Alvotech (ALVO) Earnings Call Transcript & Summary

So hello, everyone, and thank you for joining this session of the Morgan Stanley Global Healthcare Conference. My name is Thibault Boutherin. I'm part of the European pharma equity research team based in London. Before we start, I need to refer to important disclosures, Please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanely sales representatives. So for this session, I am delighted to have with me Ming Li, Chief Strategy Officer at Alvotech as well Joel Morales, CFO of Alvotech. Thank you very much for joining us today for this session. So we'll do a Q&A. But before that, would you like to start with some introductory comments on the current situation and outlook at Alvotech.

Yes. So first of all, thanks for having us, and thanks for everyone who stayed for the Thursday 5:30 session. I think we are extremely excited that there's a couple of things going on. I think, first, there's a lot of change in our company. Numerous launches, numerous filings, some visibility, not just into this year, but starting to get visibility into the next several years. And so there's a lot of rapid change in the company. But it's also happening in the construct of a lot of change in the market. So I think biosimilars have, I think, in many ways, been a long time coming. And I think that what you're seeing from the language of people that are in the space or the language of the payers that are in the U.S. or even outside the U.S., there is an embrace of biosimilars. And I think -- that's an important step in our long-term strategy, which is 100% focused on biosimilars.

Perfect. So starting with your biosimilar HUMIRA, which is, I think, one of the key products that investors are focused on right now. You currently have access to the U.S. market with this product through kind of 2 channels the usual channels through your partner, Teva, going through kind of negotiations with PBM to get on formularies and then the fractional distribution network. But you also signed a private label deal with Quallent, which is a distributor part of the Cigna Group. So maybe starting, could you talk a little bit about any difference in economics in revenue or profit contribution between these 2 channels? Is there a difference of profitability here. Maybe starting here.

Got you. The deals are slightly different in that the formulary side of the business is a revenue share, 40-60, 40 to us. And our partners, in addition to paying us substantial milestones are responsible for all the commercial marketing and patient services or any extra activities that go with commercializing the product. On the private label deal, it's different because it's actually a contract with us. And so the original model, which actually holds true with our ex U.S. counter partners as well. Makes less sense. And so for there, we -- it's actually a contract with us, we booked the revenues and we share the profits with our partner, Teva. Right? So there's an accounting difference there. But from a value contribution perspective, it's very similar, right.

And so I think you've been updating the market about your order book. You initially mentioned 1 million doses in your order book. And at your last update on the second quarter call, you kind of updated this figure to 1.3 million dose. So maybe starting with the clarification. Is this your order book for both traditional PBM channel with Teva and the private label with Quallent's. And could you -- if yes, could you give us a rough idea of the split of the book between these 2 channels.

Yes. So you're correct. I think in May, we said that we had 1 million units, and we've updated that on our last earnings call, which I think is where we're going to land in 2024. It's important to note that we're a B2B company. So we generate revenues as we supply our partners. The other thing that we mentioned was that as of the first half of the year, less than 20% of that full order book was actually supplied. So we're continuing to supply now and we'll continue through the remainder of this year. We didn't -- we haven't given an exact split between the 2, but what I would say is that it's a material contribution from both. And we also look to expand that in 2025 as well.

That's clear. And to come back on your degree of confidence that this kind of 80% remaining of revenues will be realized in the second half of '24. Is there any uncertainty here, whether it is on the kind of speed of manufacturing, whether it is the speed at which your partner are kind of asking for the dose are you -- do you have a very high degree of strategy that these revenues are going to come in the second half?

Yes. So these are binding purchase orders. So we have -- as a B2B company, we have good visibility. Usually, these order cycles are around 5 to 6 months. So we have great visibility for the remainder of this year, and we're starting to get more visibility, as I said earlier -- in early next year. So we have a high degree of certainty on the orders and a high degree of confidence that we'll be delivering on them and excited to do so.

Perfect. And so Cigna recently indicated that around -- around 20% of the HUMIRA book switched to private label within 5 weeks. I just wanted to kind of understand how this compares to your expectations? And if you could help us understand what are the incentives for patients and physicians covered by Cigna to switch from branded to private label or to prefer the private label of other biosimilars?

Yes. So I mean I think on the incentives, as they issued in their press release and have reiterated it on their earnings call, these are -- this product is being offered at $0 copay, right? So that's -- there's an incentive to the patient, I guess maybe taking a step back, I think the -- the private label space in general is extremely interesting. I think that it shows that the payers are not only embracing biosimilars, but actually driving the uptake of biosimilars. And so it's something that I don't know if we would have forecasted that a few years ago. But certainly, I think it's here, and I think it's here to stay.

Perfect. And we are seeing a similar move actually from Express Scripts. They are planning to remove branded HUMIRA from their formularies on the first of January 2025. So I mean, this is the PBM of Cigna Group. So you -- there was a biosimilar option on the formularies beyond -- the very similar that you're having with Teva there is a source some dose, and also bring here with some they have Shoprite level deal. So can you give us your view on this? And how much of an impact could that represent for your business this removal of the brand debt?

Yes. So I think it's a significant impact. And again, a significant message to biosimilar manufacturers to patients to the system in general. So I think biosimilar, it's a positive for all biosimilars. I think within that construct, we are currently on the ESI formulary, and we do expect expansion this year and acceleration into next year. And we remain the interchangeable high concentration option. And so we're excited for this opportunity.

Yes. And for HUMIRA in particular, do you see the scope for other deals with other PBMs and the similar private label structure for this biosimilar at least, it's probably this contract, and we should not expect other announcements?

So what I would say is that we remain active in our discussions and we remain open. I think we've stated, and it's no secret we would like to be a leader in the space in the HUMIRA space, also the STELARA space. So that's our aim. And so we remain open to expand our presence.

Understood. And so I just mentioned STELARA biosimilar. So starting with the U.S., how should we think about the opportunity in the light of your progress with HUMIRA in particular? Is what happened with HUMIRA's blueprint for STELARA in terms of potential profitabilities, but also potential exclusion of the brand from formularies to what you're expecting as well for STELARA, which isn't the same pharmacy benefit channel?

Yes. So I think in some ways, it is a blueprint. HUMIRA is a blueprint. I think the private label is here to stay for pharmacy benefit products, and we would remain interested and are actually in conversations to discuss these opportunities. So I think that's true. I think it's not exactly like HUMIRA in the sense that we feel that the opportunity may come quicker. As you know, 2023 was a relatively slow year for biosimilars in the HUMIRA space. And we think the precedent of HUMIRA is helpful. I think precedent is always helpful with biosimilars. You can see that in the oncology space. And I think you'll see it in the ophthalmology space. And I think you're going to see it here as well. So as far as exclusionary action, I can't really comment on that, but I would note that some of the conversion that you're seeing right now in the Cigna group is happening while HUMIRA remains on formulary.

Understood. And I don't know if you can comment on this already, but -- are you or your partner having conversations with payers already for STELARA U.S. either in terms of formulary coverage or in terms of potential profitability?

Yes. I think we are having those conversations, and I think we feel like we're well positioned. It's an earlier in the year launch relative to HUMIRA, less competition relative to HUMIRA and -- we're very excited about it. And we have a date certain, of course.

So, when you think about the potential for this private label deals to expand and to become kind of the norm in the biosimilar industry. How do you think they could be structured in the future? And how competitive will it become to secure these deals. So far, we've seen kind of each PBM choosing suppliers, but the relationship -- in the other direction, each supplier has kind of -- it's only supplying to 120 BM. So is this the type of structure you're expecting maybe some general comments on how you see this private label de-levering in the future?

So I think we said it will replicate itself in other molecules -- just as a reminder, we have STELARA, but we also have SIMPONI, those are all PBM-driven products. I think you can also expect that it won't always just be a one-to-one deal. I think you can see multiple players on different deals. And so I would expect to -- it would look more like that.

Okay. Okay. So a few questions by Sias, but maybe if you can talk a little bit about finance and the P&L as well. Funding, you've had a lot of activities recently in the first half and during the month of July. So maybe if you could remind us where you stand today in terms of balance sheet, if you are in a position already where you can reach seasonable profitability and cash regeneration -- or should we expect some additional funding at some point?

Yes, sure. So thank you. First and foremost, we were pleased with the refinancing. We accomplished a few things with that in July. First and foremost, we were able to extend some of the near-term maturities that we had out to 2029. We were able to reduce cost of capital as well. And we were also able to provide cash to the balance sheet. We were able to add about $140 million of cash to the balance sheet. All while simplifying our capital structure. I mean all that remains in terms of debt on our balance sheet. At this point, is this new facility, about $965 million. We have the mortgage on our facility as well as some equipment financing. So our balance sheet as of the close of the transaction was about $1,035 million of debt, and we had about $180 million of cash as well associated with that. So that was a great for the company. Furthermore, we have favorable call features as well, which gives us flexibility, in particular, given the financial profile we're looking to deliver on over the short and midterm. In terms of ongoing capital, we're -- we delivered very strong Q2 results, as you saw, and we're expecting revenue to continue to grow quarter-over-quarter. And so -- in terms of additional cash, really, we're looking for the 2 main sources of that to be our milestone revenue collections as well as product revenues. As well throughout the second half of the year, and we do expect to achieve free cash flow positive as we exit the year. So at this point in time, we don't foresee really any need for additional capital.

That's clear. And thinking about the shape of the P&L in the midterm. So definitely, we saw sales accelerating and we're starting to see some of the cost line evolving and what kind of gross profit margin and EBITDA margin level you think you can achieve at scale. So, obviously, not looking for a number, but conceptually, when we look at your business model, because it's a B2B, you have limited marketing and spending expenses. Your partners are doing the commercialization. So it suggests that there is the potential for a very high profitability level, much higher than, I would say, the average for our industry. So is it the right way of looking at it?

Yes. I think that's right. That is unique to our P&L profile. We don't have the large selling and marketing overhang that you see with most pharmaceutical companies, in particular, because our commercial partners really incur the bolus of that spend. We also collect milestone revenues based on our commercial agreements and those milestone revenues really help offset the cost of development as well, which we recognize in our OpEx. In terms of the margin profile in Q2, you saw that we generated just under 17% in terms of product margins. And that really just represents the beginning of our launches, in particular, in the U.S. with our version of HUMIRA or SIMLANDI. But you also can expect in the second half of the year with increased volumes, we're expecting to expand upon that initial margin profile that you saw in the Q2. We have a platform that we've invested in and that we've created in Iceland. We have roughly 1,000 employees, most of them focused in manufacturing ops and quality and R&D. And we really don't foresee the need for any significant change to our overall infrastructure, while driving higher volumes, right? We've increased our volumes threefold over the prior year, and we expect to continue to increase those volumes. And so in short, just under 17% in Q2, we expect to expand upon that as we get into the second half of the year. From an EBITDA margin perspective, just based on the guidance that we gave, it's an implied 25% to 30% of EBITDA margins that we're looking to deliver on this year. Again, this is a partial year given that we've only just begun our launch of SIMLANDI in the U.S. in particular, and we've just begun our launches of our version of STELARA in our ex U.S. markets. However, meaningfully, we have or the introduction of our version of STELARA into the U.S. market in February of 2025. So while our EBITDA margins for this year are 25% to 30%, you can expect continued expansion, both based on the annualization of our current launches, but also the introduction of our version of biosimilar STELARA.

Ok, it's very clear. And then you mentioned the milestones that are contributing to your P&L. What do we expect in terms of milestone revenues in the second half of this year? And maybe if you have some visibility on next year as well, how meaningful are these going to be?

Sure. So maybe to tackle that, I'll first explain that we recognize milestone revenues typically when we commence the clinical phase of development. And then as we advance our programs through the pipeline. And so when we achieve positive top line results, when we submit, when we receive approval, upon launch and so on and so forth. And so -- you saw in the second quarter, we had a significant contribution of milestone revenues to our performance, and that was because we had a number of triggers that converged in that Q2 time frame. And so that was -- we were pleased with the results, obviously, in the second quarter. But we are expecting, based on our guidance to continue to recognize additional milestones in the second half of the year. In particular, as those positive top line results begin to translate into submissions. We're expecting to submit 3 BLAs this year, not only in the U.S. but around the world. We have incremental launches as well. Our partner in Europe launched our biosimilar version of STELARA in the third quarter as well. And so you'll see continued delivery of that, not only in the second half, but also into 2025 as well. Obviously, these these BLAs that we're filing in the second half of the year will ultimately translate into approvals in 2025, and then you'll have the launches, additional launches. And so -- this milestone contribution is not something that's short-lived. It's very much a part of our business model, and we expect to continue into 2025.

That's very clear. Maybe coming back on some project questions. Thinking about supply, just if you could explain a little bit about your supply capacity that you have right now, how confident you are in meeting the demand for HUMIRA, for STELARA, if that demand continues to expand. So yes, maybe starting here?

Yes. So I think for capacity, we feel very comfortable that we can be a leader in the space. We talked a little bit about 2024, but I think the idea is that there's going to be an expansion in 2025. Some of the capacity on HUMIRA was unlocked as we were able to submit some variations upon approval, which are now approved. And so we're build -- we're actually building and producing at a bigger, more efficient scale currently. So that was helpful. And STELARA, obviously, we started supplying ex U.S. One of the good things about STELARA is our approval came well before our license date, which is the way generally it should work, right? So we were a little delayed in HUMIRA, but with STELARA, we're preparing now.

That's clear. And so I think if we zoom in a little bit on this year for HUMIRA, I think you unlock the bottleneck after approval of variations late June. So if you could provide some color on that process exactly? And are you now on full speed in the manufacturing of HUMIRA?

Yes. I mean nothing complicated about the variations, just drug product process scale-up and some efficiency gains that needed to be submitted, but you can only submit after approval. So we have submitted them almost immediately after our approval earlier this year. So yes, it's all systems go now and looking forward to expand production even further.

Very well. And I think you mentioned on the last call that you are working on your partners to build plants or the '25 for both HUMIRA and STELARA. And so if you could give us some status -- some update on the status of these new lines that could get live?

Yes. So on HUMIRA, we're already starting to form a view on, call it, the first quarter. So remember, there is a binding order cycle and we're starting to hit at the beginning of the year. So we're optimistic that, that will continue to firm up, and we'll probably provide updated numbers on our next earnings call. On STELARA, I think we're still in discussions. So it's strategic at the moment, but certainly, these will need to firm up pretty soon as we're planning to launch very early next year in the U.S..

In terms of commercial progress, so we talked about HUMIRA and STELARA is already approved in some ex-U.S. markets, Europe, Canada, Japan in solid days some of this market, but maybe -- if you can tell us about the reception that your partners have had so far, any particular friction or early successes in some of these markets?

So I think it is early. What I can say is that we've had replenishment orders from our global partners. And we look to expand that market share going into next year, but it will be a gradual process, although it will be and has been a material contribution to revenue, product revenues this year already.

Very clear. And switching to biosimilar EYLEA. So you filed the low-dose biosimilar formulation in Europe. Presumably U.S. filing announcement in to come soon. Correct me if I'm wrong, but I think the Europe situation is relatively straightforward. If you have approval in probably third quarter '25 and the IP protection should hand along there. So the time lines here are, I think, relatively straightforward. But the U.S. is obviously more complicated for IP reasons. So maybe if you can give us an idea of the key challenges from an IP perspective and if you have an idea of timing to get a resolution.

Yes. So our -- we will announce U.S. submission upon acceptance for review. But you can imagine that the requirements for acceptance in Europe and the U.S. are relatively similar. So a lot of this will happen post submission. There's obviously a patent patent dance that goes on. We don't give dates, but I can say that as a company, our general mindset is to try to get the best date possible. I think we think about it as we will have the low dose, we'll have the high dose. We'll have a global approach to biosimilars, and we hope that puts us in the best position to take advantage of this market.

That's clear. And -- so launching first the low dose. Obviously, Regeneron the U.S. and Bayer in some key excess regions are currently obviously working hard to try to either convert patient or capture new patients with the high-dose formulation of EYLEA. So when we think about this, what is your expectation for the shape of the market by the time biosimilars are coming on the low dose -- and then how difficult do you think is going to penetrate this market?

So it will obviously be a function of the time of biosimilar market formation, which at this point is not completely clear. What I would say is that obviously, they've started to announce their success in converting the market. So they've had some initial success, and that will continue to grow, I assume. I'd say 2 things. One, we'll obviously aggressively try to get the high dose to market. We've developed a formulation, and we think we can leverage some of the components of the original program to make this as quick as possible. And there is a market for the low dose, right? I think that for a product like this, savings are incredibly important, not to say that it's not important for any product, but there's going to be an opportunity to gain market share with the low dose. I would also add that we plan to come to the market with both the prefilled syringe and the vial on the low dose, and that's another aspect of differentiation.

So you just mentioned your development effort on the high-dose formulation. And just here specifically, so you mentioned ability to accelerate the program. But from an IP perspective, how -- if you overcome the IP challenges on the low dose, is it your expectation that there will be additional IP anges for the high dose? Or do you think this looks manageable?

So I think there's additional IP, but again, we will as aggressively as possible get to the point where we're comfortable bringing it to the market.

Understood. And so looking a bit further in your pipeline, biosimilar Entyvio that you announced relatively recently. So you're 1 of only 2 companies in Europe working on a biosimilar for Entyvio. So can you just remind us how far you are in the development program? And also what is your view on the IP situation for this drug both in U.S. and Europe?

Yes. So we intend to initiate the clinical trial very shortly, call it, in the next couple of weeks. And we'll be the second company to do so. And I think that puts us in a very good position to be in the forefront of this market. The compound patent is -- has expired. I think its regulatory exclusivity through '26. And then, of course, there's IP that's later expiring related to certain uses and formulation. But again, I think the compound patent is off and the regulatory exclusivity is off in '26. And just like with EYLEA in the U.S., we would intend to bring the product to market as quickly as possible.

That's clear. One question I have on the requirements developed biosimilars. So one of the obstacles I think we see developed biosimilars and some maybe of the, I would say, relatively smaller opportunity in the drugs of, let's call it, maybe less than $2 billion, where it's harder to make a case because of the development costs -- there are some talks right now about potentially the removal of the requirement for a full-fledged kind of Phase III clinical program. So is it something you're hearing from regulators? And how far do you think this is, how credible do you think it is, how likely it is to happen basically?

Yes. I mean, there are certainly discussions. And generally, the U.S. regulatory environment and the EU regulatory environment move at different rates. But I think we believe that eventually that will be the case. It's certainly not the case now. I mean we're doing these trials based on scientific advice, right? So we're getting real-time advice from the regulatory authorities on Entyvio or Keytruda. So it's not -- it's certainly not the case now. For a company like ours that developing biosimilars is always going to be complex. The cost is also always going to be higher. Having it slightly lower, will open up more opportunities to target a lot of products, right, that would be in theory smaller. And we could accelerate our pipeline that much quicker. And having all that infrastructure in-house, I think it will be an advantage. So we look forward to that day, but I can't tell you that, that's immediately around the corner.

Very clear. So -- when we look at the market structure, I think we saw a movement of consolidation over the last few years with a number of players realizing we need -- need scale, need breadth of portfolio to be relevant and biosimilar. And on the other side, obviously, players kind of consolidating because they're all in a good place. So where do you think we are in this process? And do you think we're going to see more of this, do you think the industry started to stabilize with some of kind of key players emerging already? So, yes.

Yes. I think some of the early partnerships have unwound. I think I don't foresee a lot of M&A in the space. And I think the other thing that we're seeing is that biosimilars -- the promise of biosimilars has been around for quite some time for decades. And there were a lot of early adopters. And I think biosimilars is a space where you could argue that you could be too early. And I think there has been a redirection of some of the early interest in biosimilars into other aspects. So I think we're hitting the market at the right time. And a lot of the players that are going to be focused on biosimilars are certainly settling in. I know Sandoz is speaking a lot about biosimilars. Obviously, the companies in Korea have been successful in developing biosimilars. And these are the companies that are investing heavily into the future of biosimilars, right? So I suspect that we're starting to see who's going to be here in the long term right now.

And that's very clear. One of the debate as well is the peak and shape of revenues for biosimilars because we start to see more launch happening at the same time in the U.S. and ex U.S. And so how should we think about the shape of revenues in different regions? What we've seen so far in the medical benefit part is maybe revenues were picking in the kind of 2 to 4 years time horizon at least in the U.S. and then maybe price erosion offsetting volumes and the sales kind of decline for the pharmacy benefit, I think the debate is more open. But what's your view here in terms of the shape, starting with the U.S.?

So I think we see at least to get to peak revenue in any market that we launch in somewhere between 2 and 5 years. The U.S. will be on the shorter side and the ex U.S. retail markets will be on the longer side. And we're also launching these things over time at different times. So the beauty of a global approach is that the launch has never happened at the same time in STELARA, we launched in Canada and Japan and Europe, all during the year and U.S. the next year. And that helps for the durability of a program, right? It's the same development program hitting all of these markets, right? So a global approach, we think, is important. And I think -- the exciting thing that we're gearing up for also that we want to demonstrate to the investor community at large is that in 2026, just fast forwarding, we expect to be in multiple molecules on multiple markets, all with some stage of their growth cycle, whether it be towards the end in some markets or in the middle or in the very, very beginning. And then we would have launches after that. So it's the idea of backing these launches in a cadence that can support growth. And it's helpful because biosimilars unlike generics are not -- it's not a peak and a fast decline, it's more of a build. And that helps you manage that growth.

And that's very clear. And so you mentioned this is kind of sustainability of revenues -- in statistic to think that some biosimilar franchises may grow in the long term and beyond just having a tail of revenue even having growth in some -- in particular, excess markets? Is that something that's realistic in the long term on the...

No, I think it's very realistic. I mean biologics are a huge portion of U.S. spending and a very small portion of the prescription volume. In a lot of the emerging markets, they're simply unavailable. So there's plenty of precedent where you can grow markets. Even in Europe, HUMIRA -- biosimilar HUMIRA grew the molecule double digits for 4 years in a row. So there is opportunity to grow, and that helps offset any price erosion. And so there are markets that can grow quite significantly outside the U.S..

I think close to the end of the time. So I want to thank you very much for your time and participating in the conference. Really appreciate.

Thank you. Thank you for having us.