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

Good morning, good afternoon, everyone. My name is Krishna Chaitanya Arikatla or K.C. Arikatla, and I cover European mid-cap pharma and life sciences companies for Goldman Sachs. It's my pleasure to have Mike McClellan CFO of Almirall; and Pablo Divasson, Head of Investor Relations at Almirall with us today. In terms of the format for the session, it would be pretty interactive with Q&A starting right away. If you have any questions, please input your questions on the interface that you have on the right side, and I'll do my best efforts to ask those questions to management.

Now moving on to questions, Mike, on 2021 guidance, you've had a very strong Q1, with good performance across all the key growth drivers. How should we think about the guidance in that context? Do you think it's quite conservative? And how should we think about a potential upside to that? What do you need to see for you to get more confidence on your 2021 guidance and upside?

Yes. Thanks, K.C., and thanks for having us at the conference. I think we did have a nice and solid first quarter. We were very happy with the performance there. We're monitoring, of course, the rest of the year. I think what we've always said is the real upside/downside factors in this year is how things would reemerge from COVID, how quickly patients would get back to same physicians, how our different businesses were doing in that context. And then some of the risk factors do we see earlier, generification of Aczone. Do we see any other real issues with the business? We saw a little downside in the first quarter that we mentioned around the cough and cold business in Spain, just one of our legacy OTC businesses. We're seeing a pretty soft allergy season, too, just across Europe. It hasn't been the right kind of allergy weather. It was a very wet spring, and now it's turning into a very warm late spring. So it doesn't give a lot of time to that. But anyways, I think the things we'll keep a very close eye on are how does COVID evolve? And in particular, the U.S. business, how do we see, Seysara starting to rebound? How quickly can we get access for Klisyri? How do we see the uptake of that franchise after the summer? So we'll give an update at the July mark. We don't want to jump too far ahead of ourselves after 1 solid quarter. But if things go well, we could trend towards the upper end of the range that we have. But with some downside, we need to keep an eye on as we go into the second half. I think you're on mute.

Apologies for that. And in terms of the rebound from COVID, do you think the June, July time frame is the right time to think about it? Or do you think any potential recovery would be much more second half loaded?

We think it will be after the summer because things are starting to open up, whether it's in Europe or in the U.S., but I don't think everybody's immediate push will be, "Oh, now I got to go see the doctor." It's going to be, "Oh, I want to go on vacation. I want to visit my family. I want to do some of the things I haven't been able to do for a year." So we think when it gets to the August, September time frame, you'll start to see a little bit of a shift back towards everyone trying to get the doctor's appointments, trying to see the dermatologists. In particular, we'll keep a close eye on the acne market in the U.S. as they get potentially the real back-to-school season where the college in high school kids might actually be going live into class. We'll see if that has a nice impact, if we can really start to drive our Seysara product. After a summer, will there be more people with actinic keratosis that want to see their doctor in the August, September time frame? So I think as we had predicted earlier in the year, it's really going to be the second half that you really start to see patient through. But now what we don't know, and I don't think anybody in the industry knows is what's going to be the situation with reps seeing doctors? Is it going to open back up to closer to pre-COVID level? Will there remain some restrictions just because of the volume of patients they need to catch up with? Will we see more of a long-term mix between in-person and virtual? That's still to be determined, and that can make a big difference for new launch products or trying to drive uptake of new brands. So a lot of things to keep an eye on. I think we're seeing positive signs, vaccination rates are going up. They're starting to see loosening of many of the countries and economies. But like I said, I think for the next 2 or 3 months are going to be people focused on traveling, seeing families and then in the fall, you'll really hopefully start to see the uptake of patients going back into the physicians.

Understood. And looking beyond 2021, Mike, I know you don't have an official guidance for '22 and '23, but there's a lot happening, be it on the clinical side or in terms of the rebound for COVID. Are you able to provide any high-level thoughts on, if nothing -- if status quo remains and then we are on the trajectory in terms of improvement, how do you think '22 and '23 are likely to shape up in terms of very broad assumptions for top line and bottom line growth?

Yes. So I think you can take it into almost 2 phases. I think in the next 2 to 3 years, you're going to see a modest amount of growth. We still need to get past some of these things that are falling off the Aczone, the product sales, the little onetime type things that we had like in the first quarter. There is a generic risk to, a product that we have in Spain, which is a second brand at Januvia that could face or probably will face generic competition into '22. So there's some minor things that are going to keep growth from being really robust in the next 2 years. But once we hit that lebrikizumab, if we get the profile that we're expecting in the Phase III later this year, we do the right prelaunch and everything, I think you'll see some acceleration as we get to '24, '25. So I think you're almost going to have to see it in those 2 steps. Same thing with a product like Klisyri, I think you'll see some interesting development in the next 2 to 3 years, but it's not until we get the large field indication extension that you'll really see a particular inflection there. And then the big thing we're focusing on is rebounding and reviving Seysara, which can be one of those things that can swing a little bit the growth factor.

And on Ilumetri, Mike, most of your sales still comes from Germany. You recently launched in France. How should we think about contribution from France and other European countries beyond Germany and France in '22 and '23? Do you think we have seen bulk of the growth in '21, and it's only bits and pieces coming from here on?

So I think that's where you really start to see the next level of the growth is we're picking up in Italy. We're starting to pick up in Spain. We've recently launched in France, and we're having good uptake in Switzerland, Austria, Belgium, a little bit in the Netherlands. So I think Germany will continue to be a nice source of growth, but it will not be the main driver as we get to 2 years out. The other countries will start contributing quite broadly as well. So we think there's still a lot of room to run with Ilumetri. We think it's in -- what should become the gold standard in the psoriasis, the anti-IL-23 class, just because of the efficacy, the convenient dosing, the long-term safety, you may see countries having step-throughs for the biosimilars of the anti-TNF-alphas and others. But we think in the long term, you're going to see a lot of those patients end up in the anti-IL-23 class. So a lot of opportunity, I think we're pretty well placed. We're starting to see the ramp-up in the other countries. We still have not launched in any of the markets in the East or in the North. So there's still more geographies that can come in the coming years as well. So we think it's going to be the nice cornerstone of our psoriasis franchise which we think that overall franchise combining Ilumetri with our oral Skilarence and our soon-to-be-launched topical which has the brand name Wynzora in the U.S., still to be officially named in Europe. But having all 3 of those in a franchise, we still see that franchise could come up to a peak of EUR 300 million in the coming years.

And not that you've mentioned Wynzora, maybe it's a small digression from the line of question, but are you able to just explain the operating leverage opportunity that Wynzora has created for you? Maybe you could give us some details about any incremental investments that you had to make or not make and the top line opportunity? Just trying to emphasize how much operating margin leverage opportunity you have in the business, especially when it comes to psoriasis franchise?

Yes. So it's a topical product. It's using the same active as a well-known marketed product, Albyl from LEO. So we think it's got a nice formulation. The nice thing about it is it slots right into our psoriasis franchise sales force. So there's no incremental sales force really needed. It's really just the money. It's a pretty well-known active ingredient for the class. So it's a little bit less education on the real end of it, even more on the visibility, the favorability for patients, the application, how it fits in with the rest of the franchise. So we think it will be able to leverage very well our existing infrastructure. So we're really just talking about A&P type money, which is only usually a component of the actual spend you make to launch products. So -- and because we were able to license it in, we do have some royalties on it, but it wasn't a huge upfront. So we think it's a nice addition to the franchise.

Okay. And in the future, would those kind of deals be the main focus for you? Or are you trying to expand into horizontal medical dermatology indications?

So we're looking at a lot of stuff. So if you're looking at the R&D-type pipeline, we are very interested in early-stage collaborations with academia, with biotechs, all kinds of different technologies. We've signed in the recent years, the agreements with 23andMe, with Roche, with Tyris for gene therapy. So we're trying to place lots of bets on the early. When it comes to the later stage stuff, if we can find any elementary or we can find a Wynzora, even another lebrikizumab, though that was be hard to replicate that one in the near term, we're open, and we're very active in that space. We also have the balance sheet to do a little bit more if we need to. But we're going to be very selective. We don't want to get bigger just to get bigger and buy established products, which are going to fade over time. What we really want to do is find things that are complementary to what we're doing, focused around the medical dermatology space and can give us very good leverage.

Clearly, lebrikizumab is a major pipeline opportunity for Almirall. If you could just lay out the opportunity for us. I know you have a peak sales assumption there of EUR 450 million. But if you could just explain the assumptions behind it in terms of what clinical profile would be needed to achieve that peak sales guidance, please?

Yes. So I mean we think atopic dermatitis is a very big opportunity in Europe. We think that with only one real medication on the market currently for the moderate-to-severe being Dupixent, there's a lot of opportunity there. It's probably -- if you look at moderate-to-severe atopic dermatitis, there's anywhere up to 5 million patients in Europe. So how many of those we created, how many we can grab into market share, how many will move on to biologics after they've exhausted the topicals and other opportunities. We think when you add all of that together and you take a price similar in the range to what Dupixent has been able to establish, there's plenty of room for that EUR 400 million. The wildcards that we don't know yet. First, we need to confirm our profile, we'll see the Phase III data in the second half. If we can confirm a profile similar to the Phase IIb, we think we'll be very, very competitive in that space. We know LEO will probably get approval for their tralokinumab. The profile is what was we had expected. We think we can potentially have a better profile than they have. The oral JAKs are still a question mark at this point. What kind of indications are going to have, what kind of profile they're going to be used for, where they're going to be used in that treatment algorithm is still a question mark. So if anything, if we're lucky 2, 3 years from now, we may even see a better picture than we do today. But we still need to get through those different steps. But we think atopic dermatitis is not deeply penetrated in terms of the severe patients. The biologics are just starting to take up -- the take up. So there's plenty of opportunity to run there. So we're very excited about the opportunity. We're working hand-in-hand with our partner, Lilly, to bring this to market, us in Europe, them in the rest of the world, including the U.S., but very exciting.

And from the time you've given the guidance, Mike, there have been a ton of changes, and you've alluded to a few of them. Be it data on [indiscernible] wasn't that spectacular, be it more data on JAKs with a lot of focus on safety profile. So given all that, would you say net-net, the market landscape for lebrikizumab -- of course, we don't know the clinical profile, the market landscape for lebrikizumab has actually improved since the time you have given the guidance? Or is that not really the case?

Well, we still need to see the profile of the product. But I'd say the market hasn't deteriorated. If anything, there may be a better market when we get there than we originally expected. But still a little bit too early to tell until we see really how the different things play out.

Got it. Before I move on to my further questions, I'm just going to pause to remind investors to submit any questions that they have on the interface, and it will hit my in-box, and I'll do my best to ask them to management. Mike, sticking with lebrikizumab, if you could just give out details on any potential royalty payments or milestone payments? And how the final gross margin or EBITDA margin will potentially look like in the first 2, 3 years of launch and, let's say, 5, 6 years after launch?

Yes. So I think we've talked about in the past that we've had mainly a milestone deal with Dermira and now lebri -- Lilly. When it comes to what we'll start paying, we'll start paying for the Phase IIIb studies, the reimbursement studies for Europe. Those could be rather not extremely costly, but we want to make sure we invest the right way to get the right level of pricing. We'll start doing the pre-marketing in the coming years. Likely we'll ramp up an additional sales force in many countries to really give lebrikizumab the focus that it needs. Royalty wise, we'll start in the low double digits, with a tiered schedule that could get into the low 20s, if we really achieve very, very high levels of sales. And we'll gladly pay that if we get to that point. So given everything, I would say gross margin with the royalties and cost of goods, it will be somewhere probably in the 70s. And it's a little too early to tell on operating margin. Of course, in the early years, you probably will not be positive as you'll be sinking a lot of investment into it. But down the road, it should be a very, very good driver of both top line and bottom line for the company.

Great. On Klisyri, the product that you've recently launched in the U.S., you've mentioned at the start that the bigger opportunity is in the large field indication. Right now, we're only in the small field indication. How should we think about initiation of those large field indications? If you could just give us a time line on start of trials, readout and commercial launch, please?

Yes. So I would expect -- we're in negotiations with the FDA already. So late this year, early next year, starting up to trial, we'll have 52-week safety data as well as the efficacy. So you'll probably see some kind of a finalization in submission towards mid- to late '23 and then an approval sometime in '24. I think that's probably the best we can do with time lines at this point. So the first 3 years are going to be driving as much as we can in the small field. And then after that, we'll hopefully get the expanded indication to get into a larger service area.

Understood. And on Seysara, Mike, if you could just give a flavor of where the gross to net pricing is in 2021? I understand you may not be able to provide absolute numbers. But is the work done, bulk of it in terms of improving gross to net, and it's not just about getting more patients to use Seysara? Or is there some cleanup that needs to be done in terms of the mix?

No. I think we've gotten to a nice spot. The gross to net for the covered scripts has gotten to a good level. We still do sell a good amount of volume [indiscernible] method, which is those patients coming into our in-network pharmacy that don't have coverage, get sold the product for a $45 co-pay. But we're starting to see that there's been a little bit uptick in the volume. Hopefully, when we get the acne market kind of normalizing after the summer, we'll see even a better uptick. The real keys to driving this product are going to be to continue to find some additional access to get into plans that haven't covered it in the past to continue to rebound the TRx volume back towards what we had in the first year where we were relying on a very, very generous co-pay to drive volume. And then to make sure that we become the preferred brand for those that have already [indiscernible] the generics. So still a long ways to go. This is probably the one product that we're focusing most on in terms of we still need to make this where we wanted to be. We had a very good volume launch when it came to getting the value, when we started to turn it more into a value, COVID hit and it's really caused a disruption. So I think in the coming months and in the next year is really going to be the crunch time to make this product where we want it to be.

Understood. And if I look at your U.S. portfolio, Mike, excluding Seysara, there's not a lot of growth happening. Of course, there's Klisyri there in terms of new launch. But let's say, all the legacy products that you have, bulk of them are flat or declining. So have you set any internal deadlines as to measuring the Seysara recovery? And if it doesn't on the corner, will you be putting the U.S. business for sale or looking at some strategic review? Or how are you thinking about the U.S. business? Or you're comfortable with having a no-growth business in the U.S. if Seysara doesn't turn around?

Well, I mean, we have a wonderful opportunity with Klisyri. So I think we can't ignore that. We still think there's growth opportunity for Seysara. We just need to continue to execute and to drive what we can with additional access. You're right about the legacy portfolio. Now that Aczone has pretty much been hit by generics. The other products were either already generic or are relatively flat. I think we still have a nice platform there. We can look to maybe add assets over the future in the right areas. So I think we're very realistic that we don't have the firepower right now to compete with, say, a biologic against big pharma. We better pick and choose our battles. But there's plenty of niches in the U.S. [indiscernible]. I don't think we're at the point anywhere near where we'd say we need to take a different tact and divest. That's not on our mind, but we need to make it much more with Seysara than we've seen so far, and we really need to maximize the opportunity we have with Klisyri, which we're just starting to scratch right now.

Right. And on the China opportunity for Seysara, I know you've mentioned it a few times. If you could give us time lines on the Phase III trial initiation? And also what's likely to be your go-to-market strategy there given local restrictions?

Yes. So we would expect the Phase III to really start to ramp-up in the second half of this year, data to finalize towards the end of next year. And then potentially a launch in late '23 in China. Most likely, we'll have to find the model that works for us, whether it's a partner model or it's a small affiliate with a contract sales organization. That's still to be determined. I think we'll update the market in the next 6 to 12 months once we've really made a determination of the best go-to-market model. But we do see an interesting opportunity there. We see a large acne market, potentially a place for a premium product like Seysara.

Understood. And you mentioned about Seysara, China R&D costs. And if I look at your R&D costs in the first quarter, it was very, very low. So is the ramp-up a big function of the initiation of the Phase III trials in Seysara, China? Or is that not the biggest thing and there are other buckets where you expect R&D to go up?

Yes. So there's 3 things that are going to drive a more second half-weighted R&D spend. #1 is going to be the Phase IIIb for lebrikizumab. So the agreement we have with Lilly is that when it comes to Phase IIIb reimbursement type studies, we will pay for Europe. So that's going to start ramping up. We haven't seen a lot of R&D expense on lebrikizumab because the Phase III was being handled by the milestones in the agreement we set up with Dermira at the time before they were purchased by Lilly. So we'll see a big ramp-up in R&D spend from lebrikizumab. You'll see Seysara at China. You'll start to see some spend for the Klisyri large field. And then we have some earlier stage things that are starting to ramp up as well. So that's why we're seeing probably a little slow first half just because the bigger things will come in the second half. And COVID's been a little bit of a slow factor in the first quarter or 2, that should start to dissipate as well. So we do see a much more second half-weighted R&D spend in 2021.

Got it. And on the cash outflow side of things, Mike, you've clearly signed a lot of early-stage pipeline contracts. Are there any significant outflows that one should be thinking of either in '21 or 2022 in terms of paying R&D or clinical milestones?

No, unless we sign something new, I think you'll see a moderate amount of cash out in those milestones. This year will be lower than last year. And next year, we'll probably be in line in the range of plus or minus EUR 50 million a year.

Got it. And in terms of your M&A strategy, you have highlighted that inorganic growth is something that you are very keen to pursue. What are the kind of deals that you are looking at? Is it more focused on the U.S. side of things, more Europe? Or are you even looking to expand into other therapeutic areas even beyond the ones that you're currently exposed to?

So I'd say I'd put it in 2 buckets. One, on the R&D side, we're very interested in licensing in early stage, collaborations with academia, with biotechs, looking at interesting assets. In the later-stage R&D, if we find interesting license in, we'll definitely look at them. So we're open to anything that's really in that medical dermatology space. Particularly, if it's something we can slot into Europe, into our sales forces or if it's in the right niche in the U.S. where we can be competitive. When it comes to buying businesses, I think there will be a lot more careful just because we don't need critical mass just to have size. If we get critical mass that leverages our position in the dermatology office or gives us access to growing in the country that we feel is undersized, they will definitely look at. If it's something that fits into the U.S. portfolio easily, definitely look at that. But using the balance sheet just to grow size-wise, we don't know if that's the best use. Because we have the launches, the fund, because we need to continue to get some more shots on goal in the early-stage pipeline, that's probably going to be our main focus when it comes to using our M&A capacity or our licensing capacity.

Got it. And on the debt side of things, Mike, there's a convertible bond that is coming up for redemption. So if you could just provide a few details on how are you trying to offset any potential equity dilution from it?

Yes. So the convertible bond will mature in December. The strike price is at EUR 18.30 something. So it would take a very good run-up in the stock price to get the bond to convert. If it does, we have a few options to partially offset that dilution. If it doesn't convert, we'll look to refinance. We'll probably look at the early fall window to start looking at refinancing options. Preferably, either a straight high-yield bond or some kind of a term loan. I think given that we feel that the stock is a little bit undervalued and that we want to avoid the dilution risk pushing forward, it's probably unlikely that we would replace the current convertible with the new converter.

Understood. Mike, I have a question from an investor, and I'm narrating it to you. Will you start Phase IIIb for lebrikizumab before you get Phase III data? If so, will you use Phase II data to power head-to-head study?

So that's a little bit of a tricky one. Yes, we will start Phase IIIbs, but there are different studies that we can do. So it doesn't necessarily mean we'll fire up the head-to-head before we get the Phase III data. So I think we'll continue our discussions with Lilly and find the right approach to Phase IIIb that fits both for the U.S. and the European needs. So a little too early to give too much details on it. But there are some things that we can start in advance. And in the Phase III, data will come in the second half. So it's not like there's a huge delay that will be needed if we decide to wait for that data in some of the ways that we may attack the Phase IIIb.

Got it. And the next question, Mike, I acknowledge, I've asked this question at multiple occasions, and I'll ask it again. In terms of how the Phase III announcement will look like. You have 2 ongoing Phase IIIs. Have you decided on how the announcements would be? Would there be club data? Would you be providing data from both the trials on the same day? How should we think about how the day off announcement is going to look like?

Yes. Unfortunately, like all the times you've asked, I can't really give you a lot of details. We're still -- it will depend on how the data comes out, how closely those different readouts are to each other, timing of announcement and what we want to do with our partner, Lilly, who's actually driving the Phase III. So we have an input into it, but we're not the only one in that whole mix. So I'll just have to say wait and see. We'll give what makes sense to give. We won't -- if it looks like the readouts between the mono and the combo trials are too far apart, there's definitely a likelihood it would split into 2 different announcements. Just to make sure that we keep the market up-to-date as quickly as we can with the real relevant data. So too early to give you an exact answer on it, but we'll make sure we manage it as best possible for the investors and the scientific communities to understand what we really have as an opportunity in the product.

Okay. And one final question on lebri. I'm not aware of any other indications that lebri is being investigated at least to the extent I have visibility. How have your discussions with Lilly been in terms of expanding into any of the potential indications? Do you see any opportunity anywhere else? Or is atopic dermatitis, the all and end all for this asset?

No, we're looking with Lilly at other opportunities. It's too early to give you any details on that. If we decide together with them, that there's some real specific things we want to do, we'll announce that in due course. And if it comes to things that are outside of dermatology, Lilly might be taking more of a lead on that, and we'll have to see how we deal with that in terms of European context. But there are discussions ongoing. And at this point, it's a little too early to give any details.

And if you could remind us if your historical contract with Dermira was limited to dermatology indications? Because if I'm not wrong, it said atopic dermatitis and other indications. So is that within the gamut of dermatology? Or does it capture indications outside of dermatology?

So we have clear rights to the dermatology deal. It's up to negotiation if we go outside of that. So that's the best I can do at answering that question at this point.

Understood. If I look at your Chief Scientific Officer role, that's been vacant for a while after Bhushan exited. What's the profile that you're looking for in a Chief Scientific Officer? And how close are you to recruiting one?

Yes. So what's really critical in that role is someone who can help us to evaluate and scout out the new opportunities in terms of partnerships with academia, with biotechs, and also our internal pipeline development. Really someone who has a good feel for what are the assets that are most likely to turn into the right kind of products and the right kind of indications, the technologies that we want to put our money on. That, combined with someone who has the management skills to run a couple of hundred versus R&D organization. So it's not a profile that's completely out of the box in terms of availability in the market. There are lots of people that could potentially fit that, but we want to find the right one that fits in with our company and our culture. Gianfranco and the Board are making very good progress. And hopefully, we'll have news for the markets sooner rather than later on that item.

Understood. And going back to your M&A and inorganic aspirations, if you could remind us of the kind of fire part that you have? And what's the kind of leverage that one should be expecting? And what are the flex factors there, please?

Yes. So if we wanted to, I think we could comfortably go up to a leverage of about 3x. We're at about 1.5 as of the first quarter of this year. So that gives us quite a bit of capacity. We don't have a desperation to do something. So I think we're in a nice spot where we've got a good pipeline. We've got plenty of opportunity with the assets we have in our hands or could have in the market in the coming years. If we find things that complement that well or fit in easily into our existing infrastructure, we have the financial resources to do it. So if we found the right thing with a good amount of income, could we do $500 million? Yes, we could do that and fit that in pretty well. Are we going to go out and buy a biotech company for $2 billion that might be on the market? No, probably not. That's probably not going to be something on our evaluation. So somewhere in there, I think it's a nice position to be in where you've got the financial resources to do deals, but you don't have the absolute driving necessity that we have to do a deal in the next 6 months or we're going to be in that shape. So we're in good shape if we can find things to accentuate that great. If we can find things to add to the early pipeline, which tend to be inexpensive anyways, that's great, too. If it's something sizable, then we'll take a very, very hard look in.

Got it. As a last question, Mike. If you're able to share any comments with respect to the commitment of the Gallardo family to Almirall that they currently own almost 60% of the company. It's moving from one generation to the next generation. From your conversations with the family, how do you assess the commitment towards Almirall from that?

No. We think the family is very, very supportive of the company, and they're very committed to it. I don't think there's any indications that would say that there's going to be any kind of change in their support or commitment to the company. I think we're very excited to have Carlos from the third generation as one of the Vice Chairman now. We still get very great insight and wisdom and support from Jorge Gallardo, the Chairman of the Board. So I don't think that's a real question to us. This is an important part of their family holding. They are very committed to the company. And they're very involved in things like the R&D strategy and CSO driven because this is a long-term asset to them.

Perfect. Those were all the questions that I had, Mike. Thank you so much for taking time out of your busy calendar to speak to us. Thank you, Pablo as well. Thank you all.

Great. Thanks, K.C. Thanks all the investors.

Thank you.