Almirall, S.A. (ALM) Earnings Call Transcript & Summary

Good afternoon, everyone. Welcome to the 41st Annual Goldman Sachs Global Healthcare Conference. My name is K.C. Arikatla, and I cover Almirall on the research side for Goldman. Before I introduce the speakers, a quick note on the format for the session if this is your first event of the day. The fireside chat will last for about 40 minutes. And if you have any questions, please submit them via the webcast or by sending an e-mail to me directly at [email protected]. With that behind us, it is my pleasure to introduce Mike McClellan, CFO of Almirall. Thank you, Mike, for taking time.

Thanks, K.C., for having us. Very pleased to be in the conference. I would, of course, love to have been in Southern California, but times are what they are. So let's do this electronically.

Yes. It's new for everyone. It's interesting.

Maybe you could kick start with a brief discussion on how your business was in the quarter and how COVID-19 has impacted your business and how are you thinking about the COVID-19-related impact for rest of the year?

Yes. So I think we had a pretty strong Q1 but, of course, aided a little bit by some stocking effects that we saw in March primarily related to the COVID impact in Europe as well as a special item, which was some release of deferred income that was trailing from the respiratory business disposal we had with AstraZeneca many years ago. So stripping that out, we actually were slightly down from last year mainly due to the generic [Audio Gap] when it comes to the COVID impact. So in the first quarter, it was actually slightly positive because we saw a little bit of stocking. We do think that Q2 is going to have a more significant impact. As we follow the IQVIA data, we see that particularly the U.S. dermatology market is being quite impacted, and we play in that space primarily with an acne portfolio, and acne is one of the hard-hit areas as well. So we're expecting that over time that the states will start to loosen their lockdowns, people will get back to their physicians, and that we'll see the business starting to come back. We are starting to see, at least in the external data, that physicians are seeing more patients, visits to dermatologists are coming up, and we're expecting to see an impact on our business in the near term there. Now how we get back to the normalized business, we'll see if that happens by the end of June or maybe it takes a little bit longer. In terms of Europe, we, of course, had an impact -- positive stocking impact in Q1. We are seeing that April and May, that reversed itself. And May has been a pretty difficult month across the entire industry. We're expecting now that countries are starting to come out of their lockdowns, doctors and hospitals are starting to see more patients, that reps are starting to get some access to the physicians that then will come back to a normalization. Now whether we can get there by the end of June or it takes more into the summer holidays, that's something that's still to be seen. In terms of overall COVID impact on supply chain, we haven't had any really. We've been able to continue to produce as normal. We haven't had any significant API issues. We weren't very reliant on API from China so we didn't start out with any issues, and we've been able to keep the production running, of course, with the required distancing and safety protection, but that's gone well. We've even slowly started to get our offices back opened up and employees back into the office setting on a cautious basis. But so far, we're coming along, and we're really just seeing how the overall impact is on the industry and in particularly those areas that we focus on, particularly dermatology.

Perfect. Thank you, Mike, for that introduction. Moving on to your 2020 guidance. For EBITDA, you had reiterated your EUR 260 million to EUR 280 million range, although now it includes a EUR 20 million one-off benefit that you recognized in 1Q, which was kind of an accelerated deferred income. What are the moving parts for the guidance? What needs to go your way to get to the top end of the guidance, please?

Yes. So first of all, we need to have a moderate erosion of Aczone in the U.S. That's something we're keeping a very close eye on because how that erodes and the mix of the payers and the rebates can have a big effect on that. Second needs to be a normalization of scripts and patients by the end of Q2. That's probably something that is going to be challenging and that we see that the lockdowns have been long, and some of the areas are opening up a little slowly and cautiously. We'll know by the end of June or in the mid-July how that's kind of shaping up and whether or not we'll continue to see negative impacts going into the summer months. The other things, we'll be returning to the growth for Seysara, getting back to the growth trends in the new launches post-COVID. Those are the things that we're keeping a close eye on. So some of it is really related to our portfolio, the Aczone and the regrowth in Seysara. The other piece is really heavily COVID related, how does that affect the ability to get new patients in, do we see the recovery particularly across Europe and the U.S., and does it normalize quicker rather than slower. In the second half, we're not expecting a second wave. That could be a risk factor not only for us but for the entire industry. So lots of moving parts, we're managing the best we can. We will have some natural savings through the COVID period that can help offset what we see in top line. But we'll give an update in our earnings call at the end of July. So if things are not really normalizing by the end of Q2, we may need to take a second look at where we're going to land in the year and give an update there. What we don't necessarily expect this year is immediate price pressure from the governments. We had flagged that we could see some pressure in Spain. That's still a possibility, but they are very busy with their COVID. So it may be something that's more of a very late 2020 or even into 2021. Same across the rest of Europe, we know governments are spending a lot of money. Tax revenues are much lower now. So how they come around to filling the holes in their budgets and whether that will affect pharmaceuticals, it's a little too early to tell when and how that's going to hit us.

Understood. And on Seysara, you did mention that your guidance -- or it was one of the swing factors for your guidance. Clearly, COVID-19 has impacted you. I know we are still super early in terms of -- if we could call it as a recovery period. But how have trends been recently, please, the last few weeks, at least in pockets where the economies have opened up and there's more free movement of people?

Yes. So we are starting to see, in some areas, more access to reps visiting physicians, more patients coming through. Still a little bit too early to tell how quickly that's going to recover in terms of the scripts. Well, we have seen in the recent weeks, we made an expansion of some of our in-network pharmacies and we've started to see a little bit of a divergence between the Bloomberg data and the IQVIA data. Our internal tracking is more in line with the IQVIA data, which is seeing us pretty flat in terms of market share in scripts the last couple of weeks. We're still waiting for that inflection point, but the overall derm market has kind of been that way, too. Of course, the latest week has been the Memorial Day holiday. So we haven't really seen past that. We do expect, following Memorial Day, that things will start to pick up gradually. The acne space may be a little bit slower to return than other parts of derm just because the high school kids, the college kids are not in school and there is a potential that we're coming into kind of the normal summer, low season anyways and that it may take a little bit longer to recover there. So all things, we're keeping an eye on, but we made a change to our co-pay assistance program. It bottomed out in March, where we kind of expected it to, and then we were hit by COVID. So we've still got a lot of work to turn that around and to start to gain market share when things normalize and recover, and that's one of our real key focuses.

All right. You mentioned about expanding your network pharmacies. Did that also come with an expanded access? Or was it just more on the retail side of things and the access was broadly impacted? And if you can just update us on where you are in terms of access with the PBMs and where you see yourself exiting the year.

Now that was more of a retail thing. So it wasn't really changing the overall access of the product. We're still at about roughly 60% full access and about 40% unrestricted. We will be looking to try to move that in the next 6 to 12 months and pick up some more regional plans, but it's not going to be at a fast pace. We've gotten the big plans where we're going to get them in the short term, and now it's about getting into the next tier, which takes just some work from the market access teams. We think we've got a nice product. It's the one that's really focused on the bacteria that causes acne. The other products used in the oral antibiotic space are really broader spectrum antibiotics used for a multitude of things. And we really think the narrow spectrum will give us an advantage over time. And potentially, there are some ideas of ways to improve the data around limiting resistance, tolerability on the GI side, leading to less longer-term intestinal issues. So we think we've got a good product. We just need to sharpen up the market share and getting -- moving back up again with this revised co-pay assistance program.

Got it. And for 2019, remind me, was your market share around 6% in the antibiotics market for dermatology? And if that is right, is it fair to assume that there is this remote chance that we'll exit 2020 also at that market share? Or is that too optimistic?

So we did get up to a peak of around 6% before we changed the co-pay assistance program. It's too early to tell if that's going to be a possibility. If the recovery period of the entire acne market doesn't really happen until school comes back, then maybe quite an uphill battle to get to 6%. I think over the longer period of time, we really see that there's a great opportunity for this product and we'd like to get to that -- back to that 6% and beyond as quickly as possible. But I think it's probably a little too early to tell if we can get there by the end of this year.

Got it. And on your China licensing program, can you just update us on the time lines here, please?

Yes. So we licensed in the rights to China. We need to do a Phase III study. That will be firing up fairly soon. That will take a little while. So we're probably talking about a launch more in the late '23, early '24 space, really depending on the regulatory time lines in China. We think this is an interesting opportunity there, probably going to be more of an out-of-pocket market, but there's such a large opportunity in the acne space that we think we can make a good product out of this. We haven't really quantified yet the peak sales for that opportunity, but we're going to continue to do some work on that. And as soon as we feel comfortable, we'll come to you guys with a ballpark of what we think that could be worth.

And given that you currently don't have any presence there, is it -- are you considering selling the China part of it, including the development part to any interested parties? Or do you want to keep most of the economics in-house?

I think we'd like to use this as a foothold into China. Now that said, we'll probably have to find either a CSO or a marketing partner, but it's not our intentions to license this out as we just licensed it in. So we think we can make an interesting opportunity. And if things go well, there could be a potential foothold into China for even further products down the road in our pipeline.

Okay. Moving on from Seysara and on to Ilumetri and Skilarence, your psoriasis portfolio projects. You're very upbeat as a company on Ilumetri's prospects. Can you just give us the building blocks as to how you think about Ilumetri's positioning in the market because it is increasingly getting a very crowded market, especially with an IL-23 out there in the form of AbbVie's SKYRIZI? So how are you thinking about carving out a niche innovator yourself?

Yes. So when we look at the psoriasis market, we agree it's very competitive and we think there's definitely some interest and advantages in the anti-IL-23 space. That's starting, if you look at a well-developed market like Germany, to actually be towards the top, if not overtaking the anti-IL-17s in terms of new patient share. And within that new patient bucket, we've got about 30% with the other 2, SKYRIZI and TREMFYA, already on the market. It's a better dosing regimen. It's quarterly. So that's definitely an advantage. We have a lower price than the other 2 in that market. So we think that actually is an advantage in some way to the more price-sensitive accounts. So we think we're able to show that within a robust market like Germany that we're able to get 30% of the new patient shares and what we think will eventually be the winning class in psoriasis. We know that there's -- you're going to have a continued use of the anti-TNF-alphas and the anti-IL-17s just because there's biosimilars there or there's habits but -- so we definitely think there's a move towards the anti-IL-23s in the psoriasis space and we're well positioned there. Now this needs to continue to repeat across the other markets, which we're a little bit slower in terms of reimbursement and uptake. But we're making good progress in some of the markets. We're starting to get some uptake in the U.K. We've gotten about halfway through the hospital reimbursement process in Spain and starting to see some early uptake there. We're still waiting for our reimbursement in France, but we feel positive that we're going to get into a good spot there. We had gotten reimbursement. We're about to launch in Italy when COVID hit. So once they locked down, it wasn't really worth launching a product full steam. So we'll do that once things open up a little more. And then we're making good progress in smaller countries like Switzerland, Austria, Benelux. We're doing quite well. So it's early days, but we're very bullish on it because we're seeing good feedback. And we see that even though we're a small company, we're able to compete against these big guys in the space because once you have reimbursement, it's really about convincing the physicians and eventually patients of the merits to your product. We're getting good feedback from physicians and patients on the efficacy. They like using the product. And the quarterly dosing is a good advantage. So we definitely think there's great opportunity there.

Understood. And if I could stick with Ilumetri. It's always baffled me when I look at the dichotomy of the performance of the same molecule. And in the U.S., if I'm not wrong, it's still stuck in single-digit dollar -- million dollar sales in the U.S. despite having a head start in terms of launch time, whereas in Europe, you are in your -- in the mid-double digits range. Like what explains the difference, in your view? Is that because you're playing on price in Europe and that is -- and the markets there are more receptive to that? What would you say are the differences?

Well, I can give you maybe a few light thoughts because it's marketed by Sun in the U.S. They've got the license. We actually licensed it from them in Europe. I think when it comes to biologics in the U.S. and part of the reason why we haven't tried to license in a big biologic as a smaller company is that you're in a different position because you have to fight for access for the PBMs. It helps if you have the weight of a market access department of a big pharma. You've also got in many products in this space, in particularly heavy DTC campaigns. So to get that right mix of heavy spending in DTC, market access as well as having the right sales force, it's tricky. And I think it's not as straightforward as maybe in Europe, where once you get the reimbursement, if you have a good contact already with the physicians because of historical sales force and other products, you probably have a little bit better chance to compete against the big companies. The U.S. is a trickier market.

Got it. And on the other psoriasis product that you have in your franchise, Skilarence, I know it's reaching its peak sales potential, what you have put out. Is it fair to say that most of the geographical expansion opportunity is behind us and it's likely to flatten out going forward maybe in a year or 2?

So I think it's kind of a 2-stage product in that the big market shares to gain quickly were in Germany and Netherlands, where the DMF products have been used in the past either through older products or through compounding. In those other countries, the rest of Europe, it's going to be a slow build. In the countries where they weren't using the DMF products, they've defaulted to methotrexate, which has an easier profile to manage but also isn't the right product necessarily for every patient because there are some counter-indications for some patients. So we've got to get those physicians used to using the DMF product used to the titration, used to the blood monitoring. It has a space but it's going to be a little bit slower build. So I don't think it's done growing, but it will be a slower increase as we move forward. We have, in Q1, seen that in Netherlands, we still have a little bit of an issue with some companies that continue to compound. There are limits to what companies should be doing now that there's an approved product, and we're going through the legal process there to get the product back as much as we can into our hands. So -- but I think if you look at the longer-term trajectory, we've built a good base. We'll see some slow growth from here, but it's -- we don't expect it to reach the same market opportunity outside of Germany and Netherlands and the other markets. It will be more of a niche product.

Understood. Before I move on to pipeline, I did want to get your thoughts on how should we think about the potential secondary impact from COVID-19 especially because you're so -- you have focused and we have seen that in 2008, 2009 that your Spain portfolio did underperform quite significantly. So how are you thinking about the prolonged impact of COVID-19 if unemployment levels remain very high in your core areas like Spain or even Germany?

So I think there is some risk. It's theoretical at this point as to what they would do. You're right, back in 2008 and '09, there were heavy price pressures particularly in Spain and some other markets. But a lot of that portfolio that they went after is so low priced right now that it would be very difficult for them to get enormous amounts of money out of that part of the chain. I think what you may see as a potential risk is slower uptake of expensive products. Likely, we're not into too high of the cost area. I'd say Ilumetri is probably our one product that's a little bit more on the biologic pricing side, but that's probably where you have a little bit of risk in the midterm. It's that countries with real deficits and difficulties to fund their health care start to slow down on some of the higher-priced products.

Got it. And on pipeline, a major focus for everyone is lebrikizumab, which you partner with Lilly for atopic dermatitis. Can you update us on the time lines there, how COVID-19 might have potentially moved those time lines in terms of a potential Phase III readout?

Yes. So Lilly has announced that they have suspended new entrants into their Phase III trials across the board, including ours, for lebrikizumab. A little too early to tell right now if that's going to have a significant impact on the end time line. We still think there's probably a path to get us to the launch in 2023 if the COVID hold lightens up in the near term, but it will really depend on how many much more months this hold goes on and then what are the opportunities to potentially speed it up through increasing the centers or other ways. But there may be a whole glut in the whole clinical trial landscape. So whether or not you can get patients in and actually speed things up, if you lose a little bit of time, we'll still be up for questions. So right now, we don't have any movement in it. Once we have anything clear together with our partner, Lilly, we'll definitely inform the market.

Got it. And in terms of the commercial opportunity, clearly, Dupixent is the numero uno there as a sole biologic for atopic dermatitis. Can you just frame the commercial opportunity for us in terms of the existing players and competition and where you stand in terms of the current time lines if those were to stay that way?

Yes. So clearly, Dupixent has kind of forged the path, set the pricing and reimbursement in Europe. I think they've got a good business going. We do think there's opportunity with the profile that we've seen in our product. If they can confirm in the Phase III that there'll be some differentiation, there'll be some aspects that might be a slight improvement on Dupixent. And we also know that Dupixent is an IL-13, IL-4. So there are broader indications, but there's also broader activation of certain pathways that may give it a different effect in some patients than others. So we think there will be a nice opportunity there. The only other product we kind of see as a potential other product in the market in that space in the near term is LEO's tralokinumab, but the market hasn't seen their Phase III data yet. We should have that sometime in June. If I'm not mistaken, they'll present it in one of these virtual conferences. And then we'll be able to assess how big of a threat that one could be as well to the market. But we feel good about our product. We feel good that there's a space. We know that there will be some differentiation if the data holds into the Phase III, particularly around speed of onset and the itch factor, so the pruritus. So we think there's a good opportunity. There's space for more than one product. We see in Europe that most markets don't end up completely dominated by only one product with no opportunity. So we need to get this to the market and get it to the patients who are either underserved or not reacting to Dupixent or want another opportunity.

And have you had any conversations with Lilly in terms of the commercial practices post the potential launch of lebri? Because to your point on fighting it out with the big pharma guys, is Lilly interested in partnering with you on the European commercial one? Or are you keeping the European rights solely to yourself?

So right now, we have the European rights. So we haven't discussed anything else on that. We're very excited to have Lilly piloting this product in the U.S. and the rest of the world. We think having a nice, big powerful pharma player is going to be a big advantage when it comes to doing all the prep work to launch in the U.S., and that can have a positive halo effect on what we're doing in Europe. And then we'll see. We haven't seen anything concrete on further developments in other indications. We'll work with them when that comes around to see how that may affect what we're doing in Europe. But so far, it's very positive. We're very excited to have Lilly having the rights for the U.S. and the rest of the world.

The other pipeline product that you have is tirbanibulin for actinic keratosis. The PDUFA date is coming up in December 2020, so potentially an early 2021 launch. And your peak sales guidance there is greater than EUR 250 million. How should we think about the sales ramp-up there given the current treatment paradigm which is heavily reliant on cryotherapy and for which doctors actually get paid as a procedure?

Yes. So I think we're quite excited about this product. In terms of the sales ramp-up, I think we need to make sure everyone understands that this is going to be in 2 different stages. The initial indication will be for what we call small field, which will be 25 square centimeters or less, very similar to the usage of Picato in a smaller area. We think that goes well in conjunction with cryotherapy and then that's going to be our role to make sure that physicians realize that cryotherapy can be very effective for the visible lesions. But the topicals also help with the things that are just starting to form or maybe even be slightly under the skin. We think we're going to have a much better profile than Picato in terms of tolerability and usage and duration of treatment. So we do think there's an opportunity that, that will be very good. In terms of that peak sales, I think we need to think that this initial opportunity between the U.S. and Europe is probably maybe 1/3 of that overall peak. And that's the second level, when we get to a larger field, which means areas much bigger on the face and scalp. And that's going to be the real opportunity for the other part of the peak sales. So quite excited. We'll have a little bit of a free field in Europe since Picato is no longer on the market. In the U.S., we think this will be a very nice product to use in conjunction with the cryotherapy. And that's going to be -- our real task is to convince the dermatologists where this plays in that space and where the opportunity is in the short term and small field and then expand that quite heavily when we get a larger surface area application in an extended indication. That will probably take 2.5 to 3 years to go through the remaining trials to get that additional field size indication.

And for the first part of the 1/3 of peak sales, that should be a relatively quick ramp because it should be potentially switching patients from Picato or patients who are previously using Picato. Is that fair?

I think it can be. It really depends on the speed of access, the speed of physicians changing over. I think -- we feel like we can take a good share from Picato pretty quickly. But then expanding beyond that, it will take a little bit of time just to get the physicians comfortable. We think with the profile and hopefully the improved tolerability, it will go quick, but it's not going to -- it's probably not going to be a rocket in the first year. It's just going to take a little bit of time to build that practice.

Okay. On to your R&D strategy, you have signed a lot of early-stage collaboration agreements in the last 1 year. Can you -- does that set the trend for R&D going forward? Or can we see more of a Phase II, Phase III collaborations?

So I think that will probably be the trend of what we bring in-house for R&D. It's going to be these early licensing-ins. What we would definitely be interested in adding to that is some potential M&A for accretive assets particularly to give us additional critical mass in Europe as well as potentially being the European partner for U.S. or international companies that have interesting assets that need a partner in Europe. We've shown now with the lebrikizumab that, that is an interesting opportunity. We feel that with the actinic keratosis product, we can show that as well. So I think those are the things, in addition to early-stage R&D assets, we would look to do to license in European rights to products that are either well advanced in Phase III or ready to launch or potentially using our balance sheet firepower to buy some existing assets that can help complement our size.

And in terms of the firepower, how would you size that? Is that in the EUR 500 million to EUR 1 billion bracket?

Yes, I'd say that's a fair estimate. I think we're 1.5x leveraged today on our current EBITDA. If you acquire something that's accretive and generating EBITDA and we say that we're comfortable looking at 2.5 to 3x leverage, that could easily get you into the range you're talking about, which I think would be good area of where we could look at if the right assets came along.

Got it. And one other point in terms of your balance sheet structure. Can you just give details around the convertible bond, the strike price? And when -- what are the details there, please?

Yes. So the convertible bond is EUR 250 million. There is a strike price of shares at EUR 18.17. So it would convert to -- into roughly 8% of the capital of the company. Given the current stock price, there is a ways to go to reach that strike price. So we will be looking at what are the alternatives if it doesn't convert, how would we potentially either refinance it or do some other opportunities to deal with it. But we think that's something that could be addressed as early as the second half of this year or into the beginning of next year.

Got it. And in terms of the cash flow generation for this year, you said 1.5x leverage as of 2019. How should we think about the cash generation because you do have a lot of noncash-related items flowing from your P&L.? So where do you expect your leverage to be by end of the year?

I'd say probably similar. I mean we'll be able to generate cash and reduce the overall net debt. But we also know from the guidance we've given, we're going to have a decline in EBITDA year-on-year. So I think the 1.5 plus or minus 0.1 point is probably a good estimate.

Got it. And the final question that I had, much more bigger picture one. You've made a transition from being the CFO of Teva to being the CFO of Almirall. And in the last 6 months, what would you say has surprised you to the positive and negative? And of course, this COVID-19, but excluding that, what has surprised you from an Almirall perspective?

Yes. So I think positively, I've been impressed by the quality of people, the opportunities that the company has, the ability to react to this COVID situation, which has been taxing for everyone, but I think the company has reacted well. We've been able to keep the supply chain running without any issues. We've kept our employees as productive as possible. We've made a very fast shift to the digital world and how we keep contact with the physicians in this very strange situation. So I think that's been great. So the negative, I think where we can improve, a little bit more transparency. I think we're finally getting to the point where everyone understands all the moving parts and the run-out of this AstraZeneca transaction that was done years ago. So I think we're getting a little bit more clarity, getting a little more transparency. We intend to revamp our disclosures in the Q2 to make sure we're even more clear and give everybody the real insight to what's really happening in the underlying drivers, where do we really see things going and how we expect the rest of the year to go in the COVID situation. So I think that's where we can really -- we can continue to up our game.

Great. Thank you, Mike. Those were all the questions that I had, and we are getting close to the 40-minute session time as well. I just want to thank you for taking time, and good luck with everything.