ALK-Abelló A/S (ALKB) Earnings Call Transcript & Summary

Hello, everyone. And welcome to today's presentation of ALK's quarter 3 results, together with the updated outlook for the full year. Could you please turn to Slide #2, where I'll introduce you to today's presenters and our agenda. My name is Per Plotnikof, and I'm Head of Investor Relations. And with me today are ALK's CEO, Carsten Hellmann; and our CFO, Søren Jelert. And today, we will look at our Q3 performance, the continuing impact of COVID on our business sales trends across our regions and portfolio and the Q3 financials. And then we'll give you an update on our 4 strategic priorities before sharing the updated full year outlook. And finally, we will end today's call with the usual Q&A session. So if you please turn to Slide #3, and then I'll hand over to Carsten, and we'll get underway. Thank you.

Thank you, Per, and thank you all for joining this call. First, let me give you the highlights. Earlier this year, we have said that we were assuming a normalization of the AIT market conditions by now in order to meet our targets. But despite the fact that this is clear -- that this clearly still hasn't happened in many places, I'm pleased to report that ALK has returned to growth and delivered a solid Q3 with 7% overall organic growth, helped by spectacular growth in the tablet sales, which were also fueled by continued strong take-up of ITULAZAX in its early launch markets. Sales in our European and international markets remained resilient and performed well. Even so, across our markets, visits to allergy clinics are still subject to many restrictions with the greatest sales impact in the U.S.A. on our legacy products in general. In the U.S.A., we now estimate missed sales for the full year worth more than DKK 100 million due to COVID. But despite all of this, sales in the quarter increased 7%, not least because of a very strong performance from tablets, which grew 52%. Tablets are now the largest single product group for ALK, accounting for 36% of total revenue. Planned product continuations reduced growth by approximately 4 percentage points. EBITDA was up 61% to DKK 58 million on the back of savings, operational efficiencies and delayed R&D costs. As a result of all this, we upgraded our earnings and cash flow outlook while narrowing our growth outlook to around 8%. The key growth driver is still the tablet portfolio and our outlook for the year is for tablet sales growth significantly exceed 30%. Before I go on, let me take a moment to highlight how we see the remainder of the year plan panning out. In Q4, we expect double-digit growth overall driven by tablets and by new treatment initiations. This assumes that patients' ability and willingness to visit doctors remain at current level, at least. Needless to say, if the impact of COVID significantly changes market conditions for the worse, it may pose risk to our outlook, but we don't expect much of that. Before we go into Q3 financials, let's just talk about COVID in more detail. Please turn to Slide 4. Despite the challenges in the U.S.A., especially for legacy products, ALK's overall business remained highly resilient to the impact of the pandemic, although we are working day to day on mitigating the consequences of COVID. We continue to protect our staff and have taken all possible steps to prevent disruption to the business and safeguard the supply of our products. Many employees are working from home to the extent possible and in Denmark, we have built an extra canteen to help employees keep certain distance when having lunch, just as of one example. Although we see patients now returning to clinics in many markets, capacity remains constrained by factors such as increased hygiene message and revised working practices. As a result, home-based treatment, particular tablets continue to do well, and in some cases, we're even benefiting from reduced access to other types of products. And there's no greater evidence of this impact on legacy products than in the U.S.A. where, as I mentioned earlier, MIS sales would be significant this year. COVID containment measures continue to affect our clinical development activities or activities to, particularly in-patient recruitment. In most cases, it's still too early to say what tangible effect this will have, although we know that in China, a delayed trial will push back our filing of ACARIZAX by at least a year. On the positive side, filings that are already under review, do not seem to be impacted. Our product supply chain remained resilient, and our inventories of both supplies and finished products continue to be robust. With that, let me hand over to Søren for an overview of the sales numbers on Slide 5.

Thank you, Carsten. Our business in Europe is performing well in the context of COVID. As you can see here, European revenue was up 6% despite reduced sales growth from discontinued products worth 5 percentage points. Some trends that are worth noticing include a 56% growth from tablets led by continued success of ITULAZAX and 42% growth on Jext. Tablet sales reflect the ongoing shift to registered treatments, strong sales force execution, and we also think a positive effect from COVID. Germany especially continued to perform very well with triple-digit growth in tablet sales and sustainable high capture rates across the portfolio among new patients. There, we are also recently seeing an update to doctors' fee structures for AIT, meaning their financial incentives for prescribing tablets will further improve in the future. In short, Germany is a key market to watch for going forward. In North America, sales were down 14% organically on the effects of COVID, which Carsten explained earlier. Sales were in line with our most recent outlook, although sales of bulk SCIT products did improve in the third quarter, registering a sales decline of 3% versus a 22% decline seen in second quarter. International markets saw revenue growth of 110% in third quarter, with continued strong sales of tablets to Torii in Japan. Despite the interference of COVID, Torii continued to do a great job in building the Japanese AIT market. In China, the effects of the pandemic were largest during first quarter so that during second and third quarter, the market bounced back strongly with the revenue for the first 9 months being up some 50%. Let's take a closer look at the 3 product categories on Slide #6. We have already highlighted the resilience of tablet sales, which were up 52% in the third quarter. And we also confirmed that tablets are now our largest single product segment. Disregarding product discontinuations, combined SCIT and SLIT-drops sales were down 5%, mainly on the effect of cooling. Sales of other products were flat as the lower sales of other products in North America were mitigated by strong performance of Jext. Now let's turn to the full year financials on Slide 7. ALK's financial robustness improved further in the first 9 months of 2020. Gross profit was DKK 1,449 million and yielded an unchanged gross margin of 58%. This reflected changes in the product mix that saw higher sales of tablets in Europe, but also lower sales and legacy products as well as increasing lower-margin sales to Torii in Japan. The sales totally is reducing the gross margin by approximately 1 percentage point. The expected gross margin of 58% continues to reflect a significant investment in supply chain robustness as well as the continuing rollout of the product and site strategy, which, in third quarter, involved certain restructuring costs from relocating part of our quality and control activities to Madrid in Spain. Capacity costs decreased 6% in local currencies to DKK 1,289 million. R&D expenses were up 7%, reflecting a step-up in clinical development activities. However, this was much lower than planned as COVID delayed the clinical activities. Sales and marketing expenses decreased by 11%, reflecting both savings and operational leverage. EBITDA was up 72% to DKK 331 million and exceeded our expectations. Finally, free cash flow of minus DKK 67 million was better than expected, mainly influenced by the higher earnings and timing of certain payments. This leaves us with a cash reserve of approximately DKK 600 million. With this, I'll hand you over to Carsten for an update on our strategic priorities.

Thanks, Søren. As to my recall, we are now nearing the end of our 3-year strategic transformation of ALK. This journey has seen multiple transformation initiatives across ALK. It has delivered double-digit growth based on strong tablet performance and improved commercial effectiveness. It has delivered pipeline progress, not least with the launch of ITULAZAX and new digital capabilities and has -- and it has leapfrogged ALK's production and robustness and quality levels. All of this has created a strong fundament for ALK's future growth opportunities, which looks promising for the next many years. This progress enables us to address how we can further develop ALK in the longer term, creating an even stronger, bigger and sustainable ALK. Early next year, we'll present an update looking at the next phase of ALK's development. I can already say now that the strategic direction of -- and the 4 pillars will overall remain the same, and we continue to focus relentlessly on strong execution and growth and profitability. Let's move on to Slide 9, where we look at the latest progress in the first 2 focus areas in more details. On the left is our first focus area succeed in North America, as we mentioned earlier, the U.S. continues to be impacted by COVID. And from an ALK point of view, this is having an effect on our efforts to build critical mass there. We estimate that lost sales for the full year in the U.S.A. is to exceed DKK 100 million. Still, we continue to do the right things to support long-term U.S. market development. We are encouraged to see then an increase of 30%, an increase of 30% in the year-to-date tablet volumes, although this has not yet translated into revenue growth due to the coupon rebates. Furthermore, the U.S. launch of our DTA platform has seen very positively early result as shown here. In our second focus area, on the right here, complete and commercialize tablet portfolio, ACARIZAX and ITULAZAX are still the most important drivers of growth. But actually, every tablet in the portfolio saw growth in Q3, and we expect to significantly exceed our full year growth target of more than 30% from tablets. The rollout of ITULAZAX to further markets continues as planned with strong performances. For example, in Germany, where in just 12 months, the product is #1 for new 3 AIT annotations despite competition from 15 other products. ITULAZAX also saw a further 5 new launches in Q3 and another early Q4. Meanwhile, we saw further evidence of the continued market shift towards evidence-based products as authorities in Germany updated their fee structure for AIT products, equalizing the financial incentives for prescribing tablets versus other products. In addition, ALK became the first company in Germany to completely discontinue nonregistered AIT products. For completeness, at the -- the note at the bottom here, just refers again to the impact of COVID on our clinical development activities. If you'll now turn to Slide 10. I'll just update you on the final 2 areas of strategic focus. Our third focus area on the left of this slide is patient engagement and adjacent businesses. This has been an area of intense activity in 2020 as against the backdrop of COVID. We have worked hard to connect with the most suitable candidate for AIT treatments ahead of the end of the year, high season, for treatment initiations. As you can see, numbers here are quite impressive to speak well to our ability to build a 2-way interactions with people living with allergy and to mobilize these people to take action. We have also been piloting different innovations in a couple of markets that may have relevance more widely. For example, in the U.K., in partnership with PharmaDoctor, we have launched the country's first allergy test and trade service. While in the U.S., we have fine-tuned our find-a-doctor service to doctors, who, we know, will offer full range of treatment options to patients, including our tablets. Also in the U.S. and in Germany, too, we can now offer to connect people directly to a doctor so they can speak about the allergies and treatment options. Behind the scenes, we are also using our digital platforms in new ways to counteract in many of the limitations created by COVID. For example, in China, more than 5,000 health care professionals tuned into a virtual medical congress we hosted online. On the right of this slide, you will see our final focus area, optimize and reallocate, which is about improving the overall quality and efficiency of ALK. One example of this is the way we are standardizing the number of active pharmaceutical ingredients used across our portfolio, in turn, reducing manufacturing complexity, helping to boost margins longer terms. Before we can make these changes, we need to update the regulatory approvals held by file -- held on file by authorities, which involve a huge amount of work for our organization. In Q3 alone, we submitted 275 change requests to regulatory authorities in 30 markets, covering 27 products. At the same time, our portfolio rationalization work continues as does our site strategy under which we recently announced the transfer of parts of our quality control activities from Denmark to Spain. Again, all in the name of improved efficiency and robustness of supply something that has been a huge asset for ALK during the pandemic. With that, let me hand back to Søren for Slide 11, where he will talk you through the changes we have made to the 2020 outlook.

Thank you, Carsten. Based on the result for the first 9 months and our current sales and cost trends, we updated the full year outlook as follows: We expect organic revenue growth of around 8%, net of product discontinuations, which reduces growth by approximately 3 percentage points. This is broadly in line with our most recent guidance. Subsequently, revenue growth is expected to reach double digits in fourth quarter, reflecting a continued strong tablet sales. A significant share of this will be coming from the tablets supply to Torii in Japan, hence, full year tapping sales are expected to significantly exceed our 30% growth target. Turning to EBITDA. That's now projected at between DKK 350 million and DKK 400 million, reflecting savings and operational efficiencies in sales and marketing and the delayed R&D spend. Continue to see the gross margin roughly on par with the last year, and we now see R&D expenses at DKK 500 million to DKK 525 million. Free cash flow is now expected to be around 0, reflecting higher earnings and the postponement of a one-off repayment of accrued rebates that will take place next year. CapEx is now DKK 250 million for the full year. With this, I will hand you back to Per and the Q&A session on Slide 12.

Thank you, Søren, and thank you, Carsten. And this concludes the main part of our presentation, and we will now open up for the usual question-and-answer session. Operator, please go ahead.

[Operator Instructions] Our first question comes from Michael Novod from Nordea.

Okay. It's Michael Novod from Nordea Markets. I have a couple of questions. Maybe you could also talk about whether you've -- I know you also did that in Q2, but maybe just give an update on whether you see any sort of sustained cost savings from [Technical Difficulty] going into the years to come, also the margin. That was one thing. The second thing is we've seen a negative effect on the U.S. business from COVID, obviously. But could there also be a scenario where you actually see a positive effect from COVID on the tablets that is also starting to sort of source through in the numbers that you see a stronger traction for the tablet franchise also going forward, given what we have seen in terms of people not as often going to the doctor, perhaps due to COVID? And then the last question, do you have any thinking around moving further into food allergies, et cetera, to sort of bolster the pipeline near-end and long term beyond what you're already doing in the pipeline also beyond your eternal strategy? So maybe getting into some of the more severe food allergies over time.

Thank you, Michael. This is Carsten. Before we go to the cost, let me just talk to you about, first, the tablets U.S. and others, and also other that you and the rest could embark on. Yes, we do see, as I said, 30% volume growth for the tablets in the U.S. And we do see many places in the world, including Germany, where we had about 18% of doctors that were totally resistant to prescribe tablets where a lot of those are prescribing tablets as well. So the answer is, yes. We do expect a pickup. And we actually, if you -- and I guess you already did that, Michael. If you look at the [ NVX ], it's in the U.S., you will see it almost double from last year to a level higher than it was in the beginning of the year. So yes, we do see a pickup there. It's complicated in the U.S. in many, many aspects right now. But definitely, it hasn't made us less encouraged by what's going on over there. The money we are losing in the U.S. is, in particular, on our allergens due to the fact that people are not going in and getting shots. On top of that, if you look at the results from the first trials in Chicago, New York on the digital platforms, that's actually a very, very rapid intake of new people, which we are having communication with, helping them through a doctor now willing unable to prescribe a tablet and not to any doctor in the U.S. So yes, we are pushing and keep pushing hard on the U.S. To the one about our future, I can only say, absolutely, yes, to the fact that when I said that we wanted to be the allergy company, it does include, as you know, already anaphylaxis treatment, and it does also include looking at food allergies in the future. And as soon as I have some more concrete facts about that, I will, of course, announce that. It's a very interesting area and the way we enter that, tablet mark would have many forms, but we are doing a lot of business development as we have done. And so does we with the consumer part, is why we have not given up on that one as well. But I think we're getting to a stage also where we can conclude that the ALK, as a company, it's much more robust and able to take on new challenges, which we have been doing. So with that one, I'll give it to you, Søren. And you can talk a little bit about the margin and the costs.

Yes. Thank you for the question, Michael. And it's, of course, clear for many and also in the report that we have submitted that the COVID currently suppressed activities, not only in the R&D and just to take that first, those costs, we do expect to come back next year. So where we originally have had a higher DKK 600 million level this year at least, for R&D, that has come down now to the DKK 500 million to DKK 525 million. And those costs, you can pretty much add on to next year. So basically, that will not change the picture. And there, we haven't actually underlying, we've seen a lot of change besides the clinical trials being postponed to next year. When you talk to the sales and marketing cost, it is, of course, clear that we do not host a lot of conferences, at least on site. We don't fly a lot. And that is actually yielding savings currently. We do anticipate that some of that will remain for some of the part next year. But in general terms, we are very committed, as a company, to focus on creating the efficiencies in sales and marketing costs. And of course, it's clear that what we're seeing now could be our tailwind to get to that because it is a more efficient way we are currently operating. So I wouldn't rule out some of the patterns we see now, we can -- that can assist us in reaching these long-term sales and marketing aspirations of 30% to sales. So yes, I think some of it will stay back. But I firmly also hope that we will be able to go out even more, visit the doctors more, have the conferences, get out with the scientific messages. So I'm expecting that it would go up. So I would say to you, read as a mixed bag. Yes, I think we will be more effective based on COVID, and it will yield lower costs next year. But I don't think, and I do not hope that it's at the level where we see now because that's not healthy either. I hope that answers the question.

That's perfect. Just one follow-up on the German fee structure. When was that change? Was that change during third quarter? Or do you expect the change to happen here in Q4 or next year? Just -- I probably missed that.

So Michael, this is Per. Let me just clarify that. That has recently been changed and it will be implemented from next year and onwards.

Okay. So you didn't actually -- it didn't actually have any -- so the German performance of more than 100% growth in tablets was not reflecting the change in the fee structure with German doctors?

That is correct. It will affect from next year onwards.

Our next question comes from Jesper Ilsoe from Carnegie.