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

Hello, everyone, and welcome to today's presentation of ALK's full year results for 2021, together with the financial outlook for '22. Could you please turn to Slide #2, where I will introduce you to today's presenters and our agenda. My name is Per Plotnikof. I'm Head of Investor Relations at ALK. And with me today are CEO, Carsten Hellmann; and our CFO, Søren Jelert. And today, we will look at our growth trajectory and Q4 results along with the sales trends across our regions and portfolio and the full year financials. And then we will give you an update on our strategic priorities before talking you through our full year outlook for 2022. And finally, we will end today's call with the usual Q&A session. So if you would please turn to Slide #3. And then I will hand over to Carsten, and we will begin.

Thank you, Per, and thank you, everyone, for joining us today. Let me start by saying that in 2021, we made very good progress, both commercially and with our long-term strategy execution. We remain committed to delivering on our growth promises, and we are also investing significantly to hedge and accelerate growth over the longer term. Before we get into the details, let me just summarize where we currently are on our trajectory. We delivered 12% revenue growth, which was at the top end of the improved outlook that we issued in November. As expected, the tablet portfolio remained the key driver of growth, but I'm also happy to report that despite continuing challenges of COVID, we also saw a general recovery in sales of our legacy products, especially SCIT, more on this shortly. Gross margin was up 3 percentage points in light of increased tablet sales, and EBITDA increased by 35% despite a step-up in R&D spend. In general, our business proved resilient to the impact of the pandemic, but it did prove challenging to selected clinical trials as we have talked about extensively over the last 2 years. We'll give you an update of where we are today in a moment. Looking to future growth. We made solid progress on what we call our new horizons priorities, which mainly covers our entry into food allergy and expansion of adrenaline. In the year ahead, we expect to see full year revenue growth in 2022 of 8% to 12% and further improvement to profitability. We also expect to make continued progress on our long-term strategy. With those quick highlights, I'll hand over to Søren now, who will start by looking at the results for Q4. So please now turn to Slide 4.

Thanks, Carsten. Quarter 4 was another good quarter for ALK, and revenue was up 4% in local currency and 11% in reported as we had little tailwind from currency movements. This was despite a resurgence of COVID, which impacted some markets, especially in Europe. It's also worth noting that quarter 4 2020 had extraordinarily high revenue growth, in part fueled by high number of tablet shipments to Japan. Q4 profits more than doubled, and EBITDA ended at DKK 136 million, reflecting higher sales as well as improved gross margins that was driven by increased tablet sales. Capacity costs increased lastly as planned. We also had some minor restructuring costs associated with the changes that we made to our commercial setup in Spain and Turkey in response to pure market conditions. Strategically, we continue to make progress in the quarter. We reached a key milestone in our efforts to simplify a case production setup with the EU regulatory approval opening the door to the necessary manufacturing changes for our SCIT product line. We also had real-world evidence from our 92,000 patients REACT study published in the Lancet. This study clearly confirms the long-term benefits of allergy immunotherapy in allergic rhinitis and asthma. With that quick look at the highlights, let's take a look at the sales development in more detail. So please now turn to Slide 5. In '21, we saw solid growth across our sales regions of Europe, North America and International, with tablets being the main driver of growth. Full year sales were up 10% in Europe and were particularly strong in the Nordics and Central Europe. This was driven by tablets, which were up 31%. We continue to see ITULAZAX and GRAZAX perform well, contributing to the market share gains and the market expansion. Sales of legacy products, particularly SCIT, showed a positive momentum and recovered some of the lost ground from previous years due to the ongoing effect of COVID and planned product discontinuations, which reduced the growth of combined SCIT and SLIT drop sales by 3 percentage points in the region. Throughout 2021, Germany has delivered double-digit growth and we saw the shift towards registered evidence-based AIT treatments continue. National reimbursement guidelines recommending that AIT patients should be initiated on to registered products were reinforced in '21, and we expect this will continue to drive the market transition towards evidence-based medicines. In North America, full year revenue was up 23% as our sales throughout the year continued to recover from the impact of COVID, and especially in the U.S. as doctors focused on bringing patients back into their clinics and hospitals. Tablet revenue increased 42% on increased uptake among key prescribers and improved sales margins. However, we continue to see the modest sales volumes in the U.S. Full year sales in international markets were up 15%, with a positive impact from product shipments to Japan and China. Please note that in quarter 4, growth was impacted by the phasing of product shipments to Torii in Japan. What continues to be encouraging is the very strong in-market sales development in these 2 markets. Now let's take a closer look at the product categories on Slide 6. Tablets continue to be the key growth driver for ALK with 23% growth in fourth quarter and 29% for the full year with strong developments across all key brands. Combined SCIT and SLIT-drops sales were largely unchanged, reflecting increasing SCIT sales and SLIT-drops sales are declining largely due to ongoing transition to tablets in France. In quarter 4, we saw an impact from COVID resurgence in some European markets. Sales of other products recovered further. In fourth quarter, revenue was impacted by declining Jext sales due to fewer prescriptions renewals because of COVID and an earlier extension to its shelf life. As well as the industry-wide adjustment of rebates in the U.K., which was announced in December. This brings us to Slide 7 and the P&L. Profitability was in line with a forecast, however significantly better than anticipated in the beginning of 2021 because of the strong sales development and improved gross margin. Revenue from '21 was up 12% in local currencies. Growth was not materially affected by currency movements. The gross margin improved by 3 percentage points to 61%, reflecting increased sales of tablets in Europe, although this was somewhat reduced by shipments to Torii in Japan, which carry lower gross margins. Behind this positive development is also the fact that we are currently spending a little less in product supply than planned. The trend is right and supports our long-term margin expansion target. EBITDA increased 35% in reported currency to DKK 534 million despite the planned 23% increase in R&D spend. Sales and marketing costs were up 10% to more normalized activity levels. Free cash flow was also in line with the latest outlook and stood at DKK 202 million at year-end, driven by improved earnings. Now let's move on to a brief status on Slide 8 and over to Carsten again.

Thanks, Søren. I talked earlier about our growth trajectory, and I just want to share this overview of where we currently are on our journey. A little over 4 years ago, we announced our new strategy, which began with a 3-year transformation program to address important issues and to establish strong foundations for the future. Having successfully delivered the transformation, our priority is now long-term, continuous growth with improving profitability. The goal is an ALK capable of delivering high revenue growth of 10% or more annually and earnings growth towards 25% EBIT in '25. Tablets will be the key driver of growth, but we are also investing significantly in new initiatives. And in doing so, we will hedge and potentially accelerate this growth. This will happen from 2025 and onwards. To do this, we're not only looking to expand our current leadership in allergy by expanding the coverage of the tablets to new patient populations, such as children and adolescents. We are also looking to new innovations, including an entry into food allergy and an expansion of our adrenaline franchise as well as an expansion in China. If you now turn to Slide 9, I'll walk you through the progress with the strategy in '21. As you may recall, our strategy has 4 priorities. Let's start with North America, where COVID restrictions eased and we saw a market recovery resulting in tablet sales growth of 42% and sales increases for legacy and other products, too. We also established a telehealth partnership that advances our efforts to smooth the path from consumer to patients by giving patients direct access to an allergy health care professional. Our work -- and secondly, our work to complete and commercialize the tablet portfolio also advanced with tablet sales growth of 29%. We had multiple new regulatory approvals, mainly in the U.K. and Eastern Europe, plus a U.S. submission for adolescent use in the house dust mite tablet. The 2 pediatric Phase III trials of the tree and the house dust mite tablet progressed as planned with both trials on track to complete in '23. These represent some of the final steps towards a full coverage for the tablets in Europe and North America, and are expected to be important future growth drivers. On the other hand, COVID impacted Phase II -- impacted 2 Phase III trials involving the house dust mite tablet, the pediatric trial in allergic asthma and the registration trial for China. In both cases, we're in dialogue with the relevant authorities about the potential next steps. Engagement with digital channels is the next priority, and our digital engagement platforms were responsible for mobilizing more than 375,000 consumers to take action on the allergies, including more than 40,000 in the U.S. Meanwhile, we also made exciting progress on our new horizons priority. For example, we made really good progress on the entry into food allergy that we announced a year ago. We reached an agreement with Catalent for the use of its tablet technology, which are already using our existing tablets, and we successfully completed a formulation feasibility study for peanut allergy products. We also continue to advance 2 parallel adrenaline auto-injector projects, one in-house and one in partnership with Windgap, with the aim of submission to the USFDA in 2024. Both are currently at similar stages of development. Finally, the new horizons, we signed an agreement with Grandpharma for Jext to become the first adrenaline auto-injector to be registered and launched in China. And I'll speak more about the Chinese market when we come to our 2022 plans. The last one was to optimize for excellence, which aims to set start our portfolio of legacy products, including upgrading production processes to meet the latest standards. This work took another important step forward with the EU approval we mentioned earlier. This work was also supported by a huge amount of regulatory activity. As mentioned, operations remained resilient, and we saw a 3-point improvement in our gross margin. A final point before we look ahead to 2022. Everything we do as a company is underpinned by a commitment to people and planet, which covers organizational agility, employee engagement and retention and sustainability. And for more on that, I'd like to remind you all that our sustainability report is also out today. With that, I'll ask you to turn to Slide 10. Let's look ahead to 2022 now. In North America, we want to further grow the tablets business by increasing prescriber depth among key specialists and by pursuing partnerships to increasingly leverage our digital health agenda. We also want to grow sales of our legacy products, and we are targeting approval for adolescent use in our house dust mite tablets. For the tablet portfolio, we're targeting global sales growth of around 20%. To give that some perspective, it means that the year ahead, we will be crossing DKK 2 billion in tablet revenue. And we will be initiating around 0.5 million new patients on to tablets, bringing the total number of patients on tablet treatment in '22 to more than 1 million patients. We will also continue our clinical development work in support of more pediatric approvals. While in China, we'll continue our dialogue with authorities on the next steps and hope to reach a conclusion soon. Just while we are on the subject of China. We see huge future growth potential in this market and we will ramp up operations there in support of our current SCIT offering with a view to be building market presence ahead of the future introduction of the tablets. In consumer engagement and new horizons, our digital initiatives will continue at high speed. Meanwhile, all eyes will be on our food allergy program as we expect to initiate clinical development of peanut allergy tablets towards the end of H1 this year. Also during 2022, we will continue to generate data on our in-house next-generation drilling auto-injector as will our partner Windgap for their equivalent project as we move closer to our target for 2024 filing to the USFDA. Lastly, and optimized for excellence, we will continue our work on the product and site strategy program known internally as the [ Task ] project. We will also work to ensure continued robustness throughout our supply chain, and we are targeting another year without any major interruptions to our product supply. All in all, we're targeting a further 1 to 2-point improvement in our gross margin. I hope that gives you a clear view on our goals for the year ahead. With that, I will hand back over to Søren and the 2022 outlook on Slide 11. Thank you.

Thanks, Carsten. The outlook for 2022 is fully in line with our long-term financial aspiration and is as follows. We expect revenue to grow 8% to 12% on tablets continuing to be key with the sales growth expected at around 20%. We expect all our sales regions to contribute with double-digit tablet growth. In addition, we expect low single-digit sales growth from the remaining non-tablet portfolio, mainly driven by SCIT products and tests. The higher end of this range assumes accelerated sales growth across all regions and faster market share gains, plus a continuing regulatory shift towards evidence-based AIT in key markets. The lower end incorporates pricing pressure in Europe and all increased negative effects from COVID, which in many cases, may still lead to some volatility across quarters, especially in the beginning of the year. EBITDA is expected between DKK 625 million and DKK 725 million. R&D will be around DKK 650 million to DKK 700 million, and we foresee that the sales and marketing ratio to revenue will slightly improve from '21 ratio, which was 32%. Costs will still increase, reflecting a series of growth investments, particularly for China and the early preparation for the future pediatric rollout. We assume that 2021 free cash flow -- we'll assume that 2022 free cash flow will be negative mainly due to the changes in working capital, including the one-off repayment of the DKK 175 million in accrued rebates that previously was anticipated due in '21. CapEx is expected to be around DKK 400 million related to tablet capacity expansion and further upgrades of streamlining production facilities as well as IT upgrades. With this, I'll hand you back to Per and the Q&A session on Slide 11.

Thank you very much, Søren, and thank you, Carsten. That concludes the main part of our presentation. So we will now move to the usual Q&A session, where we would be happy to take any of your questions. Operator, please go ahead.

[Operator Instructions] Our first question comes from Benjamin Silverstone with ABG Sundal Collier.

Congratulations on the quarter. I have 3 questions, if I may. The first one is in terms of quantifying the REACT study. Do you -- are you able to provide any information on nuances as to how this very positive study might impact growth for next year? Or if any sort of impact we can directly relate to growth? And the same question is in terms of the sales and marketing expenses. You did mention in the presentation that we should expect a bit more in total volume here despite the ratio improving, it is used to further establish China. But I was wondering if you could provide some more details on that and also potentially which other areas you will see further investment in for 2022? And then the last question is regarding Grandpharma. Just if you have any updates here on potential sales uptake or hospital coverage, that will be much appreciated.

It's Carsten. I'll start, and my colleague can support if necessary. The REACT study will be followed 92,000 patients for 9 years. We're not using that directly commercially, but we know and can see there's a lot of side effects, positive side effects from the data from the study. For example, that this is where one of the areas, you can see that AIT, for example, is significantly improving the trajectory of asthma. When you have a treatment for AIT for the allergy, you actually improve the chances for not getting asthma and so forth. But there's many benefits of the effects of AIT. But so far, we're not using it directly in our marketing. But it's definitely something that supports AIT as a concept to treating allergies. For sales and marketing expenses, yes, it's true that we are ramping up in China. It's firstly because we are growing 45% plus in '21 in our existing products, the SCIT products in the Chinese market. But we are also setting up now a full finance market, access marketing and so forth. So we have a solid organization there. We are ramping up in the sales force to make sure that we are getting into right customers, learning more and then preparing, of course, with the launch of the tablets. If you ask me, one of my biggest task is actually capital allocation because we have so many ideas and places we could invest in sales and marketing. And for me, it's very important that together with, in particular, Søren is sitting here, the CFO, we make sure that we invest in the areas where we have the right output in terms of monetary and strategically for the company. And this is where we every day think about where we're putting the money we have to spend. But we are not holding back on anything or saving anything. We take the good ideas and then we make sure that we are capable to execute in it. On Grandpharma, there's no news compared to last time. It's following exactly the plan. I think they're in 20-something hospitals right now and applying hospital by hospital for approval to start selling the Jext in China.

Our next question comes from Michael Novod with Nordea.

Three questions as well. So first of all to Torii. I know that Torii has not reported yet. But what kind of indications do you get on momentum out of Torii? We've seen it's been very strong. I know there's also been a larger switch case going there, but maybe you can also elaborate a bit on sort of the momentum signals you're getting from Torii in sort of -- into next year and beyond? And then cash flow from 2023. Is it fair to assume that it's going to be simple and may make more what you have in operational performance? Of course, I know there is the one-off in 2022. And then the latter one, the last one on the house dust mite asthma indication. I know it's not labeled indication, but the trial. Is there any plans -- and I know it's still early days, but are there any plans for you to sort of say, okay, we really want to have this trial reporting out positive, i.e., do a new trial at some point in time mainly to try to break better into the U.S. even though it's not a labeled indication?

Yes. I'll start with the trial, and then Søren will take over for Torii and cash flow. I'm not sure that it will have a lot of effect on our sales and marketing results to have that trial. Remember, this specific part of the trial with children asthma, dust mite was something that was required by the authorities. But it's exactly the same patients we have in our rhinitis trials, where we also have a lot of children. And we also have a lot of data already in Europe, and we are in the GINA guidelines where have the REACT study. So there was no label on it in the U.S., and we were thinking about, and also, I know we talked about a couple of years ago, could that be a better argument to the allergists that this was also something we had in Europe. Today, we don't think so. So we're talking to the authorities what to do now. There was nothing wrong with the trial or the products in the trial. They just didn't get the events, the children because they were staying home from school and not playing out. So no, I don't think we will do that if we don't have to, but that's the dialogue we will continue to have with the authorities right now, what to do now. It's not something that we expected to have a commercial effect on us, it's just a requirement. And so let's see what we can do from now on and we'll take it from there. So it's not an answer, but no, I don't think it would have helped the allergist. They wouldn't still make money on tablets even though we had this argument in the U.S. So there's all the other things we're doing in the U.S. that's going to pay off. So with that, I'll give it to you, Søren, with Torii and cash flow.

Yes, let's take Torii first. Thank you for the questions, Michael. It's clear that Torii for us is, of course, an interesting dynamic sometimes. As you remember, the quarter 3 on Japan was quite high. We had a number of shipments. And then as we also told you guys that quarter 4 would be somewhat lower. And I think what's very important to understand is that the underlying good growth that they are having in Japan, both when it comes to MITICURE and CEDARCURE, that we are expecting those to continue. And we see no signs why that wouldn't be the case. Then I will leave it to Torii also to give guidance on where they think that would land. But still, we are definitely on a positive note, and we see no risk signs based on what we saw in '21. When it comes to the shipments that actually do impact us, we will see the same fluctuations throughout the quarters as we have also seen this year. And I think in our assumptions, we expect that they will need sufficient inventory levels and stay at the inventory levels throughout 2022. And then you can debate whether it's still, they want to stock up on MITICURE, they want to stock up. But overall, we expect they will continue the good growth. And then it will be the stocking. Sometimes at the end of the year, they will determine whether it really can go high or low. But overall, we do not see a risk associated with Japan on the country, I would say. So that's Torii. When it comes to the free cash flow, yes, you're absolutely right that '22 is somewhat of a difficult one in the sense that we still have the rebates that we are assuming to be paid out this DKK 175 million. And then we -- management have also said that we want to secure the long-term tablet capacity, especially on the API. And that's the reason why the CapEx this year is around DKK 400 million. We don't expect that to be a normal level, but we are now spearheading the API investment in the tablets to secure that we long term have the needed tablets, whether it's China or Europe or the U.S. for that matter. So see that as a positive sign and expect definitely the cash flow will be positive once we come to '23, also given that we do not have the approval to fight with, and we are expecting also that the investment levels will come down somewhat. Hope that explains the questions, Michael.

[Operator Instructions] Our next question comes from Jesper Ilsoe with Carnegie.

Perfect. Firstly, just on COVID. So any -- just do you see any impact new treatment initiations given that Q4 is very important for you guys for the future growth? And also following up, how do you see the lockdowns and the infection rates here both in Q4, but also what you're seeing in Q1? How do you see that impact versus previous years? So just any thoughts on potential impact. I know it's very short term, and COVID eventually will go away. But just any thoughts there on the potential impact in Q1. Then also just pipeline questions on asthma, firstly. Can you just elaborate a bit on how important you see this study to your growth outlook and perhaps also compare it to the importance with the allergic rhinitis and other tablets cables studies you're running. And just on China. So what could the next step be? Would it be fair, for example, to assume that you can restart it by mid-'22, where I would presume that infection rates eventually will go down? So just any thoughts there.

Regarding the COVID, I mean, we had good results we saw both in Q4, and we are expecting that the numbers we put forward to '22 will hold water as well. But of course, that is from country to country in situation to situation, where we see patients are willing to go to the clinics that they, we saw a period of a few weeks in Germany where the doctors were mandated to go to the hospitals to do vaccinations and stuff like that. That's the type of fluctuations we see. It's not something I am planning for putting into the strategic numbers that is going to be an excuse for lower growth in ALK, maybe could have been higher than we had now should there not have been COVID. But it's not something we see. It would probably have been better without COVID. Could Q1 have some sort of a little slower impact or not, we don't know that. It's not something we -- that subscreen in our faces, but I expect something is happening. That's sort of the best way I can see it. COVID impacts us everywhere a little bit. And we are not even in the offices yet at a full impact. We still have problems getting filters and bags in the production. And yes, in some countries back and forth, doctors are opening and closing their offices. And their sales reps are doing virtual calls and then physical calls and back and forth. But in totality, it's not something that is a model in as a driver of lower growth with ALK. But of course, we are hit like anybody else. If you talk about the specific asthma trial we're talking about here. This is not something we have calculated as having a positive commercial effect, whether we had it or not. This was a requirement from the authorities. We had to do because we are covered in the big MT12 trial with asthma and asthma rhinitis also for children. And we have a lot of other studies and trials done, and we have at approvals already. So there's no commercial effect on that one. It is whether the authorities want us to continue in order to get the study done or what they want to do, we're talking to them about that. And the same is to say about China. Honestly, we don't know. We have a very good positive and strong dialogue with the Chinese authorities on what we can do to fast track our tablet into the Chinese market, and there's no conclusion on that yet. Definitely, if you're right, that we can start sending patients to China or from China in June, that would be perfect. We just don't know. But it's something we are 100% on top of and it will be done as fastly as possible.

Next, we have a follow-up question from Benjamin Silverstone with ABG Sundal Collier.

It's just a quick question for you, Søren, in regards to your gross margin. So you do report a very impressive 3% increase for 2021 despite COVID and the challenges this might have given. And you do expect a 1% to 2% spring increase for next year. I was wondering if you could just give a quick indication of which aspects we should look for next year, which might, yes, sort of guide this range? So which aspects should happen to land at the 1% spring increase and which one for the upper end? And is this mostly related to the improved product mix?

Yes. I think it's, of course, a good question and somewhat fair enough for that detailed question. Actually, if you look back to '21, on a full year scale, the change from 58% to 61% was really due to the tablets, and it was also mainly due to the non-Japanese tablets. Then there are other small ups and downs. But essentially, that was the case. And actually, if you look to also the fourth quarter, it was again surprise the tablets that was driving the improvements. And if you go to '22, it remains still to be our ambition to grow it by 1 or 2 percentage points. And there, it would also be the tablets that can yield that. Can we then -- and especially, you could say, Europe and especially sort of the grass and the trees that are good improvement characters, can it then be further improved if we really can control our legacy? Remember, we have a complicated portfolio. This is exactly what we are trying to change for the past. And until we are sort of out of that, sometimes we have to scrap because we have a complicated production, and that unfortunately leads to lower gross margins in the year. So over time, we will be less and less sensitive to that. But of course, it could be something that can swing one or the other way also in '22. But I think we are in good control of the production. And with the European approvals of the SCIT combination, that will also definitely be putting us on the right track with the past. It will not start to yield results, as we've said all along, in '22. It will be in '23 and onwards. But for '22, it is the tablet that's core driver. And can we then hop it a little much by not scrapping so much, I think that's the stuff to look for at this. So tablets might be boring in your mind, but I think it's a fantastic story, and at least it's well aligned with what we've been able to demonstrate so far.

At this time, there are no further questions. I will now hand back to our speakers for our final remarks.

Excellent. Thank you all for joining today's call. And as you can see here from Slide #13, the final slide, we have scheduled a series of roadshow sessions and other presentations that we hope that you will join us at. In addition, as always, you are most welcome to call me, Søren or Carsten directly if you have any specific questions. And with that, I wish you all a good day, and we will end today's session. Thank you very much.