Gedeon Richter PLC (RICHTER) Earnings Call Transcript & Summary

My name is Robert Rethy. I'm Head of Investor Relations and ESG. And today, we have 2 senior executives joining me for this call. It's my pleasure to welcome Gabor Orban, our Chief Executive Officer; and Laszlo Kovacs, our Chief Financial Officer, to walk you through the latest developments. Before we start the presentation, let me just quickly go through the usual technical details. We will be using presentation slides for the first part of the call. This is the presentation what we published this morning, along with our earnings, and this is downloading on our website, gedeonrichter.com. [Operator Instructions] the call is being recorded. And finally, let me draw your attention to the cautionary statement disclaimer at the end of the presentation with regard to potential forward-looking statements that may be heard in the -- during the presentation. And with that, I hand it over to Gabor to start the call.

Thank you. Good morning, everyone, and thank you for your continued interest in the company and your continuing trust and support. The first thing you probably noticed in this report is the significant foreign exchange headwind. But looking a bit deeper, I'm sure it becomes clear that our underlying performance picked up in Q2. And so now we have sufficient confidence in our ability to achieve and even outperform our full year targets. Some of this is driven by outstanding growth in CNS, but you will remember that our main KPI is the ex CNS margin, and our Q2 numbers should give us reassurance that we are taking a meaningful step this year to close the gap between where we are and where we want to be also in terms of CNS operating margin. So the guidance upgrade is basically on the clean EBIT side, partly to do with Vraylar performance and partly with stronger momentum in profitability in the remaining parts of the business. Biotechnology is on a good track. The drivers that we highlighted in recent years are at work and breaking even for this business unit is within reach. Improving momentum in women's health care and continued operational discipline across the organization were the other 2 main factors that underpin our confidence that the E&S margin should improve this year. As you see on this slide, constant currency revenue growth reached 8.7% in the first half, and this is in line with our full year high single-digit growth conditions. CNS, like I said, once again delivered exceptional performance, not only supported by Vraylar but also by Reagila our own commercial territories. Biotech also exceeded expectations on the back of successful launches and strong partner sales. Women's healthcare and Gen med showed improving sales dynamics in the second quarter, the Gen Med remained below our original plans due to timing effects and other market-related technical factors. But once we're out of the woods, in this recovery phase, we still believe that mid-single-digit growth in this segment remains the long-term potential. Despite the FX pressure on reported revenues and gross profit profitability developed extremely well. Constant currency clean EBIT is up by 21% in the first half. The innovative business is behind most of the profitability growth and the impact of multiyear efficiency and restructuring initiatives. Finally, our showing their effects. We also delivered record high free cash flow generation, demonstrating the strength of our cash conversion balance sheet. So based on the strong first half, we are upgrading 2026 Pharma Clean EBIT and now expect double-digit growth on a constant currency basis, so somewhere in the teens. Two more points on the innovative developments we launched Fylrevy, E4 mono in 3 markets. We expanded the geographic reach of Lenzetto as part of another effort to broaden our presence in menopause and took another important step forward in innovation with RGH-202 moving into Phase II. These milestones may appear incremental, but collectively, they contributed significantly to the strengthening of our future growth foundations. I'd like to go off on what may look like a tangent on the next slide, by discussing our multiyear efforts to relocate and consolidate concentrate our API infrastructure. You may hopefully know, we manufacture API in 3 of our sites Budapest, Dorog and an Indian joint venture. The Budapest site has been struggling in the last number of years, along with the rest of European API manufacturing as the sourcing gets shifted to China and India increasingly. So Europe is fighting for strategic autonomy in API manufacturing. By Europe, I mean, European companies are fighting. Europe isn't fighting all that much. There's a lot of lip service to the cause, but very little in the way of concrete measures. So in order to maintain or improve rather, the competitiveness of our API manufacturing capability, we decided in 2022 to create a fit-for-purpose infrastructure and fit-for-purpose organization, which in plain English means the rightsizing shrinking of the infrastructure for API. And so the Budapest side has now been downsized materially. We are closing down these facilities, some of them this year, others next year. We retain a small unit in order to contribute to the total synthesis of our steroid compounds, synthetic hormones mostly in Budapest, but it's maybe half a plant or 1/3 of the size of what used to be 4 plants. So we're going from 4 to 1 in Budapest. And this has had implications for headcount. And as a consequence for the restructuring costs, which Laszlo, our CFO, will discuss in a bit more detail for you, but also has implications for the energy use of the group, which is now down by 4%. As far as the API-related energy demand is concerned. So specifically API energy usage is down by half. And the operational floor area in the context of this rightsizing is smaller, in Budapest very significantly 30,000 square meters; in Dorog, also, some of that consolidation has led to a decline in the surface area used for API manufacturing. And finally, hazardous waste generation is also down by 11.5%. So this contributes to the competitiveness of API division, let's call it division. It's not a division. It's what is it, our API organization and infrastructure and our cost base for API and also it contributes to our ESG efforts when it comes to environmental impact and footprint. It also contributes to lower headcount and savings on that front. So it's been a tremendous effort, and it's a bit disentangle something that was built up over many, many decades. But in order for us to evolve the organization and evolve the infrastructure in line with our portfolio and our environment has evolved, these steps were necessary, and we are proud to have completed that. . Okay. On the second quarter a bit more in detail. Here is the business units reported growth rates and constant currency growth in this table in front of you, we were encouraged by the improving business dynamics both of our key engines performed in line with or above expectations. So we are confident that this innovation-led growth strategy will deliver sustainable growth in the coming years. Women's health accelerated in Q2, although the entire first half is still affected by lower sales in Eastern Europe and the traditional oral contraceptives. But the key growth brands such as Ryeqo, Drovelis, Lenzetto and Bemfola remains intact, and we are proud of Fylrevy that was launched in our first markets. CNS, I already mentioned, continue to perform extremely strong after what happened last year. This was little-- well, hardly anyone's expectation for Vraylar to continue growing 19% on a year-on-year basis and reaching close to $2 billion according to AbbVie's disclosure. So we are very happy with those royalty income, which is lower than what AbbVie grew in this first half, but that's due to the FX obviously. And Also, our own sales, our own commercial territories, Reagila grew a very significant 25%, partly due to the fact that we took over some of our partner sales and our book as revenues and work with the product in a greater number of territories with our own team that definitely helps. Biotech exceeded expectations. The revenue growth reached 30% on a constant currency basis. It was driven partly by exceptionally strong teriparatide sales and the conclusion from recent biosimilar launches. The playbook that we outlined for you is taking shape in 2026. And so we're confident that we can break even with the biotechnology business unit at the latest next year. General Medicines remain the only business unit that was below our original plans. Sales picked up in the second quarter, but the absence of the flu season or rather the weakness of the flu season, the high base and the rationalization of our distributor inventory, they are weighed on reported growth once we recover from the hit we took last year, we expect to grow at a steady pace of mid-single-digit growth. So continue to see, and we see clear signs that Gen Med weakness is temporary. The last set of remarks I want to make have to do with the geographical breakdown. I'll be very quick to point out that our innovative segments related geographies, which is North America and Western Europe delivered most of the growth Eastern Europe is the laggard, along with Central Asia. Trends did improve in the second quarter. We expect further strength in the coming quarters. But in the first half, clearly, they were laggards. So once again, I think geographical developments also underpin our full year expectation of close to 10% constant currency growth. And on the cost side, Laszlo will explain how we've done so far and what makes us confident that we can outperform the initially presented guidance in -- for the full year. So with that, I'd like to hand over to Laszlo Kovacs, our CFO, and the floor is yours.

Thank you so much. I'm happy to tell you that we continue to see the tangible benefits of multi efficiency programs and also the structural improvements that were implemented during the course of the past few years, of course, during this quarter and the whole first half of the year. FX was a support to OpEx and helped us to ease off some of the pressure that we experienced on the gross margin level. Cost of sales rose just slightly by 0.7 percentage point in the first half, having a better trend during the Q2. Altogether, our gross margins came down to 69.5%. Operating expenses as a whole continued to decrease. The total decrease was 6%. The pace was slowing a bit in the second quarter, coming a bit below of 5 percentage points. R&D declined by 6.5%, but still overall R&D spending remained at around 10% of our Pharma revenues, which is an important KPI for us. The result which caused the decline in R&D is a planned reduction of biosimilar spending. And of course, we are investing behind women's health care and CNS. Let me also reemphasize that these R&D costs may fluctuate between quarters as we are running multiple parallel programs together. Sales and marketing declined by 7%, also helped by FX in various regions and some lower activities were evidenced in the Asia and the Pacific, so mainly China region, and we can see a clear improvement in our commercial efficiency. G&A is basically flat, and it's supported by the efficiency program. And as a signal, this slide shows you all the figures that do not contain any restructuring costs, you can see an Appendix at the back part of this presentation. Altogether, we spent HUF 4.5 billion in restructuring, mainly due to the reallocation of the API portfolio and the start of introducing the new cloud-based solutions. Turning to the profitability, I'm happy to say that profitably continue to improve in the second quarter. Our clean ebit reaching 21% on a constant exchange rate, and there is an accelerating trend. Of course, we experienced some headwind in the FX. So the reported figure is only HUF 151.8 billion, meaning a 3% increase in H1 2026. In this period, in Q2, we did not recognize any milestones. If I compare H1 to the previous year, there is a HUF 1 billion lag of milestones that were collected compared to the previous period. The innovative segment was a significant contributor to our increased profitability. Of course, Vraylar and CNS remained our major profit engine, but women's Healthcare grew at a clean EBIT margin of 18.5% this year, which is offsetting the slightly weaker Q1 that we evidenced. Maybe it's worth to mention that with R&D costs so with the fluctuation, the growth rate in Womens healthcare, might be not that steep in the second part of the year. General Medicines returned to a somewhat more normal profitability rate, close to HUF 10 billion per quarter. but we see the results of the weaker top line that Gabor was discussing. Biosimilars, I'm personally very proud of what I see here because we reported significant growth figures on the top line. And although we came back to negative terms after having 2 consecutive quarters of profit, but still the overall loss rate is only HUF 2 billion compared to HUF 8.5 billion a year ago. Altogether, we demonstrated that the operating leverage of our business model is strong and our profit growth was meaningfully faster then the revenue grows even if I take out Vraylar from the picture. So it's a very, very positive sign towards our profitability. If you take a look below the line, I can tell you that net profit was negatively affected by the FX headwind and our net profit came down to HUF 103.5 billion. The difference between clean EBIT and EBIT is not material, half of which is due to the restructuring costs. FX had a very significant effect in Q2. Over HUF 32 billion of loss was recorded in Q2, while cumulatively, we were still reporting some FX gains. I'm proud to say that we were -- we managed to double our net interest income, but altogether, the huge FX loss, which half of this is annualized at the moment was a significant negative contributor taxes are accounted in line with the global minimum income tax rate, and there's nothing specific to report there. Going to the cash flows, we've seen record high free cash flows yet again. There on the net working capital contribution was less than in the previous quarter, which helped our operating cash flows a lot. Cash conversion days as a consequence of the above-mentioned changes are slightly below the q2 2025 numbers, but we see some level of flexibility. CapEx is well controlled. We spent only HUF 10 billion in the first half of the year, some more spending coming in the second part. And we distributed the majority of the dividends in June and the remaining almost HUF 31 billion will be paid in Q3, early September this year. And lastly, let me just guide you through on R&D projects where R&D remains a cornerstone of our long-term growth strategy. Compound 202 reached Phase II. And we see an unprecedented events when we are running 3 parallel Phase I programs in CNS. So 2 with AbbVie on compound 932, and now we are starting with 202, it is our own compound. You can see that we discontinued one program in Women's healthcare. For me, it's also a good sign because we are very strict, and we have a rigorous review system, which happened in June and we decided 1 program is not worth to further reinvest into it, but we are proceeding with the rest of the programs. And on the General Medicine part, if you may remember, Mr. Tamas Szolyak told you in Q1 that we are launching several projects. So you can see the evidence that many new developments reached the final stage and the hit the market. That's what we share with you, and I'm handing back over to Robbie.

Yes. Thank you very much, gentlemen. Now we are ready to take your questions. [Operator Instructions] just as [indiscernible] already early during the call. So we can cover these 3 questions first.

So the first question is related to our Women healthcare profitability. I'm not sure who wants to...

I'm happy to take this. So actually, what you did is almost precise. So it's a mix of all of the factors. The product mix helped us a lot, some of the high profitability products that are shipped to far away markets like China and Mexico helped a bit. And you can -- we can say that we only spent around 40% of the expected R&D to Women's healthcare in the first part of the year. So if everything will progress in line with our expectations, there is going to be a higher R&D spending in the second part. So the 18.5% clean EBIT rate a bit exceptional for this period. We expect that it's going to be lower on the overall yearly average. But of course, we are just aiming for the 20%, but it's not going to happen overnight. So year-by-year, we want to see the improvement.

The second question is about the upgraded clean EBIT guidance. I mean, first of all, this is on a constant exchange rate basis. So exchange rates have nothing to do with the upgrade what we made in this particular profit metrics. The question is also in this segment, we feel most confident delivering the upgraded guidance, perhaps, a bit of a background what led us to this guidance upgrade.

Yes. So I think across the board, we see on the cost side, the impact from many years of restructuring and transformation. So there is a sense that this year, we will reap a larger share of those benefits than we had hoped or that we foresaw in the planning phase. On the other hand, specifically the biotechnology business unit is expected to deliver closer to breakeven than previously expected. So those together combine into above expectation ex CNS margin. Of course, as you saw in the first half, even if the second half Vraylar performance only equals the planned amount, we have booked a significant Vraylar upside in H1. So that is one of the obvious drivers. But aside from that, we see biotech delivering, and we see G&A and sales and marketing and COGS are contributing to higher ex CNS EBIT margin.

Thank you, Gabor. And third question is on the use of cash or basically capital allocation question, what is the primary use of cash, whether it's going into business development CapEx or dividend buyback?

So we had some serious discussions with the Board earlier this year. And we are -- and also the majority of our shareholders are supporting the dividend, and of course, with this high amount of net cash, we are pursuing licensing and other M&A type of activities. We are working on it on a daily basis, and we will come back to you and report as soon as there's anything to announce. So that's a high priority. CapEx, we continue to spend on CapEx. We have an internal policy with a decline in cap spending. And if you don't see any disturbance on the market or in the supply chain, then we'll follow that path. So in a nutshell, you should expect dividends in line with our capital allocation policy fixed dividend and some extra if no big M&A will come through, but our primary goal is to create long-term value with M&A activities. Let me give my interpretation of this capital allocation question. So if we are very good if the management is excellent, then it's going to be business development and licensing opportunities. If the management is only good, then it will be dividend because then it means that we will have missed some of those acquisition targets that we have under this currently. In either case, shareholders will be very happy. In both cases, shareholders will be happy.

Hope this answers your question, Kasha, if not then let us know. Before continuing the chatbox, let me just turn to those participants who are using the raise Your Hand function. So first question, Bram from Wood.

A good set of results. Yes, I add a few questions. if you could perhaps from centralizing of APIs in Dorog, could you put a number on the uplift to gross margins, and I guess that's going to be primarily in, I don't know, primarily in General Medicine. So that would be the first question. The second question was with regards to rationalization of the commercial network, and I get to a certain extent of R&D. Could you just summarize the steps that you've been taking there? And yes, maybe how results are better than you've expected. And the last question is with regard to Eastern Europe. To what extent is that slowdown because it is rather visible. The result of rationalization steps you've taken to what extent is it to do with individual countries, say, Uzbekistan. And what do you expect in terms of the growth in Russia in the second half of the year because when I look at in ruble terms, it was a contraction. So those are my 3 your questions.

Thank you very much, Bram. Let me take the first one first. And there, I would like to refer you back to the capital markets document that we presented and published in March last year. All of these efforts fall into the categorization that you have on the waterfall chart there. That's what we indicated at the time to be the impact of all those efforts, efficiency programs, et cetera. So if you -- I cannot recall the diagram of the top of my head. But you remember there was a contribution from the rightsizing of infrastructure in the move from CNS clean EBIT ratio to 20. And contribution there is maybe 1 to 1.5 percentage points. This concentration of and technology transfer, reallocation of manufacturing Dorog is part of that effort. In fact, it's a very significant part of that effort, and it contributes more than half of that gap closing. The same -- or something similar is true for G&A and sales and marketing, which you refer to as the rationalization of the commercial footprint. We are in overhead fighting mode. That's the common denominator across these projects. We are fighting overhead. We want sales and marketing costs to be investment rather than overhead costs. And G&A is another area where we are making a similar -- taking a similar initiative. In particular, we have reorganized our commercial affiliate network in order to provide more of the services out of the headquarter, thereby imposing stricter discipline and cost management on the affiliates, while at the same time, reducing the reliance of these affiliates on local resources, local meaning in-house or externally outsourced services. This is true for IT and for procurement, for all sorts of G&A items. And so these are the kinds of efforts that we are taking to making to reduce overhead, and this shows up gradually in our G&A ratio, and it shows up as a an improvement in commercial efficiency also. Now this is not the only thing that we're doing to improve commercial efficiency because we are reorganizing the field force. We are reorganizing the lines, we are resegmenting the HCPs that we are working with, we are reallocating resources and money to products that have higher growth potential. Those are the usual types of measures to improve future sales and optimize resources. So just look for the relationship between the capital markets document, our annual or quarterly reports and these actions that are underway. This is how it all hangs together. Your second point was around -- what was it?

it Was commercial excellence, but I think you covered it.

Yes.

what was the third one?

Third one was Eastern Europe.

Eastern Europe. The extent to which it's a consequence of those efficiency programs, not. There is a very minor contribution from portfolio pruning to Eastern European Central Asian revenues, it has more to do with the following 3 factors: One, the erosion of the legacy portfolio. We have to face the fact that this process has not ended. We still have old traditional products whose market share is more vulnerable whose pricing or label is vulnerable, and we have seen some of that -- some of those effects last year as well as this year on revenues in Gen Med, which is primarily Eastern Europe and Central Asia. The second thing was the rationalization of distributor inventory. Now this is a complicated way of saying we had to impose stronger discipline on how much inventory our wholesalers hold against what discounts do they hold those inventories and what kind of financial exposure is correlated with the net -- with those receivables. So all of that had to -- more vigor had to be applied to all of those. And the temporary consequence is a much more choppy volatile Gen-med revenue stream. This is what I meant by we have to get out of the woods so to recover from that situation. We'll spend much of this year recovering from there. Of course, that was last year's Q3 that was an additional shock, but seriously, that looks like a temporary one-off and it shouldn't define the future for Gen Med. But these others are more medium-term effects. And some of that weakness in Eastern Europe and Central Asia have to do with this refinement of the business model, let's say -- polishing of the business model.

So that also means, I think it can translate this into one of the questions that probably Russia will be doing better in the second half also because the base was lower compared to the first half and we were against the high base and a little bit intentionally held back deliveries in June this year. Yes. Which also partially explains I think one of the questions that Lukas in the chatbox that if we see revenue growth in constant exchange rate terms in gen med by the end of the year and most probably, yes, because if you look at the intra-year trend, and the second quarter already, we were around flat in constant exchange rate terms. And the second half, we are again working with a low base. So definitely, there's going to be growth in the second half in General medicines and probably also for the full year in constant exchange.

Yes.

Good. So let's move to the next question from Gabor Bukta.

First, I have a follow-up because absolutely, the Germany is still the obvious weak spot, I guess. And yes, so why should the turnaround become visible next year or in 2028 or when? So yes, I'm also interested. And moving on to my next question. You already announced the extension of the partnership with Adalvod and how the GLP-1 could become strategically important if you could -- could you please quantify what do you expect from the project? And the third question is, I saw that you had to impair some assets or inventories in the BO segment. And is this related to new products or what has caused this impairment?

Thank you for those questions, Gabor. On the Gen Med question, my answer is we indicated -- 2 quarters ago and also last quarter that this would be a protracted recovery from the hit that we suffered last year. And there were a series of unfortunate negative shocks to the product portfolio and some of our markets, including Uzbekistan Kazakstan. So it will take time to get back to normal. But is normal, mid-single-digit steady growth with low volatility. That's normal for Gen Med. And we expect to get there starting next year. On the second one, GLP-1s are a focus area for the Gen Med business unit. They have been for 2 or 3 years. And the first milestone in that history was March last year when we announced the first item into this portfolio that we're building. We are building this portfolio in a slightly different way compared to the traditional way of nominating developing, manufacturing, upscaling and commercializing. In this space, the business models have changed, Adalvo being one of the spearheads or one of the front runners of pioneers of this aggregator model, in which you team up with a number of partners who finance, commercialize, manufacture, develop the product for you. This arrangement that we have with Adalvo and also with the Hetero Group India, is very similar in the sense that we contribute both financial technology and most importantly, commercial capability to the story. How does it fit from business perspective or from a portfolio construction perspective? The [indiscernible] line here is longevity, which is becoming more and more in the focus in the development. As you know, the best-selling products, not only in pharma, but globally, are GLP-1S. And when they go off patent in the 2030s, GLP-1s will be one of the, if not the most important quality of life and longevity products. And where do we fit in with that story? As you know, women's health is mostly -- not -- well, yes, almost exclusively on therapies for non-life-threatening disorders. You can live with endometriosis. It's very, very unpleasant and debilitating, but you won't die. You can live with infertility, you won't die because you're infertile. Contraception, you can live without. Menopause treatment, you can live without it. GLP-1s also, you can live without it. But the difference is a significant amount of funds and consumer demand goes to the quality of life type of products. And for example, in fertility clinics, one of the issues that has to be tackled before the fertility treatment is losing weight. In menopause, very often, estrogen deficiency is correlated with weight gain which is created alongside estrogen deficiency. Hot flashes are not the only implication of menopause or estrogen -- low estrogen levels. It's also bone density. It's also neuro degeneration. It's also cardiovascular risk. To the extent that the gynecologist is the GP of the women, the GLP-1s will also be very much part of the therapy that will be recommended or prescribed to women, are used by more women than men. A lot of the prescriptions, maybe most of the prescriptions are written by gynecologists. So this is a very logical and profoundly connected product offering to what we already do in women's health and in menopause, particularly. That's the point of us working on GLP-1s.

With bio impairment, yes, it's related to one of our new products, actually a licensed product where the partner had some manufacturing issues and we suffer that impairment loss. So hopefully, it should be considered as a one-off. So that's the asset part and the inventory that is just related to the normal operation. I mean, as you know, that we were launching new products. So a learning process. It's not the same to do -- commercial production is not the same when we did for the clinical trials and initial batches. So that's sort of related to that one.

Okay. But in this case, is it possible that you will get some kind of refund?

From external source there, we are always pursuing the opportunity. So maybe to some extent, it's possible or not impossible, but I would put it this way.

Next question from Dawid G rzynski, the floor is yours.

I have 3, and I will start with the one on 932 project. So we -- there was no update about the project from AbbVie on the last call. And I wonder if you had something to share, something new to share about the status of the project. My assumption right now is that the decision will be made only after GAD results next year. So please correct me on that, if I have a good feeling for the first one.

I mean because AbbVie didn't communicate, we are not really able to communicate too much either. But I can -- so basically, the official line is that the parties are still evaluating the Phase I data and seeing how to move -- or how to continue development of this molecule. But I think on the second one, perhaps I can -- we can say that that's never been the plan to wait for the GAD data before making a decision on the bipolar disorder development. So the 2 are not related to each other.

Especially because this commitment as well as ours is to get there with this development by the time Vraylar loses exclusivity. This would not be possible if we had to wait another year for the GAD results. So no, your logic is not quite right.

Okay. And second one on Fylrevy. Any update maybe on the partnering talks in the U.S. market.