H. Lundbeck A/S (HLUNB) Earnings Call Transcript & Summary

Good morning. I'm James Gordon, JPMorgan European pharma and biotech analyst. And today, I've got the pleasure of introducing the Lundbeck presentation. And we're going to hear from Lundbeck's new CEO, Charl van Zyl. And thanks a lot for joining us today. I look forward to the presentation.

Thank you, James, and good morning, everyone. Thank you for joining today. It's, of course, my pleasure to represent and present Lundbeck to you today. As you know, I joined Lundbeck in the fourth quarter of last year. So it's an opportunity for me to today set more context around the direction of the company. Where are we going? Where do we -- would we like to take the company? And how do we see the long-term future of the company? And in the title, in a sense, you already get a hint that we see an opportunity to pivot towards being a more focused innovator, and I will certainly share more of those thoughts and how we think we can get there in the long term. Of course, before going ahead, I would like to just put our company disclaimer that, of course, what we discuss today is, of course, subject to change going forward. So again, as I said, it's -- today really is an opportunity to set direction. Where do we go as a company? How do we see the long-term future? And I want to, at the start, position it very clearly that we are a pure-play neurology-focused company, and we will remain that very focused company, in a sense, treating patients with high unmet need. And our intent is to continue to pivot towards being even a stronger focused innovator going forward, and I will explain a little bit how we believe we will get there going forward. Having said that, we will also be very careful in terms of how we think about our capital allocation to maintain a sustainable long-term growth potential as well. Now in my first 90, 100 days, we've gone through a strategic review, of course, and that is still ongoing. But I am happy to share some of those thoughts with you today. Of course, we addressed really 3 questions, first one being, can we grow more with the assets we have? The second question was really, what is the strength of our innovation engine and our pipeline? And the third question was really, can we create more financial flexibility inside the company with the means we have to essentially address the success scenario of investing more in R&D to become a focused innovator? And through that, we have also, of course, listened to the questions from investors. So we have an inside-out view, but also an outside-in view, and those 3 questions are very much reflected in the core of our strategic review exercise that we have done in the first 90 days. The first question there really is, can we grow more through the mid-term LOE? You know that we are facing an LOE in 2026. And can we grow with the existing assets that we have through that LOE and focus our efforts more in the long term? And the answer to that is, yes, we can grow more, and we will explain also why we can grow more. On the innovation side, we -- you would have seen from our R&D Day that we have a strong emerging pipeline that is more weighted to the early stage. So also through this exercise, we wanted to address how do we think about external innovation and how do we build a more sustainable pipeline for the long term. And the final question in our strategic review was around financial flexibility. How do we fund a success scenario? What are the abilities for us to be able to create that operating flexibility to address scenarios where we have a more successful pipeline, and how we invest in R&D for the long term. And so I will address those in a more -- subsequent in more detail. But again, it's very much around being very purposeful around our capital reallocation as we look at this going forward. In my 90 days, of course, I also had a chance to review the company, and I would just share a few quick thoughts with you. First of all, on a product level, we have 2 very strong strategic assets, with Rexulti and in also Vyepti. And certainly from what we can see today and what we have in our hands, we believe we have more growth potential there. So I'm really confident around the assets we have and the ability for those to grow even further into the coming years ahead. The second area is really on pipeline and what I, of course, have seen, and I'll speak more to that, around the real transformation that has happened in our pipeline, and we see really significant potential there. Of course, we know that, that pipeline really is more weighted towards an early stage and will come into play more in the latter part of this decade, but certainly strong pipeline potential and a strong innovation engine. We have really strong capabilities around partnerships. We are a company that has partnered in the past and will continue to partner. And I see that also as an important strategic lever for the company going forward. So very confident to see that already well developed inside the company. And finally, the -- in a sense, the essence of the company, the reputation, the strong organization, the people we have, has really given me a lot of confidence. We have a strong organization in the U.S. where we believe we can grow further and with more investment. We have a strong innovation, science-led organization. And we clearly have a strong reputation and consistently ranked as a really strong company in the space of neuroscience. So all those elements in a sense, give me a lot of confidence in my first 90 days that we have a great promise in the company and the potential to be poised for success there. Now I want to go a little bit more into the strategic direction. As I said, today's presentation is very much around setting direction for you and where we believe we can take the company, and we believe there are 3 pillars that we are addressing in a very systematic way. First is looking at securing the long-term growth of the company. And we see that being able to be driven through 3 areas. We believe we can grow more with the existing assets we have. So we have a current assumption of building with the understanding of what we have today, the knowledge we have, we believe those assets can grow even more beyond what we see today. Secondly, the growth for the long term will also be driven by a very systematic approach to business development, a programmatic approach, and I will explain more what I mean by that. And thirdly, of course, as the organic pipeline today emerges further, we see that bringing, of course, a lot of growth potential in the next decade for the company. The second pillar is really around building that innovation engine. And of course, a lot of work has happened with the transformation. So I'm walking in the footsteps of others here, but I believe, certainly, we have a strong potential to further build on that balance of our innovation investment also towards more early stage, be very clear on where we play as a focused innovator. And through the approach of being open to partnerships with a success scenario in the pipeline, we will also be able to partner more of our assets in the longer term. And the third pillar really is around, for shareholders, delivering that sustainable profitable growth. And I want to confirm again today that we believe, with the means we have, with additional flexibility in our capital allocation, we can confirm our target adjusted EBITDA of 30% to 32%, and we believe that we can also do that through various means, both operating efficiency but also in our commercial footprint and other areas to create that flexibility for preserving that margin while also investing in R&D. So let me go a little bit more into each of those just very quickly to set the scene and the direction for you on those. So maybe firstly, on the growth of our strategic assets. And here, I want to again emphasize, as a focused innovator, we're making very clear choices here that these 2 assets will be our top of our list in terms of investment focus, both in Rexulti with this new indication, of course, in agitation associated with dementia and Alzheimer's disease; and then Vyepti, which is our severe migraine asset, which we have also seen promising growth in '23, and we feel confident now that it's an opportunity to do more there in terms of investing. And our prioritization from a geographic perspective would be to invest predominantly in the U.S. behind these assets to really see the growth there. So we are really exercising very clear focus with the clear levers of investment in Rexulti more around the breadth of our prescriber base, coverage of our health care professional base, but also activating now the disease awareness with DTC. And in Vyepti, of course, we've learned a tremendous amount around the specialty model, how we serve these more severe patients. And so patient resource managers in areas where we believe we can grow that model even further in terms of our reach will give us a lot of confidence. And the feedback we received, certainly, from the field and from key opinion leaders, that we have the best CGRP in this class here. And so a very strong promise there. And that translates roughly to what you see on the right-hand side of the slide, which is really what, today, is a 30% contribution of revenue of these assets to essentially doubling those by '28. So we feel very confident that we can grow through the mid-term LOE to focus the efforts of the company very much on the long-term strategy that we want to solve. And so I think that gives me again the confidence and, hopefully, you the confidence that our focus as a management team is really around the long-term success and long-term focus of the company. So then really going a bit more into the innovation bucket of our focus, and I will not go through the pipeline in detail today because we had done that during our recent R&D Day. But I want to just make a few comments here that we, as -- and this is more -- and I speak under the leadership here of Johan in the room, that this has been, since 2019, a transformation of the research engine. We have now 5 new molecular entities, novel mechanisms. We have filed 60 patents. We have, not reflected here, but 17 new research projects and 13 approvals. So we've seen that productivity ramp in the pipeline significantly. And this is, of course, an effort over a few years, and we're starting to see really the green shoots of that -- of those efforts. And so also in here, you see that we are very focused on 4 biologies where we understand the biology well, the pathobiology. And through the work that Johan has done, we also feel now confident that we can early understand the risk profile of assets even in the preclinical stage, and therefore, predict more success in the later stage. So very promising in terms of pipeline. But having said that, and as I said earlier, you can see clearly here that it's weighted towards more Phase I, Phase II. So there is a balance that we need to strike with external innovation, so more business development strategy to, in a sense, balance more the late stage of the pipeline. And that's why I would like to go now to the next slide, which is really giving you more of a sense of how we think about business development. And we're learning here from others, we're learning from my past as well, that a more programmatic approach, a more systematic approach with a series of deals is how we would like to address M&A. Not one single deal, but really a few, and kind of the string of pearls concept. And there is 3 clear sand boxes we want to play in, building on our strength. The first is in the psychiatry space. Of course, we are commercially very clear there. We have a strong organization, so we will continue to look externally at assets in that space to build that synergy, but also the effectiveness of our current relationships in the field there. The second bucket is really around neuro-specialty. And of course, with the launch of Vyepti in severe migraine, we now have learned there's a tremendous amount in the space around how to address those severe chronic conditions, treated really at the specialty centers in neurology. And we will continue to look in that space to build on top of our model of Vyepti a strong position there with additional acquisitions. And the third area is in the space of neuro-rare. As you know, this is a high unmet need area. We have a number of programs in our pipeline that will lead us in that direction, and so we will also continue to scout in that space. And as a final point to say here, with this focus, we look at our assets really that have the potential at this point to launch by '27, '28 into the market. So it's more weighted towards late-stage opportunities that cumulatively will give us the potential of peak sales of USD 1 billion to USD 1.5 billion. So also here, you can see, as a focused innovator, very purposeful around how we think about M&A and how we will address that. Having said that, also, today, we are in a very strong position from a cash flow generation. We have -- we're completely deleveraged, and so we have the firepower also to execute on these very targeted deals going forward. The third pillar I just want to highlight at this point, and we will go into more detail in the future on this, is really around capital allocation and how we think about this. And through our strategic review, we've identified roughly 20 to 25 different initiatives that we believe will allow us to create that flexibility while maintaining a certain commitment to our profit targets to create that flexibility inside to invest more in R&D. That's essentially what we're trying to do. And we're doing that through a number of areas, being very purposeful around our commercial footprint, where we place our investment, and where we will deprioritize in certain geographic areas. And secondly, we see opportunities in operating efficiency, manufacturing, certainly also how we allocate R&D investment across the spectrum, and other areas where we believe we can generate that flexibility. And what I've seen so far with the 25-or-so initiatives, I have a lot of confidence that we can create that flexibility to fund that success also in the pipeline going forward. And the final part is really a cultural part, I would say. The mindset of the organization, how we think about return on investment in a very purposeful way, organization that is data-driven. And I believe we have already elements of that, but it will require us to continue to transform in that direction. So giving you again a sense, just these 3 pillars that I believe are clear important areas for our strategic direction and how we see the company evolve. So a final few comments I want to make more on our sector, space of neurology, of course, and I think you know it well, but it's important to reiterate that this is an important sector, of course, an area of very high unmet need. And we are well-positioned in a sense to address those needs, all those unmet needs. But it's also a very strong growing market, and we want to participate in that growth. It's become probably a bit more interesting also with the recent acquisitions in the space. It is an attractive area and an area of high unmet need. And the final reason why we are confident about this is that the understanding of the science and the biology has significantly improved the biomarkers, the ability to take large molecules across the blood-brain barrier. All the elements that we have in our toolbox, in a sense, will also be able to help us in our discovery process. So we feel very bullish about this space, and therefore, being a pure-play neuroscience-focused company is where we would like to continue to build from. In a sense, also our experience, of course, in -- and our strength in the neuroscience space is important. We have 2 elements here. On the left-hand side of that slide, you see the deep scientific expertise, the legacy of the company, 70 years in neuroscience. The engine of discovery that we have now established is really a strong asset for us. And really, we are also, of course, very targeted in our discovery process around AI-enabled approaches towards discovery. So from that perspective, that scientific expertise, we want to kind of build on that strength. And we see that, in neurology, we are well-poised to do that. And commercial, of course, is important today as well. We have now a long history, of course, in neuropsychiatry, but also built through the acquisition, with Vyepti in migraine, a more specialty-focused model. And we believe we can now build on that model by also acquiring in that space to strengthen that as well going forward. So that's a little bit around the space. And so I want to conclude with a final slide that gives you a bit more a view of the horizon and how we see navigating through this. In the sense, the first years ahead, which I would sort of term focus today, is really around being that focused innovator. How do we make those choices? And we are now making those around being very purposeful around the geographic footprint where we invest for more growth of our strategic brands, Vyepti and Rexulti. And I feel confident that we have found the path to do that. Very clear on our sort of transparency of capital allocation and where can we reallocate, and we've identified those initiatives and we'll focus on delivering those. And of course, the innovation of our current pipeline, but also being very purposeful around focusing on our business development efforts around being very programmatic, very systematic around a series of deals, is what we will see in our sort of phase of focus, becoming that focused innovator going forward. We see, of course, through that, potential to scale into new areas, with the advance of anti-PACAP. With our development phase of that going into 2027, it becomes a very strong opportunity to build on top of Vyepti a new mechanism that can broaden our reach into the severe migraine space as well as in the neuro-rare space where we already have pipeline assets there. We see a company in this sort of window of scaling more through partnerships as well, both on an R&D level but also commercially, remaining focused on how we reach more, and an operating model of a company that's really lean, transparent, but very focused on being purposeful around where we invest and how we invest. And as we look a little bit further out into that phase of where we see the success of the organic pipeline, we see an opportunity to accelerate into the next decade. Our focus is on that LOE that we have in 2029. With a combination of our business development efforts, together with an organic pipeline, we feel we have the ingredients to be able to grow into that next decade. And of course, with the work that Johan is doing, remaining a top-level, best-in-class neuroscience discovery platform. We come from a position -- as a final point, we come from a position of strength. Strong cash flow generation today. We see the firepower evolving even more. Today, we have about EUR 2 billion to EUR 3 billion, but we see that even evolving further with the cash flow we have, so -- and a growing strategic set of assets that we have this ability to execute this plan in a systematic way and deliver on the long-term growth perspective of the company. So I want to pause there, and I think we now have a chance to take some questions. But again, thank you for your attention today and for hopefully a clear message. But we'd would love to hear your questions going forward. So James, I hand to you. I would like to invite also Tom Gibbs, our Head of the U.S., who could certainly answer more questions for you on Vyepti and Rexulti; and then also Johan, our R&D Head, to join me here.

Thanks very much. So we'll now kick off the Q&A. Does anyone have any questions they'd like to start with?

Yes. I have a question on Rexulti with Alzheimer's agitation. What would you say the sales or awareness penetration rate is in that space just due to the fact that, to some degree, it's been used off label for some period of time?

So I think the work that we've done to date really confirms that there's a significant unmet need that exists with AADAD. But it also confirms that it's a nascent market that needs to be developed over time. So as we look at the progress that we've made, we've actually very -- very pleased with the progress that we're making to date. If we look at our baseline prescribing based upon claims data, our prescriptions are up 140.2% as of October claims data, really driven within the long-term care setting, over 300% growth there, and within the community setting, 68%. But with that said, I think we're really just scratching the surface there and we have significant work to do as it relates to really raising awareness and appreciation among caregivers of the burden of AADAD as part of their Alzheimer's and really galvanizing them and activating them to drive their loved ones into seek treatment. And that's what we've been doing. We launched our DTC campaign in October, and we're starting to see some good progress there as it relates to what we've seen in the December time frame. Does that answer your question? Okay.

If I could just ask a follow-up question to that, which would be, I think we've seen some quite encouraging data that you've presented looking particularly at older people, where there has been some acceleration or some expansion of use, but the overall prescription data looks fairly steady at the moment. When do you think in the overall prescription data for Rexulti we might start to see the inflation?

Well, I honestly have a little bit of a different view when we look at the overall prescription data. If you looked at the market share in the May time frame, it was flat at about 1.79%. If we see the most recent weekly data, market share was at 2.08%. So we've seen a meaningful impact of the AADAD indication, I think, driving the overall brand performance. I talked about market share, but if we look at our NRxs, for example, we reached another all-time high, December 8, for NRxs as well.

Bigger picture question. I think you talked about growth for 2029, but how fast do you think the company can grow? I think a while back there was a comment at least in '26 that the company could do at least mid-single-digit growth. So what sort of growth potential do you see out [indiscernible]?

Thank you, James. I mean, I think at this point, we're probably not going to give you specific guidance. But we feel with the assets we have, that, that sort of hypothesis can be confirmed. And so we want to at least be in that mid-single-digit potential. But of course, we will provide more specific guidance in the mid-term as well.

One other piece of longer-term guidance or medium-term guidance, I think, before, the company had said that a margin of 30% to 32% is achievable. And if I remember rightly, that was maybe previously it was a medium-term target, but I think you said longer term. So is that still a target that could be a '25, '26 target? Or is that more of a longer-term target? What is long term to Lundbeck?

Yes. Look, I think for us that sort of 30% to 32%, we feel, is competitive in the peer group, allows us some flexibility to invest in a success scenario with more R&D. Of course, in that success scenario, we enter more into Phase III. That will ramp up our R&D costs. So we want to stay within that corridor. I believe that's also a healthy balance between profitability and also investing in innovation.

So if I understand correctly, are you saying that you think that the company could remain in the 30% to 32% from now all the way out to the end of the period that you were talking about?

Of course, that, we need to validate a bit more in a sort of a bottom-up approach, but that would be an ambition we would like to put out there. Yes.

It sounded like there were quite a few initiatives that you were looking into. How will we, as the market, get more visibility on that? Will it be like at some point, say, potentially with full year results, you will say this is a cost savings program, or we're going to save this amount of money or something like that? Or is it more just generally as things progress, you'll keep spotting the opportunities?

Yes, I think what we -- so just to be very transparent, we have gone through a strategic review where we have essentially identified a certain range of initiatives that we believe, I wouldn't call them cost cutting, but really where do we purposefully reallocate inside the company? Towards growth or towards R&D? And so we want to -- of course, as it is in my first 100 days, we need a period of validation of those. But we believe, certainly, during the second half of this year, we can be more prescriptive around what does that mean, what's the degree of transformation we expect from those? But it's very much a staged approach over a multiyear to build that flexibility.

And might it be that you communicate an actual sort of total amount of spending that you're freeing up to then invest elsewhere? Or...

We would like to do that once we validate it, but I think that will be a helpful measurement, yes.