Recordati Industria Chimica e Farmaceutica SpA

MIL:REC

Earnings Call Transcript 2018-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Recordati First Quarter 2018 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Ms. Marianne Tatschke, Director Investor Relator of Recordati. Please go ahead, madame.

[Marianne Tatschke, executive]

Hello. Good afternoon, or good morning to everybody and thank you for attending the Recordati conference call today. Fritz Squindo, our CFO, will be presenting and commenting upon our first quarter 2018 results. For a better understanding of his presentation, please access the set of slides available on our website, www.recordati.com, under the Investors section and presentations path. At the end of the presentation, we will answer any questions you may have. Please go ahead.

[Fritz Squindo, executive]

Thank you, Marianne, and good afternoon, or good morning to everyone. We can start with Slide 2 in our presentation. And we are pleased with our first quarter '18 results, which are in line with our fully targeted confirmed sales and margin growth. Consolidated revenue in the period is EUR 366.5 million, which are up by 7.2%. Sales include in this period an estimated negative exchange rate effect, which could be estimated being EUR 12.4 million, or 3.6%. Also -- sales also include those related to metoprolol-based product acquired from AstraZeneca integrated in our product portfolio as from July last year and which amount of EUR 23.3 million in the first quarter of 2018. Then good performance in term of sales, but a further improvement of our margin and in track -- in line with improvement we had in the previous year.

Let's start with our EBITDA. EBITDA at 36.7% of sales is EUR 134.4 million and up by 14.2%. Operating income at 32.9% of sales is EUR 120.5 million, an increase of 12.4% compared to the last -- same quarter of last year. And net income at 23.6% of sales is EUR 86.6 million. Here, we have an increase of 10.3% over the same period of the preceding year. Then we are improving our margin, and we're growing our margin with a double-digit growth in all our lines, EBITDA, operating income and net income. In terms of financial situation, we continue to have a very solid financial position that is at the end of period EUR 484.6 million, which is an increase of EUR 102.3 million, but which is only due to the share buyback for which we have an overall disbursement in the period of EUR 169.8 million. We continue to have a solid cash flow generation excluding this extraordinary subject.

Regarding the activity for the further development of the company, I would like to underline that at the beginning of April, an agreement was signed with Mylan for the acquisition of the rights to Cystagon in Europe and other territories. Cystagon was previously sold under license from Mylan. Then we are improving our rights in our orphan treatment of rare diseases.

Slide #3. The performance of our corporate products is in line with our expectation. Zanidip lercanidipine sales are slightly down, mainly due or, let's say, only due to the reduction of sales in Algeria following partition restriction on product for which there is local production. But in all the other business, lercanidipine is keeping market share. Sales of Zanipress are down, and this is due to the competition from generic version as expected. But I think it's important to say that, in the quarter, we have only a decrease of 6.1% even if we have to compete against generic. And the overall sales of lercanidipine franchise in the first quarter of 2018 at nearly EUR 55 million.

Urorec silodosin generated sales of EUR 26.7 million during the quarter, that are up over 12% due to good [ performer ] of our product in all the main market. Sales of Livazo are EUR 12.4 million and are up by 29.3%, and this is due to the good performance of the product in Turkey, but also in all the other market where it has been launched. Therefore, corporate product growing double-digit. Oh, let me comment -- let's now comment on our metoprolol sales. Just to remind you that on 30 June, 2007, the agreement with AstraZeneca of the acquisition of the right of Seloken and [ Seloken ] and Logimax, these are the 3 brands that we have acquired from AstraZeneca for product based on metoprolol, and was concluded. Revenue generated by this product in the European countries covered by the agreement are consolidated from 1st of July 2017. And sales in the first quarter of 2018 are EUR 23.3 million. And this product contributes significantly to the growth of our subsidiary, mainly in Germany, Poland, France and the Czech Republic and Romania. Then we have started selling and managing, and we're pleased with the performance of metoprolol in the first quarter. Then, we have other corporate products, which are down overall by 3.7%, and this is due mainly to competition from generic version of rupatadine-based brand, but most important is to the weak, late flu season and also in the negative exchange rate effects that we have had in this quarter in our sales in Russia.

Our specialties indicated for the treatment of rare diseases generated sales of EUR 54.8 million during the period, an increase of 5.2%. Sales in the U.S.A. market are down by 8.6%, and this is due to a negative exchange rate effect and also to the initial competition from a generic version of [indiscernible]. On the other hand, very solid performance in all the other parts of the world of our portfolio of product for the treatment of rare diseases.

Slide #4. This graph shows the breakdown of our revenues used by type of products. And now, you can see that corporate product, including the rare disease drugs, now accounts for 68% of revenue, with the inclusion of metoprolol franchise acquired from AstraZeneca.

Slide #5. The slide shows sales performance by geography. Let's start with our Italian market. Sales in Italy are up by 2.3%, and this is due mainly to the good performance of Urorec and Cardicor and the significant growth in the market of the treatment of rare diseases, and the integration of the portfolio is really strong all our market as from July '17 of the metoprolol-based brands acquired from AstraZeneca. Sales in France are up by 14.1%. Worth here mentioning is the good performance also in France of Urorec; the good performance of methadone, our product that we are selling in France; in addition to the sales of Lercan, the second brand of lercanidipine, which is now marketed directly by subsidiary following the termination last year of the license agreement with Pro Farma; and here again, the integration in our product portfolio as from July '17 of the metoprolol-based products acquired from AstraZeneca. It's worth also mentioning that the treatment of rare diseases [ all through France ] are growing strong.

In Germany, sales are up by 20.5%, mainly thanks to the sales generated by metoprolol-based products. Revenue generated in Russia, Ukraine and CIS countries is EUR 32.1 million, which are down in euro by 4.7%. But it includes estimated currency effect losses of EUR 3.6 million. If we're analyzing sales in Russia in local currencies these are [indiscernible] are down by 0.3%. And this is due to the sales reduction of the product for seasonal disorders due to a much weaker flu season that -- than the flu season we had last year. I would like to remind you the strong performance we had in our Russian business in local currency in the first quarter of 2017. In Russia, the corporate products Urorec, Zanidip and Livazo are performing well.

There's good pharmaceutical business in the USA. Just to remind you that we're dedicated to the marketing of product for the treatment of rare diseases. Sales in the quarter of 2018 are EUR 25.6 million. As I said, these are down by 8.6% due to the significant negative exchange rate and initial competition from a generic version of Cosmegen. In U.S. dollar, our U.S. base is growing by 6.5%.

Sales in Turkey are down by -- in euro-denominated sales are down by -- up, sorry, by 0.4%, but include a negative currency exchange effect, which is estimated to be EUR 3.4 million. Yet again, in local currencies, sales for our Turkey subsidiary continue to grow significantly in the quarter. The growth, we grew our business by 18.5%. And just to comment also on sales in central and eastern countries, which benefited significantly from the consolidation of the metoprolol-based product acquired from AstraZeneca, and we're very pleased by having now in this market a critical mass that we wanted to have.

Slide #6, as usually we present in this graph, the geographic breakdown of our pharmaceutical credit. Just to remind you that Italy continue to be in the region of 20 -- particularly in the first quarter, is 21.4% of our total sales.

Slide #7. We have already analyzed -- the P&L analysis. And sales, we have already analyzed our revenue for the period, which are growing by 7.2%. Let's now move on P&L analysis. Gross profit is EUR 257.2 million with a margin of 70.2% on sales, an improvement over that of the preceding year due to the further growth of product with higher margins and also to the positive effect of the metoprolol-based product acquired from AstraZeneca. Selling expenses at 25% of sales increased less than sales and now, therefore, are down as a percent of revenue compared to the preceding year, thanks to the increased efficiency of the group commercial organization. We continue to improve our margin, thanks to our capacity to leverage our sales organization. G&A expenses are down by 4.4 and diminished as a percent of sales to 4.5%. R&D expenses are EUR 27.7 million and our R&D expenses are up by 19.4% compared to those recorded in the first quarter of '17. And this is due to initiation of new development programs and the amortization of the acquired rights of the metoprolol-based product. Net financial charges are EUR 4.9 million, an increase of EUR 3.1 million due to the interest of the new regional term loans and higher currency exchange rate losses, mainly linked to intercompany agreements in [ ruble ] and in Turkish lira. Effective tax rate during the period is 25.1%, which is percent slightly below of the same period of the preceding year, in line with our expectation.

And now, let's finish with our net income at 23.6% of sales is EUR 86.6 million, an increase of EUR 10.3 million over the same period of the preceding year. And as we comment also the EBITDA, which is 37. -- 46.7% of sales and our EBITDA is up by 14.2%. Then let's say that in the quarter we had very solid financial performance with our margin, which continue to improve quarter-by-quarter.

Slide #8. The slide shows the split of revenues and EBIT between our 2 business segments. And EBIT margin for the rare disease segment are 47% and for the primary specialty care segment at 30.4%. It's important to underline that both segments show margin improvements.

Slide #9, our financial position. As I said at the end of March, the net financial position shows a net debt of EUR 484.6 million compared to the net debt of EUR 381.8 million at year-end of 2017. But I would like to underline that during the period, EUR 10 million milestone was paid as per the licensing agreement with Gedeon Richter for the rights of Reagila, but more important, whereby we had purchased own share for a nominal amount of EUR 169.8 million. Therefore, we have an increase of our net debt which is only due to the acquisition of our [ treasury ] stock.

Having said that, on Slide #12, we are presenting and, let's say, confirming our target for the full year 2018 in line with our previous targets. The expectation is to achieve sales of between EUR 1.350 billion and EUR 1.370 billion. No acquisition are included in this target, although I confirm that we are strongly committed, as in the past, to an ongoing acquisition strategy in order to accelerate our growth.

Regarding margin. Margin are expected to continue to improve for the full year. We expect to achieve an EBITDA of between EUR 490 million and EUR 500 million, which is around 36% of sales; EBIT of between EUR 430 million and EUR 440 million, around 32% of sales; and net income of between EUR 310 million and EUR 315 million, here around 23% of sales.

[ Then we have had ] the good performance in the first quarter. Based on the first quarter results, we are confident to be able to achieve our full year results and the target that we announced.

[Marianne Tatschke, executive]

Okay, Mr. Squindo's presentation finishes here. If you have any further questions, please -- operator, could you please open the question-and-answer session?

[Operator]

[Operator Instructions] The first question comes from [ James Wallis ] with Credit Suisse.

[Unknown Analyst]

Firstly on share buyback in the quarter. Out of your total share repurchase authorization of EUR 300 million, you spent EUR 170 million in the first quarter. What level of further repurchases would there be sensible to assume going forward for the year? Does this level of share repurchase signal a lack of sensible external acquisition opportunities at this time? Secondly, on Cystagon, in practical terms, what will the change in relationships with Mylan on Cystagon mean? Have you paid an upfront sum to avoid paying ongoing royalty? If so, what level is that? And then, also could you just tell us the number of shares you have outstanding at the end of the first quarter? And then finally, just on cariprazine, perhaps you could just give us a bit of color on sort of how the launch preparations are going?

[Fritz Squindo, executive]

Regarding our share -- treasury stock performance [ indeed ], we have significantly increased our treasury stock in the quarter, because the main reason we have both the stock [indiscernible] our stock option plan. And today we have both, practically, the full value or the total number of stock that we have to use in our existing stock option plan. But we don't see in the near future, let's say, without the new stock option planned issue, to significantly increase the number of stock that we want to acquire. Then we have invested this money to acquire what we need is necessary for the future stock op plan. In the note of our consolidated balance sheet, in particular, in the Note 11, you will find all information regarding the stock option, the option outstanding at the end of March and the number of treasury stock we have now in our balance sheet. The second question was related to the Cystagon. Okay, we had bought the full rights and then we had controlled license agreement in a product, which is now proprietary. We have -- we have paid in April and March [ time ] for this acquisition. What is significantly changing, that we have the full right forever. And we have also going forward the right for reducing progressively our cost of goods based on our full rights on these product. We have paid -- you will find this number in the next report. All together, we have paid EUR 20 million for this deal, which is based on technology transfer or acquisition of the right of the program. The third is linked to our Reagila business. The launch is going ahead. We have now in the month of April launched the drug in Germany. This was our plan and we have now in effect launched drug. Then we're also working actively in our market access activity. And we expect progressively during the second part of '18 and the first half of '19 to start launching Reagila in all the others major markets in Europe.

[Unknown Analyst]

Can you tell us what the price is in Germany?

[Marianne Tatschke, executive]

Price in Germany. [Foreign Language].

[Fritz Squindo, executive]

These are, let's say, commercial information, but the price that we have now obtained is in line with our expectation. And we are pleased by the price that we have obtained. Frankly speaking, for major reason, I don't want to comment on detail on the price of Reagila in this conference call. But it's a good price and as usual, the price in Germany is a higher price at the beginning and then the other mechanisms. And then we are expecting some reduction in Germany. But this is in line, even a bit higher than what was in our previous business in our business case. Just to reassure the market that we are on track and we are doing our activity, we are progressively developing our market access activity, and we are pleased by the evolution of Reagila market access appeal.

[Operator]

The next question comes from Bruno Permutti with Banca IMI.

[Bruno Permutti, analyst]

I would like to ask you, what is your view on possible acquisitions? And if you see changes in the market compared to your plan, to your previous view? So if you are -- if I well remember, you are keen to bolt-on acquisitions in the markets where you are already present. I wanted to understand if this is still your strategy? And if you believe that by the end of the year there could be the materialization of any possible deal?

[Fritz Squindo, executive]

Okay, then. As I said when I was commenting the target, we continue to be strongly committed to this ongoing acquisition strategy in order to accelerate the growth. And we continue to have -- target these bolt-on acquisition, which means we try to find access in the existing geography for leveraging the organization for accelerated growth. And we -- I can confirm that for the time being, there are projects that we are looking that are opportunities today. We have not included in the -- in our target because it is practically impossible to say yes or no if we are able to close some deal. But we are actively working on this approach, on this strategy and strongly commit to opportunities in the market, and then we expect to close some deals. In the past, I don't know if this would be done in the third quarter, second quarter, but I think for this acquisition, it's important that we are confirming strongly our commitment. And now I can confirm also to all of you that there are opportunity available in this arena in the market -- in the M&A arena.

[Operator]

There are no more questions registered at this time.

[Marianne Tatschke, executive]

Okay. So goodbye to everybody. Thank you for participating.

[Fritz Squindo, executive]

Goodbye to all of you.