Orion Oyj

OMXH:ORNBV

Earnings Call Transcript 2019-Q1

[Timo Lappalainen]

[Foreign Language] Welcome to Orion's earnings call first quarter 2019. My name is Timo Lappalainen. We will hold first this session here. I have a few prepared remarks. Thereafter, we open the lines for any questions, comments that you may have. And at that time, I will also invite our CFO, Jari Karlson, here to the podium with me.Firstly, I want to draw your attention to the disclaimer. This presentation contains forward-looking statements, which involve risks and uncertainty factors. And Orion assumes no obligation to update or revise any information included in this presentation.Having said all that, let's first draw our attention to the highlights of the first quarter. Of course, the big event was that the marketing applications for darolutamide for our prostate cancer candidate molecule were -- that was submitted in the main markets, in the U.S. as well as in Europe and in Japan.Our top line as well as the bottom line, those were lower than in comparable period. We continued to plow ahead and invest in R&D and our outlook remains unchanged. Our Proprietary Products sales were slightly behind last year. However, our Easyhaler, Dexdor and Simdax those sold very well in the first quarter. And then as we've indicated earlier, the Specialty Products, especially here in Finland, continue to suffer from the headwind. However, in some other markets in Scandinavia, we had a tailwind.Also the update on our pipeline is that we have initiated a new Phase I trial for ODM-209. This is a molecule with the same mechanism as the ODM-208 and a selective hormone synthesis inhibitor. And currently, we are studying that for both prostate as well as breast cancers. And we've also made a decision not to independently pursue further trials on ODM-104, which is our Parkinson's compound but actually to allocate our resources into these first in compounds.So the key numbers for the first quarter. The net sales, EUR 240 million (sic) [ EUR 241 million ], we were slightly behind last year. Operating profit, we've indicated earlier that this year, the operating profit will be under pressure due to the commitments that we are making for our road toward the EUR 1.5 billion growth track. And certainly, this quarter, we suffered from that. The operating margin, we did not quite reach the 25% target. However, we were still at a very good level. And then the cash flow per share was a strong cash flow, especially driven by our working capital -- favorable working capital commitments.And here is the waterfall, how the first quarter evolved compared to the last year. So when we start with 2018, the Parkinson's products, there we suffered. There were certain timing issues related to that. In terms of the milestones and royalties, there were no major milestones in this quarter. The reference pricing system that is putting the pressure on -- or continues to put pressure on pricing here in Finland. Easyhaler, plowing strongly ahead. That seems to be in a very good track now in trajectory in becoming our largest product this year. For this quarter, we had a favorable exchange rates for EUR 2 million. Last year, the swing was totally different. And then there, of course, were some other factors as well. Now how that then translates to operating profit. Certainly, the product sales, we took a hit there and also the margin in terms of the pricing. There was a slight impact from that. Then the ForEx, there we gained a couple million. On the milestones, those -- obviously those fly directly -- flow to the bottom line. So the EUR 3 million from the net sales flows to the bottom line. And then the other income also, we had last year certain income that we were missing this year. And the fixed cost really plowing ahead toward our growth plans there. As we've indicated, we are estimating about that EUR 30 million on the top of the normal expenditure what we are putting to make the growth story to happen. And that's how we've ended up with the EUR 55 million here.Now when we look at the sales from the geographical breakdown, of course, we notice that still Finland continues to be the largest single-country market followed by the other European countries: Scandinavia. In North America, our exposure is fairly limited, and other markets, especially Japan and China are important for us.In Finland, we continued to suffer as I said. Scandinavia, we had a slight growth there. And in other European countries -- other large European countries, there we continued to plow ahead. In -- then in North America, pretty much at par and other markets, we had a decline.Then when we switch our side to the product portfolio view. So in the Specialty Products, which is very much Finland-dependent and also strong presence in Scandinavia, there we had a 5% decline in that business. Proprietary Products mainly relating to the POM products was at the 5 -- 4% decline. Animal Health had a good start for the year, Fermion as well. And Contract Manufacturing, of course, the base number is fairly small. But here you see also on the right-hand side pie here that the Specialty Products, so that's generics, prescription products, OTC products, nonpharma as well as biosimilars, that is currently our largest business.Now the #1 product that has changed. So the Easyhaler product family indicated for asthma, COPD and based on Orion's proprietary drug delivery vehicle as well as formulation, that continue to plow ahead and now commands #1 position in our lead table of products. Stalevo, second place there. Dexdor, continuing to grow as well as our acute heart failure indicated, Simdax and also Orion's proprietary sedatives -- animal sedatives. And then thereafter, there's a whole array of products and biosimilars, of course, being an important part of our growth story.Now if we look at the Proprietary Products, there the Easyhaler is the important product family for us today. Parkinson's disease products, Stalevo, Comtess, Comtan, they're being invested in that at first in the last year and beginning of this year where we practiced the products of Stalevo as well as Comtan here in Europe. Dexdor, still moving strongly as well as Simdax. And on Precedex, those are mainly royalties as well as API sales to our partner, Pfizer.Now with Easyhaler, the combination product, budesonide-formoterol, that is today the large bulk of our business and continues to grow strongly with almost 35%. And we have a strong market position in some countries, especially here as an example in Sweden. But then there's also quite a runaway still to grow in some other markets. And here, we're taking the largest country market in Europe and Germany where we are still only at 7%. And then as we mentioned in our last earnings call, the salmeterol-fluticasone combination products, those sales have only initiated towards the end of last year and the beginning of this year. So we are in very early stages of that. And we are working on the development of our seventh Easyhaler product for tiotropium where the indication is likely to be COPD.Then -- and the Parkinson's disease products, Orion took over the Stalevo sales in Europe from our partner, Novartis, in the beginning of December. And, of course, the transition period has taken place, and we haven't booked all the sales in the first quarter. However, we expect at the second quarter, we would capture the majority of all those sales booking by Orion, and then we'll continue to see a little more of our own sales. That's the darker part of this bar always. And then, of course, still we have the fluctuation of our partner sales. Novartis held their purchasing pattern goes to -- from quarter-to-quarter. And here, you see that Japan, Europe as well as rest of the world, those are pretty much at the equal footing and North America, mainly the U.S., is actually very small part of the business today.And then the Dexdor continued very strong performance in the first quarter. We also hear flak to -- everybody to know that the patent -- the base patent has expired or the use patent at the end of March. However, the first quarter, we did not see any material competition in that in the excess what we've seen in the past. So we'll see how this will pan out this year, but the very strong start for this -- for the first quarter.Then we'll switch gears to Specialty Products. So those are the generics, OTCs, nonpharma and biosimilars. And then if we look at that first by territory. So in Finland, we suffered from the heavy price competition, especially in the prescription products side. In Scandinavia, we were pretty much at par as well as in Eastern Europe and Russia. So this really tells you also the weight of this business of Finland, Scandinavia and then selected Eastern European countries as well as Russia. Now also it's good to know -- note always that the generic business plus also prescription products is almost 70% of our business. 1/4 is self-care products, including the nonpharmaceutical products and less than 10% are biosimilars.So in Finland, we've continued to suffer, especially in the reference price system and those product categories, which are an important category for Orion. So the entire market for the first quarter was roughly EUR 100 million, about 10% down that market. Our market share is more than 1/4 in that market, and we also went down but little bit less than the market and continued actually to gain on the volume. And in the overall pharma market here in Finland, the market was a little bit more than EUR 0.5 billion. Orion continued to command about 11% market share, and of the self-care products, we have about 1/4 of the market. And then, as said, the reference market business, that is very important for us and with 26% market share.Now our future, R&D, where we put more than EUR 100 million investment every year. So the tiotropium that, of course, we continue to work with that for the seventh Easyhaler version. On darolutamide for the first indication, as I said, the rollout of the first marketing authorization applications has taken place. And now, of course, there will be subsequently also other markets to follow. There is another trial ongoing to expand -- potentially expand the indication area, and that is fully recruited. And there, of course, we need to wait for the results of those -- that trial before we can talk more about that.Our ALS trial, where we are actually developing to increase the skeletal muscle especially relating to breathing function of the patients, levosimendan and oral formulation that is recruiting currently in about 100 centers around the globe and the recruitment is going fine and according to our plans. Then there are some earlier compounds, including the 209 out of the same mechanism as 208. However, here, we are expanding the trial from the very outset. So we have a basket trial, including prostate cancer and breast cancer patients. And now we've also taken out from this table the 104, which was a CMD inhibitor program for Parkinson's disease as we made a decision that we would be partnering that compound and focusing on these -- bringing these assets further in our clinical pipeline.And here it's just the reminder that the darolutamide, we have an ongoing Phase III trial that we are collaborating with Bayer, and the patient recruitment is finalized. And then the -- on the ALS trial that the program is going. And then, of course, the new thing for us the 209 is of the same mechanism as 10 -- 208. We've also -- in the beginning of this year, we set certain targets for ourselves in our drive to business for EUR 1.5 billion and also, of course, to maintain other business targets. And the first one is the drive the business to the successful commercialization of darolutamide. And there, for the first quarter, we have the marketing authorization applications. Those have been submitted. And, of course, then the ARASENS continues with the effort to extend the indication. Then the other one big trial that we are doing solely by ourselves is the ALS trial. There the patient recruitment is proceeding as planned. And then the Specialty Products business in generics and in OTC and biosimilars, that's an important part of our business. And our volume share in Finland continued to grow faster than the market. And pretty much the same story, of course, when we look at the overall portfolio of that business because of the heavy weight of Finland in that business. Then Easyhaler, that is the near-term online products, which is an important and following up on that, and the entire Easyhaler family had a strong start for the year. And, of course, the fluticasone -- salmeterol-fluticasone combination, we are following that closely. Then the in-licensing opportunities with a broader indication of our materiality, that work is continuing. And at this stage, we have nothing to report on that.Important part for all organizations today is corporate responsibility and, of course, the patient safety with the new serialization that took place in February in Europe. That has been implemented in Orion plants, facilities and by all partners. And so we are -- we were ready on day 1 to go ahead with that. And we understand that there will be other countries following little bit of this similar type of anti-tampering or serialization approach, and we are making ourselves ready for those markets as well. We had our value sets. We had it -- we had a large questionnaire on that to all the Orionees, and we had more than 90% strong response rate to that, and those were approved and are being implemented. And we feel very, very strongly about our values. Of course, the climate change is an important part of everybody today, all the businesses, and we've set ourselves a pretty strict target for those, which is reducing the CO2 emission at 75% against our actual 2016 by 2025.In terms of the financial outlook, that is unchanged. So we estimate that the 2019 net sales will be slightly higher than 2018. This estimate includes the darolutamide EUR 45 million milestone payments that relates to the commercialization of darolutamide in the U.S. And a similar fashion, on the operating profit, that is estimated to be at the same level as 2018. Also, this includes the aforementioned EUR 45 million milestone payment. And that -- of course, those are important elements.The next bigger event for the company is our Capital Markets Day, which will be held for institutional investors and analysts in Helsinki, on May 22. And thereafter, the normal course again takes place. And towards the mid-July, we will report the second quarter results. So at Orion, we had a good start for the year, continue to build the company for our goal for the EUR 1.5 billion. And in the meanwhile, of course, continue to invest strongly also in our future in R&D. At this stage, I invite our CFO, Jari Karlson, to join me here at the podium to take any questions or comments that you may have. So now we turn over to the phone lines and are happy to take any thoughts, questions you may have, please.

[Operator]

[Operator Instructions] We'll take our first question.

[Jo Walton, Managing Director]

It's Jo Walton from Crédit Suisse . I believe I'm open for question. I've got a few if I could, please. Firstly, if I'm right in remembering when you sold your Diagnostics business, there was a potential for an earnout. And we're about a year or so from that disposal. Is there any timeline? And is there any expectation of an earnout coming? Secondly, I wonder if you could give us a little bit of an update on the outlook for the biosimilar tendering business. Is there anything -- are there any big tenders coming up that we should be aware of? And do you have any sense yet of when you will be able to launch your Herceptin biosimilar? My next question is an R&D one, and I wonder what ODM-209 does that perhaps ODM-208 did not do? Should we assume that your efforts will really move on to the second one of those molecules? Or are they distinct in some way and that we should think of value for both of them? And continuing on R&D, with ODM-104, now you've made a decision to do no further work on it yourself. I wonder if you could tell us what the prospects might be for partnering that. It's not attractive for you to do the work, but you feel it would be attractive for somebody else to do the work. Should we assume, let's say, you would just hand it over and perhaps get a royalty on the product if it ever comes to the market? And my final question would just be on Precedex, which was obviously down very strongly. You pointed out that, that was royalties and product sales. Is that a reflection of an ongoing level of quarterly income? Or is that just volatility, and it will pop back and still be one of your top 10 products at the end of the year?

[Timo Lappalainen]

Okay. Thank you. Excellent questions. If I'll start out with the OD, the earnout. Actually, the structure, what we said in the press release is that we have the right for the earnout up to EUR 60 million. So it's anywhere between EUR 0 and EUR 60 million, and that actually will dependent -- will depend on the exit of the existing owners. So the buyer, when their private equity, when they make an exit, that depends on their return. So it's tied to that. And as they are still owners of the business, so this earnout has not materialized.

[Jari Karlson]

And very likely, we are talking about several years into future. I mean like the exit for this private equity investors we were talking about maybe 4, 5 years minimum. So it's -- we are not expecting to see anything from that for many, many years in the future.

[Timo Lappalainen]

In terms of the biosimilars, there are some tenders coming out that there is a possibility actually to supply those toward the end of the year. However, as the price level of biosimilars in our markets, especially in those national tenders that I'm referring to in Denmark or Norway, is at a fairly low level. So I would not get all that excited about the profit impact of those. Of course, there will be profit impact but probably not material this year even if they did materialize. And the -- pretty much the same story is actually with any subsequent new launches of biosimilars this year. There will be some smaller tenders where we will be participating with the entire portfolio and depending on the label and some markets. But I think the materiality threshold will not be broken with any of the biosimilar business that we don't have in our outlook yet.

[Jari Karlson]

And like we have stated in our outlook, the estimate is that in the ballpark the sales of biosimilar portfolio will be about the same as last year this year.

[Timo Lappalainen]

Then on ODM-209 versus 208, of course, there is and -- in the nonclinical experiments, they have shown differences. I mean, that's obviously why we are running these both molecules. But whether -- then how does that replicate in men remains to be seen. I think the first one that you would notice there, however, is the patient pool. Whereas 208 is geared today solely for prostate cancer, at 209 we go directly to a basket trial, including breast cancer patients and prostate cancer patients. So at this stage, we -- there's no way to make a determination whether both of them will move forward or either one or just one. Today, it all -- of course, we are optimistic because we are in the early stages. But that's -- so the potential best outcome could certainly be that we have both products, but they are differentiated by the indication.104, what type of deal structure for the out licensing? Of course, that depends. But I think if we are not prepared to put the money on the table in collaborating in development of 104, I think the likely outcome there would be that there would be some sort of access fee, some sort of signing fee related to the product. But mostly, I think the income would be, as you suggested, in the form of royalties. Maybe we also supply product, but that remains to be seen.

[Jari Karlson]

And in the question about Precedex, the volatility mostly came this quarter from lower deliveries of the API. So the royalties is more like timing and there is no dramatic underlying decline in the market sales. But API deliveries have been changing for 1 year to another quarter or depending on the production strategies of Pfizer when they are buying the API from us. But of course, in a longer run, it is a declining product, but has been declining relatively slowly in the recent years. But this third quarter decline in sales doesn't indicate similar type of decline for the full year, not at least as far as we know today.

[Operator]

[Operator Instructions] We will now take our next question.

[Iiris Theman, Financial Analyst]

Yes, Iiris Theman from Carnegie. A few questions, please. Firstly, how do you expect your group margin to evolve if you reach your sales target of EUR 1.5 billion in 2025?

[Timo Lappalainen]

Okay. Of course, we are not that far yet. And we've -- what we've said is that our operating profit margin target is 25%. And on our road there, it is likely that there will be put pressure on that ratio as we saw in the first quarter that we've indicated also earlier as how to actually utilize the proceeds that we received from Orion -- divestment of Orion Diagnostica so that allows us to continue to pay dividends -- attractive dividends even if our profitability for any given year might not be sufficient to cover the dividends. So that's one indication, what we've said earlier on. But we certainly are not able to give you any exact operating profit guidance for that far out.

[Iiris Theman, Financial Analyst]

Okay. And then secondly, how much did you spend on ALS in Q1? And what about other growth in investments? Did you have any other new growth projects in Q1? Or are those going to be visible in the coming quarters?

[Timo Lappalainen]

Okay. What we've said on the ALS trial is that the overall expenditure on that over a 3-year period is EUR 60 million. And that certainly has a heaviest weight of that trial will be this year.

[Jari Karlson]

And in the February outlook, we actually estimated that it will be roughly EUR 25 million this year. So we are pretty much spending that type of money at the current planning.

[Timo Lappalainen]

So that was one. And then, of course, the Stalevo -- our acquisition of the Stalevo rights in Europe, the depreciation, amortization of those assets is roughly EUR 1-point-some million a month. So that hits us every month now, every quarter for the 2-year period. Also, we took online the -- our plant in Fermion, which is mostly geared towards producing darolutamide. So all of those are there, including then, of course, our extended efforts in Germany for commercialization of Easyhaler.

[Jari Karlson]

So most of the EUR 7 million increase in the fixed spending was related to this growth in [indiscernible] neither marketing and sales or in R&D.

[Iiris Theman, Financial Analyst]

Okay. And still on ODM-203, when should we expect Phase II data for it? I think according to clinical trials, it should have been completed if I understand correctly.

[Timo Lappalainen]

Whatever data will be published, it will be firstly published in a scientific congress. And, unfortunately, we are not able to give the congress until it's been approved for presentation. But of course, we are all waiting eagerly for that data.

[Iiris Theman, Financial Analyst]

Okay. And then still have final question regarding Finnish price competition. Are there any changes in the situation between Q1 and Q4?

[Timo Lappalainen]

No material changes. So there's no change in our law or system or the structure of the business. So it is just continuing the same trajectory that we've seen earlier.

[Jari Karlson]

But, of course, like we have indicated, the estimates for the full year is that we gradually see lower price decrease levels than last year and -- but especially during the first part of the year, we are still seeing the impact from the price increases from last year, meaning that the prices today are still quite a lot lower than they were a year ago. But I think we can reiterate that idea that we have seen some signs that the market is maybe getting slightly more stable than it was during the past couple of years but still declining this year, that's clear.

[Operator]

It appears there no further questions at this time. I would like to turn the conference back to you, sir.

[Timo Lappalainen]

Thank you very much. And at this time, it is -- I'm thanking everybody for listening in, dialing in. I appreciate that at least here in the Nordic markets, this is so-called Super Thursday, there's a huge number of companies giving out their first quarter releases as well as tomorrow. So thanks for joining us, and I hope to see you, quite a few of you, in our CMD in about month's time. Thank you.