Gedeon Richter PLC (RICHTER) Earnings Call Transcript & Summary

Greetings. Welcome to the Richter announcement conference call. [Operator Instructions] Please note that this conference is being recorded. At this time, I'll turn the conference over to Gabor Orban. Gabor, you may now begin.

Thank you very much and good morning, everyone. Thank you for joining the Richter announcement call. We are -- we have published our numbers for the first 9 months this morning, and I'd like to give you a brief update and explanation to some of those numbers. Turning on -- over to the first page, you see 9 key figures, among which I'd like to draw your attention to the one in the bottom-right corner. Pharma sales were up by almost 16% compared to the base period at HUF 550 billion nearly. This strong double-digit growth was -- or could have been even higher had it not been for the depreciation of the ruble that we saw in these 9 months. You'll get more details on the impact of the exchange rate later on. You also noticed probably that consolidated sales went up by only 4%, which is the consequence of the sale of the wholesaling business in May. So our numbers are affected negatively by the absence of the wholesale turnover since May. Gross margin's up, which is not surprising given the absence of, once again, the wholesaling business in half of the reported period. More interestingly, our clean EBIT is at HUF 176 billion, up by almost the same rate as pharmaceutical sales. However, as you have seen in previous quarters, EBIT is, unfortunately, it had decoupled early on the year from clean EBIT. It's down by 6.5%. And net profit is even lower as a consequence of external factors that I will explain in a minute. I'm not very pleased with the way that I have to talk during these earnings calls about external exogenous factors instead of focusing on what is under our control, the business itself, which I think has been developing very much according to plan or even outperforming plans. Unfortunately, those exogenous factors, or at least some of them, unfortunately, overrode much of what we achieved internally. That said, I'd like to spend 2 slides on the overall picture, which is basically -- it was defined by those favorable trends that continued on the volume side. We have seen strong orders from distributors. And our sales revenues were also boosted by new product rollout, new product launches in different geographies. I'll discuss them in more detail in the context of the business units. I've mentioned already that exchange rates were a drag, and underlying profitability was much stronger impacted by those negative exchange rate developments than top line. I also felt that it's very important to mention this breakthrough in endometriosis, the approval by the European Commission, that our Ryeqo product received not long ago will be very much focused in the coming months on making this accessible to as many patients in Europe as we can given that it's the only oral therapy available and the only alternative to surgery for this extremely severe gynecological disorder. Revenues were up across the board, exchange rate adjusted or not. We've seen very strong growth in ex U.S. cariprazine sales. Many of you have been inquiring about when and how this will become a meaningful component of our business. It is now up, exchange rate adjusted, by 64%. Without the adjustment, it's almost the same. We have seen a number of markets reimbursing this product, and the consequence is a very strong uptick all from a low base. In biotechnology, we see -- we saw a 16.5% growth at a steady pace, I think, without much noise. And in General Medicines, our branded generics business unit, sales were up exchange rate adjusted by 12.5%, which for this business unit is a very satisfying performance. Even in -- without exchange rate adjustments, our performance is up from the previous year by a small margin. In women's health, we posted 23.5% growth, and I'm very proud to announce that to you. This is despite the fact that this business unit is also quite exposed to the Russian market and has suffered from the ruble depreciation. That said, the new product launches and the strong performance of existing brands, established brands have made this business unit very successful in these first 9 months in terms of top line growth. When it comes to those special items that I mentioned, I'm afraid I cannot leave this to the end because it has such an important effect on the different bottom lines. The windfall tax is now estimated at HUF 30.7 billion this year. This has to do with the increase in expected sales revenues. Please don't forget, we have had this project -- or we had this project on the reallocation of G&A overhead costs. And that affected sales and marketing numbers as well as G&A numbers. So there's a technical factor here that I'm asking you to consider when reviewing the P&L. And the milestone income in the base period, which should not be -- it should not go unnoticed, HUF 8 billion in the first 9 months 2022 as opposed to close to 0 this year. Hopefully, next year, this number will be higher than 0. But this year, it's down compared to the base period. I'd like to spend some time on the exchange rate development. Some of the observers have found it curious to see how financial P&L went from HUF 25 billion minus from June 30 to HUF 18.5 billion loss at the end of the reported period, 30th of September. This improvement is due to favorable changes in euro-HUF, euro-dollar, but the ruble did not improve even in this period. So the loss is still there. It's still a drag on EBIT and on net profits, after-tax profits, but less of a drag than it was 3 months ago. I cannot guarantee that this negative number will not grow to become an even higher negative number by the end of the year. We'll see what happens to exchange rates on the last day of 2023. I'd like to mention the increase of clean EBIT by 24.5%, which was again, without the FX effect, 24.5%, and the headline reported figure is up by 13.2%, I'd like to remind you that the clean EBIT is HUF 176 billion is a figure that we obtained after filtering out the base effect of the milestone payment last year, the export profit tax and, what else, actually, those 2, I believe. And the exchange rate adjusted figure is seen on the right side of the slide. The EBIT is down, as I said at the beginning, as a consequence of the windfall tax. There was no windfall tax, remember, in the first 9 months last year. It was added in the fourth quarter. That's why these adjustments are very important to consider when assessing our performance in the first 9 months. And some more explanation to the financial P&L here. We have rubles that contributed negatively HUF 23 billion as a consequence of the revaluation of the balance sheet items that are denominated in ruble. And you see how -- and I'm sure you're familiar with this graph here. You see how at this time last year, we had a very different level of over half -- almost twice the value we see today, which is around HUF 3.8 billion. That is a massive change in the value of that currency. The 2 percentage point increase in the benchmark rate in Russia has probably contributed to stopping the pace or slowing down of the pace of devaluation but clearly not a game changer for the ruble, which is very weak. Moving on to discuss in a bit more detail the business units. These are the figures that we started reporting in the first publication this year. We'd like to give you a better sense of the underlying profitability of each of these. It will come as no surprise given the change in sales target by AbbVie in August that the CNS business unit has performed extremely well. We have -- we're looking at a 2.7 billion turnover in Vraylar this year, which translates into more than $500 million worth of royalty this year in expected value. Here, we had the time proportional amount booked for the first 3 quarters. The biotechnology business unit has been moving forward at a steady pace, according to plan. The 2 most important activities there is the finishing of the Phase III clinical studies for 2 of our monoclonal antibodies that we intend to file next year, hopefully, obtain marketing authorization in the year after that and '26 depending on the geography. Other than that, our biotechnology business has generated sales and profits from CDMO activities using our technology platform to support other companies that operate with an asset-light business model, meaning they outsource manufacturing. So we've manufactured a number of batches once again for biotechnology companies that are lacking those technology platforms. In women's health, we generated a massive HUF 192 billion of worth of revenues in the first 9 months. We are on our way to become the leading provider of pharmaceutical products in Europe for women. The profitability is a steady HUF 33 billion in terms of clean EBIT. And here, I should -- I'll go into some more detail about the individual products on the next slide. General Medicines, again, profitability is, I don't think -- it's nothing to be ashamed of HUF 37.5 billion against a turnover of HUF 168 billion. So that's that. And a bit more detail on each, just for you to have these figures on the dynamics. You see year-on-year changes of first 9 months versus first 9 months last year, and you also see Q3 figures against Q3 figures last year. No wonder we have weaker numbers for the quarterly comparison given how the ruble has affected almost every business unit negatively. There was a very strong base last year and the weak one is a weak period in Q3 this year. So you see a negative number here. But overall, in the first 9 months, [ 16.5 ] is still nothing to be ashamed of, in my view. When it comes to revenues, we're talking about 16% and sales and marketing costs roughly in line with that. So clean EBIT went down. No wonder it went down slightly. It had to do with the depreciation of the ruble in Russia, which is a highly profitable part of the women's health business. In neuropsychiatry, I think you'll see familiar figures. Revenues are up by 40% on the back of the new indication in the label and AbbVie's strong performance on the commercial side. Clean EBIT kept largely pace with it. The only reason it didn't is that we started investing into neuropsychiatry R&D to a greater extent this year, completely according to plan in order to move the project forward that will follow it. In biotechnology, I think I have said everything that was relevant in that business unit. General Medicines is probably the last thing that I want to mention to you today in terms of explaining the slides. Again, revenues were held back by the exchange rate headwind. Still, we managed to grow clean EBIT. However, it's slightly down compared to last year. It's a single-digit drop, but still the exchange rate effect is there. No way of hedging that exchange rate effect coming from the ruble. So it has been a drag on our performance in this business unit, which is by far the most exposed to the ruble swings. With that, I would like to conclude my opening remarks, and we'll get ready for questions in a second. What I need to discuss in a bit more detail is guidance for the remainder of the year. We're almost there. So there's 1.5 months left to go before Christmas. We have more clarity on what we are likely to achieve. However, the previously -- our previous approach to communicating expected results in constant currency terms has led to some confusion, I believe. I would like to make this simple, and I'm asking you to take this with the required level of caution and the required degree of uncertainty. There's a lot of risk around what I'm about to say. But our best estimate is that we will approach EUR 2 billion in revenues this year in the pharmaceutical segment of our business. We will not reach EUR 2 billion. The final number is most likely to be -- to start with a 1, but it will be close enough despite all the exchange rate headwinds that we have suffered already. This is, of course, only true if exchange rates stay where they are, relatively speaking, or stay where they were at the end of the third quarter. Our best estimate for this year is a EUR 2 billion revenue number. The corresponding earnings figure should come in around EUR 570 million, of which -- let's see, please add what you would -- again, this is an estimate. I'm not going to guarantee this, but our best estimate at the moment is EUR 570 million for EBIT -- for clean EBIT. This will be eroded further by the financial P&L, and it will be eroded further by the windfall tax. So we'll end up much lower, I believe. But hopefully, those detractors can be estimated now on April-November with a smaller margin for error. That will be it from me today. And I'm asking you to open up the floor for questions, please.

[Operator Instructions] And our first question is from the line of Victoria Lambert with Berenberg.

My first question is just on M&A. Are you seeing more sort of targets out there? Are you presenting if you just sold the fertility services business. So just wanted to have an update on that. And what type of women's health care assets you're looking for? And then just a question on Russia. What percentage of pharma sales does the country now contribute? And what is the risk of assets being possessed by the government? And then the third question was just on your progress in biosimilars. I see Fresenius is going to be the first to launch -- or they've launched their Actemra biosimilar in Europe. So just wondering if you guys are still comfortable being in like the second or third wave of launches in the product.

Thank you, Victoria. Those are 3 difficult questions, but I'll try to take them one by one. On M&A, we have a long list of projects lined up that we are closely following or already working on. I cannot disclose any information on the stage at which each of them are, but I can assure you that we have our hands full. There are a number of opportunities -- a higher number of opportunities than previously in terms of assets to be acquired, mostly products or portfolios as opposed to companies or physical assets. I think the target list is longer than it was. Execution, however, has not become any easier. Pricing may have improved somewhat. The aggressive bidding from private equity bidders is now -- may have abated since a year ago, let's say. It's very clear that their access to equity or credit has been limited by higher interest rates. They're exiting on ever higher multiple strategy, I think, has come to -- have reached its limits. That said, they're still around and they are not ready to sell for anything reasonable. So this keeps part of the market rather frothy. What's interesting is the private equity guys leveraging up, not on the account of the business that they own, but via their own accounts. This is a new thing, and it tells me that some of these financial engineering trips are becoming, let's say, pursued by -- or being pursued by these players because there's no other way to generate value. And this kind of excessive risk taking is what's becoming the new norm. And so I'm not -- I wouldn't say that pricing has -- pricing is the same as it was. It has probably improved, but not as much as it would make it very easy to pick up assets for cheap. We're not there yet or maybe we'll never be. In Russia, there isn't much I can tell you. The conditions are stable from the government side from the financial aspects. Payments have been made on time. Transfers can be executed without any problems. We have lots of -- it's an uphill battle every day, but we are managing. Just like every other competitor in the industry, we are managing as before supplying patients with what they require. We have 12 million patients that rely on us for their daily medications, and we want to make sure that we meet those expectations. Yes, Fresenius is ahead of us in our biosimilar project. We never said we'd be first. We've always said we will be in first wave and expect that first wave to be able to make money as the biosimilar penetration improves over time. Indeed, Fresenius is likely to launch first. This is not a game changer for denosumab. But indeed, they are a strong competitor. I will not downplay the importance of their successful regulatory outcome.

Our next question comes from the line of James Vane-Tempest with Jefferies.

Three if I may, please. Firstly, just the avoidance of the doubt, the FX number you're using to give your euro guidance. Obviously, it can move between now and the end of the year. But just so we know where we're sitting to get to the approaching EUR 2 billion and EUR 570 million of clean EBIT half that you're assuming, that would be really, really helpful. Secondly, you mentioned in terms of how the royalties are changed, hopefully, you'd have more next year, what sort of royalties milestones. Just curious, what could they possibly be that may come next year? And is any of that linked to some of your pipeline developments? It would be great to have an update on some of your earlier-stage pipeline, please. And then my last question is just regarding the overall tax regime and a global minimum tax around 15%. Just wondering if you can remind us because I know there's lots of puts and takes here in terms of deductions and, I guess, a favorable treatment of royalties, but how we should think about the overall tax position of the company as we move through the next few years as well.

Thank you, James. The exchange rate you're looking for is 380. On the next one, milestones, yes, this may have been loosely spoken message from me. There isn't a milestone that we expect to collect next year. That said, we're working on a number of projects in the preclinical pipeline that have the potential of being worth a milestone payment. Most of these, as you know, are in the CNS therapeutic area in neuropsychiatry. And among them, most are in one way or another connected with the neuropsychiatry/neuroscience strategy of AbbVie. I've said this on previous calls, we have aligned our preclinical strategy with the commercial strategy of AbbVie. And together, the joint effort is aimed at continuing the line of psychiatric compounds that can bring a meaningful difference to the practice of psychiatry globally. As you know, one project -- one such project is in Phase I, and it will stay there for the better part of next year. So I won't be able to report much in that regard. No news will be good news on that one. There are several others that we are pursuing, and this was the reason I mentioned milestones could be. I think it's -- I wish I hadn't mentioned it because I don't mean to confuse you. That's the preclinical landscape, broadly speaking. And the final one, the global minimum tax. Yes, this is the new framework under which our tax situation will evolve. We are not going to be able to return under no circumstances to the regime we had prior to 2022. Even with the best of intentions, the government cannot create a tax environment for us here in Hungary that is comparable to the one we had prior to '22. That said, we have reason to be optimistic that we will not be paying a higher corporate income tax, a higher rate than 15% starting 2024. That's my expectation for the tax burden that we'll be facing starting next year. And that includes the minimum -- the export profit tax that will be -- windfall tax that will be upheld in part [indiscernible].

A few quick clarifications, if I can, please. So if it's no more than 15%, so that's the corporate tax, the local business tax and whatever part of the windfall tax, which is included in 2024, which admittedly part of that is an EBIT. So we need to look at all of that together in totality to think of 15%. Is that the right way to think about that to make sure I understood correctly?

Yes. Thank you for doing my job and explaining perfectly clearly what the tax outlook is for the coming years, yes.

And another quick follow-up. You kindly gave us the euro rate and your guidance of 380. Are you able to give us what the dollar rate is?

We never have forecast the exchange rate. So when we did this guidance, we used the first 3 quarters' actuals and the current spot.

Yes. So exchange rates staying broadly at the levels observed in the past couple of weeks is what we have in mind when it -- when we give you an estimate of full year revenues.

Our next question is from the line of Alistair Campbell with Royal Bank of Canada.

Just one quickly. Just looking at the pipeline chart you've put out there, there's obviously quite a lot of product for GenMed in the regulatory and launch phase. So against that backdrop, I wonder if I could tempt you to maybe sort of give you a sense of what you'd like to see for CER growth for GenMed as we roll into 2024.

We'll give you a better sense of the outlook in February once the business plan and all the planning process has been completed. What I can tell you as of today is that our ambitions for the branded generics part of the business are significantly stronger than they used to be. We see more potential in our markets in those market segments than we used to see. And that means we are feeding the pipeline, working on rolling out the products in the broadest geographic coverage possible. And I expect, despite the headwinds, this sector will see -- will continue to see in the form of price erosions and cost pressures. We will be able to generate high single-digit growth in the coming years. Well, maybe -- I might be able to give you -- or we might be able to give you more clarity in February. We'll have to think about how the guidance should be framed or phrased to give you a better sense of what each business unit is likely to deliver next year. Thank you. If there are no additional questions, then I'd like to thank everyone for participating in this call today. Thank you for your thoughtful questions. And please reach out to Róbert Réthy, who's sitting next to me, our new Head of the Investor Relations and ESG department. And I'd like to take this opportunity to introduce him to you and offer on his behalf that he is ready to receive your questions and feedback.

Thank you very much, Gabor. And indeed, I am at your disposal, so please reach out if you have any further questions. And I'm very excited to join this world-class company. So very happy to be on board and hopefully be in touch with you personally and on the phone as well. Thank you.

Thank you, Róbert. And then that concludes our call. Thank you again for dialing in.

Thank you to everyone who joined us today. You may now disconnect at this time. Thank you for your participation.