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

Hello, everyone, and thank you for joining today's presentation of ALK's Q3 results and our full year outlook. Let's start by turning to Slide 2, where I'll introduce the presenters and the agenda. My name is Per Plotnikof, I'm Head of Investor Relations. And with me today are ALK's CEO, Carsten Hellmann; and CFO, Søren Jelert. And today, we'll bring you up to date on ALK's Q3 performance, sales trends across our regions and portfolio and the financials year-to-date. And then we will give you an update on our strategic priorities before covering the updated full year outlook. And as usual, we will end today's call with a Q&A session. So if you please turn to Slide #3, I'll hand you over to Carsten and we'll get started.

Thank you, Per, and thank you all for joining us today. Let me kick things off with a couple of highlights. Q3 revenue increased by 11% in local currencies, with growth in all regions, meaning that organic growth -- sales growth for the first 9 months was 13%. On top of this, we had a positive effect from currencies and reported sales growth for the quarter was 14%. Tablet sales were 19% growth year-to-date, but lower in Q3, where we saw some wholesalers in Europe reducing stocks, while some patients also held back after a mild tree pollen season. Back in August, when we upgraded the full year revenue forecast, we anticipated that tablets would make a large contribution to growth in Q3. Nevertheless, the full year sales outlook is still close to our latest upgrade for tablets. Oppositely, the non-tablet portfolio is making a larger contribution than expected. Strong performance from other products, especially Jext, resulted in high [ single-digit ] growth in Q3. Operating profit year-to-date was up 27% and ongoing inflationary pressure on gross margin and capacity cost is still projected to be modest in 2022. In light of the performance year-to-date and the current sales momentum, we are updating the full year outlook. We'll come to this shortly. Finally, we continue to execute on our strategic agenda. The ongoing Phase III trial remain on track -- the ongoing Phase III trials remain on track, while we have recruited the first patient on to our Phase I peanut trial. Meanwhile, we continue to evaluate initiatives to strengthen our platform, both short and long term. With that quick overview, I'll hand over to Søren, who will take a closer look at sales trends on Slide 4.

Thanks, Carsten. As you can see, third quarter was a quarter with broad-based growth from all regions. Let's look at Europe first, where sales were up 6%. Tablet sales grew by 13%, but sales were impacted by -- negatively by the adjacent season of the tree pollen and wholesaler destocking, which we believe is linked to the weak tree pollen season earlier this year. ITULAZAX, however, continued to gain market shares amongst new initiators. Despite this, our biggest market, Germany, delivered double-digit growth and increasing market shares. Other important markets also recorded good growth. Jext continued its strong momentum with 36% growth, partially driven by continued supply interruptions amongst competitors. In North America, we saw growth of 16% driven by Life Science products and SCIT. On the other hand, tablet sales were weak due to the long-standing market barriers in the U.S. In contrast, Canada is doing well. Revenue from international markets were up 24%. This reflected a high level of SCIT shipments to China. Tablets grew by 18% as shipments to Japan increased further over the already high level of last year. Fundamentally, both China and Japan are on a good trajectory, although both markets were temporarily impacted by COVID, which also saw to readjust their full year expectations for in-market tablet sales the other week. Now let's take a closer look at the product categories on Slide 5. Revenue from the tablet portfolio was up 13% globally in Q3, and I just mentioned some of the inferences just before. Combined SCIT and SLIT drop sales increased 1% on growth from international markets, especially China. Growth from the bulk SCIT products in North America remained on a level with the first half of the year. Sales of other products were up 29% and sustained their strong momentum from the first half year, mainly on strong growth in Jext sales and sales of other products in North America. So all in all, we are well on course to deliver on our guidance and double-digit growth for 2022. This brings us to Slide 6 and the P&L. Revenue for the first 9 months was up 13% in local currencies to DKK 3.3 billion. The higher U.S. dollar had a positive currency impact so that reported growth was 16%. The gross margin improved by 2 percentage points to 62%, reflecting increased sales of tablets in particular, and production efficiencies, although this was somewhat offset by increased shipments to Torii in Japan at a lower margin. Furthermore, in third quarter, we had one-off costs associated with discontinuation of a nonstrategic product. EBITDA increased 27% in reported currency to DKK 507 million, corresponding to an EBITDA margin of 16%. Capacity costs increased 11% in local currencies. Sales and marketing spend was up 13% due to investments in market expansion in China, and in general, high activity levels. Finally, free cash flow was positive at DKK 93 million. This reflected changes to working capital, buildup of capacity for tablet production, upgrades to legacy production and investments in in-house adrenaline auto-injector currently in development. Now let's move on to a brief strategy status on Slide 7, and over to Carsten again.

Thank you, Søren. Let us take a look at the progress we have made on our strategic priorities in Q3. As you will recall, we have 4 focus areas, which are shown here on the slide. For North America, we've spoken regularly about the long-established market barriers where allergists are disincentivized monetary to prescribe tablets, which stand in the way of tablet adoption in the U.S. And these activities continue to -- and this situation continue to prevent us from developing the market in the way we would like to do with the allergists. Even so, we still have a significant number of prescribers, and we continue to engage digitally with consumers while we also invest in and access new business models for the future. In addition, work to prepare for and secure pediatric and adolescent indication for the house dust mite tablet remain on track to be launched over the coming years in the U.S. In Q3, we continued efforts to complete and commercialize the tablet portfolio globally throughout the ongoing Phase III clinical trials. MT-12, our pediatric trial in Europe and North America on the house dust mite in allergic rhinitis, is on track. We do have a number of trial subjects in Russia and Ukraine, but we -- there have been a very minimal dropout rate to date. TT-06, our pediatric trial in Europe and Canada for the tree tablet is -- sorry. The TT-06 is our pediatric trial in Europe and Canada of the tree tablet. This also includes some participants in Russia. But again, there have been very few dropouts, and this trial also remains on track. In China, were continued ahead of an ALK regulatory submission for the house dust mite tablet later this year. Our partner, Grandpharma, also carries on with the regulatory proceeding for Jext in China. On a new horizon. Priority work on the peanut tablet, progress with the recruitment of the first patient for the Phase I trial, PT-01. Work also continued on the 2 adrenaline auto-injector projects, where we are still on target for a 2024 submission to the FDA in the USA. Meanwhile, we continued our work to develop and leverage our digital ecosystems, which aims to engage with treatment-eligible patients digitally and connect them with prescribers. Finally, under our optimize for excellence priority, a quick word about the most recent employee engagement survey, which will not -- where we did not only have a 95% response rate, but also saw us improve our engagement score from 8.2 to 8.3, which places ALK among the top 5% of international companies on engagement for employees. Now let's move on to the updated outlook on Slide 8 and back to Søren.

Our full year outlook has been revised and we have lifted the floor of the growth range. We now expect revenue growth at 11% to 13% versus previously outlook of 10% to 13% growth. Growth from tablets is now expected at a level somewhat below 20% in 2022, primarily driven based on the weaker performance in Europe. This compares to the previous expectations of minimum 20%. The non-tablet portfolio is expected to make stronger contribution to overall growth in line with the trends we have seen year-to-date. We now expect sales of non-tablet products to grow high single digits, up from mid-single digits in August and from low single digits in February. The midpoint of the projected revenue range now assumes that total sales in Europe will be slightly below 10%, where sales growth in North America is now expected to exceed 10%. And growth in international markets is still expect to significantly exceed 10%. The higher end of the projected revenue range assumes improved sales of legacy products and/or tablets, while the lower end factors and further negative effects of destocking cool and/or a weak tree pollen season in Europe. Based on the current exchange rate, we forecast a positive effect of approximately 3 percentage points in 2022. EBITDA is still projected between DKK 675 million and DKK 750 million, based on an expected gross margin improvement of approximately 1 percentage point and a continued high activity level across the organization. CapEx is now expected to be a little below DKK 400 million. Based on this, and since the vast majority of some specific accrued rebates will be rolled into the future, we now assume a free cash flow that will be positive in 2022. All in all, solid results with revenue growth and earnings improvements well in line with our long-term ambitions. With this, I'll hand you back to Per, who will now kick off the Q&A sessions on Slide 9.

Thank you, Søren, and thank you, Carsten. And this marks the end of the main part of our presentation. So we will now move to the usual Q&A session, where we will be happy to take any of your questions. [Operator Instructions] And with this, operator, please go ahead.

[Operator Instructions] We'll take our first question from Brian Balchin from Jefferies.

It's Brian Balchin here from Jefferies. Just 2 questions. Firstly, you've flagged lower tablet initiations in Germany this quarter. I just want to understand, is that a onetime impact? Or are those patients that won't be coming back on treatment next year? And secondly, tablet momentum has historically been growing over 20%, but you're guiding for below that this year. In terms of growth rates for '23 and beyond, is 20% or thereabout still how we should be thinking about it?

Sorry, but very, very hard to hear your question because a lot of echo from your phone. Could you -- I'm sorry, could you just repeat again your question, just with a few sentences?

Yes, sure. Let me just try that now. So you flagged lower tablet initiations in Germany this quarter. Is that a onetime impact? Or are those patients that won't be coming back next year? And then just on tablet growth guidance, it's less than 20% this year, that you've been guiding for historically. So just how should we be thinking about it in '23 and...

Okay. Thank you. Remember, when we said about the market decline in tree tablets of about 7%, 8% in Germany due to the pollen season, that was to reflect why we believe that some of the retailers are destocking a little bit, while we saw this sales of about DKK 50 million or EUR 7 million, EUR 8-ish million, to be lower than we expected. We always said around 20% this year, and then we upgraded after first half because of the momentum to above, and now we say below. So just remember, we are talking about this range here. We still have some months to go for initiations. And whether we're going to stick to 20%, I cannot guarantee that forever. However, we will, also next year, expect 10% growth for the company, and we will have more than 10% growth on the tablets and less than 10% growth for the legacy business. And we will make sure that we focus all we can to keep up the high growth. Remember, we have never ever initiate as many patients as we do already today. So it's not like we have any tablet issues, as such. We just saw a little glitch from -- we expected to do more, to do less, in the range of EUR 7 million this quarter.

And our next question comes from Thomas Bowers from Danske Bank.

Yes. A couple of questions here from me. So just maybe could you comment a little bit on how the new patient initiations looks like here in the fourth quarter? So is there any, we would say, macro effects? For example, patients with sort of an element of out-of-pocket paying delaying therapy? So also maybe implying some softness to next year's outlook. And then just on your pricing power in Europe in order to sort of offset price inflation. Do you have any indications from payers, governments, anything, that, that could maybe see you being allowed to raise prices at some point in order to mitigate cost inflation? I guess you have quite a lot, with close to DKK 2 billion in wage costs, and of course also the energy and raw materials. So any comments from that would be appreciated.

Yes. Thank you. Regarding, first of all, the patients and their purchasing power. We have 75% to 80% of our patients are fully covered by government insurance. So they don't have any out-of-pocket payments. So we don't expect that the situation about gas prices, electricity costs and so forth is going to plant imprints here. We also expect that we will have sort of a normalized Q4. We don't know that yet. But of course, we're doing everything we can to keep up the pace there. Regarding pricing power. Actually, on the contrary, we already saw Bill coming out from the German government demanding that all pharma companies in Germany increased the rebate of about 5% next year, which is for us something in the range of DKK 50 million, or again, EUR 7 million, EUR 8-ish million, which is going to be something we have to handle. For energy and transportation cost, you just have to -- and remember it's only for '23, the German demand of the price reduction. For energy and transportation costs, they are -- first of all, energy costs, we have hedged for '23, most of it. And secondly, we do not have that much of energy and transportation costs. I think the total cost for energy in ALK globally is less than EUR 8 million, EUR 9 million, and approximately the same number for transport. So even though those costs doubled in our cost base, it's still within the frame of the size of our business. So patients are mostly covered. Pricing power, we saw and we managed to take up the prices for the bud -- business in the U.S. We also took up the prices for venom in Europe. For the tablets, they are more fixed by the government, and I don't think they will allow us to increase the prices. But on the other hand, we don't see the same pressure as many other companies does. For inflationary series, I think we are within plus or minus a percentage point of what we had planned already, and I think we will manage.

Our next question comes from Michael Novod from Nordea.

Just a question to the U.S. strategy. I've seen your report that -- and also on your slides, that you're sort of assessing new business models in the U.S. Maybe you could elaborate a bit on that. I know you just put in a new head of the U.S. business. So it would just be interesting to see what your thoughts are on that. And then on the second question, maybe you could elaborate a bit on -- also going into next year now, it's premature to guide. But where you see sort of the largest negative impact per tablet product? Is it on ACARIZAX? Is it on GRAZAX? Or is it only ITULAZAX? Maybe you would just rank them, that will be highly appreciated.

Thank you so much. Starting with the U.S., what we are doing is some of the same, but still a little bit different. We are focusing a little more on selected areas in the U.S. instead of going broad on the allergy side, which seems to be a more efficient way of doing it. We are also starting now the inroad via the adolescent indication we got and the pediatric indication. We already have, just prior to ACARIZAX coming out with children as well, to move into the pediatric segment and understanding what are the hurdles or bottlenecks we need to address in order to be successful in the pediatric segment. And on the third one, we're doing on and reframing it still with digital. We have now had the first patients to a fully digital system, and meaning that we mobilize the patients digitally, taking them to an online consultation, home testing and then onset. And there are still some things we need to work out some specifications in our label. What is a medical setting? Is that a doctor in a home of a patient? Or is it a doctor's office? And stuff like that, which we're figuring right now. We definitely continue to invest in the U.S., and we are making sure that we learn from all the things that does not work and just focus on the things that does work. Regarding our tablets. I don't think that there's any of the tablets as such that should be in trouble or not growing or anything like that, compared to what they do today. Of course, we're not launching any new tablets next year. But I think we have seen the halo effect. We are seeing that all the tablets are growing well. We're taking market share. So despite the market settled a little bit in the 3 in Germany, we actually grew and took a lot of market shares. So -- and we know that from the in-market data. So I think all in all, it's a lot up to us to execute and do the sales and marketing activities properly. And I think we will be okay for all 3 tablets on the level we see now.

And our next question comes from Benjamin Silverstone from ABG.

I have 2 questions. The first 1 is regarding the destocking in the tablets. Could you just give us an indication of the scale of this destocking? And also if there is any visibility into how to potentially catch this effect in the next sort of quarters? Or is it something we should expect to come again? The second question is regarding the rebate in Germany. So just to make sure that we understand it correctly, it is a 5% additional rebate to be paid in 2024 -- sorry, 2023? And is it correct to assume that it will normalize again from 2024?

Yes. This is Søren speaking. I think on the destocking, I think it's a super good question. And to some extent, this destocking also was a little bit different than what we anticipated as the lion's share of the change is actually more linked to parallel trade, where it's a little bit more difficult to exactly see where it's bought, its factory, what country it's bought, and in a factory, and then what market is sold into, in-market sales. And normally, it's a little challenging to see that until after the fact, in this case, as we didn't see in-market sales per country. And that's actually what changed -- or challenged us a little bit. Bear in mind that we are talking a challenge here of DKK 15 million to DKK 20 million. So it's actually, in the bigger scheme of things, relatively small. Had it been bigger, it would probably be easier to detect. But at this magnitude, it's actually quite difficult to except for on the back of it. So that's still what puzzled us. And actually also what -- during the Q2 actually was basically not visible for us. It didn't become visible actually until we saw the true in-market shares here in September. So that's actually the trade side of your question. So no, you cannot evidently see it anywhere, and it's to this tune, DKK 15 million to DKK 20 million. And again, put it in the perspective of DKK 500 million a quarter or DKK 2.1 billion a year, then it's relatively modest. Speaking of the German rebate. As Carsten talked to, it's -- as you know, there is today a mandatory rebate in Germany from 7% that's the one they have lifted to 12%. They have been very explicit in stating that it's a '23 game only. And the good thing about the Germans is that they stick to their promise. So in our mind, it goes out of the equation again in 2024. And yes, it is equally against all our product lines. So -- and in this case, 40% -- and a sort of DKK 40 million of it approximately, it is the tablets. And then of course, it's dominating by the tree and grass, as that's what we sell most in Germany. So I hope that clarifies the DKK 50 million in total in Germany. 80% of that is tablet-driven, and it's a 1-year effect as it's been stated by the German government.

And our next question comes from Jesper Ilsoe from Carnegie.

So just going back to the German price cut, just making sure. So have the German government actually confirmed it would be reversed in '24? Or will there be a chance where they could actually say, "Well, we saved some money. And therefore, there will also be this new rebate level in '24 onwards." Then just on Torii, you say that COVID is the primary driver behind the weakness in Torii's numbers. What data points do you actually have, or is it mainly your own speculation? Thirdly, on the potential recession impact on allergy medicines in the coming years. Perhaps we can just get your thoughts, high-level thoughts, on how this could potentially impact you. And then sorry for asking a last question. But if you take all these headwinds together, you normally guide for 8% to 12% growth when you enter any year. Is it fair to say this will be a few percentage points less in '23, given the headwinds you have? Or do you still expect some 10% growth next year?

I can start, and then Søren will take over. You mentioned a lot of headwinds, like purchasing power and stuff like that. I think I addressed that earlier that we don't believe that, that's going to be a major negative driver for us as well, as we have both hedged energy and we do not have that much transportation cost. I don't think that you should expect that we will go significantly away from the guidance we have done previously for the years to come. Fundamentally, our business are very strong. I mean, remember, we are posting a 13% organic growth year-to-date and 20% profits up. The long-term plan I've communicated, we still stick to. There will be maybe some ins and outs, but in totality, I don't think that we'll have massive headwinds, so to speak. And just go back to the German, they have done it before in history in Germany, having these in a one-off payment from pharmaceutical industry, and they have always stick -- stuck to what they said. Is this period or this year or this half year, you're going to do something? And they have explicitly said this is for '23. And it's not just ALK, for the whole pharma industry, is a '23 year thing, that we wanted to increase the rebate by these 5 percentage points. Having said that, I don't know what politicians would do, but it would surprise me a lot if the German government, suddenly for the first time, did not do it -- stuck to what they said.

When it comes to Japan, I think no, we are actually assessing what Torii is also putting into the market in terms of the growth. Underlying, they have a good growth, they have a very good tradition for adherence in Japan. And it's, for them, mix of the initiations. So overall, we see them as a very strong-performing partner. And they are doing really well in terms of growth. But was it a reduced outlook they gave? It was. And that sort of mainly affected our royalty payments for the in-market. Overall, they're still a strong growth company, and they expect to continue to do so. So that's definitely the Japanese story. You had something on recession and allergy. I basically don't think that, that's going to affect us that much. As Carsten talked to, that the majority of our patients are well covered. So we do not consider that as a major new risk factor.

Our next question comes from Martin Parkhoi from SEB.

Correct. Martin Parkhoi, SEB. Just firstly on the guidance. I just need to understand the EBITDA guidance because if you take the 2% split on the top line, that corresponds to sales of around DKK 78 million. And you still have a split with -- in EBITDA of DKK 675 million. And given gross margin at the tune of 60%, then you could expect to that -- that it would be that level, of the DKK 78 million which would impact the EBITDA line. So why do we still have this wide range? Or should we maybe reality-check the range, and then remove this DKK 25 million to DKK 30 million that you have in one-off in COGS this year? And then secondly, I don't know if you said it, Carsten, the wage inflation. Did you say how much wage inflation that you expected in totality of ALK next year? And then just on the DKK 50 million to DKK 60 million that you have reduced tablet sales guidance for this year. I can't remember if you said that as well. What is the split? How much of that was actually in Q3? That is all.

Okay. A couple of questions. To start off with the last one, it's approximately half of it that is linked to quarter 3. So like you can then calculate what quarter 4 is. And when it comes to the earnings profile, a little unclear what exactly you are asking. But what I will say is that we expect that the impact on these one-offs is approximately DKK 25 million. And this is also the underlying reason why we were not just removing the lower part of the guidance. So basically, these DKK 25 million keeps us to still confirm the DKK 675 million as the bottom range. Whereas the DKK 750 million is basically driven still by a high end of the revenue and then a probably more favorable cost pattern. So it's -- you can say you're right in assessing the 675 million is probably safe. As we now have baked in this one-off, I think that's fair to say, but we also want to ensure that we have the necessary freedom to support the growth for next year going into fourth quarter.

And no, I did not say exactly the percentage because I haven't told the employees yet.

6 But I guess that, Carsten, if you can split your sales force, I think that Bowers, he alluded to DKK 2 billion in wages. How much of that blue collar and how much is white color?

I think that's a super good question. It's not a percentage that we focus too much on in terms of that. I mean, we are dominated by white collar in production as we are. So in that sense, I think it's -- when you talk about salary increases, I also think you pretty much have to look at what's the country mix of where you are besides actually whether it's white or blue. And then I think also you should consider that...

What is the country mix?

Sorry?

What is the country mix?

The country mix of -- we have -- we of course have 2 sites in the U.S., we have 1 site in Spain, we have 1 in France and we have 1 in Denmark. So we have quite a widespread country mix when it comes to our production network. And then when it comes to the sales reps, I mean, that's evidently of course spread over the globe. So I'm a little bit unsure of what you are trying to ask for actually here.

That was the first question. I was asking for the wage inflation in total. But I didn't get that, then I'll try to dissect it. So -- but...

No, but I think it's a good question, actually. And it's definitely a question that many are trying to get their head around and exactly what it's going to be. Is there going to also be a recession, and how will that actually impact? And when that is coming? And what wage increases will you go by? I think it's fair to expect that we are probably higher than going into '22. But exactly what level, I think Carsten is absolutely right. There, we need to reserve the right also to discuss with our employees and local country management before we go into that. But overall, I think we have a solid model and we are not afraid of what we're looking into currently.

And just a follow-up question on that. What is the turnover in employees now? The job market, I guess, has also changed a bit over the last 6 months. So has that also changed for ALK, the turnover in employees?

Yes, you are -- it has actually changed. And we are at 13%. And that's a little notch up, that turnover. And again, here, it fluctuates quite a lot. For instance, we have a shared service center in Poland, where we've seen quite a lot of turning over in the back office. There's a lot of stability when you then go to Spain and France. We've seen a little bit in the U.S. And then we have seen people going in and out in Denmark. But overall, we had 13%, which is not dramatically high, but it is a notch higher than what we've seen historically.

[Operator Instructions] Our next question comes from Jacob Mekhael from Kempen.

I'm just curious if you can provide a progress update on the status of the peanut allergy trials. And when should we expect next year to see some data from this program?

Yes, I can give you that update. So the trial is progressing. The first patients have been included. We will have, anticipatively, several data points reading out from this trial next year. The trial is split in 2 parts. One part that will conclude in the first half of next year. And we expect to be able to communicate some of the findings from the first part of the trial, hopefully, some time before summer. And then conclusions on the second part of the trial and the overall conclusion towards the fall and winter next year. So it's a trial that will involve 100 subjects in 15 centers in the U.S., and recruitment is ongoing.

And it appears we have no more questions at this time. I will now turn the program back over to the speakers for any additional or closing remarks.

Excellent. Thank you all for good questions, and thank you for joining today's call. And as you can see from the final slide here on #10, we have several presentations scheduled. We hope to see you at some of these events. And also shown here is the publication date of our annual report in the beginning of February. And as always, you're always welcome to call Søren, Carsten and myself at any time if you have further questions. With that, thank you very much, and goodbye.