Cosmo N.V. (COPN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Cosmo Pharmaceuticals release of Half Year Results 2023 Conference Call and live webcast. I am Alice, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Alessandro Della Cha, Executive Director, CEO. Please go ahead, sir.

Good afternoon, everyone and welcome to our half year results report where we're giving you an update on our progress. I hope you can all see the presentation on your screen. Presentation is divided into 5 sections I think the title under one is gone, I don't know why but the title of the first section is the following: Investment strengths. We believe that we are performing according to our plans and according to our expectation and hence, we would like to recap first and foremost before going into the details of the presentation or what we believe are our investment strengths. So first of all we have a growing revenue stream from an established business. As you will see effectively the revenue from our existing products they do continue to grow and grow I think even beyond our expectations. We have 2 revolutionary growth drivers that have been launched in large markets and entrusted to world class partners and clearly I'm talking here about Winlevi, about GI Genius. We have an exciting development pipeline, which is full of catalysts and things that are happening as we speak, very strong financial position with no debt. And we're profitable, with dividends being distributed in '21 and '22. And if things will go according to plan, also distribute it in '23. What our main focus area, just want to point it out again, we're active in 3 areas. One is gastroenterology. The second one is HealthTech. The third one is dermatology. And we have a product portfolio that is really quite wide given the size of the company and given the market cap. So we have 6 approved product this is what we call the established portfolio. We have 2 growth drivers. GI Genius and Winlevi. We have an interesting development pipeline, and I'll walk you through after a little bit more in detail. So I think that this is a very consistent offering given the size of the company. Our H1 2023 financial and operational highlights are as follows. We have progressed on all fronts, and it's important to me to mark the following. First of all the overall figures in terms of revenue is EUR 43.7 million versus last year for EUR 41.5 million. But I want to remember that last year in the first half we received an EUR 80 million milestones under our Cortiment agreement with Ferring whereas this year in the first half, we received only EUR 2.7 million as a milestone from our partner CMS for the filing of the Lumeblue NDA in China. So if you look at the revenue excluding the milestones, our increase is actually 21.8% for a total of EUR 40.8 million of core revenues, but I will say that we are increasing on all fronts. I would like to point out that if you look at manufacturing standalone this half EUR 8.3 million versus EUR 6 million last year, first half, our manufacturing of our own product has moved to EUR 26.4 million from 22.2 million. Our revenue coming from royalties to EUR 5.2 million versus EUR 4.6 million in the first half 2022 and other revenues moving to EUR 3.8 million. They include the milestones that we have received as I mentioned before. Most important for us the business is actually experiencing a high organic growth. So if you look at what we call the established business, the one that I showed you the 6 products in the slide above you can see that the Lialda franchise increased by 27.7%. The Cortiment income increased by 85.7%. Contract manufacturing by 48.1%. The Eleview income by 110%. I believe that this is quite a performance in these times. Also our 2 growth drivers have increasing revenues. Winlevi as expected, we've seen a significant increase in royalty income and bear in mind that it is absolutely natural that we see at the beginning in the time of the launch that we see more manufacturing revenue coming in respect of royalty revenue, but then over time, you should see the royalty revenue increase irrespective of the manufacturing revenue as sales begin to pick up and in fact, we have here seen a manufacturing income decrease by 55% and symmetrically an increase of the royalty income of 92.3%. Also the GI Genius revenue has increased by 59% to EUR 4.3 million in the first half. I also want to remember you that last year our total revenue for the year was EUR 102 million if I'm not mistaken of which EUR 41 million was in the first half. So historically, we do perform higher revenues in the second half versus the first half. So just keep in mind. This is also one of the reason why we are confirming our guidance as already stated in our press release. So far we are achieving our plan. Again, I want to point out that in total, we're at EUR 43.7 million revenue versus last year EUR 41.5 million at EUR 14 million EBITDA versus EUR 14.9 million last year, but again, bear in mind the influence of the EUR 8 million milestone in this. Same for the operating profit this year is EUR 7.1 million versus last year EUR 8.1 million. But again, you have to keep in mind the impact of the EUR 8 million milestones. And profit before tax EUR 3.7 million versus last year EUR 9.1 million. Again, please bear in mind, the impact of the EUR 8 million milestone. Probably the best indicator and then the quickest indicator to see that things are actually progressing very well in the right direction. There is a significant improvement in cash generation. Last year, in first half we generated EUR 12.6 million cash this year we have generated EUR 15.5 million and bear in mind that the milestone coming from CMS which has been accounted in the first half has not been paid yet. So that has not impacted the net cash inflow. We do have a very consistent position in cash and short term investments. That's EUR 222 million at 30th of June. I have seen questions popping up about how are we going to repay the bond and let me just give you immediately a straightforward answer. Well, we're going to repay the bond with the cash that we have at hand. The bond is EUR 175 million and we have more than EUR 222 million in cash and short term investment as I said, plus, we are generating substantial cash from the operations. We are so confident in our future that we have continued to purchase our own shares in the market within the limits set by the Swiss exchange. So the position at the end of June was close to 1.5 million shares versus a position in 2022 and the first half of [1,003,000]. We have experienced a very significant progress across all of our product portfolio. We just want to mention some of the most important highlight of this first half. We have had the approval in Japan of Cortiment meant by Ferring/local partner, Mochida. We have expanded our cooperation with China Medical Systems Holding to expand the reach of Lumeblue also to other territories which will include a lot of countries in Southeast Asia and most of the ex-Soviet Republic. CMS has sent us communication that has started the preparation for launch and therefore asking our team to join and help to prepare launch. Just want to remember that the approval in China is expected between year-end, let's say fourth quarter '23 and beginning of next year, so first quarter of '24 and this is why they have decided to start preparing for launch. Also, our key growth drivers are experiencing significant advancement. Well, first of all with GI Genius, we have expanded our agreement with Medtronic but most importantly, we've been awarded GBP 2.5 million from the United Kingdom NHS to run a very large scale real world trial of GI Genius. The UK government is a strong supporter of introducing as quickly as possible artificial intelligence in healthcare and it's a very good indicator that they are now running this trial and awarded us with a significant benefit. The new research that was published I believe that we have issued a press release to this new research published by Northwestern Medicine has shown the impact of using artificial intelligence not anymore in the academic clinical trial setting but in real life with real procedure, everyday procedure with everyday endoscopies, not STAR endoscopies. And the results were mind boggling. They were presented at the last DDW in Chicago where this study raised a lot of attention. Basically, they have shown that the consistent use in everyday practice of GI Genius increases the ADR which is the adenoma detection rate by 13%. I just want to remember that for each 1% increase in the ADR you have a corresponding 3% decrease in colorectal cancer. So 13% which might not look like a very, very large number actually translates into 39% decrease in colorectal cancer, which is nearly half just bear in mind that if I'm not mistaken in the US you have around 50,000 people dying every year of colorectal cancer. So imagine what the reduction of that would be in terms of lives saved. And last but not least, we have won the AI Breakthrough award. This is one of the probably the most prestigious award that it's giving for AI innovation. If you see who the competitors were in that arena, and for a moment, instead of the name Medtronic, you put the right name of the developer and owner of the product which is Cosmo. Then you can see whose Cosmo is competing with in that arena. You're going to see the best name. Winlevi we have announced the license agreement with Hyundai Pharma for Korea and the approval of Winlevi in Canada. We have several agreements underway that we all intend to close in the second half of the year. You will see deals happening for the rest of Europe, the Nordics, United Kingdom, Republic of South Africa, Middle East, North Africa, we are really expanding very significantly the franchise. So also this is quite an advancement. What pertains our development pipeline? Well, we have announced that we finally began our Phase III trial in males for Breezula, they just got their own solution for androgenetic alopecia. We have consistently advanced our oncology program. We have now started to treat the fourth cohort. Also in that specific venue we are proceeding according to plan. We have completed the formulation and IP protection of our new drugs against bile acid diarrhoea, that CB-01-33, colesevelam. We are in the process of drafting the clinical protocol and the intention is to be in a position to start the Phase II clinical trial in the second half of this year. Actually, as we speak, finalizing the agreements with the centers that should be running the trial. I would like to take a little bit of your time. I hope that I'm not knowing those who might know these details already about our 2 key growth drivers. So we do have 2 revolutionary products in large markets that are entrusted with very strong partners. One is Winlevi and one is GI Genius. Now to begin with Winlevi, you will remember that this is the first ever topical anti-androgen for the treatment of acne, it's quite a remarkable achievement. It has been licensed to Sun, and it is, as we speak, the number one prescribed branded topical equity product in the U.S. To date, prescriptions that have been generated on a cumulative basis are above 670,000. Even more important than that is the fact that the unique prescribers since launch, now have reached a number of 15,000. Actually, 15,000 represent 88% of the total health care petitioner in dermatology. So this means that basically 88% of those can potentially prescribe Winlevi have already prescribed Winlevi. Also, particularly important, we are now finally seeing beginning of a second issued prescription, meaning not just first prescription, but also prescriptions that are renewed. This is a very important sign that the drug is penetrating the market. One of the reasons for this switch to second prescription is that Winlevi is sold in a tube that's particularly big, it's a 60-gram tube and that adolescent teenagers are very frequently, not very compliant. So in terms of applications of the cream and therefore, there is a situation where the tubes in their hand, they actually last more than what was originally forecasted. And this is the reason of the delay in the visibility of the renewal prescription. But this is also proceeding well. Sun is particularly satisfied. And in fact, they have restated in their Q4 earnings transcript, Winlevi is one of their 3 main growth drivers in the specialty business and its coverage has improved in the last quarter and they hope to continue improving coverage. And just to be clear, coverage means payer reimbursing the drug. I just want to recall what was the outcome of a survey made by Citi, the bank on the potential perspective of Winlevi. They run their own survey with 112 dermatologists in the U.S. And according to what they answered, Citi concluded that the market potential of Winlevi could be 12% to 13% of the overall market, which would translate potentially in peak sales of $700 million to $800 million. So originally, the forecast was around 5%/7% of the market share. Now the survey show that when Winlevi effectively capture 12% to 13% of the market share, which should then be equivalent to $700,000 to $800 million. I just want to remember the audience that we do receive double-digit royalties that we have the potential to receive EUR 190 million in commercial milestones that we are the exclusive manufacturer of the product. Moving to GI Genius. GI Genius, I think, continues to be the most undervalued asset, most severely undervalued asset in our pipeline. I guess, there has to be something with the way we explain the business case that just doesn't go through. That is precisely the reason why I feel that we need repeating ourselves until this becomes kind of evidence. So GI Genius was introduced into the market with a first, very particular indication, the detection of polyps in real-time. But what GI Genius has effectively does is GI Genius is a platform to overlay artificial intelligence content to any real-time video coming from any procedure. So just think of any situation, clinical or diagnostic where the physician is looking at a screen to perform the procedure, there is room there for applying AI and therefore, the reason for GI Genius to be there. We have shown another mind boggling performance in the reduction of mixed colorectal polyps because our trial has shown that we can achieve a 50% reduction of mixed colorectal polyps, which is actually equivalent to saying that we find 50% more. And in fact, if you look at one of the most reliable quality measure for colonoscopy, you will see that GI Genius actually detects 46% more adenomas in a colonoscopy, than without. Another indicator of how important GI Genius is becoming is that the total number of academic publication on GI Genius has now overtaken 30 and if by any chance you venture to say to go and look at what other potential competitors are doing, you may find one or you may find 2, we have more than 30 and the most remarkable is the one that I just told you about Northwestern. It's also one of the latest. Also, Medtronic is enthusiastic about how GI Genius is performing. You see there a quote regarding their earnings on the fourth quarter of the financial year '23, the same mid-teens growth driven by procedure recovery and strength in GI Genius sales. Our GI business grew 16% in procedure volume recovery and continued strong adoption of GI Genius. You will have noticed if you have already scrolled the presentation, but if you haven't noticed, I'm going to tell you now, we're not giving any more data on the penetration of GI Genius in terms of how many devices have been placed because Medtronic expressly asked us not to do it. So what we will be saying to you today is that, that installed base continues to grow. I think that this slide shows you the quality of the U.S. hospitals that have already installed GI Genius as well as the organizations, the institutions mentioned on side with the logo that have already adopted GI Genius and are introducing more and more GI Genius in their endoscopy suites. What makes actually GI Genius so special. GI Genius is a game changer and I want to remember you all that while this year, we won the AI Breakthrough award plus year we won the Fortune 2022 'Change the World' list for the quality of the innovation. It's science-backed, it's data based, but it's also human-centered. What our studies are showing more and more is that when artificial intelligence and humans they work together, they are more effective than any of them on a stand-alone basis. So this is actually the new paradigm differently from what anybody can see now about the fears of the introduction of artificial intelligence here and there, when we see what is the impact of the introduction of the artificial intelligence in health care and especially in diagnostic procedure, we see that the joint action of both AI and the physician makes the quality of the joint performance not comparable with the performance of the physician on a stand-alone basis. And this is why we always want to mention that GI Genius is designed to assist the physician and is not designed to replace them. We are in the process of creating this new ecosystem to distribute applications, AI application within GI Genius because GI Genius as I told you, is a platform with a modular architecture whose purpose is to host multiple algorithms, multiple functions, multiple features, multiple applications. We are partnering, as we speak with some of the leading providers of med tech and AI and the overall, we are establishing cooperations with important hospitals, important institutions, well-known companies. We have created our Innovation Center website to allow parties to develop applications to be installed in GI Genius. You can find a lot of details if you just have a curiosity to scroll through our cosmoimd site. Cosmo IMD stands for Cosmo Intelligent medical devices, and this is our dedicated company for AI. This is a company that currently employs more than 50 people that are working 24/7 on the development of this new AI application. I'll tell you more about what is it that we are currently developing when we come to the pipeline. But what we want you to understand is that this platform creates the opportunity to be the U.S. market leader in real-time AI in GI and beyond. This is just a very simple list of the procedures that you can run using GI Genius as a platform to overlay AI content. And as you can see, it's not just 19 million colonoscopies, but it's also 6 million endoscopy, 500,000 ERCP, which is a special kind of endoscopy. You have 15 million laparoscopy where we can provide substantial assistance to the physicians performing the laparoscopy. You have rhinoscopy in non-GI, you have cystoscopy, you have laryngoscopy, you have arthroscopy. So the market has an incredible potential and let me tell you, we're not even mentioning here, robotic surgery, spine surgery. And again, all the many procedures where the physician does perform the procedure by looking at the screen and not by looking at a patient. The economics of creating a medical AI platform probably is not yet completely understood. The fact that it was one single device, you can introduce multiple apps should have everyone concentrate on the multiplier effect. We are trying to give an example on this slide, but just showing you the potential. You would remember that last time we gave a figure about how many devices have been placed. They were in excess of 1,000. Now we just look at 1,000 as an example. You just imagine that applications to perform different tasks could cause the hospital only as little as $1,000 per month that's not very much. If you assume that the app is going to generate substantial benefits for both the physician and the patient. But just look at that if you have only 1,000 devices and you have only one app place, that 12,000 per device because you have 12 months, that's $12 million in a year, and that's $36 million in 3 years, just bear in mind that the standard duration of the agreements that Medtronic is signing with the clients is around 27 months. If you have 2 apps, then you're going to have revenues of $60 million a year, every 1,000 devices and $180 million in 3 years. And if you have 10 apps, you're going to have $120 million for a year and $360 million for 3 years. Now if you have $120 million for 1,000 devices, and we have already placed as we told you last and we're not going to go back to that number. And we're not going to give you any update, as I said. But last time we spoke, I believe, we told you that we were around 1,500 now already placed. Now imagine that we are already at 2,000, then with 10 app that is $240 million. And with 3,000, you have $360 million. I don't need to walk you through the multiplier effect anymore. We are basically with GI Genius, we are everywhere in the news. Here, you just have a few gems of what's happening. We have an excerpt from the Northwestern Medicine. We have the statement over there from an MD at Northwestern Medicine, it was saying, because of our commitment to high-quality colonoscopy, we are already doing better than the national guidelines recommended, but could artificial intelligence make us even better. The answer is very clearly yes. On the left-hand side, you can see a couple of statements from the institution called MNGI, which is a very large health care provider and owner of many hospitals, you see Minnesota's best colonoscopy just got even better and why? Because they are launching and using GI Genius in all of their facilities. We told you already about the award. I just want to remember them again, AI Breakthrough award, Prestigious National Health Services in the U.K. award, winner last year of the Best Deep Learning Platform and being awarded, as I remember, we told you already about the very, very important contract with the U.S. Department of Veteran Affairs to install GI Genius in all of their endoscopy suite. Let's move to the pipeline because believe it or not, this is all that comes together with our market cap today. We have one product that has begun Phase III, that's Breezula for androgenetic alopecia. Then we have 2 early stage that we expect will generate substantial returns with low investments, and I talked about those already. First one is our one and only oncology program, which is nicely advancing in its Phase I. And third one is CB-01-33, colesevelam for the treatment of bile acid diarrhea. We expect to move this into Phase II at the beginning of the fall. This is what I wanted to point out. This is quite a new slide, but gives you the sense of what the company is doing. This is telling you what we're doing in terms of development pipeline for GI Genius. Actually, you don't see in here all that we're doing. You just see some of the things that we're doing right now, but we have 7 applications under development in GI and 3 applications under development outside GI. So the first one in GI is an app that we'll be able to issue what's called a summary that's going to tell the physician the level of bowel preparation score, the withdrawal time, the caecum intubation and other important performance indicator that will be very useful for the position to indicate in the report that it will issue. The second one is polyp sizing. This is underway. It will be an app to measure the size of the polyp, which is another very important thing and also quite indispensable to properly program to surveillance follow-ups. The third one is the automatic AI-generated report. What is this? This is going to be an application that will allow the physician to just print and sign the full report on the outcome of the procedure without having to lose any more time sitting at this desk and try to collect what's needed to type the report. And remember what has been done, what hasn't been done, what was found, what wasn't found. We will just now have to press the button and the artificial intelligence will generate the report, including procedure highlights just for him to sign, and we are respecting that this is going to save the position of a substantial amount of time. Then we're preparing application, first one to support the standardization of upper GI procedure. And here, I'm talking about gastroscopy and examination of the esophagus. One will be specifically dedicated to help the physician assess conditions in the upper GI endoscopy, monitoring esophageal symptoms and detecting esophageal conditions. Another app we're working on is to assist navigation in the stomach during gastroscopy, the stomach has put a complicated organ to be examined. And this is an application that will tell the physician whether he has effectively or not examine the whole surface of the stomach in search of our lesions. Another separate application will be for the detection of gastric cancer exactly as we have won already for the detection of colonic lesion. Then outside GI, we are developing 3 applications. One is for the detection of cholangiocarcinoma, you probably do not know, but there are many issues in the detection of that kind of cancers. And there are also many mistakes that are done, sometimes diagnosing a cancer, something that is not a cancer. We are also working on 2 different applications: one in laparoscopy and one in robotic surgery to help the navigation by creating a system of waypoints that will allow the surgeon to perfectly position itself inside the organ that needs to be examined and treated. When it comes to key priorities, we are reiterating both our priorities and our guidance. So total revenue between EUR 110 million and EUR 120 million, operating profit between EUR 25 million and EUR 35 million. The priorities will be expand the GI Genius business, expand the Winlevi franchise, advance the clinical and development pipeline and as mentioned in our press release, reimburse the bond and cash. I hope I've been effective in explaining that we don't need to do anything peculiar to reimburse the bond, we will just use the money that's in our account. But I also wanted to be precise, and here, I'm stating there's going to be no rollover. So Cosmo will not issue any more debt. We don't intend to have another bond. We don't intend to raise money with bonds in any form. We will just use the cash that we have at hand. And we will, together with the cash that we're currently be generating, we will have more than sufficient cash to just conduct all of our operations. So I'm thanking you very much. And I'll be more than happy to take any questions that you might have.

[Operator Instructions] Question from the telephone comes from the line of Bob Pooler with valuationLAB.

A few questions, if I may. First of all, maybe on the currencies, we're seeing a weak dollar there and how far does that impact actual revenues on a translational effect and also you're maintaining your revenue outlook. So that means that you're seeing actually strong underlying growth. Is that true?

Thank you, Bob. First of all, I mean, you're right in pointing out that and traditionally, we've always been exposed to currency fluctuations in a way that clearly we cannot control. This is a consequence of the fact that we do account in Euro, but we do receive substantial revenues in dollars, and we also have substantial spending in dollars. So from a certain standpoint, what we try to achieve is a kind of natural edge by keeping our liquid assets into the different companies. Also bearing in mind that the main spending that we have ahead, which is the Phase III for Breezula actually will be in U.S. dollars. So we do have to keep U.S. dollars. And last year, we did a gain on the U.S. dollars. And last year, we're making a loss on the U.S. dollar. That's not really something that we can avoid also because we have explored many, many times if there was any efficient way to manage the risk maybe entering into swaps, but that would have ended up just being too expensive and we decided not to do it. What we currently do is actually we do change in Euros, our surplus to try to reduce the impact. But clearly, if you have even only $40 million and then you have a 10% decrease, then you lose $4 million and actually, it's important, it's $4 million that are just figuratively lost because that's not actually impacting the position because the dollars that we keep are the dollars that we will spend. So effectively, it doesn't have an impact. But given that you have to draw lines at a given point because you have to close the accounts, then you have this impact, which is kind of annoying. And in respect of the underlying growth, the answer is yes. I just want to remember that also last year, we had EUR 41 million revenue in the first half, but we had EUR 61 million revenue in the second half. And as I said, we have also different deals, which we are about to close for the expansion of the Winlevi franchise. So we believe we can fairly say that we will be okay with the guidance.

Okay. I think that's quite a strong message there because, yes, as you said, the currency with the U.S. dollar, the weakening there to maintain and you're getting a lot of revenue coming from the U.S. Winlevi, GI Genius all and so that does, I think, means that you're getting strong underlying growth here. Maybe then switching to GI Genius. I think many people are starting to understand the multiplier effect on that and the leverage. I think more of the question is, when do you expect this multiplier effect to be material. So when do you see apps, when do you see this actually happening? Where will it take off?

We're putting out a plan with Medtronic for the deployment of the apps. Our intention would have been to have the first app deployed within year-end. And the other one other one to follow, at least 2, if not 3 of those that I have listed in the slide would be intended for deployment during 2024. Of course, this would also depend, some of them will need also regulatory clearance. So we will see somehow depending on FDA clearance. But otherwise, that is okay. Then I think that we're also working with people that are actually developing their own application, which they would like to embed in GI Genius, and they're taking care also of their own regulatory pathway, meaning that they will provide us a software as medical device SaMD as we prefer to say, app, which will be already fully approved and just ready to be installed. So it's also possible that because of this year will see the number of apps that will be placed in 2024 increase.

Then going to Winlevi, when do you expect the EU filing to occur?

The EU filing is actually scheduled because I don't know if you know, but you do have to get a specific slot, you cannot file whatever you want, but you need to have a slot booked. And our slot is booked for October. October.

And then just on Breezula, could you give us a little bit the time line for SCALP 1 and 2 when you expect top line results and maybe estimated costs plus also your commercialization plan?

I think it will be fair to say between the end of 2024 and the beginning of 2025. But you have to bear in mind that clearly, we cannot recruit all the patients simultaneously. So it's a process, and we have 60 centers. So it's quite a piece of work.

The next question comes from the line of Nicolas Pauillac with Kepler Cheuvreux.

Congratulations for the strong half year results. The first one will be regarding Winlevi. Could you give us more detail on why there was a delay in the payment of the stock? How much do you estimate this revenue to be? Can we expect this revenue to be imputed into H2 revenues?

Sorry, I'm not sure I understood the question. You said a delay in what?

In the press release this morning, you mentioned that the manufacturing revenue decreased due to timing differences in deliveries during H1. Can you give us more color on that, please?

That's simply because it was shifted. They have the inventory. So these are just regular shifts. Normally, depending on how sales goes, you do have request for manufacturing orders either in the first half or in the second half. If they believe that they have sufficient inventory in the shelf, they will just delay and say, well, instead of delivering me in April, please delivery me in September and hence the shift. That's just absolutely normal. It's a kind of sinusoidal curve that of the supply drugs. And clearly, any company try to or there just was strictly necessary to satisfy the market demand. This is why, for us, it's more important to see the royalty revenue increase rather than manufacturing revenue increase because we're expecting it to gradually dissolve, so what is reflected by sales is actually the revenue generated and the royalties.

And just to make sure I understood, we can expect, therefore, that there will be higher manufacturing revenues in H2 as they will come on new products, right?

That is correct. Yes.

Okay. And then we had a second question regarding the GI Genius. I believe in the press release, you said that the OpEx increase because of GI Genius. Could you explain us why the manufacturing revenues for GI Genius remain stable in the meantime?

I don't believe that we have provided a big breakdown between revenue coming from manufacturing and revenue coming from royalties.

In the report, you did provide the information.

Okay. No, sorry. You were mentioning the press release because in the press release, there was no breakdown. So I'm not sure I understand what is your question. You have to bear in mind the following: We don't manufacture anything that's not being ordered. When you see an increase in inventory, that's because we have been ordered devices, which we will then manufacture. We don't manufacture waiting for order. We only manufacture on order but clearly, we are paid only once we deliver, okay? This is important to understand. Over time, you will need to see that our share of revenue coming from Medtronic, which is our royalty if you want to call it like that, but it's actually more of a pure revenue share has to increase as contracts come to fruition and customers start paying. So it will be natural also in this perspective to see the revenue coming from subscriptions increase and the revenue coming from manufacturing being stable or actually decrease, okay? That's the nature of the business.

Next question comes from the line of Laura Hindley with Berenberg.

Firstly, on phasing. You reiterated the guidance for sales and operating profit for the full year. But given the first half performance, you do need considerable growth in the second half. Could you give some more color on where this growth is going to come from? And then from your comments on Winlevi, it seems like at least some of this could be milestone or upfront revenue contribution. Have you baked that into your guidance? And if you are including this milestone revenue in your guidance, is that only relating to Wind Levy or to other pipeline products as well? And then when we're thinking about modeling, should we expect greater milestone income in the second half of this year compared to how it was in the second half of last year?

Thank you. Well, to start from the last, we do have budgeted sales milestones from Winlevi, reaching certain level of sales. That is what we have in our budget. And coming to the first question, that's a little bit more tricky to answer. Yes, we do expect either upfronts and milestones coming because we have several potential agreements underway which we would have expected to close in the second half. So yes, you're going to see growth. We will be expecting actually organic growth, but you should also be expecting revenues coming from milestones and upfronts. And I'd rather say mainly upfront.

The mix split be there between organic growth and then the contributions from revenues and the milestones and upfront will put on in the upfront? When we're thinking about getting to your guidance, what level of contribution will the milestones and upfront be? Will this be greater than the milestones and upfront that we saw in the second half of last year?

Yes, or at least more or less in the same area. Kind of the same, if not higher.

And then another question on your tax rate. So your tax rate was particularly high this half, but typically, Cosmo has paid more tax in the second half of the year rather than in the first half. So should we expect even higher tax in the second half of this year? How should we think about the tax rate evolving as you go forward?

What have you seen that was difficult to explain in our tax rate. We have a rather have a rather flat situation. I'm not sure. Can you just help me understand better what is your…

Yes. So your tax rate comes out at around 60% say in the first half of this year, but historically Cosmo has paid higher tax rates in the second half. So if we think about this trend applied to this year, should we expect the continued high tax rate in the second half or is this a one-off particularly high tax rate?

Well, actually, it depends on the company because I'm not sure that this is completely clear. Cassiopea is an Italian company, Cassiopea pays higher taxes. So sometimes when you see the swing, that also depends on which company is more impacted by revenues. If you have strong revenues in Cassiopea, then you will see the tax rate increase, but that's the effect of Cassiopea being Italian and paying more taxes. Do you see what I mean?

More income from Winlevi in the future, we should expect Cosmos tax rate to trend up from where it is now, is that a fair assumption?

The fair assumption is that the revenue coming from Winlevi is taxed higher than the revenue coming from any other asset because all other assets have since ages been sitting in Ireland, and therefore, they do benefit in terms of royalties overall of a lower rate. The assets that are in Italy actually, they are impacted. And bear in mind also the following, that you do see swings also because our manufacturing activity is all done in Italy by Cosmo SPA, which is a fully-owned subsidiary of Cosmo Pharma. Therefore, if by any reason, in a given year, we have larger revenues coming from both dermatology and manufacturing, you see a shift in the tax rate because then a lot of taxes have to be paid uniquely whereas if it's in a year where we do receive upfronts for products and license that belong to Cosmo Technologies, which is our Irish subsidiaries, then you see the tax revenue going down because that is taxed at the Irish rates.

Okay. That's really helpful. And so just generally thinking about this year, should we expect an overall tax rate similar to last year?

Yes.

Okay. And then my final question, and I'll get back in the queue. If I've noted on your pipeline that you're not including Aemcolo in irritable bowel syndrome, diarrhea anymore. Have you discontinued development of this asset? Is that across all indications and why if you have?

The cost to run a Phase III in IBS is very expensive. And we have decided that we're not going to bear it if we don't find a partner that will support it also because given the fact that we would not be the ultimate market here of the of the product, it doesn't make sense that we're at a Phase III on a stand-alone basis and then hoping that we're going to find a partner afterwards. So we are actively in pursuit of partners for further development programs, and this is basically where we stand. Unfortunately, our partner, RedHill is not in a financial position to bear that cost, as you might have seen, given their current market cap. So that's why we're actively in pursuit of another partner.

Still looking for partners for this asset, it's just not listed in your pipeline because you won't be doing the Phase III trial?

Correct. We don't want to do a Phase III typical trial if we don't have a partner on sight.

We have a follow-up question from Mr. Bob Pooler, valuationLAB.

Just probably that is similar with Lumeblue on the potential second trial needed there for the U.S. What's the status with the U.S.?

The status for the U.S. is actually we haven't found the partner yet, and we won't do the second Phase III trial until we have found the partner. We are in active discussions, but so far, we haven't identified a partner yet. What we've been doing currently on the regulatory side is that we have added the FDA whether they can take as a second Phase III trial, the trial that was done by CMS in China because that was a very, very large trial with more than 1,800 patients. The nice thing of that specific trial is that it was run by CMS using the same protocol that was approved by the FDA for the second Phase III trial of Lumeblue. So actually, that specific Chinese trial is gathering all the information that are needed. And so we do hope that the FDA will agree that that is a sufficient clinical data to support the approval.

And then just one follow-on on Winlevi then. In the U.S., you've seen the last years, now you're getting the repeat prescription there. Do you see less sampling and rebates going on also with the second prescription?

Yes. The key now for Sun is just to expand as much as possible the coverage. So that is what they're working very, very actively. We've also seen an improvement in the gross to net. So that is a good thing. But the most important thing for them is now to expand coverage.

The next question is a follow-up from Ms. Hindley with Berenberg.

I'm just following up from both question again on Lumeblue and actually Aemcolo as well. So you're in these partnership discussions, I appreciate it's difficult to know exactly when these might happen. But are you thinking about deals being struck this year? Is that too soon? Could it be next year? And how should we think about the level of upfront in contrast for Winlevi? And then a similar question for Breezula. Will you only seek a partner once your Phase III trial is complete or are you in active discussions now? And how should we think about the upfronts there as well?

In terms of Lumeblue, I do not know. Frankly, I just want to tell you bluntly, I do not know. I don't think it's going to be irrelevant, but I do not know because that is going to be impacted also by whether the partner has to run a trial or not. And if we do get a clearance from the FDA that the Chinese trial is sufficient not to have another one, I guess that the outcome will come there. So unless we have full clarity on the regulatory situation, that's going to be a little bit difficult to speculate there. If instead it comes to Breezula, I believe that Breezula will see a definitely higher upfront that the one that we have seen for Winlevi. I don't think the market potential is actually comparable. It's true that alopecia is more of a condition than a disease, but the expectation is that this is going to be a global drug and therefore, it's coming with a very, very significant potential. Basically, all the partners that we've been having discussion to in respect to Winlevi, they all wanted also to in-license Breezula, but we have slowed down that. What we want to do now just establish everything in the trial, do patients start to see outcomes. We are absolutely confident that, that will be positive. And I don't want to be in a position that I'm lowballing anything given that we have decided to bear the cost of the trial anyway. So what I think that we will do is that we will wait for the end of the trial. But we will, in the meantime, entertain the discussion that we are already entertaining with all partners. And clearly, on the first one that's interested, it's also Sun. Sun actively pursued that first refusal for Breezula when we discussed the Winlevi license and we just told them that we weren't ready to go for that because giving a right of first refusal, would have actually hampered our capacity to negotiate freely also with other potential suitors.

Okay. So did you say higher upfront than Winlevi?

Higher, yes.

Finally, the timeline and potential upfront for Aemcolo and other indications.

Well, by other indication, I think you're referring mainly to IBS-D, and I told you where we stand there, if we were looking for a partner that's willing to bear the cost of the development because we don't intend to bear it ourselves.

Okay. So thinking about that happening this year is probably unrealistic.

It's probably unrealistic, yes.

We have another follow-up question from Mr. Pauillac with Kepler Cheuvreux.

The first question is regarding Winlevi, when can we expect the first revenue coming from commercialization?

That's going to take at least a year because the regulatory pathway for South Korea requires at least a year. So they will have to assemble the dossier, file it and then we hear. So not sure that we will be able to see it by the end of '24. That's more 2025, beginning of '25.

And maybe a final question from my side. Regarding GI Genius, how will the leasing model evolve with the new application? Will Medtronic come to an hospital with a list of fabs and then the hospital will have the choice to pick one application or it will be a package that they have to take?

No, it's exactly as you foresee. Medtronic has opted for the subscription-based model by looking at what Adobe had done in the past. And I'm sure you're familiar with what Adobe, the software maker actually did. Yes, the hospital will be provided with the list and hospital will decide which apps to download. And then clearly, the invoicing will start as soon as the app is unloaded. And you have just mentioned a very, very important point because the platform concept together with the subscription agreement model is going to change dramatically the way medical devices do get into the marketplace because now you have as you can imagine, extensively to promote them with physical meetings, you have to promote them by having reps going around and losing a lot of time and having the limited capacity of seeing on a certain number of clients every day. This is going to be completely different. You're going to have a menu you're going to choose from the menu, you will be in a position to test them. You will see in a position to see whether you like them or not and then be able to do a final purchase with the same speed that you would otherwise use to download an application on your mobile phone. So this has gone to revolutionize the whole health care industry also in terms of how apps will actually be promoted. Imagine the time to market and also the time to invoicing how that will be compressed in respect of today. Today, we have a lag time with GI Genius, which is more than 9 months between the moment that the hospital is starting to look at GI Genius and the moment the agreement is closed, and then we can start having the invoicing. So basically, the results that you're seeing right now in the promotion of GI Genius are basically those of exactly a year ago. People don't understand, but it's important that everyone understand, things are not happening as you speak. What the results that you're seeing of GI Genius now are the result of a year ago because of this lag time. When GI Genius will be solidly installed in thousands and thousands of towers in hospital, then the time to download the new app and the time to start making money out of those apps will be minutes. You see what I mean. It's not going to be 9 months or 12 months anymore. It's going to be minutes.

And maybe one last question regarding Cortiment. When can we expect the first revenue from Japan during H2 or later?

August. If everything goes according to plan, we are actually already been manufacturing the batches that we have ordered and we will ship them in the next coming weeks to Japan or probably some of them have been already shipped actually. I see the team telling me that we have already actually shipped prior to launch. So yes, the initial sales are expected for the beginning of August.

There are no more questions on the telephone at the moment. We will now read out questions coming from the webcast. The first set of questions comes from the line from Martial Descoutures with ODDO. The first one is, could you come back on the Lialda dynamics in the U.S. and Japan. The sales continue to increase. How do you explain the dynamics in terms of value and volume? And could you give us your feeling to manage the expectations for this drug?

That's right. The sales continue to increase, and there's a very simple explanation for that. The sales continue to increase because the generic doesn't work. So people and unfortunately are put on generic treatment because of the agreements that they have with their own insurers, which clearly puts them on the medicine with a lower cost, but not necessarily the generic is as good as the originator. And actually, in many, many instances, and we would have to open a very big and long bracket here. In many, many instances, the generic just do not perform as the originator or do not perform at all. So very often, patients do realize it, and therefore, they switch back to the originator even if this occurs at their own cost. And we have a lot of anecdotal evidence coming from patients that were on LIALDA that were moved to the generic and then wrote us that they were going back to the original Lialda because that worked and the generic did not. So that is the best explanation that I can give you. So my expectation is that Lialda will continue to grow. It will not be a tenfold growth, but it will be a steady and a nice grow and a very nice contribution and a very nice contribution to the P&L, which we expect will continue to increase. And the second question that I see, maybe I can read that because I have it in front of my screen. The second one is, do you expect specific milestones paid from your partners in H2? Well, we were expecting milestone coming from Sun. That's the main one. Milestone that was due by CMS is already into our first half account. We are expecting actually upfronts. We're expecting upfront from the agreements that we are in the process of negotiating. So yes, we do to expect milestones and upfront coming in H2. We've seen an acceleration of your contract manufacturing revenue in H1. Have you a specific objective that you could disclose for this year? No, that is a business that will also continue to grow. It will not be a dramatic growth, but it will be a steady growth as we also try to shift from less profitable production to more profitable production. I guess here, you're referring a content manufacturing on behalf of third parties. We don't have a specific objective, but we still have a limited capacity in our plans to expand that production and if there's going to be opportunities, we'll do it. Net financial expenses were strongly impacted by the FX. Can you give us more details for this end of the year? Well, I think we'll walk you through the dynamics. The dollar that you see within our deposits are dollars that will be spent over time. So we're going to bear whatever outcome is going to come out of that because it doesn't make sense for us to change them into Euro and then rechange them into dollars when needed. Let alone the fact that every time you change them, you're losing money. So we have always taken the attitude that if we have a foreign currency deposit that we plan to spend, then we just don't change it, and we keep it in that currency. This is the case of the dollar, as I have explained, the Breezula trial, which is going to be our most important cost center in the next year will be in dollars. So we will spend the dollars that we have. Could you come back on the Phase III design evaluating clascoterone? When do you expect to conclude the recruitment, publish the first data? I think we told you this. The Phase III design is relatively simple. The treatment will last 6 months, and we're going to have 2 co-primary endpoints. The first one is actually what is called an objective clinical endpoint. It will be the increase of the hair in a defined target area, which will be tattooed on the scalp of the patient and then counted. It's called TAHC, which stands for a Target Area Headcount. That is, as I said, completely objective, you just examined that the tattooed square on the scalp and you counted the number of hair and how this changes over time as an effect of the treatment. The second co-primary endpoint is a little bit more tricky. It's called PRO and this is actually completely subjective. PRO stands for Patients Reported Outcome. This has nothing to do with whether the hair is growing back or not, but it just has to do with how the patients feel, do they feel better? Do they feel more comfortable? Do they believe that their hair has grown even if it hasn't grown at all or do they believe that it hasn't grown, where the hair actually it has grown. That is the patient reported outcome. It's something that has always been there in this alopecia trial. And so the result of the trial will depend on the joint performance of these co-primary endpoints. There's another question coming from Mr. Thierry Serero. Can you give more details on the guidance. Last year, you had large milestones with Lialda and Cortiment despite the very strong underlying growth without milestones or license, the guidance will be difficult to reach. We have tried to explain several times receiving upfront and receiving milestones, it's an integral essential part of our business model. We are not a commercial organization, so we don't do direct sales. We develop products and then we license the products to our partners. So milestones and upfront actually are not occasional. They are embedded in our business model, and that is precisely what you should expect. You understand that it is very difficult to model them, and it's also very difficult to predict exactly when they will come, but this is part of our model. And I think that so far, as you have seen, we have delivered. Question from Mr. [indiscernible]. Can you talk about Genius GI competition in the U.S.? I would feel like cutting the answer very short by saying that basically there's no competition. Olympus had the plan of launching their own AI system. Now that plan has been delayed indefinitely. There is a company that's a spinoff of the Massachusetts Institute of Technology that to my knowledge so far, and with great fanfare has placed on device. They raised 150 million, but they have placed one device. Last time I gave you our data, which was March 2023, we had placed more than [1,005,000]. None of the alleged competitors have a marketing organization. None of them has the marketing power of our partner, Medtronic. So I should just say that I'm not particularly worried about the competition. But even more, no, while you do have some guys that are trying to develop a similar system for the detection, well, it's important that the market understands that we are far, far beyond that. Nobody has even yet conceived the creation of a platform and the deployment of a marketplace for AI applications. So I think that if any of the competitors will get to the market, then we will be far away from where we stand, the moment they come. I do have another question here for Mr. Ernst Hornet. Question is, where will you get the cash to repay the debt? The answer is from our bank account. Chris Tanner is asking us a question. Does GI Genius' revenue increases a factor of performed colonoscopy or a factor of gastroenterologists using the system? That is a question that I have a hard time understanding because what Medtronic gets paid for does not depend on the number of colonoscopies. It's a subscription that the hospital pays and therefore, the revenue does neither depend on the performed colonoscopy nor by the gastroenterologist using them because if the hospital takes a system and pays us and then doesn't use it for us is the same because we get the money anyway. So I hope I made myself clear here. Another question from Chris. Given the excellent reports on AI NHS, what is hindering the increased penetration of the EU market by GI Genius? Well, nothing is hindering, if not the fact that it is extraordinarily difficult long and cumbersome to deal with European hospitals because most hospitals are owned by the state and they're not private entities. So you have to participate to bid. You have a very long procedures to get into, then you have to fight with the well-known scarcity of resources of the public sector and the fact that the whole of European welfare is under a lot of pressure. So thank god that the U.S. have a different dynamic because if the success of anything would need to depend from the speed of reaction of European government, I think that we would still be at Stone Age. Finally, still from Chris, could you describe the subscription model with Medtronic? That's very simple. Medtronic is leasing the device to the hospital so the hospital does not become owner of the device, but Medtronic remains the owner and the hospital pays Medtronic a monthly fee. The average duration of any agreement for the placement of GI Genius is just currently 27 months. And why is this really important? Because every time Medtronic signs a deal, it knows already that it will be paid also for the subsequent year and for part of the third year. And this is very, very beneficial for their P&L and also very beneficial for ours. I believe that we've answered to all the questions. I don't know if there's anything left.

There are no more questions, either on the phone or written.

Thank you all very much for your time. And clearly, I'm more than happy to talk with any of you or answer any further questions offline, you can reach out to either me or Hazel at any time. Thank you so much, and have a good afternoon.