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

Good day, and welcome to the Almirall's Financial Results and Business update Q3 2020 presentation. Today's conference is being recorded. At this time, I would like to turn the conference over to Pablo Divasson. Please go ahead, sir.

Thank you, Joa. Good morning to everyone on the call. Thank you for joining us to review Almirall's Q2 results. I hope everyone is safe and remaining healthy. As usual, you can find the slides to this call on the Investors page of our website at almirall.com. Moving to Slide 2. I would like to remind you that information presented in this call contain forward-looking statements that involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially. With that, please advance to Slide 3. Presenting today, we have Peter Guenter, Chief Executive Officer; and Mike McClellan, Chief Financial Officer. Peter will review the third quarter business performance and later come back to sum up, and Mark will give you details on the financials. After that, we will open up for a Q&A session. So with that, I will pass you over to our CEO, Peter Guenter.

Thanks a lot, Pablo, for the introduction, and good morning to everybody on the call. Before I move on to the quarterly results, I would like to first address my decision to leave Almirall. First, let me tell you that I have enormously enjoyed my 3 years at Almirall. Since I joined the company, we have worked extremely hard to build what I call the new Almirall. This new Almirall is driven by a sound strategy, by highly experienced and talented people and by a series of innovative launches and late-stage pipeline products. Above all, we at Almirall are driven by a profound desire and commitment to make a real difference in patients' lives suffering from debilitating dermatological diseases. And I very much believe that we have indeed succeeded in building a very strong company that is poised for future growth. The transformation of the company is quite obvious when you look at the structure of our EBITDA. The core EBITDA, which is at the end of the day, what we really manage, has more than quadrupled over the period. Consequently, we are no longer dependent on other and deferred income elements. Moving forward, growth of core EBITDA is what we should be looking for. Of course, I have not done it alone. We have significantly reinforced many parts of our organization by development of internal talents as well as by external hires. I'm proud to say that I leave in place an internationally experienced leadership team capable of driving long-term shareholder value. Also, we have built one of the strongest pipelines in medical dermatology. Thanks to a series of successful in-licensing projects, we have evolved from a pipeline based on reformulations with little clinical relevance into a pipeline of late-stage innovative new entities that will bring clinical relevant patient benefits. Consequently, Almirall is set for a period of sustained growth of our core business over the coming years, further accelerated by the launches such as tirbanibulin in U.S. and EU, the launch of lebrikizumab in EU and others to follow. We have also strengthened our R&D capabilities, for which I thank -- want to thank Bhushan Hardas. Bhushan has recently decided to leave the company for family reasons. Finally, I want to thank many people, starting with the Gallardo family for their unwavering support; the Board of Directors; and last but not least, all the employees of Almirall, without whom this transformation would not have been possible. Although this will be my last earnings call, you can be assured that I remain fully committed to Almirall until year-end, and we will, of course, continue to press forward with our fierce strategy. Now moving to the business. In Q3, we have seen a generally resilient performance despite the environment with a varying impact across geographies. Our European business has shown steady growth while our U.S. business, having been severely impacted earlier this year, has showed initial positive trends. I will comment on our performance in these markets shortly. To highlight our core -- our growth drivers' performance, Ilumetri continued to perform strongly, surpassing pre-COVID levels, and we are excited about the imminent launch in France, a key building block for the product going forward. For Skilarence, no surprises here, continuing in line as we have guided you at half 1. However, we are pleased to have achieved net sales growth sequentially Q3 versus Q2, plus 12%. Seysara sold TRx back to pre-COVID levels in absolute terms as overall U.S. oral antibiotic market has started to rebound. These initial positives are supported by the critical label update we explained during the half 1 call. Our pipeline leverage potential remains extremely significant, as you all know. For lebrikizumab, we expect readouts of Phase III in half 2 next year, and we are working with our partner, Eli Lilly, in the planning for a 2023 launch. We feel very confident that lebrikizumab will become our #1 product, by far, in the treatment of moderate to severe atopic dermatitis. We are focused on making the final preparations for the launch of tirbanibulin in the U.S. and EU in Q1 and Q2 2021, respectively. For Bioniz, we have 60 days to review the data, which we expect to receive by the end of the year, and therefore, a decision will be made in Q1 2021. And finally, it is important to mention that we have received the acceptance of the clinical trial application for Seysara in China. This means we are on track to start the Phase III trials as planned. So as you can see, there is important progress in the late-stage pipeline. With the resilience of the business we have seen in year-to-date, we also reiterate the full year guidance. On the next slide, I would like to show you in more detail the market trends we are seeing that directly affect Almirall. There is a clear rebound in face-to-face interactions after a trough in the Q2. Our own internal data follow a similar trend, and we have been quite successful to beef up our digital communications with our customers. As you will see later in the Ilumetri section, we have even launched in Belgium and Italy, by virtual means, in the month of May and June. Additionally, we will show you the rebound in the OAB market, where we are seeing the increase in prescriptions of Seysara. Let's now move to Ilumetri. So this slide shows you the market dynamics in the anti-IL-23 class. You can see clearly from the German data that anti-IL-23s are competing with anti-IL-17s, capturing now 30% of the dynamic share of the markets within the biologics with compelling reasons for this trend. The anti-IL-23 class has a strong efficacy profile, with the key attributes being a proven lasting efficacy with convenient dosing and with no significant safety concerns. While competition remains intense, Ilumetri's product profile is compelling with long-term sustained efficacy, delivering maintained control for psoriasis patients, very good tolerability and ease of use as the key attributes. The superior profile benefits patients and physicians in the current environment but will continue to be a competitive aspect in a post-COVID world with a quarterly dosing regimen and a cost-effective price, which will continue to support the growth of the product in this winning class. As you can see on the next slide, Ilumetri has a strong performance, with sales growing sequentially and with 125% increase year-on-year. The performance in the key market, Germany, has continued to drive sales growth, achieving our highest monthly unit volume since launch in that country with more than 1,200 units. Across the different markets in Europe, most countries are surpassing March levels, which really is a good achievement and validation of the potential of Ilumetri. We remain fully confident in its growth potential going forward, with data for September being very encouraging, continuing the momentum of Ilumetri. At the recent EADV Congress, we have released, as first anti-IL-23, a full 5-year data set analysis, demonstrating long-term psoriasis control with a reassuring long-term safety profile through 5 years. We are confident this evidence will help doctors in their clinical decision-making, further adding to our understanding of the role that the anti-IL-23p19 class can play in achieving long-term control because that's really the goal of treating a chronic disease like psoriasis. On the next slide, as we mentioned last time, we are very excited with the imminent launch of Ilumetri in France, which is a significant strategic milestone for the company, with France being the second-largest psoriasis market in Europe, and is a strategic opportunity for Ilumetri. This enables Almirall to build a strong footprint in the dermatology field for future launches with, for example, tirbanibulin and lebrikizumab. Also here, we provide you with some incremental detail across specific markets where we have launched virtually, for example, in Italy and Belgium. These are proving to be successful launches even within the current restrictions. In summary, despite the continued impact from COVID in the third quarter, we delivered a strong performance with Ilumetri with significant sequential sales growth. Even though we are not back at full normalization, we have been able to continue with the rollout. We strongly believe that coming through this pandemic, the profile of Ilumetri is really what is making the product for physicians and patients to turn to. Now let's take a look at Skilarence. Overall, no surprises in Q3. We are pleased with the sequential positive net sales growth seen this quarter despite the continued impact from COVID. I remind you that patients on Skilarence need block monitoring. And we have also previously outlined to you the issue of compounding we have faced in the Netherlands, which has stalled our growth there. The legal court case is pending and has progressed, and we are expecting to be able to update you in Q1 2021. So it's been a decent quarter for Skilarence. Furthermore, in a post-COVID world, the profile of Skilarence will support -- will continue to support this growth. To remind you of this, Skilarence is a product with a good balance between efficacy and safety, indicated as a long-term maintenance treatment. The dose is flexible and adjusted according to the clinical response and tolerability of each patient, achieving an individualized therapy based on the minimum effective dose. When we will return to normalizations, new patient starts will begin to increase as patients get back in front of their doctors. Now moving to the U.S. In the U.S., as their chart shows, the OAB market has also rebounded from its lowest level in May and is trading close to its pre-pandemic levels. In Q3, the weekly total prescriptions have shown a positive trend. And the latest data show that prescriptions are at the highest reported volume since the end of March. Let's now turn to Seysara. COVID-19 impacted Seysara prescriptions in Q2. In Q3, we are encouraged by the increase in new-to-brand prescriptions despite the continued challenges presented to us by COVID and this gives us confidence in rebuilding our position. This was the first quarter with the FDA updates to the microbiology label of Seysara. While we are still at an early stage, it is proving an important factor that we are able to leverage with physicians as it really differentiates the product from the older generics that continue to dominate the market. The narrow spectrum of Seysara versus other products on the market gives us a meaningful advantage. The overall U.S. OAB market has started to show positive trends, and our expectations are for the market to continue to pick up gradually. Our focus remains to build prescriptions and gain market share. With that, I'll turn it over to Mike for the financial review.

Thank you, Peter. Now I want to take you through the financial part of the presentation. As Peter mentioned in his introduction, in Q3, we have seen resilient performance despite the tough realities of the COVID-19-impacted environment. The key highlights for the 9 months to date are the following: our European business remained relatively resilient with steady growth while our U.S. business, having been heavily impacted by COVID-19 effects, has shown initial positive trends in recent months. Year-to-date, net sales have declined by 3.7%, and total revenues have declined by 9%. However, if we exclude Aczone generic impact, net sales increased by 4.3% year-to-date, which gives us a better sense of the sustainable growth outlook for Almirall. This is important as the generic impact has annualized at the end of Q3 with a reduced drag on net sales from Aczone going forward. If we look at Q3 in isolation, net sales decreased by 9.7% versus Q3 2019 but increased by 1%, excluding the impact of Aczone generics. Looking at total revenues. We guided earlier this year that we would see a significant reduction in other income, which resulted in a year-to-date decline of 9%. The gross margin ratio is in line with our expectations, given the adverse impact of the generic competition to Aczone on margins. In terms of OpEx, SG&A declined in line with total revenues as increased new product investments were offset by lower promotion activity and general expenses in the 9 months due to the COVID situation. The combination of these elements resulted in a decline in EBITDA of 20% for the 9-month period. Turning to Slide 17. We continue to increase our product sales disclosure, adding a quarterly breakdown to better help you understand the dynamics of our business. The difference between our European and U.S. business momentum is clear, as we see the relative resilience of the European portfolio in Q3 driven by the growth of our dermatology business, which I will detail in the next slide. Our U.S. portfolio was still impacted significantly by the generic erosion of Aczone as well as the COVID impact on other products such as Seysara. However, following the severe impact experienced earlier in the year, we are seeing initial positive trends in Q3. Our rest of the world business benefited from strong orders from partners in the first half. As a reminder, other net sales includes the impact of the accelerated recognition of deferred income that we mentioned in the Q1 results. The Q3 deferred income was around EUR 5 million, which is EUR 2 million less than the Q3 2019. Now that we've essentially analyzed the impact of the generic Aczone, our portfolio has limited patent expiry risk going forward in the near term. Moving to Slide 18, looking at the Q3 dermatology sales. We drove a strong performance in Europe, benefiting from the growth in Ilumetri, as Peter has described, as well as strong trends from our Ciclopoli franchise. Here, you can also see the generic impact of Aczone in the U.S., which is compared to the strongest period of last year in Q3, resulting in a challenging comparator period. The rest of the portfolio in the U.S. is still seeing lingering impacts of COVID situation, but we've seen improving trends during the quarter. As we move forward, we expect growth to be driven by the recent launches like Ilumetri and Seysara as well as new products coming to the market such as tirbanibulin in 2021. Looking at the overall net sales evolution. Here is a bridge for the 9 months, and you'll see a couple of things I'd like to pull out for you. The existing portfolio in net sales increased around EUR 33 million, of which EUR 24 million was due to deferred income released in the first quarter when you compare the 9 months year-to-date versus last year. As you are aware, the deferred income included in other net sales will normalize for the full year to a difference of roughly EUR 22 million, resulting in around EUR 52 million this year versus EUR 30 million in 2019 for the full year, with a remaining amount of roughly EUR 17 million to be recognized in 2021 before the deferred income is fully amortized. On the opposite side of this, we took a hit of close to EUR 60 million in the U.S., of which EUR 49 million was due to generic Aczone. To repeat my earlier comments, this impact has now annualized, having ended at the end of Q3. Excluding Aczone, net sales would have grown 4.3% year-to-date for the company. Looking at the P&L. We've now reviewed the sales performance, so let me make some additional comments. Other income reduced, as expected and previously communicated, as AstraZeneca milestone income declined. Despite our investment in recent product launches, SG&A has decreased due to reduced spending during the COVID-impacted period, which also reduced our R&D spending as compared to 2019. The despite lower expenses, the decline in our revenues, other income and COVID impact led to a 20% reduction in our 9-month EBITDA to around EUR 190 million. Moving on to Slide 21. Continuing down the P&L., there's nothing in particular note for you here, except the Q2 impairment charge on the legacy portfolio in the U.S., which does impact our pretax profit. We finished the quarter having generated normalized net income of EUR 74 million for the 9 months and a normalized earnings per share of EUR 0.43. If we now look at the balance sheet, there are quite a few comments provided on the slide, so I'll only highlight one of the most important factors. We finished the quarter with a leverage of 1.7x EBITDA to net debt, which gives us strong liquidity in the current environment and also flexibility for potential M&A activity. We are on track to land the ratio between 1.6 and 1.8x by the end of the year, absent significant M&A activity, which is what we already described at the half year results. Let's take a look at the cash flow statement. We delivered operating cash flow generating EUR 85 million, aided by a collection of a sales milestone for AstraZeneca. We've had a negative charge in working capital for the 9 months, which is a combination of the decrease in accounts payable from lower rebates in the U.S. and COVID-related activity slowdown across the business as well as increased inventories for recently launched products. There were no significant investments made this quarter. In Q4, we do not expect a significant amount of investing activities since the decision on the option agreement for Bioniz for the underlying CTCL asset will likely be in early 2021, as described by Peter. As you are aware, the dividend payment was delayed as a result of the COVID situation postponing our annual General Meeting. In October, the gross dividend was paid of EUR 0.203 per share, with the majority of the shareholders choosing a script dividend, resulting in approximately EUR 2 million cash-out that you'll see in Q4. With that, I'll pass it back to Peter for his wrap up.

Thanks a lot, Mike. To wrap up today, we have tried to provide you with more detail to understand the business and the different moving parts. This quarter has demonstrated the resilience of our European business, which has experienced steady growth, and we started to see positive initial trends for Seysara. Going forward, there are many aspects we can be optimistic about, including the performance of Ilumetri, the good progress of Seysara in terms of prescriptions as well as our strong financial management and balance sheet. Furthermore, as I highlighted at the start of the presentation, we are progressing nicely with our exciting innovative pipeline. I'm very pleased to see the continuation of the transformation of the company. Almirall is a company in good shape, set for long-term growth by unlocking the value of the pipeline, which will be led by the experienced leadership team. This growth will come from the increasing contribution from the current and future growth drivers as well as management's continued focus on additional external opportunities to generate sustainable value for shareholders and further boost growth prospects. With that, Pablo, I'll hand it over to you for the Q&A.

Thank you, Peter. Joa, back to you for the Q&A, please.

[Operator Instructions] Your first question comes from the line of Trung Huynh from Credit Suisse.

It's Trung Huynh from Credit Suisse. Firstly, to Peter, all of us at Credit Suisse, we're very, very sorry to hear that you're leaving. But we do -- you've left the company in a much better position in dermatology than when you joined, so we look forward to meeting you again in your new role. So 3 questions from me, mainly for Mike, I think. First one on guidance. Given the high level of cost control that you've done so far this year, is there any risk of beating the EUR 230 million to EUR 250 million EBITDA guidance? Is this simply caution around COVID in 4Q? Then secondly, on the gross margin side, pre-COVID, you said you should see a small increase for the gross margin despite the genericization of Aczone. But for 9 months this year, you're down 4% on sales and up 4% on COGS. How should we think about the mix of your COGS for this year? And then just looking at cost drivers going forward on SG&A and R&D. We've had this significant step-down this year, but it should come back in 2021 as you roll out more countries for Skilarence, Ilumetri. You launched tirbanibulin and invest in your R&D. So is a level similar to the 2019 SG&A and R&D spend look like a sensible assumption for 2021?

Yes. So let me go through the different aspects there. So with the full year guidance, based on what we've seen 9 months year-to-date, we're confident that we will be in that range. We do see a little bit softer spending. But we also, of course, see in Q4 that there is some increased COVID restrictions across some of the geographies. So we think, with all of the different moving parts, we're still on track to land within that range. I think it would take quite a significant increase in sales to get us above that. So we're comfortable with the range at this point. If we look at the gross margin, we have seen a little bit of an extra drag on -- mainly related to Aczone. If you take out the Aczone generification, the sales -- underlying sales growth and the underlying cost of goods growth is pretty consistent. So we do expect to see a slight improvement in Q4 because we will see the annualization of this Aczone impact. And we should get fairly close to last year's gross margin. I think as you go forward into 2021 and beyond, the increase in sales of the newer launches will help to get us back in that range of 70%-ish. If we look at SG&A, yes, we've been soft this year because of the COVID impact. So I think when you start looking into 2021, and we'll give you our guidance in February, but you've got to think of a couple of different factors. One is that there will be a natural increase in SG&A just by a return to normal activity. And you add to that the need to launch tirbanibulin and continue pushing some of the other products, and we will see an increase in SG&A and R&D as well because you'll see a more normalization there. Our goal in 2021 will be to grow the EBITDA, the core EBITDA of the company. Now keeping in mind that we do have a significant amount of deferred income rolling off, EUR 52 million going down to EUR 17 million, that will create a stretch at the overall EBITDA level, but we will really concentrate on growing the core EBITDA with the new launches despite the fact that we will see an uptick in expenses next year because of the normalization post-COVID, which we don't expect to last as an effect for the full year of 2021, and new launches. So lots of moving parts. We'll give you a much clearer view on 2021 when we get to February.

Perhaps one more comment from my side that on the -- I mean, with all other things being equal, the question also what is a commercial going -- go-to-market model post-COVID going to look like. And of course, I think we've learned an awful lot during the confinement period. We have seen the possibilities in an accelerated way. We've all undergone, I think, a kind of a Digital Evolution for Dummies, so to speak. And we have learned a lot that by digital interaction, you can -- we can also reach many customers in a very cost-effective way. So let's see what comes out. I think -- of course, there will be an increase for sure. But some of the lessons learned during the confinement will be sticking there for the future go-to-market model.

Your next question comes from the line of KC Arikatla from Goldman Sachs.

I have 4, please. The first one, you talked about starting a Phase III trial for Seysara in China. How should we think about the timing and the cost of doing that? And will you be partnering with someone in the region? And also, does this trigger any milestones that you need to pay Allergan? That's the first one. Second, sticking with Seysara, do you think COVID-19 has changed the long-term peak sales potential for the drug in any way, be it increased competition or changes in how physicians are prescribing? Third, for lebrikizumab, when should we expect the Phase III readout, please? And can you confirm the status of recruitment and how it is going amid the pandemic? The final one, you previously talked about potential Spanish pricing reforms. Can you provide us an update here? If you still expect this to happen sometime in 2021?

Yes. So thanks, KC. I think I'll take the first and the last question, and I'll let Peter take the 2 in the middle. So with Seysara China, we will be ramping up Phase III studies as soon as we can. You will see that in the R&D expense, but I think this is going to be a couple of years, and it's not going to be hugely expensive because it's already capitalizing on the data from the U.S. When it comes to milestones, the agreement on Seysara China is with Paratek. It has nothing to do with the Allergan acquisition because Allergan did not have the rights to Seysara in China. So there will be no further payments to Allergan because of that. The final question was...

Spanish reform.

Spanish reforms. Given everything that's going on in COVID, we don't expect to see a fundamental reform package out this year. We'll keep our eye on what's going to happen with 2021. We are seeing, of course, the normal pressures that you see in products that have generic competition and sometimes, with new launches, lower prices. But we don't expect anything comprehensive to come out before the end of the year.

Yes. So on your 2 other questions, KC. So Seysara long-term potential, well, it's obviously -- 2020 has been a very special year. We could say, to some extent, a lost year because of COVID-19 and the impact on, let's say, the acute business of dermatology. And of course, acne is an acute business par excellence, but -- so it's all going to be dependent on when, in a normal situation, how fast can we grow the business, how fast can we grow prescriptions, how fast can we grow market share. But it's true that the new label is -- has a very, very favorable response in the eye of the customer. So KOLs are very supportive of that new label of Seysara, so -- but I think it's a little bit early to see, and we have to come to a more normal situation then to see to which extent that we can grow the brand. Actually, piggybacking a little bit on your previous question, let's not forget that we have a very interesting business case in China. So a largely derisked clinical trial program, a relatively limited one also, by the way, in terms of costing. And a registration or submission in 2023 for a potential launch in 2024 because, as we mentioned in one of the earlier calls, we are looking at an out-of-pocket business model. And of course, in the affluent part of China, the price flexibility is there and so we are very optimistic on that possibility. Then your question on lebrikizumab, as you know, Lilly had paused the -- all the clinical trials. I have the positive news that they have, of course, resumed. They are accelerating where they can, not only in the U.S., but they have opened now massive new sites in Europe also, which is very important to us obviously to have also European KOLs having a hands-on experience with the drug before we launch. And I'm pleased to tell you that for both of the monotherapy studies, but also the combination study with TCS, with topical corticosteroids, most of the sites are open, and the patients are recruiting rapidly. Not a surprise to me because even if lebrikizumab is a great drug, there's a very important remaining unmet medical need. And in such indications, normally, you don't have a lot of difficulties to recruit fast, new patients. So we're still on track for a readout of these studies by half 2 next year and a launch in 2023.

Your next question comes from the line Alvaro Lenze from Alantra Equities.

Most of them have already been answered. But I just wanted to know if you could give us some more detail on the performance of Seysara and whether the uptake we've seen during Q3 is more driven by a recovery in the overall market or whether you've been also gaining market share.

Yes, I think it's both. You've seen an increase in market share of a couple tenths of a percentage point as well as a rebound in the market. Of course, as you get into the summer months, you're into the back-to-school, which is typically better for the OAB. But we're very encouraged by gaining some market share in that period. So we think we're on a good track and trend. We'll see how COVID impacts the rest of the year. But so far, so good. You have seen an inflection point since the launch of the new label. And that adding with the rebound of the market has helped us to have a much better quarter in Q3 versus Q2.

The next question comes from the line of Jose Maria Canovas from JB Capital.

Just one follow-up on potential changes on Spanish regulation. If I'm not wrong, you guided for a potential impact of up to -- negative impact of up to EUR 20 million at the beginning of the year. Just wondering if you're still seeing such impact or if it could be more, should we see these changes in 2021?