Orion Oyj

OMXH:ORNBV

Earnings Call Analysis

Strong Q1 Results and Positive Outlook for Orion

Orion's Q1 showed strong performance with sales growing by 11% to EUR 308.5 million and operating profit increasing to EUR 56 million, a 1% uptick. Key contributors were better-than-expected Nubeqa royalties and Easyhaler sales. The company received a EUR 30 million milestone from Bayer and saw a substantial improvement in cash flow partly due to a EUR 41 million pension fund transfer. Orion reaffirms its financial goals, aiming for revenue growth beyond 8% CAGR and maintaining high equity and return ratios. CEO Liisa Hurme noted the positive impact of green initiatives on Easyhaler sales in the UK and Germany.

Strong Start to the Year

Orion's first quarter of 2024 has shown a remarkable performance with a strong top-line growth of 11%. The company recorded sales of EUR 308.5 million, compared to the previous year, and operating profit grew by EUR 56 million. This translates to a 1% growth and results in an 18.2% profit margin for the quarter. .

Key Growth Drivers

Several key products drove this growth. Nubeqa, a prostate cancer drug, saw almost EUR 12 million in growth. Easyhaler, an inhalation product driven by environmental initiatives in the UK and Germany, also posted significant percentage and absolute growth. The company's strategy to invest more in R&D, as well as sales and marketing, paid off, contributing to this top-line expansion. .

Challenges and Declining Margins

Despite the overall positive results, Orion faced pressures with declining margins. This was primarily due to the decline in sales of highly profitable products like Simdax and dexmedetomidine, which faced increased generic competition. The replacement products did not achieve the same profitability. .

Focus on Innovative Medicines

Orion’s focus on innovative medicines paid off significantly, with a 37.4% growth in this segment. This was bolstered by high product deliveries to Bayer and other partners. The company started from a baseline royalty rate at the beginning of the year, which compounds, enhancing both royalty rates and sales as the year progresses. .

Sustainability and Future Outlook

Orion continues to prioritize sustainability, already ahead of its 2030 target for carbon neutrality in Scopes 1 and 2, and working towards Scope 3. Alongside its sustainable practices, Orion also raised its guidance for operating profit for the year, narrowing the range to EUR 280-310 million from the initial EUR 270-310 million. The net sales outlook remains the same as initially projected. .

Investment in Capacity

To support its growth, Orion is investing in production capacity to keep up with increasing demand, particularly for Easyhaler and Nubeqa, which continue to be star performers. These investments are part of a broader strategy to ensure long-term growth and sustainability. .

R&D and Product Pipeline

The company noted a significant increase in R&D expenses, aligning with its ongoing initiatives in Phase II and III trials for various pipeline products. Notably, Orion has collaborations with MSD for co-developing assets like ODM-208, where MSD covers the development costs initially. The guidance does not include any R&D costs for ODM-208 for this year. .

A Farewell and the Road Ahead

This earnings call was also significant as it marked the last report delivered by Jari Karlson, the CFO of Orion Group after more than 20 years. The transition marks a new chapter, as the company continues to build on its strong foundation with robust financial health and a clear trajectory for future growth. .

Earnings Call Transcript 2024-Q1

[Tuukka Hirvonen, executive]

[Foreign Language] Good afternoon, ladies and gentlemen, and welcome to Orion's earnings conference call and webcast for the financial period of January-March 2024.

First, I would like to apologize the slight delay. We were facing some minor technical problems, which are now over, and we can proceed on here. My name is Tuukka Hirvonen, and I'm the Head of Investor Relations here at Orion.

In a few moments, our CEO, Liisa Hurme, she will present the results of the review period, after which you will have the possibility to ask questions from her and also from our CFO, Jari Karlson. We will be first taking questions from the conference call lines. And then also after that, we will take questions. You can type in through the webcast chat function to us. [Operator Instructions]

And just before I let Liisa to step in today, we have actually quite a special day today because this interim report is actually the last one that Mr. Jari Karlson will be delivering to you as the CFO of Orion Group. Jari has been the CFO of Orion Group ever since 1st of September 2002, so more than 20 years. And today it's actually his 87th interim report or financial report he will be delivering. So while I let that sink in to you guys, I'll draw your attention also to the traditional disclaimer about forward-looking statements and then hand over to Liisa.

Liisa, please, your turn.

[Liisa Hurme, executive]

Thank you, Tuukka, and good afternoon on my behalf as well, and welcome to Orion Q1 results webcast.

Q1 for this year started very well with the strong top line growth of 11%. We raised EUR 308.5 million of sales during the first quarter and EUR 56 million of operating profit with 1% of growth, resulting in 18.2% profit margin. Cash flow was clearly better than in Q1 '23, to that transfer of pension fund was one contributor and then a EUR 30 million milestone that we received from Bayer was eventually paid in first quarter of '23. And of course, good sales of Nubeqa can be also seen here with the royalties and product sales. And regarding the operating profit growth of 1% or even being flattish compared to the revenues, we have, as planned and as communicated, invested more to R&D and also our sales and marketing, and results of that can, of course, be seen on a top line growth.

And here, when we look at in a bit more detail, very good news regarding Nubeqa, almost EUR 12 million of growth. Also Easyhaler, if you look at here, the Column 4, almost as high growth, posting percentage and in absolute value with Easyhaler product portfolio. Also the whole other portfolio, excluding Animal Health and Fermion, grew with 7.3% and Animal Health and Fermion were also growing nicely.

We see a slight decline with entacapone product portfolio, but clearly, the decline is slowing down compared to the previous year and hopefully will clear out as we go along this year. The usual aspects are on the Column 1, Simdax and dexmedetomidine continued generic competition taking sales down here.

On the operating profit, volumes are clearly growing, but margins are declining due to the previous slide explanations on Simdax and Dexdor decline, very profitable product and the new ones replacing those are not exactly as profitable. Royalties here, you can see the effect on the operating profit, and then fixed costs have grown 12.3% and that's in line with our previous estimate for the R&D cost, sales and marketing costs. And here, we can also say that some -- our [indiscernible] costs have increased somewhat, we have a big program ongoing with the SAP renewal and some of our programs and data needs to be running parallel systems during that.

Now Innovative Medicines, plus 37.4% growth, a wonderful number. And let's remember here, that we start every year from the beginning with the royalty rate. So it's really a cumulative royalty rate from the beginning of every year. So it kind of -- both the royalty rate and the sales will grow as the year proceeds. And we have seen all-time high product deliveries to Bayer during the last quarter of last year and actually the second highest ever during this first quarter. So the prognosis is, from that aspect, very good. And of course, as I said, other income is mainly from the research purposes, and we are really investing more, and I will talk more about that when I get to the R&D pipeline. And we are continuing with Ztalmy to get the pricing and reimbursement in place in Europe.

Another business in a very good shape, even though with a slight decline of 2.2%, if we deduct here the effect of Dexdor and Simdax and Russia from previous year, we still had some sales in Russia in '23, especially in the beginning of '23, the basic portfolio in generics grew plus 5%. That's very healthy growth. It's assumed currently that generic sales in Europe grew between 4% to 6%. So we are exactly in that space with our generic business. And in Finland, which is the biggest part of the generics, we were able to beat the competitors, especially in the reference-priced market, and we're doing also well in the OTC, health care and consumer health markets.

I think that I probably -- unfortunately skipped one slide here in between. Branded Products, another division, growing with 2-digit numbers, almost 18% growth compared to the Q1 '23, Easyhaler being a clear lead indicator and growth product here with more than 30% growth. It is driven by the green wave in Europe, especially in U.K., but currently, we are also seeing same kind of demand in Germany. And with the Easyhaler product, we can answer to this demand at the market. Entacapone, I already discussed, almost with previous year. And Divina series, which for us is mainly a hormonal [indiscernible] with estradiol is also growing compared to the previous year. All in all, a very good start for Branded Products as well as for the Innovative and for the Generics, which shows that all of our businesses are contributing to the growth of the group, Orion group.

And then a bit smaller businesses, Animal Health not being shy at small compared to the other divisions, healthy growth there as well, and Fermion keeping up with the external sales to other pharma companies. And Animal Health sales grew also both on companion animal side with sedatives repetitive, also launch of Bonqat in Europe and then also on the livestock business.

Clinical pipeline, the change here to the previous one is that we have now completed ODM-111 Phase I successfully. We are expecting and preparing to report the results at some point next year in suitable scientific congresses. Otherwise, the portfolio is as it has been this far.

Sustainability continues to be a very strong item for Orion. Of course, we are preparing as any other company for the CSRD reporting. And here, you can see some of the major themes that are important for us. It's patient safety. We look at it from the supply perspective, of course, from the wider scope of pharmacovigilance and product quality as well. But in these days, it's not self-evident that the pharmaceuticals are and the medical -- medicines are available in pharmacies when you need it. And our service level is an exceptional level.

Environment. We continue to work on that front. We are already ahead of our 2030 carbon neutral target for Scope 1 and 2 in Orion and are now expanding Scope 3. We've also put a lot of emphasis on social responsibility, building a road map in the company and including our stakeholders and groups that we work with and also, of course, the safety -- by putting focus on safety of our employees.

Now that you saw the quarter 1 results, which we are very proud of, our quarter 1 was better than we were planning, and based on that, we are specifying our outlook for 2024. I'm specifying so that we raised the lower limit from EUR 270 million to EUR 280 million. So we have a more specified narrow scope for this year from EUR 280 million to EUR 310 million of operating profit.

The outlook for net sales remains the same as it was in the beginning of this year. And to this outlook and our understanding of the year that has started, it's important to understand that really all our businesses. Nubeqa is a wonderful growth driver. But as you saw, Easyhaler is as important with the fast growth, and all our divisions are growing in a healthy way if we deduct and -- or decline the effects of Simdax and Dexdor. So all businesses are contributing to the growth of our net profit.

Here, you can see on the slide, the basis for the outlook, which I already discussed. So Easyhaler, Nubeqa growth, Entacapone products are mainly more as a flattish, Easyhaler or Animal Health definitely growing and generics-based portfolio as well growing.

What is challenging is really to predict the timing of Nubeqa royalties and product sales and some of the milestones this year, it's the EUR 70 million sales milestone. So thus, we have a certain, how would I say, room for our outlook given these facts. And R&D expenses are anticipated to increase significantly, and significantly means that it's on a different level than we are used to. It is understandable as we are going to start a Phase II program for our pain molecule with several Phase II studies and we have still several Phase IIIs ongoing with our partners.

And also, we have molecules in our research pipeline, which actually demand much more or consume much more of our budget since those are biologics. And there, we need to do the CMC work -- hard work ended. So clearly, a more emphasis on R&D and also on sales and marketing, which has resulted in growth in all divisions. And this kind of puts together what I already said that this, how would I say, makes it concrete and gives a framework for our strategy. We clearly have growing revenues, and all divisions play important role there, and that allows us and enables us to spend more on R&D. We want to build the company future beyond the 2030s and also invest in other ways, like sales and marketing, secured that we have enough production capacity -- and have enough production capacity.

I'm sorry, we still have a bit of a technical challenge here. I was actually in this slide. Thanks, Tuukka. So also, we want to invest in the production capacity as we are doing currently, increasing Easyhaler capacity, increasing our [ digital ] capacity and also our Nubeqa capacity at Fermion. So all these growing revenues enable increasing the investments, growing EBIT and also growing our dividend.

A clear package, and we really work in this framework, and now I'm going, jumping one slide over to remind you our financial objectives, which relate to the previous slide of our strategy. Now they moved totally independently. Anyway, when I say that the revenues will grow, it's growth beyond 8% on our CAGR, also that we are able to grow faster with our operating profit, keeping the equity ratio at least 50% and return of equity on at least 25%. So this gives a very strict, nice framework for all our investments and growth initiatives. And then the dividend payout of between 50% and 100%.

Now I go back, let's say, how this works. It works well. And we come to the capital allocation focus, telling the same story, a very, very good story here. Internal pipeline as a first priority, dividends, maintaining and increasing the capacity where it's needed, then in-licensing or acquiring commercial or R&D assets, whatever is then suitable at which time, and then acquisitions, if they really fulfill a criteria to produce growth in a way we want in, for example, such geographies that where we are not yet operating, or if they provide some kind of a competence or capabilities that we need to fulfill our strategic targets.

I think it's time to close on my half and invite Jari Karlson here with me to answer to your questions before we close the session. Please feel free to ask any questions.

[Tuukka Hirvonen, executive]

To the operator. So operator, please, it's time for the questions from the...

[Operator]

[Operator Instructions] The next question comes from Anssi Raussi from SEB.

[Anssi Raussi, analyst]

A few questions from me. And the first one is about your minor upgrading guidance, like, of course, you mentioned that the year has started slightly better than you had expected, but is there something which is like trending more positively than you had expected? Or was it something a Q1 specific event like just trying to figure out how the assumptions behind the guidance are developing?

[Liisa Hurme, executive]

Thank you. A very good question. Indeed, I said that the Q1 was better than we planned. And it comes from many places. So I'm not going to go and say separate things here. It was a bit better gross margin or gross profit on our sales. It's slightly better Nubeqa royalties and excellent and slightly better sales from Easyhaler. So you could call those trends as well or those are trending. So it gave us the opportunity to be a bit more accurate on our outlook.

[Anssi Raussi, analyst]

Okay. And then now, as you mentioned, the Easyhaler, like what was behind the strong growth in this product, like extraordinary strong?

[Liisa Hurme, executive]

Well, first of all, Easyhaler has enjoyed strong growth since latter part of the last year. And there are several reasons, the most important being really this green agenda of health authorities in U.K. and the same agenda seems to be forming in Germany. So these countries and the authorities have set a very high and demanding target for their carbon emissions, declining their carbon emissions. And they have actually calculated that [ inhaler ] are the worst ones to produce carbon in their portfolio.

So being able to provide a dry-powder inhaler with a very, very small carbon footprint or not at all actually has provided us an opportunity to accelerate our sales. Of course, we need to remember that last year first quarter wasn't that good for Easyhaler. So the comparison -- comparable period wasn't that strong, that, of course, kind of intensifies this growth percentage for this quarter.

[Anssi Raussi, analyst]

Okay. That's clear. And then about ganaxolone. So can you give us any timetable for ganaxolone? And have you included any expectations regarding this product in your guidance for this year?

[Liisa Hurme, executive]

It would be great to give a time line. It's not up to us. It's really up to the reimbursement and pricing authorities. So these processes take a long time in Europe, and you need to go country by country. So we are in a process, I can't give you an exact time line currently. And thus, it's difficult to give an estimate for a product either.

[Jari Karlson, executive]

But like we have said many times before, this first indication for ganaxolone is expected to be anyway a very small one. So even if the launch had gone as planned, it still would have had only a very minor impact on our overall numbers.

[Anssi Raussi, analyst]

Okay. I understand. And finally, thank you, Jari. It's been a pleasure to work with you during this recent year. So thank you. That's all from me.

[Operator]

The next question comes from Sami Sarkamies from Danske Bank.

[Sami Sarkamies, analyst]

Okay. Just wanted to start with thanking Jari for good cooperation over the years. I have 5 questions. We'll take this one by one. I still want to go back to the guidance that was touched in the previous question. Have you assumed any more positive development during the rest of the year? Or is this guidance revision sort of backward looking, that you have just sort of updated your assumptions relative to Q1 that went a bit better than expected?

[Jari Karlson, executive]

Well, I guess, I mean that was -- that part was already discussed. But I think one thing is we started from maybe a relatively wide range. And now when we are one quarter of the year is gone, so we gradually have more accurate view of how the year will look like, and that's also behind. So nothing really has changed in the overall big picture. But our overall view of how the year will be going is hopefully now a little bit more accurate than at the beginning of the year, and that's also behind the specification. So we thought we are confident enough that we could narrow the guidance a little bit and especially taking it upwards from the lower end.

[Sami Sarkamies, analyst]

Okay. Moving on to other products. If we think about the Easyhaler, Stalevo and Animal Health, are you expecting Q1 like growth rates in the full year? Or are there things that we should take into consideration when I think about the rest of the year?

[Liisa Hurme, executive]

Well, generally, as stated already in the outlook, we are expecting Stalevo and entacapone product family to be quite flattish. It's already the decline has stopped to some extent. You know the decline that we saw last year. And Animal Health should continue on the same trajectory that it's been going on to date this year. And with Easyhaler, of course, that this first quarter percentage might be a bit more than we will see because of the first quarter '23 was not good -- was not at the same level as the rest of the year of '23.

[Jari Karlson, executive]

Yes. So we really saw during last year already nice growth that when we started last year, we were actually a little bit behind the year before and then ended up to a relatively nice growth for the full year. So we really saw a very good second half of the year last year, and that's why the percentage definitely will not be as strong as during the first quarter, but nice growth anyway effective for the full year as well.

[Sami Sarkamies, analyst]

Okay. Then moving on to the pipeline. Regarding ODM-208, you're planning to initiate a new Phase I or II study with Merck. This will be in combination with other drugs for prostate cancer. Can you comment on which drugs we're talking about and whether this could broaden the market potential for ODM-208 significantly?

[Liisa Hurme, executive]

Well, indeed, yes, such studies is going to be started. Unfortunately, I'm not in place to comment that. I leave commenting on to MSD on that program.

[Sami Sarkamies, analyst]

Okay. And then I just wanted to verify, are you still on track to initiate Phase II for ODM-111 during second quarter?

[Liisa Hurme, executive]

We have stated that we will start the ODM -- the Phase II program for ODM-111 during this year. So we are still on track with that.

[Sami Sarkamies, analyst]

Okay. And then finally, do you have any comments regarding the situation at Marinus, anything about their recent setback with ganaxolone?

[Liisa Hurme, executive]

Well, again, I think this is something that Marinus is the right party to comment on. So I wouldn't like to dwell in other companies' matters.

[Operator]

The next question comes from Brian Balchin from Jefferies.

[Brian Balchin, analyst]

It's Brian from Jefferies. I thought I'd just ask a bit more on the pipeline. Just on that Glykos partnership for up to 3 ADCs. Have you started R&D for those programs? Just trying to get a sense of timing for additional R&D. And when we should expect to see something in the clinic? And then just on those 3 ADCs, would one of those relate to Glykos' GLK-10 asset in discovery targeting HER2? Or are we talking about new targets here leveraging MMAE cytotoxic payload, which I think is an improvement on MMAE used by [indiscernible].

[Liisa Hurme, executive]

Well, I had a bit of difficulties with the line, unfortunately. But I will try to summarize and then you need to just ask again if I couldn't get it. You were asking about the pipeline and timing on some of the programs there and whether we are going to have new clinical programs starting this year, that we have not stated anything yet on clear. All programs are such that anything can happen. And thus, we don't dare to publish or tell such data. Of course, we are hoping to bring new molecules to our pipeline within the next few years, and we have the biologics there in research and pre-candidate stage. I think you were referring to those when you were asking probably on the mechanism of those. But I would probably need to ask you to repeat the question or even write it down to the...

[Brian Balchin, analyst]

Okay. Just to check, you heard it with regards to like Glykos.

[Liisa Hurme, executive]

We have a collaboration, yes, with Glykos.

[Brian Balchin, analyst]

Okay. Yes. That's it then. I think you've answered it then.

[Operator]

The next question comes from Graham Parry from BofA.

[Graham Parry, analyst]

It's Graham Parry, from Bank of America. Just first one, just to kick off on Easyhaler. Just is there any inventory build in? I know you talked about the sort of easy base and then the green agenda and the U.K. and Germany, but any inventory movement or any inventory build that was driving the sales in that line?

[Liisa Hurme, executive]

Any inventory build?

[Jari Karlson, executive]

Yes, I guess we just are not aware that our customers would have been building their inventory. So as far as we know it really is coming from the actual increase...

[Liisa Hurme, executive]

Straight from the market.

[Jari Karlson, executive]

In the demand for the product.

[Graham Parry, analyst]

Okay. Then on ODM-208, I know you've reserved the sort of EUR 60 million cost, but as you start Phase III there, just at which point do you think that would be exhausted and you'd actually have to start booking R&D costs through the P&L? And would that be in 2024? Is that something you wouldn't anticipate having to actually book P&L costs until '25, '26, assuming, of course, this isn't compared to sort of royalty deal?

[Liisa Hurme, executive]

Well, I can start, and then Jari can continue. Just to remind that the deal with MSD is now -- is a collaboration and co-development deal. And we are really developing together. However, we are not accruing costs on the development currently. MSD is paying for that. And yes, we have accrued EUR 60 million to cover those in case needed. There is an option in the agreement that either side can turn the agreement from co-development, the traditional licensing agreement. And of course, if such option would be exercised, then we could release that EUR 60 million from the balance sheet.

[Jari Karlson, executive]

Yes. So it really is dependent very much whether the option will be used or not. And so far, the arrangement is such that until that decision is done, Orion will not [indiscernible] costs or of course, if we would calculate that the costs in that case would -- our share would clearly exceed the EUR 60 million, then of course, it might be a different thing. But at least not -- for the time being, we are not in that situation. So the decision will be made once we know whether the option will be used or not. And happy to remind that the option is something that both either party can use. So even if Orion decides not to use the option, the MSD still can just do it and the other way around.

[Graham Parry, analyst]

And so it's the timing and the decision tree on the option then at this point. So at which point -- I guess at which point do you know whether you're going to need to start booking P&L costs for ODM-208 in excess of the EUR 60 million?

[Liisa Hurme, executive]

Well, if either party exercised the option, I'm sure both parties will let markets know that. But at this stage, we can't comment on that one.

[Jari Karlson, executive]

And I guess the only thing we can say is that we have earlier told that in this year's guidance, we have not included any of these ODM-208 cost as part of our R&D. So that gives a little bit of picture of the time frame. But what happens then beyond this year, then that needs to be communicated later.

[Graham Parry, analyst]

And sorry if I missed it, just could you quantify the pension release benefit to cash flow?

[Jari Karlson, executive]

Yes. The -- like you mentioned at the -- on the last day of last year, the pension liabilities were transferred, and we gained the approval from the Finnish Financial Supervisory Authority to transfer the cash during the Q1 and about EUR 41 million worth of cash was transferred from the pension fund to Orion during that quarter. So that is included now in the positive and good cash flow for the first quarter of this year.

[Operator]

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

[Tuukka Hirvonen, executive]

Right. Thank you. It seems that currently, we don't have any questions online any more. And I guess that there won't be so quickly any follow-ups on the conference call lines either. So I guess it's time to state that every good story must come to an end. And unfortunately, from our side, good for you. It's now time to wish Jari well-deserved retirement, and thank you for all these years as a colleague and friend.

[Liisa Hurme, executive]

Indeed, I want to thank Jari warmly on this year, not only years as a CFO working with me in the events like this, and every day, we worked very, very closely. But I have had a privilege to work with Jari for more than 20 years as a colleague and now we worked very closely together. And I couldn't find -- I hope I found I could say CFO. But to date, I can only say that it's really been brilliant. And I have had a full trust, and it's been a privilege to start a CEO career with such an experienced CFO, who has patience to explain things and take you through the initial steps. So I wish you all the best for your coming career. Thank you so much.

[Jari Karlson, executive]

Thank you, Liisa, for your nice words. And I also want to thank many of the people in the audience, who I have had the privilege to work with for so many years. It's great to have good analysts, who know the company and asked tough question for us to answer because that also helps us to develop our thinking. All these have been very nice years, and like Tuukka said, all good things come to an end at some point, and now it's time to move forward.

[Tuukka Hirvonen, executive]

Thank you, Jari, and thank you for the audience. Next time we will meet here on August 8 with the half year report. So have a good summer, everyone.

[Liisa Hurme, executive]

Thank you.