Orion Oyj

OMXH:ORNBV

Earnings Call Transcript 2022-Q2

[Tuukka Hirvonen, Head, IR]

Good afternoon, ladies and gentlemen, and welcome to Orion's Half Year Financial Report Webcast and Conference Call. My name is Tuukka Hirvonen and I'm the Head of IR here at Orion. In a few moments, our CEO, Timo Lappalainen will present the results, after which you will have the opportunity to ask questions from him and from our CFO, Jari Karlson. We will first take questions through the conference call lines and then we will turn to the questions you may type in through the question tool in the webcast broadcast. Kindly state your name and the organization you are representing before asking your question.

And just before I let Timo to step in just a brief reminder about the forward looking statements. Here they are. So this presentation contains forward-looking statements, which involve risk and uncertainty factors and actual results may differ even substantially from those stated here today. However, Orion has no obligation to update or revise the information in today's presentation later on.

But now, Timo, please. The stage is yours.

[Timo Lappalainen, CEO]

Thank you Tuukka for the kind introductory words. So let's dwell into the highlights of the first half 2022. And certainly, it was -- we had quite a flow of news events throughout this first six months. First, we announced in the early part of the year that we will be focusing our research on oncology, as well as on pain areas. Now this has now been completed. And of course, we will see the fruit of that focusing in years to come as the progress of the various programs takes place and then finally enters the clinical and then to the commercial phase.

We also concluded an arrangement whereby Orion has now access to a novel selective [natural] (ph) channel blocker, which has been labeled as ODM-111 for the treatment of acute and chronic pain. The compound is not yet administered to men, but we expect that to take place soon. Also recently, we announced acquisition of animal health company VMD, which has the main operations in Belgium, as well as in France. That's how Orion also accessed the broader sense in livestock market as well as gained access to a facility that is -- production facility that is dedicated to animal health.

Company board has announced my successor, Dr. Liisa Hurme has been appointed to the President and CEO effective 1st November, and we all wish her luck and success in her new position. This week Orion and MSD announced a global development and commercialisation agreement for ODM-208 and related pathway compounds. And Orion received as a part of this arrangement an upfront payment substantial $290 million, of which $228 million was recognized or will be recognized in third quarter this year.

In terms of the operating environment, Orion through the work -- hard work of the various colleagues around the globe has been able to mitigate the supply chain risks. So far, however, we expect that the cost inflation will be start feeling more at the later part of this year and then potentially more 2023. But of course, we all know that the world is today very volatile in respect to the inflation and various prices on commodities.

So the key set of numbers, the net sales for the first half, we were up by 6%, also on the operating profit, up by 5%. On the operating profit margin, we set ourselves a target threshold for 25%, so we were north of that. In terms of the cash flow, we were behind last year. And one of the reasons there is, the capital that has been tied in working capital. So the waterfall, how did we land here? When we look at the last year we've told you throughout the year that the Simdax and Dexdor are facing generic competition. And certainly, we lost our business there, mainly due to the pricing. Now Nubeqa, of course, being still in the early phases of its launch, and we are all eagerly waiting for their new indication is trumping ahead, as well as Easyhaler, our product for treating asthma as well as COPD. Also, our other products did well. Now the exchange rate accumulated had an impact of $15 million for the first half.

In terms of the operating profit, certainly driven by the product sales, we took a hit on the margin product mix and, of course, the previously Simdax and Dexdor have an impact, as well as the declining price level for generics. Again, of course, exchange rate had an impact on the milestones. And what we also seen is that, in terms of the activity in various parts of the organization has picked up after the slowdown of pandemic. And we see the marketing cost, of course, being one of those elements also Orion is investing in the new information systems so that is part of that fixed cost increase.

In terms of the geographies, of course, we are happy to note that -- but one region actually recorded a positive development and even in North America we were very close with par the year -- with the previous reporting timeline. Then, when we look at the different businesses, how we report the sales? So specialty products, our largest business was up, as well as was proprietary business. Animal health was behind last year, this has more to do with timing of shipments to our large partners as well as discontinuation of one arrangement that dealt with the Finnish -- local Finnish market here. Fermion, pretty much at par with last year.

Now the league table of our products, the Easyhaler franchise continues to plow ahead and is our largest single franchise today. Also our Parkinson disease product line doing nicely, as of course, is, as said, Nubeqa, Simdax is down as well as is the Dexdor of our original compounds. And then the animal health sedatives were down for the period, but this has more to do with the timing aspects.

Now if we move more to the key products in proprietary side. And there actually if I'll just browse through the Nubeqa. Here for the convenience of you who follow the company, we have now split our sales with regard to Nubeqa in two components hopefully to make this more transparent to you to follow. So as we've always said, our sales to Bayer, those actually are a combination of two aspects. One is the royalty and the other one is the product sales. To make things a little bit more complicated, whatever we ship in terms of the product this quarter that will be subtracted from the royalty payment on the following quarter. So that's why it is actually longer term trend line that one should focus on, not on any given single quarter.

Easyhaler, as said, plowing ahead and has done a nice comeback after the slowdown, what we experienced during the pandemic. So that is doing very well. Also, when we look at the Parkinson franchise, of course, this is a long term disease and the patients who have been stabilized with the product typically tend to stay with the product for a while. And here we see that it is -- over the longer period it is a fairly stable product.

Now the Dexdor and Simdax story. Dexdor story we've discussed several times early on. So it had the uptake during the pandemic, then it came down. And I think now the trajectory that we are seeing is somewhere that we've expected and there are multiple players -- generic players in that market today and certainly we've seen the price decline. In terms of the Simdax, also this is slowly starting to experience the generic competition. It is not in full force yet, but there are already a number of generic offers in the marketplace. And subsequently, we've seen that impact in our numbers.

Then I'll turn over to Specialty Products. So this is the product category in our books that contains OTC prescription products. So both of these categories and when we look at the markets, the key markets for us are Finland and Scandinavian and certain Eastern European countries. And with all of these territories, we've seen that there was positive gain for the period. But of course, the business is heavily tilted toward Finland as we see more than 50% of the business is today in Finland. So growth in both segments, so in both prescription side as well as on the self-care side. So good going there despite the fact that we've seen also heavy discounting continuing in that generic side.

And when we look at the largest single country market for our generic business, it is Finland and the reference price product, the entire market went down by 6% as it is reported. And Orion’s business went up by 11%. There are a little bit screwed here with the -- how these are presented, but I think this gives a very good proxy that our volume share certainly was up for the first six months compared to the market. And when we look at then the overall market, our reference price product market share increased to 25%. We remained at 25% at the self-care and of the overall human market, we were at 11%.

Then I'll move on to the research and development. And here we see that the -- of course, the -- based on the RSN's trials, we've submitted or Bayer has submitted an indication expansion and that is currently under the regulatory phase. We have also another trial looking to expand the patient population [indiscernible] and that is currently recruiting. Earlier this week, we announced a global partnership with MSD relating to ODM-208. That is also indicated for metastatic prostate cancer. And this collaboration, of course, has been announced in a separate fashion and also then that meant that we upgraded our outlook for this year. Then we have ongoing also our program for 105. And then what we've said is that the tiotropium that we will complete that trial and the following Easyhaler programs, those will be wound down.

So then as always, we take sustainability very seriously. And here is a snapshot of our sustainability report of 2021. How did we do and we try to condense a very thick document in one slide, giving you a little bit of the perspective in terms of our progress against the targets. And as you see, it's not all green. We have still work to be done here. And of course, all of these are moving targets. But I encourage you to take a look at that, because there's a lot of good material that has been chewed. And also it is something that we present at the very open manner. So I encourage everyone to take a look at that.

However, if we look at some of the highlights that we have been very successful is ensuring the supply of medications. Of course, it all starts from there. However, in terms of the patient safety and we look at here also withdrawals from the marketplace, there is always room for improvement in terms of the quality. We are well in our way to carbon neutrality by our own operation by 2030. There is still work to be done for taking care of our own. And this is a measuring yard or stick that we put in the ground for lost time incidents. And unfortunately, we did not meet that goal. But then, when we look at the ethics part in our business there, we have been able to achieve our goals. So we put these four boxes sort of patient safety, environment, taking care of Oriones and ethics. These are the areas that we are focusing Orion's resources and work in terms of the sustainability, because that's where we think we can generally make an impact.

Then when we look at also the business targets. So apart from the numbers, some of the highlights that we have told you that would be good to take a look at that, how we are performing against these targets. Of course, the Nubeqa sales, we are all following that very closely. So that is moving on green. Easyhaler, the similar fashion. In licensing of new products, we've achieved already some of that, but of course, we are looking continuously furthermore there. One M&A we can take that, so that is in our animal health business. And then the 208 development and commercialization, that was announced this Wednesday, so this is hot off the press, this green color here. Then in terms of the launching of the Phase III trial for 208, we've decided with MSD that we will expand the ongoing trial -- ongoing Phase II trial and then later then based on that decide the Phase III clinical trial program. So that will not take place this year.

Then taking one new program to clinical development, 111. So our pain program is likely to be one of those, so we'll see later on this year. And then, of course, that was also part of the new collaboration agreement that we were able to license in to complement our own research and discovery.

And then our renewed outlook that we gave out on Wednesday, so we estimate that net sales as well as operating profit will be clearly higher than in 2021. And the basis for this, the upgrade, certainly the upfront payment on both sides, both in net sales, operating profit is a substantial. Of course, Nubeqa is also contributing to that in the long run and is an important part. The acquisition of VMD, all the animal health operations certainly increases our net sales. But as we've said, the Simdax and Dexdor, those are products that the generalization is tracking down, also on the profitability side. And of course, the cost inflation that everybody, everywhere is today seeing, that is part of the pack that nobody is immune, including Orion to that.

And we expect that the price competition in generics would continue. We will see how that will evolve. Are we close to seeing the bottom of that? That we will see in the next then releases. And as said, many of the activities are actually returning back to the pre-COVID levels and we are again able to invest in sales and marketing and expanding our business in that sense.

So the next scheduled event is our third quarter report on October, 20. So that's what we are planning for as next one. And then we also today released our schedule for next year's releases, as well as the AGM.

At this time, I invite our Chief Financial Officer, Jari Karlson to join me here at the podium and we are happy to take any of your questions. And as Tuukka here said, we would first take the questions from the webcast lines and -- conference call line, sorry, Tuukka correct me here correctly. And then we will take the questions from the chat box and Tuukka will kindly moderate those. So please.

[Operator]

Thank you. [Operator Instructions] The first question comes from the line of Jo Walton at Credit Suisse. Please go ahead. Your line is open.

[Jo Walton, Credit Suisse]

Thank you. Just a couple of questions. Firstly, on ODM-208. So the clinical study record was updated earlier this year in April, pushing out the primary completion to -- from October to December with an anticipated enrollment of 112 patients, which didn't change. Now you're telling us that you're still recruiting patients, could you give us an idea of how many additional patients you would look to recruit? And whether this pushes out the results to -- is it the first half or the second half of 2023?

My second question would be, I'm assuming then that you will need a Phase III unless you tell us that there's a very high level of additional patients in Phase II. My second question is a simple one, where in the P&L will we see the $12 million non-cash benefit of the ruble revaluation you say, impacted the operating profits? And my final question is a more philosophical one, I guess. Just wondering on your thoughts of the level of the upfront that was received from Merck, how much of that you think should be retained for business development and how much could be handed back to investors perhaps as an enhanced dividend in 2022? Thank you.

[Timo Lappalainen, CEO]

Well, thank you very much. Excellent questions. Let me take the couple first one and then Jari can address the ForEx question. So the decision or the protocol modification has not been submitted yet for the extension of the ongoing Phase II trial to include further patient population in that. So unfortunately, that's too early to discuss. However -- and also that would be too early to give you an indication when the data log would be opened. But however, we expect that the extension, the top line would be available in the course of 2023. Unfortunately I cannot give you a better answer in that.

Furthermore, certainly today the view is that Phase III program would be certainly needed. I don't think anybody's banking on anything else. Should that not be the case? Of course, we would then inform the market on that.

You want to take the ruble question?

[Jari Karlson, CFO]

Yes. So the exchange rate gain from the ruble, they are shown as net sales, they are also their part of the product sales. And then when we go to the appendixes, they are not allocated to any of the businesses. So they are the reason why the other shows a number of this case, normally the other would be very close to zero, but now because of this FX gains, there is all our number for -- product net sales is the answer. And of course, ruble was not the only part where we got some gains because euro has weakened against US dollar. So we have some other currencies benefiting as well the second quarter numbers, but the ruble was the key reason for the very high FX gain.

[Timo Lappalainen, CEO]

Then the excellent philosophical question on the capital allocation. Certainly, when we look at the history of the company, of course, the company is known to be shareholder friendly. However, also what we have very openly said is that, we are looking for external opportunities. And if one now looks on the past 14 months or so, we've acquired a product from Marinus for one that is very close to the market. We've cut the deal with Jemincare for the earlier part and now also made a business or acquired an animal health business. So we're looking all of these tools available. However, we also have fairly stringent financial criteria. So we do not expect that the money would burn a hole in our pockets. We look at that very rationally. I'm sure the Board will also look at that very rationally, but it's too early to give you any guideline on that how we think. Also, of course, it depends how various opportunities present themselves. But other than that, I think I would defer at this stage.

[Jo Walton, Credit Suisse]

Thank you. You can’t tell us roughly how many additional people you are looking to recruit above the 112 that are in the original protocol?

[Timo Lappalainen, CEO]

I'm sorry, because the protocol has not -- the renewed protocol has not been submitted. I don't want to take any position of that, because we will do that jointly with MSD.

[Jo Walton, Credit Suisse]

Thank you very much.

[Operator]

Thank you. Our next question comes from the line of Sami Sarkamies of Danske Bank. Please go ahead. Your line is open.

[Sami Sarkamies, Danske Bank]

Okay. Hi. I have several questions. Starting from ODM-208. Can you talk about the partnering process, did you have multiple options to choose from? And what led the selection of MSD as the partner? And how likely is it that ODM-208 will be investigated for also other indications than prostate cancer?

[Timo Lappalainen, CEO]

Well, typically in this type of processes, you have also a number of candidates coming from different perspectives. And so we did also in this case, of course, MSD is well known and globally known to develop compounds programs for -- in the area of oncology and also prostate cancer. And of course, their capability and resources also in the commercial side are well known. So that made the, of course, the weight towards MSD. And of course, there are also many other elements that one has to take into account.

Initially, the Phase II is focused on metastatic prostate cancer and that is the initial indication. But as we all know, any oncology product is typically you look at for various patient populations and various stages of the underlying cancer. So that is too early to take any position on that at this stage. So I would probably defer that to a later stage when we have a little bit more data including the Phase II data.

[Sami Sarkamies, Danske Bank]

Okay. Then continuing with your outlook assumptions. If I look at certain product areas, for example, Stalevo, since we're up by 9% in the first half, but you are expecting a stable sales during the full year. Easyhaler sales were up by 17% in the first half, you're expecting only slight increase in the full year and spread of the product sales were up by 6% in the first half, but you're expecting only similar sales. Are you being overly cautious with these assumptions or how do you justify your views?

[Timo Lappalainen, CEO]

Well, I think question is very valid. Of course, in today's environment the instability that we see across the board in all of our markets, including the behavior of the payers or the potential behavior there, of course, is one of those aspects. In terms of Stalevo, there are -- however, the first half and second half are not going to be equal. We already know that there are some shipments, some of our partners who have taken more material in the first half than they are likely to take in the second half.

In terms of the Easyhaler, the uptake has been very good. There are, of course, part of the Easyhaler business is based on tendering type of arrangements. So should there be a positive surprise there? We are happy to take that. And where we overly cautious when we put the 5% mark there, maybe in the early part of -- when we look at the last year of course, it was a disappointing start. So we are happy with that. In SPP, in the generic side, the problem there is also pricing. And we know that in most of the markets the pricing cycles are very short. So the largest market here in Finland, the pricing cycle is three months, but we also have markets where the pricing cycle is shorter. So that makes the estimation little bit difficult because if you don't make it within the pricing cycle, you may be out in totality. So that is -- but that's the overall. So there is -- we don't have any magic stick here. This is the best scenarios that we've been building on.

[Sami Sarkamies, Danske Bank]

Okay, thanks. That's very helpful. And then, I would have a couple of housekeeping questions. Firstly, you did record EUR1 million earn out from the earlier divestment of Diagnostica. Would you still be eligible for further earn outs? Or was this all you were able to get? And then secondly, could you elaborate on which areas of the business the EUR4 million hospital payments were related to in Q2?

[Timo Lappalainen, CEO]

Okay. The earn out, that was it. We're done with regard to the divestment. Of course, there are -- we have a close relationship with the operations, because they operate in the real estate that Orion owns, but that's a separate thing. But as far as final consideration, now we are done with that. Not the entire, but the timing of a certain restructuring of our arrangement related to the Easyhaler product in a certain territory.

[Sami Sarkamies, Danske Bank]

Okay. Thanks. I don't have any further questions.

[Operator]

Thank you. We have one further person in the queue. [Operator Instructions] And the next person is James [indiscernible] at Jefferies. Please go ahead. Your line is open.

[Unidentified Participant]

Yes. Hi, thanks for taking my questions. I have three if I can please. Firstly, you talk about inflationary trends sort of picking up in the back end of this year into next year. Just wondering if you can give us a little more clarity where you're seeing that and what you can do to mitigate that and the magnitude of those inflationary pressures, please? And second question is just on your guidance. Just to clarify, can you confirm that the guidance change this week was just purely due to the milestone and were there any changes in underlying assumptions that went into that? And then my final question is just on Nubeqa. I appreciate that there's sort of an element to kind of catch up in terms of adjusting the royalty for supply, et cetera quarter-over-quarter, but it does seem to be quite a big dynamic shift this quarter in terms of the magnitude of the product supply and the royalty. And I was just wondering if there's any clarity you can give us or color on that? And is it a case of the markets stagnating in terms of why the royalty is much lower? Is there a particular reason why the supply to your partner was much higher? So I know there's very limited you can say in the cost of your partnership, but if there's any market clarity you can give us that would be really helpful. Thank you.

[Timo Lappalainen, CEO]

Okay. Excellent. So I'll take off first the inflation and then probably guidance and Nubeqa, maybe Jari can reply to those. So in terms of the inflation, maybe the most visible that we see today is in energy prices. Of course, pharmaceuticals per se is not the most energy intensive industry there is, with the exception of the active material, because that's genuine chemical operation. And of course, there we are seeing the price hikes in energy cost. In terms of the consumables or raw materials intermediates, there we are seeing that as well, but it's probably -- the overall impact is probably less material to us than would be in case of energy. Then the third item where we've seen multiple fold of increases is actually in transportation.

Now, also in pharmaceuticals typically transportation is not a very significant item, it's more that you actually get the capacity. But of course, everybody are now looking for a more economical way to ship the product. Airfreight is commonly used, but of course, today, you're also looking at the sea freight. Furthermore, of course, one aspect that we flagged that is difficult in pharma is the price hikes. As we do not sell directly in the US or in markets where there were free pricing. That is, of course, the little bit of the headache for the entire sector as the prices are controlled. Of course, we are in two segments where the prices are not controlled by the pricing boards or various regulators. One is OTC, then the generic business as far as it is pure tender business. So I mean, there is no price regulation. There are only rules how you tender products. And then, of course, the animal health product where the competition takes care of this.

So energy prices, of course, we are looking how we can make our operations more energy efficient and we have multiple of such investments going on on the raw material, in intermediates and so forth, there is actually little that you can do, you can source from multiple producers, but you're pretty much stuck with the ingredients that you have in your dossiers or in your products. And then in terms of the shipments, of course, you try to use the most economical transportation means that makes sense. Jari, you want to take the guidance and the Nubeqa question.

[Jari Karlson, CFO]

Yes. Well, the reason for the upgrade was purely the MSD milestone. So there has not been anything in our base business, which would have triggered this type of outlook change. Of course, all the time business changes a little bit, but the changes were not to the magnitude that they would have cost any reason to upgrade the guidance. And then to the difficult question of how the Nubeqa shows up in our net sales. So basically if one starts from the actual market sales, so there the sales buyer is doing is developing as plan, they are growing and there are no dramatic monthly variations. So that baseline is kind of a stable. But then what causes the variabilities is two things. First, for one reason or another, which we cannot really control buyer is not buying the same quantity of product every month and every quarter. So as you can see from those slides, there is actually quite a lot of variability in their buying patterns. And we cannot really answer on their behalf why there are such big fluctuations in there. But that is causing -- and then of course, the third element is that since we only get the royalty calculations after the quarter has ended, during the quarter we base our royalties on certain type of estimates on how the sales might end up looking and that, of course, also then causes certain variability when we then after the end of the quarter received the final calculation and then of course correct the royalty accruals we had in the previous quarter. So that plus the variability of the tablet deliveries to buyer cause the variation.

And like Timo already explained in his presentation that we -- the value of the shipments like in the second quarter of this year are then deducted on the royalties of the third quarter. But of course, that deduction finally takes place only when we receive the final calculation of the second -- third quarter royalties during the fourth quarter of this year. So during this quarter, again, we are basing the royalty calculation for an assumption of market sales and then taking into account what we already shipped during the previous quarter. So it's kind of a complication -- complicated calculation, unfortunately. Hopefully in the long run when the volumes start growing in the market and the business continues to grow, the volatility on the monthly and quarterly shipments becomes less and less. And of course, as a consequence of that also the volatility and how our sales look like. So long explanation, but it's fairly complicated. Also I can ask you -- internally to do these calculations.

[Unidentified Participant]

Thank you for the color. Much appreciated.

[Operator]

Thank you. And we've just had one further question come through on the phone. That's from Jo Walton at Credit Suisse. Please go ahead. Your line is open.

[Jo Walton, Credit Suisse]

Sorry, just one follow-up clarification on the Merck deal that you have done. You were asked about the background to it and you said how fantastic Merck was in terms of being in oncology and prostate cancer. But of course, that would also apply to Bayer. Just checking to see that -- and I don't know how you'd say this anyway, but there's been no breakdown in your relationship with Bayer such that you chose to go with an alternate partner, or did you feel that it was important to have diversification in your partners given the importance of the partner to driving the revenue that you will need? And then just finally, again, I'm afraid on this Merck transaction. Just to understand how the relationship could develop. So Merck paid you a substantial upfront, and does that get them 50% of the right to the product? Just what does that actually buy them? And then you say that they could take an exclusive. So they have the right to trigger that. They can say, right, we want to do it all ourselves. You Orion can't do any of it, or is that got to be a simple negotiation between the two before that turns into a simple royalty relationship. Many thanks.

[Timo Lappalainen, CEO]

Okay. Thank you. No, I mean, this is by no means any vote of nonconfidence to Bayer. They are highly, highly respected and extremely important partner to ourselves. That was never a consideration that we would deliberately want to diversify our base or partnerships, this is how it ended. And unfortunately, I cannot comment who the other part is or if there were some parties that were mentioned here is of that we are all bound by confidentiality.

In terms of how the split of the business, the development and commercialization is performed. No, MSD have the majority share of both future revenue profits as well as on cost of that. And actually the way the release was worded is that, both parties do have the option to convert the arrangement to an exclusive one and then -- with the subsequent financials, then that we did not disclose at this time, with the exception that Orion manufactures the product in either case.

[Jo Walton, Credit Suisse]

Thank you.

[Operator]

Thank you. And as there are no further questions from the phones at this time, I'll hand the floor back to our speakers.

[Tuukka Hirvonen, Head, IR]

Thank you. And currently, we have no questions from online. So now all the online viewers, if you have any questions, now is the right time to type them in. We will wait for 20 seconds or so. And if there are no further questions coming from online, then we can wrap this webcast up and everybody gets to go home on a sunny, hopefully at some point, sunny Friday afternoon. It seems that we do not have any questions online this time. So Timo, please, you may wrap up the session.

[Timo Lappalainen, CEO]

Well, thank you very much everybody for joining this call. Do appreciate your interest in the company and we welcome you to join again in October. In the meanwhile, please enjoy the summer and stay safe.