Orion Oyj

OMXH:ORNBV

Earnings Call Transcript 2023-Q1

[Tuukka Hirvonen, executive]

Good afternoon, ladies and gentlemen, and welcome to Orion's earnings conference call and webcast for the financial period of January-March 2023. My name is Tuukka Hirvonen, and I'm the Head of IR here at Orion.Like normally, today we start with a presentation from our CEO, Liisa Hurme, after which you will have the opportunity to ask questions either from Liisa or from our CFO, Jari Karlson. We will be first taking questions through the teleconference call lines and after that we will then turn to the webcast questions, which you may type in using the box below the screen in the webcast view. [Operator Instructions]And just before I let Liisa to take over, I'd like to draw your attention to the disclaimer regarding any future looking statements in this presentation.But these -- with these forewords, it's my pleasure to invite on the podium Liisa. Liisa, please, the stage is yours.

[Liisa Hurme, executive]

Thank you Tuukka, and good afternoon on my behalf as well and welcome to Orion Q1 2023 webcast. For the first time, Nubeqa darolutamide is now Orion's top selling product. Also, there are news regarding Nubeqa lately. We started with Bayer, a new Phase III study called ARASTEP, and I will talk more about that later. And also we have received approvals for additional indication for the metastatic hormone sensitive prostate cancer in Japan, European Union and China.Year 2023 has largely started in line with our expectations. Net sales was EUR 277.9 million and that grew 2.7% from the previous year. The main positives were of course Nubeqa and also Animal Health after the acquisition of Inovet. Also, the base portfolio in general performed well. However, there were some negatives like the entacapone, effect of Russia and dexmedetomidine and Simdax. Operating profit was EUR 55.5 million, decline was 22.4%. However, the decline in the operating profit was in line with our expectations and forecasts. And the full year outlook is same as previously.The factors behind the declining operating profit was the increase of fixed costs by EUR 9 million. The effect of the contraction of the Russian business alone was EUR 7 million.And then the lower gross margin was a result of price declines, product mix and increased cost of goods. Cash flow from operating activities declined 87.9%. This is due to the decline of course in operating profit. Also, our working capital increased and was much higher than in the comparative period, mainly resulting in regarding the Nubeqa and darolutamide.When we look at the net sales in more detail, we can see Nubeqa sales, which actually was EUR 18 million higher than in the previous year. And then also Easyhaler and other base portfolio developed very well. And then of course Animal Health, as we can see on the last column here, together with Fermion performed excellently.However, there were the declines of EUR 12 million of the Russian operations. The environment is very challenging at the moment and then some decline on entacapone. This is a timing issue related to the shipments to our partners. So this should sort out during the year. Exchange rates, very little effect from that part. Stable quarter compared to the previous last year.Operating profit decline here on EUR 27 million is partly due to the product mix and cost increase. However, when we look at the price decreases, the very significant part of that is explained by the fact that Orion has supplied Nubeqa with the lower price than in the comparative period in Q1 2022. This will be a temporary effect as the prices to Bayer changed actually in the middle of the year 2022.So it's been in effect already for a while, some quarters, but it wasn't in effect last year's Q1. So to the comparative period you can clearly see the difference. And however, even though the transfer price of the tablets is lower to Bayer, as those payments on those tablets will be reduced on the quarter's royalties, the final income is actually – it doesn't really have the effect on that income. Actually, it has a positive effect on royalties.Then we also see here the effect of exchanges and nothing significant there. No significant milestones. We also see fixed cost increase and that's mainly due to the increased costs in our sales and marketing. We almost don't remember that last year this time pandemic was still heavily impacting our lives. And last year, we were not able to meet our customers as this year. So though we are kind of getting back to normal on the sales front.Inovet is, of course, included here. That wasn't in our fixed cost base last year at this time. When we look at all the business divisions, and now for the first time we are reporting the new business division according to the new business division structure. We can see here in the columns that Animal Health and Innovative Medicines performed very well compared to the previous year. And we can see the division of the sales split between the divisions.Generics and Consumer Health still almost half of the revenues, Branded Products 21% and Innovative Medicines 15%. Just to remind that the previous year, I think Innovative Medicines was less than 10%, somewhere around 7%. So it's really hiking up here. And of course Animal Health is already 10% of the revenues.On the top 10 list, Nubeqa has the first one with 93% of growth. Easyhaler, a solid performance during the Q1, then the usual suspects to the generic competition, Simdax and Dexdor and a rather steep decline in entacapone with the 37.1%. But this is really a timing issue that just hit us on the first quarter and should be sorted out as we go along. Divina here and Solomet have declined mainly due to the contraction of the Russian business. They were rather big products in that market.Nubeqa, when we look at the Nubeqa, and here we of course look at the Orion sales, the trend is extremely positive. But we can still be prepared that there might be fluctuations between the quarters due to the product supply to Bayer. We are in a launch phase, especially with the new indication and some quarters we might deliver extremely big quantities to Bayer. And I say those are then deducted from the previous quarter's royalties.Branded Products due to decline in entacapone, almost 20% down. Sales is balanced nicely between Easyhaler portfolio and entacapone products, which actually should be more than 40%, if the deliveries would have been made. And then a smaller portion of HRT products, Divigel being the biggest of those.Generics and Consumer Health business performed well, even though it shows minus here. But looking at the environment where division operates, I think, this is an extremely good achievement. Simdax, Dexdor, we know what's happening there. Russia actually has been a somewhat significant part of this business and the maturity of that decline is actually seen in generics and consumer health.In Finland, we performed again very well. Finnish market grew 3.4%, the whole Finnish pharmaceutical market and Orion was able to grow 5.4%. The growth was even more visible with the reference priced prescription products where Orion grew 8.3% and the whole market went down with the 2 digit numbers. Again, I can't resist to underline that we've been really able to create a competitive edge with our service level, which is the best in Finland and very good also in Scandinavian countries.Animal health doubled its revenues due to the acquisition of Inovet VMD. Also, the companion animal, the sedative portfolio, performed very well. Of course, this sometimes has to do again with the timings of shipments. For the Fermion, we see a small decline. However, we currently manufacture big quantities, tons of darolutamide that kind of limits to some extent capacity for the external sales. But we are working all the time as we speak to build more capacity on that front. And the strike in Finland had a small effect on Fermion in the early part of this year. Fermion, which is a process chemical industry for Fermion, a few days strike means actually almost 2 weeks out of operations. As you need to run down operations, utilities, and then again start it all over again. And both ends take several days to be prepared for.And our clinical pipeline proceeds as we have planned according to our strategy. Happy to tell about our step trial, a new 1 in Phase III with Bayer. Here, we study patients with the high-risk prostate cancer, hormone-sensitive prostate cancer. And high-risk meaning that they double their PSA value in a very short time, within a year after the first round of treatment. So this way we will be able to offer the Nubeqa and this treatment to the earlier segment of the disease. To which it fits very well as the side effect profile is very good and mild compared to some other products. And of course, ARASENS has now received the marketing authorizations in all the key markets. Of course, there are smaller markets where we still await for the registration.Then we have ODM-208 for the prostate cancer with MSD. And we are happy to tell that a Phase III study will be starting in the end of this year. This is good news, this is good news, of course for the both companies, but also for the patients. Our ODM-105, tasipimidine for psychiatric disorders, we are preparing for the global Phase II. And then our ODM-111 for the treatment of pain is advancing well in the Phase I.We have published our sustainability report recently. I hope everybody has been, you've all been able to look at it. Sustainability is an important matter for Orion. Here I would like to raise 2 new things that we've taken to our agenda. On the environment track, we have extended our climate targets to cover the scope 3 emissions. Scope 3 meaning the emissions of our suppliers and partners. To this date, we've been focusing and targeting to scope 1 and 2, which are our own manufacturing and logistics. And all the projects that we are now and we've been running for several years in our own operations have been very successful. And we've been able to reduce both the energy or increase the energy efficiency and decrease the emissions. Also we are now aligned with the 1.5 Celsius warming target.The other topic that I want to raise here regarding our employees and all the professionals working in Orion is the diversity, equity and inclusion. We have raised this topic so that on our safety sessions, all our teams from the Executive Management Board to the factory floor level have safety sessions on a regular basis with different topics. And now we also discuss these DEI topics and it's an important thing for me that all the Orion employees feel safe and accepted and included in Orion.And our outlook for the current year is as we've told before it unchanged as it is. We estimate that our net sales will be slightly higher during this year compared to the 2022 and where the comparative number is EUR 1.130 billion without the signing fee from the MSD. For the operating profit we've given the outlook that we will grow -- we will be on a slightly higher or higher level compared to 2022 and there the comparative number is EUR 232 million.Separately from this outlook, we are currently exploring a possibility to transfer our pension fund to an insurance company. Until today, Orion has managed its pension funds by itself, but now we are exploring if we could really sell this business if you could call it so, but we don't include it into this outlook. It is a one-off event. It is a very administrative action and it is difficult to estimate since this will happen. The final day of closing will be in the end of the year, so we don't really know what will be the final effect for the income. It will be dependent on the discount rate, and then, of course, on the value of the assets when it relates to the cash flow. So that is a separate matter from our outlook, but of course something that we want to share with the outside world.And basis for the outlook are the same as previously. Nubeqa, animal health, the milestones, we are looking forward to a milestone regarding Nubeqa. And certain sales thresholds exceeded. Easyhaler, a very robust business. And of course, then the generic competition, Russia will still have an effect to us, especially on the early part of the year. I mean, the difference to the comparative year and the pricing pressure will have some negative impacts on our net sales. And then the operating costs will still have an increasing effect on our cost of goods, especially on the first half of the year.Regarding upcoming events, the next one will be on 25th of May, our Capital Markets Day. You are all very welcome to participate. And then in July the half year financial report. Thank you.

[Tuukka Hirvonen, executive]

Thank you Liisa. Now it's time for the questions and we will start taking questions first from the conference call line. So, operator please, the first questions.

[Operator]

[Operator Instructions] The next question comes from Dominic Lunn from Credit Suisse.

[Dominic Lunn, analyst]

So you stated that you plan to move ODM-208 into Phase III by the end of the year, but we haven't seen the Phase II data yet. So I'm just wondering what gives you confidence to go to Phase III? And then for the Phase II study, I think at the full year results you said the trial would complete in the second half of 2024. So do we have to wait until then to see the data or is there anything you plan to share ahead of that to help us assess the Phase III opportunity? And then lastly, when might we see that data for the Phase III?And then secondly, just wondering what assumptions are built into your Nubeqa forecasts in the longer-term in terms of the Inflation Reduction Act. So wondering if you could just give a bit of context in terms of firstly the proportion of U.S. sales in Medicare and then also on our analysis it looks like Xtandi could be selected in 2026 even if Nubeqa isn't so could there be some indirect impact there? And then just curious on what your assumptions are in terms of impact from any Part D redesign?

[Liisa Hurme, executive]

I'll start from the beginning. So regarding the ODM-208, I leave commenting on that Phase III program to MSD. That much I can say that yes, Phase II will run until next year, but based on the results there in the middle, it will be possible to draft the study outlines and start to carry out Phase III studies. But otherwise, I think it's MSD who will be able to give you those details.Regarding Bayer, your question was on the long-term plans and forecasts for Nubeqa, taking into account the IRA and other things on the marketplace. Also, that's a question for Bayer. I'm not going to comment on that one. I'm sure they can tell you how they have estimated these market effects and changes to their forecasts.And the last question was, if you could repeat.

[Dominic Lunn, analyst]

Yes. So that was just related to, it was still on the IRA, so I think that's probably a question for Bayer.

[Liisa Hurme, executive]

Yes.

[Operator]

The next question comes from Unknown Caller from Number Ending in 1868.

[Graham Parry, analyst]

Hi, it's Graham Parry from Bank of America. So just the first one's on COGS phasing through the year. So do you think you've seen now fully the impact of inflation in your cost of goods, or do we still expect to see inventories being sold off where we could still see elevated COGS? And also, if you could just comment on the impact on cost of goods of the different pricing to Bayer in terms of the Nubeqa sales and how that might positively or negatively impact your COGS?And then secondly, on Russia, should we expect that to continue to shrink to remaining quarters, or is that now essentially annualizing in the base, or should we expect to see continued declines on future quarters through the year? So, two questions on phasing of costs and margins through the year.

[Jari Karlson, executive]

Maybe I can take those. So I'd say that compared to last year, we probably still will see some impact in COGS on the inflation. On the other hand, quarter-to-quarter, I think the numbers are not changing because of the inflation that much anymore. But one needs to remember that especially in the case of Fermion, because of the long production lead times, the impact on our COGS for the inflation that started around this time last year was shown only towards the end of the year. And that's why we will still see the impact of the inflation in our numbers compared to 2022. But on quarter-to-quarter, I think we probably will not see that much inflation impact anymore. Of course, salaries are increasing in some markets and so forth, but not that much impact in maybe the cost of goods.And then you asked also the impact of the Nubeqa and the transfer prices on COGS. That of course doesn't have any impact on COGS. So how the Nubeqa profitability ultimately for Orion will be that it will be the royalty minus the cost of goods sold. But what is having impact on our profitability is that if we produce a lot of and deliver a lot of Nubeqa to buyer, that of course means that in that period there is a lot of cost of goods sold. And now as the product is still growing, it means that all the time we are producing and shipping more products to buyer than they are selling out, because they of course need to prepare for the growth. So that's the impact on margins, not that much. The pricing as such of course is not really impacting the cost of goods, but margins it has impact because of this timing.And I guess on the Russia, the business is very small there now. We still had business there last year. Currently the business is very, very, very, very small as one can see in the negative impact on the first quarter. So for the full year of this year, Russian business will be very small. But last year we still had actually quite a lot of sales and because of the increased value of the Russian ruble, also the currencies were very beneficial in 2022

[Operator]

The next question comes from Sami Sarkamies from Danske Bank.

[Sami Sarkamies, analyst]

I have 3 questions, starting from Nubeqa. If we look at Q1, you had 90% or €80 million growth year-on-year in Nubeqa sales. What is roughly the EBIT contribution from higher Nubeqa sales in Q1 if we take into account changes in transit pricing that you're highlighting?

[Jari Karlson, executive]

Well, like with any of the other products, we are not disclosing the details of the profitability on individual products. So unfortunately we cannot really give you too much of an impact or numbers on that. But like you referred to, royalty of course is 100% the income, but then the cost of goods is something we are not disclosing.

[Sami Sarkamies, analyst]

And then regarding ODM-105, you mentioned that you're preparing for a Phase II study. When do you think you'll be ready to start this trial?

[Liisa Hurme, executive]

Well, we'll see. I hope we'll be able to inform about that timing, more accurate timing during this year.

[Sami Sarkamies, analyst]

And then on ODM-208, according to the contract between you and Merck, you have an option to convert this into a normal licensing model. Can you discuss why it would make sense from an Orion perspective to do this instead of a current partnership model?

[Liisa Hurme, executive]

Well, I think the option gives always the freedom for a company to look at the company situation at that time. The market environment might change, the company's strategy might change. So it really gives a flexibility to look at that matter again.In general, comparing those models, I think licensing model, if you would license the global rights, is a lighter one for Orion type of a company where you wouldn't have to bear all the costs for the development. I think that would be the main difference between those models.

[Jari Karlson, executive]

Yes, exactly. It's a timing question that carrying out and participating in expensive and large phase three trials, of course, means that we would be heavily burdened during the early years. Then, of course, if everything is successful, of course, that would mean then higher income years later. So our perspective is really questioned that how do we allocate our R&D funding? Would we like to use it in ODM-208 or something else? But then, of course, one is to remember also that the other party also has the same rights. So even if we would like to keep it, but our partner would like to use the option, then it would be used. But for the time being, that is a question that we need to consider for later years.

[Liisa Hurme, executive]

That's true. And as both parties have the option, it gives the flexibility for the both companies to look at the situation at the given time.

[Operator]

The next question comes from Jo Walton from Credit Suisse.

[Jo Walton, analyst]

It's just a more general question, Liisa. Now that you've got the new structure in place, you said that you thought it might be a bit more responsive, aligning the costs of the businesses together. Can you give us some update as to how you found that now it's bedded in for a quarter? Are there any examples you can give us as to perhaps a more speedy response to things that the new structure has been able to give? And could you also tell us from your perspective of looking at the northern European markets in particular, if you're seeing any signs of austerity measures from any governments anywhere making it more difficult to launch products, or just some update in terms of the market environment that you're seeing at the moment?

[Liisa Hurme, executive]

Well, the first question was about the new structure. Yes, one of the purposes was really make the divisions more accountable for their businesses and also for their operations and actions, and also be able to compete in their respective markets, which are very different. And I think we are seeing the first signs of that, especially with the innovative drugs and how they respond to the market, how they build the market access and other type of capabilities and competencies.So I clearly see that each of them is now approaching their markets and capabilities in a more precise way and being able to compete with the respective similar peers. That's very clear. Also, now for the generic business, their research and development is now separated from previous earlier research and development, which is now fully focused on the human innovative drugs. So they are looking for more pace and new partners and CROs to do it in a speedier and more efficacious way. So clearly, there is – I can see the signs that this was a very beneficial solution.Then for the Northern European market. Well, well, first of all, Finland, our biggest single market, we can see the continuation of the price decrease. However, in some of the markets, we already hear rumors, like in Sweden, that government and the pricing systems might change so that they would allow probably more flexibility in pricing, not just putting prices down. But I think what is really important and interesting at the moment is the EU drug legislation that was published yesterday. And there were several leakages of that beforehand, which will have an effect on the European innovation and competitive environment.There are several kind of changes that are suggested for the exclusivity period, for the launch timing and other things. So it will be very interesting to see what will be the final outcomes of that one and what type of an effect that will have on the pharma industry in Europe.

[Operator]

There are no more questions at this time, so I hand the conference back to the speakers.

[Tuukka Hirvonen, executive]

Okay. Then we will turn to the webcast questions. We have a few from Carnegie's, Iiris Theman. I will start with the first one related to cost of goods sold. So your cost of goods sold increased by about 15% year-on-year in Q1. Why are your cost increases higher than the inflation, i.e. what are the main cost items that have increased?

[Jari Karlson, executive]

Well, of course, one always needs to remember that, this is cost of goods sold, which of course means that if you get the same sales at lower price, it means that you have more costs. And part of that increase is due to that. For example, the impact of the lower Nubeqa price -- pricing. It means that we are selling certain amount of Nubeqa to buyer, but the cost of goods is higher than in the comparative period because the volume was higher. But then if we think of the actual cost elements, the normal ones, energy of course is now, luckily the costs are down, but still of course energy during the first quarter was more expensive than it was last year.And then many of the key materials we are buying there, one can see clearly that in various type of chemicals the costs are higher. So those elements have been increasing, but as big impact in the higher cost of goods is really that the volumes have increased and as a consequence of that the cost of goods is higher.

[Tuukka Hirvonen, executive]

Then Iiris has a follow up. The COGS increases likely to be faster than sales in Q2 and then in turn in H2, so the second half of the year due to easing inflation, so will the sales increase be higher than the cost increase?

[Jari Karlson, executive]

Well, like I said in the previous one, of course, it again is a mix of pricing and actual costs. So still during the second quarter compared to last year, we probably will see a little bit like I said in one of the earlier answers that the inflation still is impacting our numbers.Then when we go to the second half of the year, probably the impact of that will be less because the higher costs were already there. But then again, as long as we see prices declining like in Simdax and some of the other areas, that probably will show in the numbers as if the cost of goods were increasing. So for the full year, we probably will see a decline in the product sales margin, but probably the impact is bigger now during the early part of the year than in the second part of the year.

[Tuukka Hirvonen, executive]

Thank you, Jari. Then the third one from Iiris is regarding ODM-208. I have understood that you have planned to start your Phase III study for ODM-208 as fast as possible. Could this happen already in the first half of this year?

[Liisa Hurme, executive]

I don't think so. I think the message is very clear that the study will be started in the end of this year –

[Jari Karlson, executive]

Or by the end of this year.

[Liisa Hurme, executive]

By the end of this year. So MSD will confirm this one.

[Tuukka Hirvonen, executive]

Yes. Thank you, Liisa. Now we have exhausted the webcast questions and I had the information that there should be at least one follow-up on the conference call line. So I will hand it back to the operator, please.

[Operator]

The next question comes from Dominic Lunn from Credit Suisse.

[Dominic Lunn, analyst]

Hi. Thanks for taking my follow up. So it's just a longer term question. So you still appear to be paying out the vast majority of the free cash flow to pay out the dividend. I'm just wondering what gives you confidence to be able to continue to invest in the growth of the business overall. And can you just remind us of how you think about the dividend policy longer term? I think it was just kind of noteworthy that you said deciding on whether to license ODM-208 might do it yourself might depend on how much money you've got at the time. So I'm just wondering how that kind of weighs up when you think about the dividend as well? Thank you.

[Liisa Hurme, executive]

Well, I could start and then Jari can continue. Well, in our financial guidance, we have clearly stated that we pay at least EUR 1.30 of per share dividend. Then we've also said that, of course, as we generate more income from the Nubeqa royalties, we will invest more to research and develop and also to our sales and marketing organization. But then it's always a decision by decision. And eventually Board makes a decision on the dividends. I mean, it's a decision every year, a separate decision, and it depends on our strategy and confident on how good projects we have. But eventually it's a board decision. Jari, you want to add something?

[Jari Karlson, executive]

Yes, I mean, I think the dividend payout ratio as such doesn't really have an impact on the R&D spending because it's more that what kind of a profitability we want to show. And then after we have certain profits in our hands, then, of course, it's a separate decision that how much of that will be distributed as a dividend. So that's clear.And then, of course, it's another question that if we want to do M&A and investments like that. And then, of course, it's a question that how much that and what is the right ratio between dividends and the investments. But ultimately, the Board looks at the overall total allocation of capital and it's a balancing act between all of these elements.

[Operator]

The next question comes from caller from Bank of America.

[Graham Parry, analyst]

Hi, it's Graham Parry. The follow-up. Sorry. Just actually just a question on the pension fund sale or transfer. Just would that potentially generate a material gain and would that be excluded from your outlook? And are there any sort of administrative costs that could sort of benefit the operating profit margin as you're no longer administering it? So I'm just thinking it sort of what kind of changes we could see through the P&L from the transfer if it goes ahead?

[Jari Karlson, executive]

Yeah, I can -- I can probably take that. So we published that assuming that the discount rates will not fundamentally change from the current level. We are talking about plus 20 million one-time gain from the dissolution of the pension fund.On the other hand, we probably will actually see a small annual decline in our profitability in the coming years because the pension fund has been performing quite, quite, quite well. And the administrative costs are really very, very, very small. So that is the key thing which we are now evaluating, that is the one time gain enough to cover long enough period, lower profit or higher pension costs so that it makes sense to do it now.And then, of course, the cash flow is the other -- other impact. But the outcome is that we probably will have a little bit higher costs than – than -- than today if we don't have the pension fund.

[Operator]

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Tuukka Hirvonen, executive]

Thank you, operator. We don't have any further questions on the webcast tool either, so I'll hand it to Liisa and Jari for your concluding words.

[Liisa Hurme, executive]

Well, I thank you for your attention and a very good questions and discussion. Maybe to conclude in the end that really the year has started in line with our expectations, even despite of the decline in the first quarter. So we are keeping our outlook as it was at the beginning of the year. Thank you.

[Jari Karlson, executive]

Thank you.