EQL Pharma AB (publ) (EQL) Earnings Call Transcript & Summary

[Foreign Language] So while we're waiting for some more people to drop in, I just wanted to check if there are any non-Swedish speakers in the call today, in which case, we will do the presentation in English. So if there are any non-Swedish speaker, please, just ping or raise your hand or. Okay. [Foreign Language] No I see in the chat that we actually have the non-Swedish speakers. I'm so sorry for noticing that too late. So if we still have any non-Swedish speakers left in the call, in that case, my apologies going forward. Okay. Okay. Okay. Thank you. Sorry, Dan and Joseph, I saw your pings in the chat there too late. But we can do -- we can try and do the questions here maybe in English, so that -- for Dan and Joseph here. And then in the coming quarterly presentations, we will do in English.

So I think we have a question from Ludvig here.

Yes. Thank you for a nice presentation. So I have a couple of questions. How big of share was -- how big of share of COGS was freight during the quarter?

So let's say, in general -- if we take that question in a little broader sense, in general, you can say that our COGS always has a part of it, which is the freight. And that is quite different depending on if the product comes from Europe or if it comes from India. But in general, you can say that the freight cost -- in general, you can say that the freight cost is at best, SEK 1 per pack and at worst, it is SEK 5, SEK 6 per pack in the normal sense -- in the normal case. So what we had in the quarter was extraordinary freight cost due to the situation in the Red Sea. And when we try to estimate the extraordinary part of the freight cost, it amounts to roughly SEK 1.6 million, meaning freight cost that was uniquely associated with this situation.

Great. And how much cost do you have left related to the uplisting?

I would say that the absolute majority of the uplisting costs have been taken now.

Great. And expected launches of products, what would you say is the biggest uncertainty factor on how this will actually play out?

That is always logistics, I would say. So when it comes to -- so what happens normally when we get the market authorization, is that it takes -- for our normal pharmacy products, it takes roughly 6 months to launch the product. We need to place the launch purchase order. We need to finalize the art works and/or the labels. We need to make the logistics work. And all our laboratories that analyze the product, it always takes a little extra time the first time. So it is a matter of the practicalities so to say. So it will be a matter of logistics primarily, I would say.

Yes. Great.

Thanks a lot, Ludvig. I also want to say if somebody has questions and is not comfortable to ask them in English, it's fine to ask in Swedish, and I can translate here. So we have one question here in the shut, and it's -- I will read it first in Swedish, and then try to translate it to English for our non-Swedish speakers here, so. [Foreign Language] Okay. So in English the question is, the decreased gross margin is partially explained by the increased freight cost due to the Red Sea situation. The rest of the margin drop compared to quarter 3. What is that because of? And that is because of the product mix. So we always have a certain variability in our product mix. Sometimes we sell more of our high-margin products, sometimes we sell more of our lower-margin products. And some of our lower-margin products are also top-line drivers. So it's always a trade-off you can say here because we have our growth target, and we also have our margin target. In general, we have prioritized sales growth above margin optimization at this point because it is also not the last year in the 5-year plan, where we really measure ourselves against this 25%. I hope that answers Anders' question here. Otherwise, Anders, just [indiscernible] you then. We have a couple of different under share. Otherwise, please just write in the chat, and I will try to explain better. Then we have a question from Krister here. What is your view on the cash flow for the quarter. What do you expect for the quarters to come? Okay. So if we zoom in a little bit on the cash flow for the quarter, we have a relatively large increase in working capital. And that is partially due to a lot of new launches. So always in relation to new launches, we stock up quite much, which means that our inventory increases, which means that our cash position decreases. Also, in combination -- in relation to when we grow, when we grow a lot, which we did this quarter, we also tie up working capital in accounts payable, and that is one component. If you go through and have a look, you will see that it's one component that has also increased quite much is accounts payable in the quarter. And this is -- so that increases the working capital. And that is, I think -- yes, it has a negative impact on the cash flow for the quarter, of course, but it is temporary. The accounts receivable and the accounts payable posts in the working capital, they -- I mean they neutralize each other over time. For the quarters to come, I would view that we will keep building stock. And here, and this might seem counterintuitive to some, but we have decided to focus on top line growth and EBITDA margin for the time being. So we are still a fast-growing company. So for the time being, we don't really optimize on cash flow. We make sure, of course, that we are cash efficient. We make sure that there is enough cash to do what we want, but we don't really optimize on cash flow like a more mature company would do. Like, for example, in 10 years' time, it is maybe something or even in 5 years' time, it's something we would focus more on. But for the time being, we have selected to focus and optimize on sales growth and EBITDA margin, even if cash flow needs to suffer a little bit to support that. And -- I mean it costs money to grow that. That is how it is. So that we need to manage the liquidity here. I think the really important thing here for me is that we see a steady sales growth and a steady profit growth without jeopardizing our cash position. That's my view. Then we have a question [indiscernible] Okay, I see thumbs up, so I hope she's happy with the response. Otherwise, please just write more in the chat. I will try to clarify. Then we have a question from Anders [indiscernible]. [Foreign Language] Can you say something about the Mellozzan launch in Germany? How has the initial reactions been? Yes, I can say a little bit about that, but not so much about figures. I mean it's only been selling here for a little more than a month. So it's very, very early. And when you're building a market from scratch like this, it is about going out there and informing doctors, informing patients, informing key opinion leaders and actually making doctors prescribe a new product and making families actually feel safe with giving this product to their children. So this is something that takes a little bit of time. But we have received quite a nice report from our partner that, and this might seem a little bit fluffy, but the reports I'm getting is that the bus is good. And what that means, the bus is good. What that means is that when they are interacting here with their sales force -- field sales force, with key opinion leaders, looking into ADHD communities online. There are huge Facebook groups, for example, for ADHD for parents, with children with ADHD and so on, they report that the bus is good. So let's see what that means. I suppose it's a positive thing, but let's hope that also translates into good sales figures here. But I would like to -- I have great hopes for Germany, but I would also like to manage expectations by also saying clearly, that it takes time to build a brand like this. That is, let's say, the downside of it. The upside of it is that once we have a strong brand, we have the brand loyalty as well. So I hope that gives a little flavor, Anders. Then question from Erik here. [Foreign Language] Okay. So how much do you capitalize in the quarter? And where in the P&L can I see these capitalizations? So okay, before we jump into the figures there. So just to explain a little bit how we work with capitalizations. So a lot of the work that we are doing is working with our pipeline, meaning products that are not launched yet. This can be milestone payments to CDMOs, it can be license fees, and it's also internal hours here that for the team who work with the developments. So -- and regarding the exact figures, I think Anna, I need a little help from you there. Do you know them by heart?

Not the number of it. No.

Can you help me to guide where it can be seen?

If we see -- you can't see the specific, the amounts, but you can see it in the OpEx. OpEx.

And I suppose, Anna, you could also see it by comparing? If you look at intangible assets in the end of Q3...

Yes, of course.

And then look at intangible assets in the end of Q4, you will see the delta there, where you can see exactly how much was capitalized during the quarter. We should, of course, know this figure, so I apologize for that. But -- yes, it seems neither me nor Anna know them by heart. But have a look there, Erik, and you will see. And homework for me the next quarter is to study these figures closer. One more question from Ludvig here. How much have you had to rely on airfreight during the quarter? And how do you believe this will continue going forward given the status quo at the Red Sea? Yes. So the situation, what we had in the quarter here in regards to airfreight was a little bit of a perfect storm because we were stock out on a lot of products, on a lot of antibiotic products going into Q4 and late in Q3, meaning very dependent on inbound logistics. We had 8 launches in the quarter, meaning super dependent on inbound logistics. So if you sum those 2 together, we have been very, very dependent on inbound logistics in the quarter. And quite often, when we have been stocked out and when we are launching new products, we use air as an option, then we generally fly home a little quantity and put the rest on boat, so that the quality we take by air will cover a couple of weeks or even a couple of months of sales. And then our sea volumes arrived, and they have lower COGS because the freight cost for them have been lower, and then they can take over sales, so to say. We have not really dared to be so bold now in this quarter to really optimize this as we normally do because the situation has been quite rough and even getting transportation has been difficult. So we have, I would say, chosen really to put most of the critical quantities here on air, and that is also the reason why we successfully could launch a lot of these products that we launched. And that we could successfully relaunch a lot of our antibiotics during the quarter. So what I believe is that we will still have elevated costs for freight going forward, but we will have less and less air dependency for every quarter. So I would estimate that freight cost will be higher than normal going forward, but that we saw a peak in Q4. And that Q1, Q2, it will decrease quarter-by-quarter here as we can manage more by sea freight. And when the situation in the Red Sea will change? I can, of course, not speculate. We will just try to work around it for as long as it will be there. So again, Ludvig, if you have any follow-up questions, just to write in the chat. Then another question from Krister here. Can you elaborate a bit regarding the time line for the uplisting at Nasdaq? Yes, as much as I would like to do that, and as much as I'm sure everybody would like to know, I cannot elaborate so much on that. But what I can say is that it's not so long until we can give more information. So quite shortly here, we will be able to provide with more information. So I'm sorry that I cannot say more about that right now, but it's simply how it is. Then we have a question from Pontus from [indiscernible] here. [Foreign Language] So our revenue from Mellozzan outside of the Nordics accounted for as a royalty revenue? I think, Anna, I need your help there. Again, how we have done that so far?

It's both yes and no because if we have a royalty, and then it's -- I can say both yes and no. They are different.

And -- yes. So I would think there, Pontus, that we have I would say we have 2 different revenue streams from Mellozzan outside of Nordics. We have one revenue stream, which basically is the license fees that we are getting, which is basically something we are getting for our asset. And then we have royalties -- we have revenue streams from buying and selling the actual product. And there is a logical difference there, and hence, also in the accounting. Then I would also like to say that the actual sales of Mellozzan outside of Nordics has been relative to our total revenue, quite limited so far. So it's not something that has a huge impact yet. And we have a question from Dan here. So let's say, Q1, I understand there were some stock out situations. How much do you think the lost sales have amounted too because of out-of-stock percentagewise? Let's see. Question one. Of course, question one I was -- in my mind is on quarters. Question one. Let me see. Yes. So 2023 and '24 has been -- I mean we -- after all was said and done, we actually managed to grow here our base business by 30%. That is less than our target, but it's still decent. So I am relatively happy with what we actually managed, but it was a challenging year. And the main reason for that was the stock out of the antibiotics, which we struggled with for more or less the whole year, except for parts of Q4 here. So -- I mean without the stock outs, obviously, the sales figures would have been better. So it's a little difficult to speculate in. But I mean our growth trajectory is on 40%, and I think we would have definitely managed 40% growth this year, if it wouldn't have been for the stock outs of the antibiotics. So it has a very big impact. Question number 2 from Dan. Could you please say a few things about your competition? Absolutely. So we have -- if we focus on the Nordic region, where we have the majority of our sales and profit for the time being, we have a couple of main competitors. I would say, there are a few companies that have understood the same thing what we have understood about the niche space, but have still a slightly different way of doing things. So we have Orifarm Generics. They are, I would say, very competent competitor, which have more or less realized the benefits of this niche space. But I would say they have focused more on the niche generics part maybe 10 years ago or even a little more and done it very good. Their focus right now is, in my view, not so much on these type of little smaller products, you can say, products between EUR 500,000, up to maybe EUR 2 million sales. What is our sweet spot? They are a little more on bigger products, I would say. And perhaps parallel import as well. We have Evolan Pharma, which is a very competent company, a highly respected competitor, which also very active in the niche space and have grown very nicely. They're a private company, so not public. They, I think, have focused a little more on licensing and asset deals which, of course, gives very fast sales growth and profit growth, but with a higher leverage. So they're also doing it slightly different than we are. And then obviously, we have companies like Sandoz and Meda, now owned by Viatris, which hold the originator products to which we have developed generics. I know also that especially, I think, both in the analysis that [indiscernible] conducted on us and also in the old [indiscernible] analysis, there are very good sections on competition, if you want to read a little more about the competition. Then we have a question from Krister. How much do Mellozzan and [ medpex ] need to contribute to allow you to reach your next year target growth and the EBITDA of 25%? Okay. So I will not go into figures there, but I will say that they don't need to contribute very much for us to reach our goals. And the reason why we have built our plan like this is that I want to keep the base growth plan relatively free of dependency of [ medpex ] and Mellozzan if that makes sense? Because -- of course, I believe a lot in Mellozzan and [ medpex ], but they have a completely different character to our normal product, which made them more difficult to project. So it is -- when projecting Mellozzan sales for the upcoming 12 months, it's more about hoping and dreaming rather than actually making a bottom-up forecast. Therefore, I would like to keep the plan relatively independent. Okay. Thumbs up from Krister. so I take it that the question was answered. Then we have a question from Victor here. With your focus on growth and not optimizing cash flow, can you give some color on your liquidity and financial headroom, including bank facilities to achieve growth ambitions? Yes, of course. So if we start with my general view on cash position and how we optimize and how we allocate cash, so -- we have a lot of cash tied up in inventory. And the reason for that is that we believe that holding more stock than our competitors, in general, makes it possible for us to grow faster than our competitors because doing just-in-time logistics in our type of business is very, very difficult. So if we always have a little more stock than the others, we can benefit from others stocking out. Then we also have facilities from that. So we have a working capital financing, which, for the time being, cost us around 5%. So that is -- on the downside, it's an interest cost. But in the upside, it allows us to tie up more cash in working capital. Then Obviously, CapEx is a huge cash flow post for us, and it has been in the range of SEK 20 million to SEK 35 million in CapEx here, historically. My ambition is to accelerate CapEx, and I think that is the right thing to do for us as long as we still discover good products, discover good opportunities that allow us to grow. So my ambition when it comes to, when it comes to CapEx, is to really use all the free space that we have in our cash position from the generated free cash flow from the business, whatever is left after working capital to reinvest into the company as CapEx. And you will see a growing CapEx here in the years to come, and that is an -- a result of aggressive growth strategy that we have. And we also have, I would say, quite -- we have certain working capital facilities, where we also have still unutilized head space, you could say. So I am not super worried for our cash position for the time being. I would also like to say that in our continuous analysis of our business and our forecasting, we look very much on liquidity forecasting, so that we can play this game in the right way and balancing CapEx investments with working capital investments and still making sure that we have buffer in available funds to run the company smoothly. So just let me know there in the chat, Victor, if that was answered enough to your question or if you would like some more color? Victor is happy. Question from Erik. I'll take it in Swedish first. [Foreign Language] So in English, one more question about capitalization. Maybe you cannot answer that more specifically right now. Is it fair to assume that the post investments, divestments of intangible assets from the cash flow statement of SEK 9 million was activated in the quarter. Honestly, I need to pass that one to you also.

Yes, that's correct. We have both activated a cost that comes from salaries that our employees work with products that are not -- well, that are in our pipeline. And then yes, like you said Axel, the other costs that have been activated in the quarter. So yes, SEK 9 million. Correct.

Yes. So you can say more or less SEK 9 million in CapEx in the quarter here? And this is also -- yes, historically, and also, like I said, historically, we -- our CapEx went up and down a little bit historically, but it's been sort of in the range of NOK 20 million to NOK 35 million, and we will see CapEx going up here in the quarters to come. And I would view that as -- I see that as a very good thing because where we are reinvesting into the company, and we are finding actually -- we were unsure if we were going to find more products in our home turf, which is the Nordics, but we are continuously -- more or less every quarter, not this quarter, but more or less every quarter, we're signing new products, and I think that's great. And that we're finding more profitable product here, and which will, of course, lead to higher CapEx, but also to have a long-continued growth journey ahead here. Any more questions? While we're waiting for that, yes, again, I wanted to apologize to the non-Swedish speakers here that we made the presentation in Swedish here. So going forward, now that we have a couple of international institutional owners as well, we'll do the presentations here in English. And if anyone in the audience is not comfortable with asking questions in English and so on, just you can always e-mail your questions. Also, just write them in Swedish here, and we take them in English. But it seems there are no more questions. And I cannot see any raised hands. Now we have a few more coming in. I saw Erik again. [Foreign Language] Okay. So how do you view the EBITDA target when you capitalize since you -- since EBITDA excludes depreciation and amortization? As I interpreted, increased CapEx will contribute positively to the EBITDA target? I wouldn't really say that. So the way I view it, I view EBITDA as the clean operating profit growth in the P&L from a business that invests a lot in the future. So I would say, I mean, increase in CapEx and increase in capitalization will not automatically increase the EBITDA, but I would still like to encourage everybody who really wants to understand our business needs to look at EBITDA, EBIT, balance sheet, cash flow statement, everything. But I mean, we are not doing any kind of accounting exercise here to optimize EBITDA by capitalizing more internal hours than what is reasonable. We're trying to do a representative accounting here where we simply -- the people who work with R&D and the pipeline those hours we capitalize and other hours we take as normal OpEx. And then, of course, the larger the intangible asset part in the balance sheet grows, the larger the depreciation and amortization will be. So meaning the larger the bridge between EBITDA and EBIT will be, that's, of course, true. That's, of course, true. I hope that answers the question, and we have only very little time left. And the final question from Pontus here. How is the process going with starting a tender for the Nordic market? So if I understand Pontus question correctly here. There have been ambitions with Nordic countries for coming together and doing joint tenders. Do I understand that right Pontus that is the question. Just do thumbs up there if that is. I think Pontus is referring to new development projects for -- that we have been tendering, some new products. Just -- can you just verify Pontus that, that's correct. Yes, thumbs up. okay. So what Pontus refers to here. is that we have added a lot of products here in the last, I would say, 18 months, a lot of products to the pipeline. These are mainly been licensed products simply because it's faster to -- faster and cheaper to find licenses. In parallel, we have also been looking at new development projects, meaning products where we, together with the CDMO develop the product from scratch, the generic product from scratch. And we have been reviewing a large number of such products. And I can say that a handful of such products are very close to signing. Let's say, 4 or 5 products are very close to signing, meaning we can start a new wave here of development projects and add a handful of new products to the pipeline. And another 10, 12 are still under negotiation and so on. And I hope that we will be able to sign them here during the year, but I'm not sure on that yet. But it's something we work intensively on. So I think we need to wrap up there. It's 11:00. I hope you all feel it was informative. Thank you. Thank you very much, everybody, for listening and asking good questions here. And let's meet again here in 3 months and hopefully, have some very good figures and progress to discuss them. Thank you very much.