 2019 guidance that we provided at the start of the year. As a reminder, this have already incorporated the discontinuation of ThermiGen. Following on from this, we are confident in Almirall's growth products being driven by the rollout of ILUMETRI and Skilarence in Europe and following the U.S. launch of Seysara for acne, where we have already achieved the #1 branded product position. Furthermore, as you heard from Bhushan, we are progressing our pipeline with positive Phase III results for ALM14789 in actinic keratosis and reinforcing it with an option agreement on lebrikizumab. We also remain fully focused on searching for additional external opportunities to further complement this growth profile and generate sustainable value for shareholders. So Pablo, I hand back to you now for instructions on the Q&A.

[Pablo Divasson del Fraile, Head of IR & Corporate External Communication]

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

[Operator]

[Operator Instructions] And the first question comes from the line from Trung Huynh from Crédit Suisse.

[Trung Chuong Huynh, Research Analyst]

I have 3, if I can. Firstly, we've spoken to some KOLs who have said while they like Seysara, their use of antibiotics is dwindling because of fears to resistance. So they try one, and then if that doesn't work, they'll move on to something stronger like a retinoid. Have you seen this shift in using less antibiotics in the treatment of acne? And then just 2 modeling questions, if I can. Gross margin was strong at 73% for the quarter. Is this the level we should continue to expect for the year? Or should we expect it to increase, given the mix of your newer products is getting bigger? And then finally, we saw a big step-up in net financials because the new debt and FX. Again, how should we think about net financials for the year?

[Peter Guenter]

Yes. Thanks, Trung, for your questions. I'll take the first one. I'll defer the second and the third one to David. So on your question on Seysara and use of antibiotics, oral antibiotics in acne, we know of course that some KOLs indeed would give you that information, but if we look at the fact of the numbers, we see actually that the market -- the use of oral antibiotics in moderate to severe acne is amazingly stable. So it's really since months and months and months, if not years, a very stable market, and it remains a very huge opportunity. So you had seen from the numbers that we have actually -- we have had a very strong inroad into the branded segment. But of course the name of the game is long term, also headed into the market of the [indiscernible] of the generic or antibiotics. And I think Seysara has exactly the product features to do just that. So on the second and the third question, I'll defer to David.

[David Nieto]

Thank you for the question. On the gross margin, it is definitely a geographic mix that we're experiencing positive. And I think if you look at it in constant currency or constant exchange rate and in actual exchange rate, both are positive, between 350 and 420 basis points. And I would say this is something that we will see how it goes into the year. But it's a level of the gross margin that we should expect, I would say, from now until some of our products in the U.S. goes generic. On the third question on net financial expenses, I would say that you have some details on the Slide 33 on the back-ups. The financial expenses, as such, were EUR 2.3 million from a P&L standpoint and about EUR 1 million from a cash out. The difference came from exchange rate differences, which are out of our control. But this is the way you should model it. Modeling exchange rate, it could be a challenge, and you can just model what you know. Go back to that Page 33. It would give you the answer, and I'd be happy to have a phone call, if needed.

[Operator]

The next question comes from the line from Peter Welford from Jefferies.

[Peter James Welford, Senior Equity Analyst]

Firstly, on lebrikizumab. Curious, there's also the opt-in decision. You said early June, and I think you said 3Q starting the Phase III. Is -- are there terms within the collaboration, I guess, to enable you to have a say ahead of that in the Phase III trial design? Just thinking presumably you'd like to opt-in and then be involved in that process, particularly given the potential differences in the EU regulatory requirements? And also how do you think about then the Phase III in so far as other than trials Almirall would run themselves? Or is this very much a worldwide collaboration with all trials being run on a global basis? Just then on a few financial questions. Just on tax, first of all. The rate was a little bit higher in the first quarter. Any insights you can give us on a sort of tax rate we should be thinking about for the full year? And then also just with regards to other income, I think you mentioned 2 milestones that would help that in coming quarters. Obviously one we know about is the sales milestone you disclosed. I presume the other is the Duaklir milestone. Is there any sort of visibility you can give us on that? I haven't seen a press release. But in so far as the impact on the P&L and the cash flow of that milestone in the U.S.

[Peter Guenter]

Yes. Thanks, Peter, for the question. So I'll defer the first one on lebrikizumab to Bhushan.

[Bhushan Hardas]

Hopefully, I answer all your questions. So yes, we have received the Phase IIb data package, and it will take us until early June to make a decision. We are projecting if we go ahead with this option, the clinical trial will start possibly in Q3 or Q4. We, Almirall, definitely has a say, to influence and collaborate with Dermira very closely in regards to both the design of the Phase III protocol from an EU perspective as well as any kind of collaboration which is required for conducting the trial in EU.

[Peter Guenter]

Let me just add to that, Peter, that in terms of timing, given where we are now, we think that the start of the trial will be rather beginning of Q4 than the end of Q3, to give you a little bit more precise guidance. And in the agreement we have with lebrikizumab, actually, as Bhushan said, it is a overall agreement on the design of the Phase III pivotal studies. And of course, within that, we have also foreseen specific EU trials that you have to do from a payer standpoint, yes? So there is actually the clinical data package that you need for the regulators and then there's specifically for EU payers. You need sometimes specific additional studies, and we have actually foreseen all those studies in the agreement. The comment -- sorry, the questions on tax and other income, David?

[David Nieto]

Yes. Thank you, Peter, for the question. So on the tax rate, let me maybe summarize Q1. So basically, we had 9.3% -- EUR 9.3 million, sorry, of tax going to the P&L, which represent 20.5% tax rate. This is, as you mentioned, a little bit on the upper side of our range. We continue, and I think this will normalized by the end of the year, to be between 18% and 20% tax rate. That's the way you should model it. And if you look at the cash flow, the cash flow was EUR 3.5 million negative, which is a payout of taxes, of course. Last year was positive because we had a lot of positive things that we did last year like we highlight on this slide coming from the carryback opportunity of the tax -- Trump tax reform and other things that we could apply last year. So last year was a little bit of an abnormal year in term of tax rate. This year, we're going back to a normalized -- or normal tax rate of 18% to 20%. When it comes to the net -- to the other income, sorry, I think Q1 was exceptionally low. Having said this, this is one of the quarters that we still deliver very strong EBITDA despite having a low other income, which demonstrate that our P&L is strong without any other income injection in that sense, so -- or normal level of other income. And when I talked about the 2 milestones, I'm talking about the one we already, I think, published, that we have reached during Q2 in April, which is a $65 million. That it's a sales milestone related that we have achieved with AstraZeneca. And out of the $65 million, partially will be paid -- or has been already paid in Q2 and partially will be paid next year, at the same time next year. And you will see that coming through the P&L in the next -- in the quarters to come. The second milestone, which is more product launch-related in the U.S., we're not giving details about it. But basically we always said that we would expect it in Q3 to have that event happening. All in all, everything has been reflected in our guidance with an increase of the other income of plus 20% versus prior year. So this is going by normal course of business, although it's a little bit difficult for you to model and to understand what is going on. But everything is going as expected on our side, and everything is under control and is coming through. You will see it in Q2, and hopefully, the product launch milestone in Q3.

[Operator]

The next question comes from the line from K.C. Arikatla from Goldman Sachs.

[Krishna Chaitanya Arikatla, Research Analyst]

This is regarding ILUMETRI. Can you give us some information on the price point of ILUMETRI versus competition? I understand that you're in the initial months of launch in Germany so the price point is not necessarily negotiated yet. So if you could give us some idea on what is likely to be the final price versus competition. And also sticking with ILUMETRI, for a European country to include the drug and their treatment paradigm, how important is having fewer injections, given that this is subcutaneous and not intravenous?

[Peter Guenter]

Yes. Thanks for the questions. On the pricing of ILUMETRI, as you rightfully say, this is only the first 12 months. You go through the Almirall procedure and then you -- after the negotiation, you will sign up with the final price after negotiation in Germany. So far, we have priced the product quasi on par with the other IL-23 that has been launched in the German market so far, which is guselkumab of J&J. And we have also obtained, as you have noticed, a positive NICE opinion which was of course subject like, I would say, all NICE approvals of a patient access key, which is a different way of saying "Well, you have to give us a rebate to become cost effective." So that is the normal way it goes in the U.K. As you know, these rebates are confidential, and I cannot reveal here this rebate we gave. Now the fact of the matter is that we have had now a very good NICE appraisal with a cost-effective drug, and we're also looking forward to see then the first uptake in the U.K. in the second and the third quarter this year because you also have to go through different CCGs, who have 90 days after NICE positive appraisal to implement the NICE guidance into their local CCGs. So I think it's speculative where we will land after the AMNOG negotiation in Germany with a net price. So I think we'll have to wait for that until we have the final call on that. Your second question on the 4-times-a-year injection. The feedback we have from the market is actually very good on that even if it's a subcutaneous injection. It is a very important element of differentiation and especially in Germany where patients typically would see their dermatologists back every 3 months because that's the way the German system works actually. That actually coincides perfectly with our every-3-months injection. So yes, it is a different -- it is an important element of differentiation.

[Operator]

The next question comes from the line from Jose Maria Canovas from JB Capital Markets.

[Jose Maria Canovas Garcia de Blanes, Analyst]

Actually, most of them have been answered. Just wondering with the working capital during the first quarter slightly above our expectations and somewhat high, mainly related, as I am reading, to the receivables in the U.S. So I just wanted to know, are these the normal levels that we should be expecting for the rest of the year? Or should the figure normalize over the coming quarters?

[Peter Guenter]

Yes. David?

[David Nieto]

No. On receivables, we had a timing issue on the collection. I think it depends on when you ship and how you collect. But basically, also with the launches of Seysara, which came in on -- started in January with some pipeline that was maybe filled a little bit late in the quarter. So you should see, by Q2, the balance sheet normalizing and the cash flow, operating cash flow getting stronger and the working capital coming down. So this is just something that you will see a little bit of, of course, receivable as we go the business, as we're getting integrated Seysara in the U.S., but not that level of -- that you see today. I will quantify it at about 20 million to 25 million is what we basically should have collected that we did not in the first quarter, all right?

[Operator]

[Operator Instructions] The next question is from the line from Isabel Carballo from BBVA.

[Isabel Carballo, Chief Analyst]

Well, my question is regarding the EBITDA guidance for full year '19. Given that you have achieved an EBITDA of EUR 80 million this quarter with a very low figure for other income, if we, i.e., multiply this figure for 4, I've reached to an EBITDA figure above your guidance. So is this because U.S. tax in acceleration winning a particular stance in the coming quarter? Or is any additional spend related to lebrikizumab that you are forecasting for the second part?

[Peter Guenter]

David?

[David Nieto]

Yes. Isabel, thank you for the question. I have to say that we are very encouraged with the launches of our product in key market. Of course, we have to invest behind it. I have to say that our cost control is going in the right direction in Q1. This is a very strong start of the year. But it's premature at this point to upgrade the guidance. I mean we still have -- for multiple reason, we cannot extrapolate Q1 into the full year EBITDA. We have seasonality effects. As you know, we have some seasonality products in Spain that are strong in Q1 than the rest of the year. And we also have Aczone in the back end of the year in the U.S. So more to come. Let's see how the second quarter goes, but we cannot extrapolate the first quarter into the full year. But I have to say that we are very pleased with our first quarter and our cost control and product mix, too.

[Operator]

We have one further question from the line from Trung Huynh from Crédit Suisse.

[Trung Chuong Huynh, Research Analyst]

Just a quick one. Can you remind me when you expect Aczone generics to come in and how quick and aggressive that erosion would be?

[David Nieto]

Thank you. So the Aczone, we said as the acquisition's done, that we expect in the second half of this year, mainly 2019. We'll see this coming, I would say, in the second half of the second half, so more around the fourth quarter at this point. And as we go into the process and some news are coming around, we'll let you know more. But our expectation are now more into Q4.

[Operator]

And we just got another question through from the line from Jaime Escribano from Banco Santander.

[Jaime Escribano, Equity Analyst]

So 2 questions from my side. The first one is regarding the -- of the legacy portfolio of Allergan excluding Seysara. Could you tell us how this is performing? And secondly, regarding ILUMETRI. You were telling us the competitive differentiation factors versus the previous IL inhibitors. But my question would be if there is any differentiation factor also with the Johnson & Johnson product? Or how are you commercializing? Or how are you positioning ILUMETRI versus its direct peer?

[Peter Guenter]

Yes. Thanks, Jaime, for the question. So first on the U.S. business ex Seysara, I can tell you we're very happy with the way we have integrated this portfolio. We have the necessary commercial infrastructure, not only of course to push Seysara but we have other products like Aczone, Tazorac and some other products that we have -- we put into promotion. And we see actually the reactivity to promotion is very good of those products. If you would sequentially compare first quarter 2019 and fourth quarter 2018 and even more the quarters before, we took some products back off into promotion. You will see that it's actually moving in the right direction. So yes, we're happy with the way we have been able not only to launch Seysara, but also the way we have been able to see again reactivity to promotion of the ex Allergan portfolio. Your question on ILUMETRI and the differentiation vis-à-vis the J&J product, guselkumab. So the biggest differentiation, I guess, is the frequency of injection, where indeed we have a every quarter injection, whereas the guselkumab is every 2 months. So that is actually a benefit we have. But I think the more important picture to look at is that if you would talk to many KOLs, they would tell you that IL-23 is really providing a very, very good longevity of response compared to other classes in psoriasis. And I think that tildrakizumab or ILUMETRI being a IL-23, we're going to benefit from that overall positive momentum that the IL-23s will have. I think we will rise with the tides of the IL-23. So we're very, very happy with what we have seen in the first quarter this year so far.

[Operator]

Thank you. And we do not have any further questions. With that, I will hand back to Pablo to -- for his closing remarks.

[Pablo Divasson del Fraile, Head of IR & Corporate External Communication]

Thank you very much, Petra. We are now going to close our Q&A session. And with this, we will complete our conference today. We want to thank you for your participation. You may now disconnect.