Orion Oyj

OMXH:ORNBV

Earnings Call Transcript 2022-Q1

[Tuukka Hirvonen, executive]

[Foreign Language] Good afternoon, everybody, and welcome to Orion's earnings conference call and webcast for the financial period of January-March 2022.

My name is Tuukka Hirvonen, and I'm the Head of Investor Relations here at Orion. We will kick off today with CEO Timo Lappalainen's presentation, after which then we will arrange a Q&A session where also CFO, Jari Karlson, will be present. We will be first taking questions through the conference call lines. And after that, we will turn to the questions you may type to us through the chat function of the webcast on the bottom of the screen. We kindly ask you to state your name and the organization you are representing before asking your question.

And just before I let Timo to step in, I'd like to draw your attention to this disclaimer regarding forward-looking statements.

But then without any further delays, it's my pleasure to give the stage to Timo. Timo, please.

[Timo Lappalainen, executive]

Thank you, Tuukka.

Welcome to our earnings call for January-March. And it is a twofolded event, of course, also for Orion. So if we look at our lead growth product of Nubeqa, the growth is doing very well. On the other hand, we are seeing the war ravaging in Europe, causing various stresses to our supply chains. In R&D, we were happy to report the detailed results of ARASENS study in ASCO GU, including the world's most prestigious clinical scientific paper, New England Journal of Medicine. And the results obviously were flagged then later also by the upgraded sales forecast by our partner, Bayer. We've also announced during the period that we are planning to refocus our R&D more on oncology as well as pain that will firstly take place in research. And then obviously, as the time moves on, also have effects in development.

Now Nubeqa sales, those we booked showed a strong growth in the first quarter. We had a large product deliveries to Bayer, and I'll come back to that a little bit later on because there are some accounting issues here that we all need to be aware of. Also, Easyhaler performed very well during the period. And as we've noticed several times and have noted all of you that the Dexdor and Simdax declined as we expected.

Now what we've seen in the operating environment is that the one of the results in purely in the business or financial sense is that the war in Ukraine has accelerated the underlying cost inflation, also increasing the supply chain risk, which today are combined also with the logistical issues that are being faced in China. And then whilst those all work down the chain, we'll have to see what is the impact of those to all the industries on all the companies, including Orion. So that's partly also the leftovers that what we are seeing in COVID.

As we've noted early on in pharma and especially in the business where you are mainly in prescription business, it is not easy to pass on the rising production cost to sales prices. You are limited to the either tendering tenders and tendering where it's basically a reverse auction or then you are administered pricing system, and you have to discuss with the pricing boards.

Of course, the company was happy to announce successor planning had been now completed. The first step has been completed by the Board and Dr. Liisa Hurme, whom some of you have known also because she has a long tenure with Orion, has been appointed to President and CEO effective 1st of November, and we all welcome Liisa to her new position.

So the key figures for the first quarter. So net sales pretty much at par with last year, so EUR 271 million. Operating profit, a little bit shy of last year, also reflecting in our operating profit margin, still above our 25% mark, which is our target. Cash flow before the financial items are a little bit higher than last year, which was a little bit slow from that perspective.

Now if you look at the waterfall for the sales, so what has changed now for only a couple of millions, however, there are multiple, of course, points that affect to that effect. So Simdax, Dexdor, we took a hit in that and it's mainly in pricing for EUR 7 million. So there is -- if we look at the Dexdor, actually, volumes are very stable or even increasing and Simdax also very little volume impact. Nubeqa, going strongly as it should. Also Easyhaler doing well and also the other products as well. Now if you look at all the rest, there was a decline, partly relating to the Animal Health, and we'll talk that a little bit later on. On the ForEx front, roughly EUR 4 million and also in milestones and royalties and that ended up, as said, pretty much at par with the comparable period.

In terms of the operating profit, product sales, which are -- those were higher, so that's a very positive news. Margins and especially product mix so that relates to the decline in prices. We've seen that. And as said, the ForEx, we took a hit then there. Milestones and royalty is certainly lower than last year -- sorry, higher than last year. And then what we are seeing in fixed cost is that we are slowly starting to be in a more normal sense in a normal operating mode as far as the fixed cost base comes, but also there are some timing effects that relate to our clinical trial. And that's how we ended up at EUR 71 million.

So then the geographical breakdown of the sales. So Finland continues to be the largest country market followed up by, of course, large European markets, Scandinavia as well. And then North America, where we do not have our own presence, commercial presence. So that's a partner country or countries that is about 8%. And then rest of the world, including Japan, roughly 15%. So if we look at then the -- by the geographies. So growth in many markets, Scandinavia pretty much at par and then North America, that really depends today on our shipments of our partner products and of course, Nubeqa there as well, how does the North America perform in this graph.

So then by the business lines, if we look at the Specialty Products, there was growth there as well as on proprietary sites. So both the human businesses, we saw growth there. Animal Health saw a decline. This relates to the timing of our supplies and sales to our partners. So we expect that there will be catching up as we move towards the end of the year, whether that will be fully caught up, we'll have to see, but at least we will be catching that up. And then pretty much at par with Fermion as well.

So then if we look at the league table of products, Easyhaler had a strong start for the year. And some of us, we may remember that last year, the comparable period was not very good. So -- but nevertheless, we had a strong start for this year. Stalevo, Comtess, Comtan, our Parkinson franchise, pretty solid performance. Nubeqa, of course, strong growth as is should be now #3 product. Simdax saw a decline. And then if we look at the Dexdor, also there, the decline continued. And the animal sedatives is now at #6 -- sorry, #9 position, and this is due to the timing of our shipments to our partners.

So if we move on then to Proprietary Products. Here, we see pretty much the numbers that we already discussed. But moving on then to Nubeqa sales as Orion books this. And just a reminder for all of us, the way this works, the way the math works is that when Orion ships products in quarter 1, that means Nubeqa products. Those shipments or that invoice value is then deducted from the royalties in quarter 2. So that means that there will be some volatility in that overall income as we record both the product supply as well as royalties. So that volatility will be there. However, of course, all of us, we are looking at the trend line.

On Easyhaler, we had a very strong growth and a strong quarter. Actually, if one looks at the even longer period, so the business is doing well in that front. And we see that the customers are in many countries back fulfilling their scripts, visiting doctors and taking care of their asthma and COPD.

Parkinson's franchise. So this is the Stalevo, Comtess, Comtan. So pretty much at par with last year, we see also there the quarterly volatility relates to the shipments, of course, to partners. Sometimes we are even changing partners. So there are some inventory buildup or de buildup of that. So -- but then overall, of course, we are talking about the disease, which is a chronic disease, patients are well under control with a given medication. So this is a fairly stable business from that perspective.

Now Dexdor. And here, we've seen the huge volatility, the run-up in '19, then another run-up in '20 and '21, and these last 2 ones were due to the COVID. And as we have said that the Dexdor today has multiple generics in the marketplace. We are seeing less patients admitted to ICU. So that Dexdor is a product that used in patients in ICU setting. So COVID does not help anymore that much. Also, the generic competition, we have multiple offers there, so the price levels have come down quite drastically. We are still pretty well holding up the volume.

On Simdax. Last year, you remember that we estimated each quarter that there will be competition. If we look at the situation today, to our understanding in European key markets, we are having 2 generic competitors who are supplying the market. And as thus, that means that still it is limited generic competition. However, there is a pressure on pricing by the buyers. So that we certainly are seeing today.

So then moving on to Specialty Products. So this is the business which includes our prescription generic business as well as our nonprescription business, meaning OTC as well as nonpharma. The largest part of this business is in Finland, and we had a nice growth there. Scandinavia, the same thing and also Eastern Europe and Russia. The rest of the world pretty much at par. And if we look at then the overall then both grew both the prescription business as well as the self-care products. And here, you see also the split. So about 3/4 is a prescription business and then one quarter is roughly self-care products.

In our largest market for the entire company and also for the SPP products is Finland. And there, the largest segment is the reference priced products. And there, the entire market for the first quarter declined by 5 percentage points. Orion, due to the volume growth because here, we see continued price erosion, the volume growth we were able to increase our sales by 1 percentage point. And then when we look at the overall market, we continue -- Orion continues to command 11% of the human pharma. And as said in our reference priced products, we hold 24% market share and in the self-care roughly 25%.

Then I'll move on to research and development. So how does the future key clinical development pipeline look for us. So the ARASENS study that I mentioned in my opening remarks. So that is currently in regulatory phase in all the key markets. And hopefully in not-too-distant future, we will learn more about that. ARANOTE, which is also indicated to the similar patient group, is well under its recruitment and is recruiting very well. ODM-208, which is for prostate cancer, there we've announced that we are in discussions for partnering that compound. And currently, there are multiple discussions going on, but we do not have anything publicly to report at this time. Then from our own discovery pipeline, we have a compound in Phase I, which is a potential indication is in psychiatric disorders. And then as said, our largest franchise. So the Easyhaler for COPD, asthma, there we also carry on programs.

So then if we take the responsibility and sustainability in the times of severe conflicts, this is something that we will not forget. This is part of Orion DNA. Of course, Orion condemns the war in Ukraine, conflict there and invasion of the country. When we look at the -- our priorities in sustainability, of course, the patient safety, keeping, making the product available also in the worn and torn territories is something that we are working on, including with -- through the NGOs and donating product to those effect. Then taking care of Orionees, of course, that is paramount and we are happy to report that so far, all our colleagues in Ukraine, they are safe. And this is something that, of course, our hearts go to all of those, our colleagues, their families and others who are suffering from the war.

Now the environment is today, ever more important aspect of any company. We have a very ambitious targets, including client efforts for the climate, and we continue to work on that. Of course, given the environment where we are today operating, there may be hiccups to that effect. We haven't seen that yet, but we'll see how all these supply chains are able to cope and adjust to new environment. Ethical aspects in today are very important. One of the parts here is naturally that as we work in pharmaceuticals, pharmaceuticals are not sanctioned products. However, there are cases where actually logistics becomes very, very difficult. But today, of course, our aim is to keep our products in the market, and we are working heavily to making certain that also our supply chains can cope under difficult circumstances.

Then I move on to the business targets. And this is something that you remember that now we have for a couple of years, we've given you sort of heads up on the topics that give you a little bit perspective how we are moving towards our strategic goals and certainly, of course, starts from the sales and the Nubeqa sales, how those are performing, that, of course, should continue on an accelerated curve and this is today doing very well. Also on Easyhaler, the sales are growing as they should because we have ambitious targets there as well. We are working on several discussions with licensing new products in different phases. Those are in progress, and we don't have anything to report on in the similar fashion as with the larger product acquisitions, do they take form of product acquisitions or M&A that remains to be seen.

As I mentioned, we are in our discussions or in the midst of discussions for ODM-208 for finding a partner for the development and commercialization of that product. And of course, here, the commercialization, the key focus area here is North America. That relates also then to kicking off the Phase III program. And then of course, we want to build and bolster also our clinical pipeline, and one of the targets is that we could add one new program to our clinical development pipeline. And that means also that we are actually looking for opportunities also outside Orion to continue actually our very nice track record in cutting agreements with many our partner companies.

Then when we look at the financial outlook, that is the same as what we published in February, which was before the war broke out in Ukraine, and we are maintaining that. So we estimate that the sales will be at a similar level as last year and then similarly with the operating profit to be at a similar level as '21. Now the key assumptions that how we built our model for the year is, of course, Nubeqa is one of the drivers for both sales as well as operating profit. Simdax being in the similar fashion driver, but on the negative side and how fast that will then take place is an important factor to look at and Dexdor today, but to maybe a lesser extent.

Cost inflation that we are seeing is an important part, and it is also cost inflation, not only to the material, it's the logistics, just accessing the product. And of course, we need to be also during -- due to the very recent events, we have to be also worry that we are monitoring, but nobody has a full visibility what will, for example, the potential disruption of the supply of energy, raw materials, feedstock mean to suppliers and that is something that will be difficult to estimate at this time. Of course, we expect the price competition in generics to continue. We haven't seen that, that would stop or slow down. And as I said, in business operations in general, we are slowly resuming to more normal levels, including that there will be more face to face. There will be physical meetings. There will be events also to drive the business forward.

And then this year's scheduled events. So the half year report in July -- on July 15, and then the first 9 months will be in October 20.

At this stage, I invite our CFO, Jari Karlson, here to join me to the podium, and we are happy to take any comments or questions you may have, and as we all heard, we will take first the questions on telephone lines or live questions and then any that you want to type to the box, chat box there and Tuukka will assist on those questions. Tom, please?

[Operator]

[Operator Instructions] And our first question comes from the line of Harry Sephton at Credit Suisse.

[Harry Thomas Sephton, analyst]

Just 2 questions from me, please. So my first question is on gross margins. You've been quite clear in flagging the squeeze on margins you're seeing with inflationary pressures. But in the first quarter, even if you adjust for the contribution from Nubeqa, you can see that the contribution to the first quarter's gross margin was still relatively high. So I just wanted to clarify whether this is an accounting effect with inventories or whether you're seeing any significant mitigating factors in the quarter?

My second question is on the Japan price cut for Stalevo. I think you've mentioned that you expect you'll be able to offset this price cut. But I just wanted to clarify the exact timing to the price cuts in Japan, the magnitude of the price cut and then in what geographies you expect you can mitigate that decline?

[Timo Lappalainen, executive]

Do you want to take the gross profit?

[Jari Karlson, executive]

Yes. Like you already stated, the key driver for the good gross margin was the fact that the Nubeqa royalties were clearly higher than last year at the same period. So when that is adjusted, we are pretty much at the same level than last year. And there, the key driver is that volume development in our sales and as a consequence, also in our production has been good during the first part of the year. And when you have the fixed cost base and the volumes increase, that has a favorable impact on the gross margins. So from that point of view, situation was relatively good.

And we had some headwinds in the exchange rates, but not that much yet. So the pricing and exchange rate headwinds had a negative impact, but that was more than offset by the growing volumes in our margins. And as a consequence of that, we were pretty much in par with the gross margin and then had a good royalty stream, which then improve the overall gross margin. But it's, of course, clear that the cost inflation has not yet fully impacted our numbers during the first quarter because most of the sales we did came from the inventories, which had been manufactured already during the previous year. And as the time goes forward, the higher material prices and other inflation items gradually start showing up more on the gross margin as well. So it's both timing, but it's also the volume issue.

[Timo Lappalainen, executive]

Okay. On the Japan, Stalevo, that became effective to Orion in the beginning of the year. And the overall impact of that, I think we have not disclosed that. But in the overall context, it is still a few millions, but we don't have to regard it as such a material event that we would fully disclose that. But it was -- of course, for first quarter, it was something that made a dent. In terms of making up for that, I think when we are looking at the Stalevo across the board, we would still expect that pretty much to be in overall Stalevo sales pretty much at par with last year. There will be some variation difficult to estimate how the year-end deliveries go. And the growth that we are seeing is actually ex Europe pretty much in Asia outside Japan. That's the main territory where we're seeing the growth.

[Operator]

We currently have one further question on the phone. [Operator Instructions] And that next question comes from the line of Sami Sarkamies of Danske Bank.

[Sami Sarkamies, analyst]

I have 3 questions. Starting from Russia, where you booked EUR 3 million provision. How are you thinking about the continuation of your business? And can you elaborate on any further risks related to this part of the business?

[Timo Lappalainen, executive]

Okay. In Russia, I'm a little bit careful on purpose here, how we comment on Russia because I think many of us, we've been informed, and we read that we have to protect our colleagues there, and we have to be careful how we address certain questions here. We are carefully analyzing the situation in Russia. I think we have the risks under control. There are risks that there are always risks. But if one looks at the long history of Orion, we have -- I don't recall if we ever had uncollected payables there. We do not have fixed assets in the country, no production assets. So our assets in the country are in the form of inventories and receivables.

And of course, there is some cash as well that you need to operate the company. We have roughly 100 people in the country and our sales last year were in the ballpark of EUR 40 million in the country. Now that was with the exchange rate that we saw at that time. So of course, the business environment has become very difficult in the country. However, there are not only ethical obligations for pharma that you need to take care of certain obligations and deliveries to the patients, but we are also, in certain cases, contractually bound to deliver products. And of course, those we need to then adhere to those contracts. But having said all that, the business environment is very difficult today in Russia. And of course, the compliance matters are extremely burdensome today. There are various issues, including logistical issues that are very, very difficult today to operate. But I hope that you respect that if I leave it there.

[Sami Sarkamies, analyst]

Yes, that's okay. Then the second question would be on R&D refocusing that you announced in March. You will be focusing on pain and oncology going forward. Can you open up on the practical implications from this?

[Timo Lappalainen, executive]

Yes. Well, I think at the people level, the practical implication will be that there will be some shifts of people task. We are also in statutory negotiations with the employee representatives, should there be any terminations relating to the contracts of the people, and we've estimated that there will be some, so that will be something. But as I mentioned in my remarks, today, the focus is really in the research. So that means in the laboratory work -- in the work before the clinical trials. So there we have good leads and good research programs in pain. We also have very interesting programs in oncology. But the CNS and movement disorders have proven to be a tough nut to crack. And there are maybe less opportunities, at least for us in that space. So those are the reasons why we are focusing that work in research. But before you would see that carried over to the clinical phase, that will take some time. And I'm sure we will have some offshoots as well in the clinical where they may not for a couple of years' time to fit exactly into these boxes. But we will continue also, of course, in our development efforts in Animal Health as well as in our generic business.

[Sami Sarkamies, analyst]

Okay. My final question would be on high OpEx growth you experienced in Q1. Can you open up the reasons and comment the full year outlook when appropriate?

[Jari Karlson, executive]

Maybe I can take that. So from -- in the sales and marketing side, the growth, there was some growth, but not in percentage terms that rapid and that is very clearly due to the opening up of the business. So it didn't come from any specific one line item. So a little bit more promotion, a little bit more travel, a little bit more personal cost and full form. So it really came from all around the place. But in R&D, we had faster growth and that was basically totally due to timing of some of the clinical trials we are having. So one quarter to another, it's sometimes difficult to estimate. And on the full year term, there we don't probably foresee any major change from last year. So this is more a timing question of the clinical trials. On the other hand, of course, the clinical trials are always somewhat difficult to predict exactly what will happen on which quarter.

Also on the administrative side, we saw growth and there basically, there were 2 reasons, some were just timing issues on booking of certain type of costs between the quarters. And another one to a smaller extent was related to the fact that we are now speeding up our new ERP system development. And there is some additional cost compared to last year when that program was not yet running. But also on the administrative side, we don't see any major changes on full year scale from last year. But on the senses and marketing side, yes, we definitely expect to see also full year growth in that cost area because of the higher level of activity. But currently, the estimate is that during the rest of the year, we will not see as rapid and large change compared to the previous year than we saw during the first quarter.

[Sami Sarkamies, analyst]

Okay. I don't have any further questions.

[Operator]

[Operator Instructions] Okay. There seems to be no further questions from the phone lines at this time.

[Tuukka Hirvonen, executive]

Thank you, operator. And at this time, we don't have any questions from the chat line. So I think if there's not any further follow-ups on the conference call lines, you may wrap up, Timo.

[Timo Lappalainen, executive]

Well, thank you very much. Thanks, everybody. Thanks for listening in. And next time, we will meet in July 15, and I welcome each of you to join the earnings call at that time. Thank you very much, and have a safe day.