Eusa Pharma (Uk) Limited (REC) Earnings Call Transcript & Summary

Good afternoon. This is the chorus call conference operator. Welcome, and thank you for joining the Recordati, the acquirer of Eusa Pharma conference call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Federica De Medici, Investor Relations and Corporate Communications. Please go ahead, madam.

Thank you, Jodie. Good afternoon or good morning, everyone, and thank you for attending the conference call today. I'm pleased to be here with our new Chairman, Andrea Recordati; our new CEO, Rob Koremans; and Luigi La Corte, our CFO; and Gabriele Finzi, Head of Business Development; and Corrado Castellucci, Head of Recordati Rare Disease. With a short presentation, we will provide more color on the strategic rationale and present the transaction in more detail. As to slide is available on our website under the Investors section. At the end of the presentation, we will answer any questions you may have. I now leave the floor to Andrea. Please go ahead.

Good afternoon, and morning, everyone. Thank you for attending our conference call today where we're pleased to give you some more color around the transaction that we just announced this morning. And transaction that we feel offers great growth opportunity and also inhabits our opportunity to further build scale and a new for us and very attractive and undeserved for [indiscernible] area. And therefore, a further diversification further for our rare disease business. In line with our strategy of complementing organic growth with value-accretive M&A, we see the acquisition of Eusa Pharma has an excellent opportunity to further expand, like I said, and reinforce our rare disease franchise. Building on top of the businesses, which have already demonstrated solid organic growth being clearly metabolic and endocrinology as recently communicated in our Q3 2021 results. The acquisition broadens the Recordati rare diseases therapeutic focus. We'll be entering to the rare and niche oncology area and is another step in fulfilling our mission to improve the lives of patients by delivering treatment to address serious unmet medical needs. We are acquiring not only one single product but a well-diversified portfolio of products, adding in-market assets with a growing trajectory, a portfolio which is expected to generate over EUR 150 million of revenue by 2023 and with expected peak sales of around EUR 250 million. Just a few words on the main products and the products of the portfolio. Qarziba is an anti-GD2 monoclonal antibody, is a first product approved in Europe, indicated for high-risk neuroblastoma, approved for both new and refractory patients in EU and other countries with a potential future expansion in the U.S. and China. Sylvant, an anti-IL6 monoclonal antibody also has a strong potential since the first and only one approved product for idiopathic multicentric customers' disease, iMCD in the U.S. and EU. This product has the U.S. as the main current market, but we expect a global growth potential for set products. Fotivda is an oral highly selected small molecule tyrosine kinase inhibitor, approved for first-line treatment of advanced renal cell carcinoma. And Caphosol is a global medical device for oral mucositis due to the chemo and radiotherapy, a niche products sold global. With the acquisition, we are also going to complement our existing global footprint and expertise with new capabilities, which will provide a platform for future expansion of future and further expansion in these areas. This transaction is clearly very coherent with our strategy of growth, acquiring assets, able to create long-term value and we expect Eusa contribute approximately EUR 50 million of -- EUR 50 million of EBITDA level in 2023 and with EBITDA margins in line with the rare disease segment. If you could turn to the next page, please. So this slide aims to provide you with a bit more color around the company that we are acquiring. Eusa is a world-class biopharmaceutical company with current main reference market being EMEA, which represents almost 70% of sales, but with good future growth potential also in the U.S., which is currently at 20% of sales. The pie chart shows the breakdown of the last 12 months net sales at the 30th of June of 2021, which are approximately EUR 130 million. It has a global commercial presence for direct operations, mainly in the U.S. and -- in EU and in the U.S. And also some presence in other countries globally and complemented also with strategic partnerships where they don't have a direct presence. The company has a profitable cash in generating business and a unique and diversified portfolio of 4 rare and niche oncology products, as I said, with a growing trajectory. Company overall employs more than 200 people, with a strong patient-centric culture and a leading disease area expertise, which will surely be complementary to Recordati's know-how. As we're adding a new specialty rare and niche oncology to our product portfolio, we want to focus on maintaining skills, knowledge, business know how, customer relations and interactions and continue delivering crucial therapy options for patients and obviously, the health care providers. Qarziba and Sylvant combined represent more than 80% of the Eusa revenue. We are protected -- these 2 products are protected by long-lasting patent protection and market exclusivity as you can see at the bottom part of the slide, that are also biological products with complex manufacturing processes, which makes them -- which we feel gives them further protection versus potential generic entry also post patent expiry. This portfolio of transformative unique assets is managed for a highly efficient and commercial infrastructure, like I mentioned before, with globally market access through direct presence and selected partnerships, which is obviously offers Recordati a platform for future expansion in this area. Moving on to the next slide, financial snapshot. So here, we want to give you a bit more details clearly around the transaction, the actual transaction details. As mentioned, we expect the position to contribute EUR 150 million of sales in 2023 with peak sales of EUR 250 million, an EBITDA level that we expect to be around EUR 50 million by 2023, with the ongoing margin in line with the average of our Rare Disease segment. Some nonrecurring costs in 2022 and '23 will come from ongoing manufacturing tech transfers and also the acquisition integration expenses, which are estimated to be around EUR 35 million. And clearly, are also subject to the timing of the closing. The value of the transaction, i.e., the enterprise value is of EUR 750 million, and the payment of a consideration will be funded by existing liquidity and bridge financing fully underwritten by JPMorgan and Mediobanca. It's a healthy cash-generating business, I would like to stress, with net debt of EUR 26 million at the 30th of June of this year. We expect our leverage after the transaction to be below 2.5x at closing and to return below 2x by 2023. The transaction does not change our dividend policy, which is confirmed to be around 60% of reported consolidated net income. As for the timing, like I mentioned, the closing of the transaction is subject to regulatory clearances, as is normal in this case, and these are expected to take place in the first half of 2022. And that brings me at the end of our first kind of run through the acquisition of Eusa Pharma. So I think we can switch now to the Q&A session. Thank you.

[Operator Instructions] The first question is from Brian Balchin with Barclays.

So just [indiscernible] if I may. How much of that EUR 250 million peak sales is tied to the U.S. approval of Qarziba? And also, what kind of growth rates can we expect on the [ ESA ] products? Should we be thinking that they be in line with our current orphan portfolio? And then secondly, can you just confirm that, that EUR 50 million EBITDA in 2023 is adjusting out into ration costs or if we need to wait until 2024 for a clean EBITDA? And then finally, if I could just squeeze in one more. If you can just tell us the incremental interest costs associated with the financing package as well, that would be great.

Brian, it's Luigi. Thanks for the questions. I'll take the last 2 first. EBITDA excludes nonrecurring costs. As always, we do expect 2023 to still see investment behind the global growth opportunity of Sylvant and as we prepare for potential development of Qarziba for the U.S. So yes, it's like peak or, let's say, going rate of margin will come up post to 2023, but we're not going to give sort of a specific date for that. On the financing expenses, I think you can sort of safely assume -- sort of level of financing charge in line with the sort of current financing costs of Recordati. And clearly, it will depend also on the sort of market conditions at the time that we actually close the deal in 2022. With regards to your first question, frankly, we've not closed the deal yet. It's not our business at this point in time. We're not going to give sort of breakouts of revenues by...

It is also confidential information. And Luigi just explained that we haven't closed the deal yet, so we cannot get into the solid details at this time. We appreciate that.

The next question is from Niccolò Storer with Kepler.

My first question is on upside risk that you see on the EUR 250 million guidance. Do you see some upside in this sense or not? We all remember of histories as a first indication, which were very low and subsequently rise by a big amount. And the second question is on the ramp-up in profitability which you see on this portfolio of products starting from some 30% in 2023 to a number more aligned to your orphan drug portfolio, so more in the 50% region. So which are the drivers behind this growth is just volume or -- is there something else?

Niccolo, thank you. It's Luigi. I think in terms of the margins, rather, really, it's going to be the operating leverage, right? As Andrea mentioned, this is a portfolio of products of high growth. We are expecting, as we've seen so the numbers for significant sort of revenue appreciating over the years, and that will drive the margin improvement that we expect year-on-year with 2023, still expected to be a year of investment. On the peak sales, that is -- it's our best estimate at current. And I was just cautioning drawing too much from [ Parana ] with [ Endo ]. I think in a number of occasions, hopefully, I was able to explain a number of things actually sort of evolved since the end of the year was announced in 2019. We had an earlier-than-expected approval in U.S. of Isturisa. We had the readout -- a positive readout of the second study, the LINC-4. We had very strong endorsement in Europe at the time that the orphan drug designation, that was confirmed all things which were not given or known at the time the deal was done. So the EUR 250 million that we've set out today is our estimate of the potential at this point in time.

The next question is from Martino De Ambroggi Equita.

A few questions on the deal. Even I -- if I know it's probably not possible to answer, but just to have an idea of what is the starting EBITDA margin for the acquisition? And am I right in assuming big sales towards the end of the decade, looking at patent expiries for the 4 products? Third question on the R&D. Is there any change in your R&D going forward following the acquisition, assuming you have to spend more money for the final process or probably you have milestones, I don't know if you can disclose it? And the last question is on the guidance. You provided the 2023 guidance. Am I right in assuming that through this acquisition, you are probably approaching, if not achieving at the low end of your ranges? And through this acquisition, your free cash flow on an annual basis is moving towards the EUR 500 million already in probably 2024.

Martino, thank you. That's quite a few questions. I'll try and see if I can briefly hit on all of them. And you guessed right. I mean some of them, I'm not going to be able to say much. I mean when we'll reach peak, that is something that we don't typically disclose. Hopefully, we've given you some direction already, again, on a deal which hasn't yet closed. We're not sort of giving for similar reasons for the current EBITDA in the sense of the recurring trading simply because that's not going to be relevant for us for a number of reasons, including the fact that the deal closes in 2022, and we still don't know at which point exactly in 2022. So again, there, we've made an estimate and would have done a number of changes over the course of 2021. So frankly, 2021 is completely irrelevant. R&D costs, yes, there'll be -- we're not going to give now sort of estimate, sort of breakout from the P&L. Again, we've given you a guidance on EBITDA contribution that we expect. I think R&D costs will reflect, for sure, a level of amortization charge that will be triggered once we've done the purchase price allocation post-closing. And yes, there will be a bit more R&D cash cost behind the development of Qarziba for the U.S. But we'll provide more details on all this when we -- once we close the deal and are ready to speak about it a bit more freely. The deal is consistent with our 3-year planning strategy. We always said 2023 guidance included BD. So there's no change there from our point of view. And free cash flow, the EUR 500 million -- sorry, I'm not sure I tend to sort of comment on that number in terms of when we will reach it. Again, we gave a guidance for EBITDA for 2023, which is a pretty sort of close proxy, and we're saying today, we're still feeling in line with our guidance. Hopefully, Martino, that addresses your questions.

Yes. Just a follow-up, if I may. I know your guidance in 2023 already include some acquisitions. But my question was, is it enough to fill in the gap including these acquisitions. So whatever will come is probably an add-on on the possibility to achieve the guidance, which is probably already visible through the last acquisition.

Martino, as you know, we never gave an exact split of what is organic and inorganic because it's not as simple as that. I think we've given that when we did the plan, in May, some, I think, quite some perspective on the expectation -- growth potential of the organic -- the current business. We took a view on the potential contribution of BD and then sort of looked at that in the round and set a range for the guidance. And I know that has been asked many times, but we see it as a number. So I'm not now going to comment on what is the -- where it positions exactly within that range, to be honest, per [indiscernible].

The next question is from Jo Walton with Credit Suisse.

Just a few, please. I'm assuming that the majority of the uplift in opportunity that you see is from the Qarziba product potentially going into the U.S. Now when -- I don't how you pronounce Eusa Pharma. When the company who bought this -- bought it in 2016, they said in their press release that they were expecting to file it in the U.S. in 2017, and yet it's still not there. If you look at their website, there doesn't seem to be any clinical study ongoing at the moment that would be pivotal enough to support a U.S. entry. So could you just give us some idea of the time line for getting that product into the U.S. And if we're correct that, that is the major growth opportunity that you see within the portfolio. The second one is just your comment on manufacturing technology transfer, presumably, particularly for the complex monoclonal antibodies, you're not making that. So is the manufacturing technology transfer for the [indiscernible] or the mouthwash product? Just trying to understand that. And then just as we have the deal starting and you've got to transfer your market authorizations, et cetera, are we going to have the same sort of distortion to your earnings that we normally get when you get a product coming in. So we don't see the revenues to start with. We just see the gross profit contribution. So initially, it looks like you get the higher margin. I know we had this with Eligard, we've had it with Isturisa, but this is a bigger deal potentially.

Look, Jo, I mean, the 2 drivers -- I mean, growth drivers of this portfolio, if I understand the question correctly, your first question, are -- It is currently in the U.S. We are excited about the process about potentially bringing us in the U.S. market. But we will discuss, obviously, as I said, we said before, we're still between signing and closing kind of situation. So we need to discuss this closer with the Eusa and it's not really appropriate to give more details at this stage. I can tell you that obviously, that is an important driver of growth in the plan. But at the same time, we also see a lot of potential and a lot of the growth that we expect to get into this portfolio is also coming from Sylvant. So that is going to be a very, very important driver of growth as well, okay? Regarding the second question, you asked many questions.

Yes. I'll take the next 2. I think the second one was around transfer, you will have noticed the word said ongoing. So this is a tech transfer, which is already ongoing at the level of Eusa on the products. And I think on the other one on sort of marketing authorization transfers and sometimes the effect that has on the accounting, that's not the case in this transaction when we're buying a company. So there won't be any of that in this specific case, Jo. I mean there will be -- obviously, we'll consolidate as and when the deal completes, but there's no -- there's not a big effect that we discussed for the Signifor deal or the Eligard deal, if that's what you're referencing.

And can I ask the 200-odd people that work for this company. Do you -- can you give us some sense of what proportion of those are in marketing in the field promoting these products? What degree there is any internal R&D? All of these products were acquired into the company. They weren't developed within it. But presumably, they are running clinical studies, and this could be a meaningful addition to your R&D unit. So just to get some sense of that. And a final one would be just so we really understand this, what do you think you can do better with these assets than the prior management were able to do? Is it something whereby you can immediately give these products more support in the markets that they're in and accelerate the growth? Or is this something where you're prepared to effectively pay the premium because you need their expertise? Just trying to understand the driver for this.

Jo, this is Rob Koremans. Pleasure to talk to you. The current assets under Eusa is actually doing fairly well. There's a nice growth. So it's not that we will, all of a sudden, the magic -- these are good products that are performing quite nicely. With Qarziba in the U.S. on top, it could actually grow faster. But this is a very nice growing business with very, very competent people. And we continue to do that. We do not have very specific deep therapeutical know-how in rare disease oncology. So yes, we will depend on the people there. And we believe culturally, they fit fantastically to us. We can't give a split out on the company that we don't yet own for obvious reasons. But we look forward to integrating them as fast as we can after we get the clearance. And we believe that this is an incredibly nice addition to our company, both in culture and fit in strategy. And like I said a couple of times already, the products are on the market are profitable and growing, and we believe we can do a little bit to help and accelerate that, but the potential is in the product itself already there with the people that are promoting it. I hope that answers your question.

Yes. Just the size of the R&D element, just to get a sense, do they have, I mean, you don't -- you've admitted you don't have much knowledge in this rare disease area and companies that are successful here tend to have really deep knowledge in this area of fantastic relationships with the relevant doctors, et cetera. You're confident that you're going to be acquiring all of that with this company. It's fully fledged with that expertise on board.

The answer is yes. We will be acquiring, and we will be -- like I said also in the presentation, I think our objective is to retain the know-how and the organization. This is not a synergies-driven deal. This is a growth-driven deal, okay? And also, obviously, a diversification deal, like I mentioned, because it allows us to enter a new and very attractive underserved therapeutical area where we don't have the actual expertise both for commercial level and also R&D operations. So we will be aiming to retain this know-how in the company because we think there's a lot of value in it, obviously.

The next question is from Keyur Parekh with Goldman Sachs.

Congratulations on the transaction. Two, if I may, please. The first one is, if you look at the last 12 months revenue for the assets you're acquiring at EUR 130 million and your guidance of EUR 150 million in 2023, kind of by my math, that would give you kind of mid-single-digit revenue growth for these assets over that period excluding the U.S. expansion, is that a good ball point for us to think about the future growth of these assets? That's question number one. And then question number two, just following on Jo's question, what do you see as the rate limiting factors or the critical steps between now and the U.S. approval of this molecule?

Keyur, it's Rob. Yes, I think you sort of -- in the assumption that is giving us a fairly good way of looking at growth potential without the U.S. I think like within any rare disease, what is one of the limiting factors is the ability to bring in often very difficult to spot and diagnose patients and get them into therapy, right? So that is something that is not going to be different from anything else that we do in rare disease, and that's where we can probably also help and drive this. But focusing on getting patients in and then giving them the unique opportunity to be treated with these dutiful products, I think that's what will be our first and foremost focus once the deal is approved by the authorities.

The next question is from Jeff Carter with Barings.

Just a quick question on the financing. The bridge structure, is that coming in at the opco level? Or is that coming in at the holdco level where the existing received debt trades is placed? Or -- and also the bridge financing, how do you plan to take this out once the transaction closes?

And there's nothing to do with in this. I mean clearly, we're discussing the transaction, the bridge financing is going to be at the level of Recordati, [ SpA ]. And as far as sort of the takeout is concerned, again, we don't know exactly when the deal will close, we'll decide on the details of that closer to the date in 2022 when we have more visibility and depending on the market conditions at the time. We have quite some discretion around how we do that. And obviously, we'll do that -- depending on what the market looks like at that stage. As I said, I would expect a level of cost from that, which is broadly consistent with our current sort of financing costs. I hope that makes sense and is clear.

Sure. Can I just ask, at the opco level, do you have a maintenance covenant at that level?

We have -- our sort of debt covenants are 3x net debt to EBITDA, if that's the question.

That's opco, okay. Yes.

I mean, for me, there is no opco or holdco. I mean there is Recordati, and that's it. That's all I'm frankly focused on and we are all dedicated to here on this call today.

And apologies, so 3x is what you can go up to, what is the leverage right now?

So as we said -- sorry, it was at Q3, it was 1.23. We said -- I think you'll find in the slides, we expect at the time of close to be below 2.5x on a pro forma basis and to be below 2x by 2023.

The next question is from Giorgio Tavolini with Intermonte.

I was wondering if you could provide some data on your 2022 expectations? I mean what's your level of confidence on 2022 consensus, pending the uncertainty on the deal closing in H1 or later in the year and the visibility on the current trading. The second question is on synergies. Do you expect to achieve the synergies on costs over time once you integrated the 4 drugs in your organization. And the last one is on the current split on rare disease and specialty care. Now you have almost reached the 30% of your sales from the rare diseases I was wondering, and you accomplished -- more than accomplished your target of in excess of 25% of sales from the rare disease. So I was wondering if you -- if we should expect further M&A in more in the primary specialty care business.

Okay, Giorgio, thanks very much for the question. So I'll take the -- start with the first 2 in terms of expectations. So far, we sort of remain on track for -- to deliver on the guidance that we recently set out for 2021, albeit, as we said at the bottom end of it. And I've already mentioned, I reconfirm we are on track, we feel to deliver on our 2023 guidance. With regards to 2022, I mean, as you know, in customary, we typically -- we have not given sort of a guidance yet, and we would do that early next year as we've always done. You've asked to sort of comment on consensus. And at this stage, I think consensus is, from my point of view for 2022, maybe a fairly simplistically drawing a straight line between 2021 and 2023 guidance, which, frankly, I don't think is fully realistic. Because if you recall, when we set out the 20 -- with the 3-year plan, I think we said very clearly that 2022 will be effectively a year of investment behind Isturisa in Europe as and when we progressively gain reimbursement in the key European markets, with revenue in Europe accelerating as soon as effectively those gates are open. And I don't feel that's perhaps been captured in us. And the other thing I've mentioned, obviously, we've said that before, our P&L, unlike that of other sectors is very resilient to what we're seeing in terms of inflationary pressures, it's not immune. So to the extent that they sort of persist, you might see a little bit sort of near-term and short-term impact from that. But we're talking here sort of 0.5% margin level. Again, we'll provide sort of a crisper view as we've always done for 2022 early in the year, and we'll see where we are with the regulatory process to see what we would build in or in that for this transaction. In terms of the synergies, I think Andreas already said it very clearly, and I think Rob has echoed it, and I'll sort of say it as well. This deal is not about synergies. We are buying 4 assets which are doing really well, and it's about growth and complementarity of capabilities and diversification. So hopefully that's clear. On the split, if you just do the math, this would take us at around probably close to 30% rare disease. But we've always said, we continue to be committed to both businesses. They're both great businesses with great potential, we feel. And we'll continue to look for BD opportunities on either side...

Like we're doing at this moment in time. Let me add.

So I hope that Giorgio, I address this, I hope to have hit all the questions.

The next question is from Isacco Brambilla with Mediobanca.

A couple of questions from my side. The first one is on the R&D pipeline from the target company. Is there anything -- any relevant product candidate in the clinical development process and beyond the 4 products already disclosed and on the market? And the second question is on your comments in the press release and the presentation of the [indiscernible] fit of this acquisition, potentially a platform for future expansion in oncology. Should we expect this area to be growing catalyst of your M&A interest in the future.

So regarding the internal pipeline, if I understood that question correctly, the internal pipeline today, there's no other candidates in the pipeline, okay? There's obviously the approval of Qarziba in the U.S., which is an ongoing clinical trial, and this stops at that. The other question was regarding the attractiveness of doing more in oncology -- in rare and niche oncology. This is important. We're not talking about oncology. We're talking about rare and niche oncology. Yes, obviously, we are going to start looking -- this is what I tried to get across in the presentation, it's going to add another pillar for us to grow on and also find new opportunities to reinforce our portfolio. But it doesn't mean that we're going to stop looking for new opportunities for expansion and growth in the endocrinology and metabolics. What is attractive at this deal is that we're actually adding a third therapeutical area or call it pillars, our rare disease franchise, in order to allow us more optionality and more opportunities to grow the business in its entirety in the years to come. And maybe to add, and that specifically for rare disease, oncology, that there are -- there is a large unmet need. So this is a good field to focus on. And that's the platform that has been referred to in the press release.

The next question is from [ Bart Shah ] with Citadel Capital.

Apologies, if you answered this earlier, I joined it late. Can you provide the split plan between debt and your use of own resources for this deal?

Sorry, I just heard that the -- you asked about the split of something, but I'm not sure I understood this bit of what about. Sorry, could you repeat this?

The financing split in this own cash flow and the financing that you would use on this?

Yes. No. I mean sort of the bridge financing sort of its size is EUR 650 million, but we'll see -- sorry, there's a lot of background noise. We'll see at the time how much of that we feel we need. And hopefully that provides you a sense. If I think I understood the question right.

[Operator Instructions] The next question is a follow-up from Niccolo Storer with Kepler.

Can you please give us an idea of the market of -- for Qarziba in the sense that the reading on your slide that it is #1 product in Europe, how is the market structure in Europe and maybe also in the U.S.?

So Nico, I think at this moment, we don't really should go into that level of detail. I'm happy to do that once the company is really -- when the deal is approved, and I can say more. But I don't think that we should be doing this now. I hope you appreciate it.

The next question is from Naveed Mukhtar with PGIM.

A quick question from me. Actually, you're buying a company rather than assets. Can you maybe talk a bit about any liabilities that you're also bringing on, maybe any kind of litigation or any regulatory, I think issues that the company may be involved in that you're buying?

The simple answer is none.

There's net debt of EUR 26 million. To be honest -- and also to be honest, I don't think it'd be appropriate to -- and obviously, we've done due diligence. We're very happy with the deal. Hopefully, you've seen that reflected also in the closing of this call. So the short answer is to the extent that we can comment, we don't feel there's any issues. So no.

No reason not to do this.

Yes, exactly.

Okay. Maybe the last question.

Operator, we probably have time for just one last question.

[Operator Instructions] Gentlemen, there are no more questions registered at this time.

Okay. Thank you very much, everybody, for connecting on this call, as like Luigi said, we are extremely excited for this deal for Recordati. I think it's a fantastic deal. It would bring growth, new diversification, optionality, reinforcement of the portfolio, a very competent organization that would become part of the Recordati group. And so I really hope you all take away from this side. It's a very, very positive deal for the group going forward. Thank you very much.

Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.