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

Ladies and gentlemen, welcome to the Lundbeck conference call. I'm Mullet, Chorus Call operator. [Operator Instructions] and the conference is being recorded. [Operator Instructions]. At this time, it's my pleasure to hand over to Charl van Zyl, President and CEO. Please go ahead, sir.

So good afternoon. Thank you again for joining, of course, our call today on very short notice. And we want to use this time together to engage with you on our definitive agreement that we've announced to acquire Longboard Pharmaceuticals. And of course, this is a significant step for us forward in our journey to become a focused innovator. But before we go to the more detailed points on the deal, let me go to the next slide, please. So on this slide, again, I want to make you aware of the forward-looking statements. So these include statements regarding the transaction between Lundbeck and Longboard and of course, are subject to various risks and uncertainties and subject to change. If we can go to the next slide, please. And before we then talk about the deal itself and the agreement we've reached, let me highlight a few of the following points. The tender offer has not yet commenced, and of course this will -- as highlighted in the press release. And this call is, therefore, only for informational purposes and, of course, neither an offer to purchase or a solicitation to sell any of the shares of common stock of Longboard. I just wanted to make you aware of these points as we go into the next discussion about the deal. So let's go to the next slide. And of course, I want to say again here that I'm really pleased that we could announce this deal today for Lundbeck to acquire Longboard Pharmaceuticals, and there are 3 and 4 important points that I want to highlight for you again around why we believe in this deal. First of all, it's building on our future as a focused innovator in the space of neuroscience and what this deal brings us is a real perspective on long-term growth for Lundbeck in the future and in the next decade. It really builds on our strategic ambition to build strength in the neuro-rare space going forward. And of course, this complements other areas we have, like amlenetug in an alpha-synuclein in MSA that is also part of that program in the neuro-rare space. And of course, what is important in this asset that we are acquiring today, bexicaserin, is that we are acquiring an asset with breakthrough therapy designation and the potential to address a number of severe and rare epilepsies in the space of developmental epileptic encephalopathies. And the final point I want to make again is that -- based on what we know today, this asset and the programs that we will develop it in will have the ability to deliver peak sales in the range of USD 1.5 billion to USD 2 billion and of course, complementing our existing mid-stage and late-stage pipeline and building therefore a strong position for long-term growth for Lundbeck. If we go to the next slide, what I would like to again emphasize, as you've heard from us many times and for myself, these are the pillars of our focused innovative strategy. The one is, of course, to grow what we have, grow in the midterm, our strategic assets. And of course, we see very strong results there as we have communicated in the first half of this year. And that, of course, continues to be a key focus of growing through the midterm with our existing strategic assets. We, of course, focus very much also on our capital allocation towards innovation for the long term. And this is where our deal today with the acquisition of Longboard fits very well. It fits into our focused innovation strategy to build sustainable growth for the long term. And what we bring into the pipeline now is an asset that is going into Phase III and Phase III's trials are being initiated with the ability to launch in the fourth quarter of 2028. And of course, the final pillar that we will discuss in more detail also during our upcoming capital markets event is, of course, our ability to also reallocate capital and fund that future in a very sustainable, profitable way. So if I then go to the next slide, just a few words on Lundbeck and Longboard. And I first want to take a moment to, of course, thank the Longboard employees. This is a tireless effort that this team has worked in advancing the science in the space and bringing this level of innovation into an area of very high unmet need. And so I'm sure that the team is very proud of their achievements. And we are, of course, very grateful that we can now build on that legacy and bring those 2 patients in the future. So what you have here is bexicaserin, which is a very selective 5-HT2C, an agonist with a broad potential, and we see that potential in areas like Dravet, Lennox-Gastaut and of course, other rare developmental epileptic encephalopathies. And so this is an area where we see really a number of patient populations that can be addressed by this very selective mechanism. We have seen, of course, compelling Phase II results that lead into Phase III with also a breakthrough designation that is compelling in terms of its efficacy and safety profile that we believe could be a best-in-class treatment in this space. And of course, the fact that the Phase III results were compelling of course, also means scientifically that is derisked and we have a high confidence that it will come to the market, and of course, will contribute to the USD 1.5 billion to USD 2 billion peak sales potential that we see across these multiple indications. To now talk a bit more about the strategy and the strategic fit, I would like to hand over to Maria Alfaiate, who is our Head of Corporate and Commercial Strategy, who will share a bit more of her perspectives on the deal and the strategic fit for Lundbeck. Maria, over to you. Thank you.

Thank you very much, Charl. And as we have been or as Charl has been mentioning, this acquisition showcases a perfect strategic alignment with our focused innovative strategy that we've been sharing with you for a while. It also showcases our ambition to continue to bring leading innovation to patients within neurospecialty and neuro-rare diseases. Charl has already alluded to the fact that this is a derisked asset with several potential indications with compelling evidence, convincing evidence of what could be potentially a best-in-class for Dravet and Lennox-Gastaut, but also first-in-class for other DEEs. The significant IP protection also gives us considerable runway where we can drive the success of this asset. Of course, it has a strong fit with Lundbeck's strategy. It enhances our dedication to neuro-rare and also to the established presence that we have in rare epilepsies in the U.S. We expect launching in Q4 2028 as already been alluded to. And I would move on to the next slide, please. You've also seen from the press release that Longboard Pharmaceuticals has an interesting profile. They have been experts in this area. And with the initiation of the Phase III DEEp SEA Study evaluating bexicaserin in Dravet syndrome that is scheduled for this year, we will play into this rare epilepsies field. So on the asset, you've read before bexicaserin. We believe that to be the best-in-class within the modality. We are going for a broad range of indications, many of those that are currently very underserved. This asset is, in reality, a pipeline in a product. And I will let Johan tell us a bit more about the profile of the asset itself.

Yes. Thank you very much, Maria. Let's turn to the next slide. So before I go into some more preclinical and clinical details about bexicaserin, I'd like to sort of orient you a little bit in the indication space we're operating here. This is an antiseizure medication intended to work in a certain group of epilepsy patients. Epilepsy, as you know, is a very, very broad category of diseases with still enormous unmet medical need. It's estimated that around 30% -- between 25% and 40% of epilepsy patients are not really reaching any good therapeutic effect with the drugs that exist today. So they are what we call resistant to seizure medication. If you look then in how we classify different epilepsies. We still work with the classification on how the onset of the seizures start. So here, we have the 2 different groups of focal and generalized seizures. This is actually a highly new classification in terms of epilepsy. We've previously talked often about partial onset issues when we talked about the focus issues. But it really now recognizes the focal onset in, say, the temporal lobe or some other more defined unilateral region for the focal seizures. The generalized, or as indicated by its name, something that broadly emanates from the whole brain, both sides of the brain. There are also mixed patterns of onset of seizures and then, unfortunately, there are a number of unknown reasons for it. If we then drill down on the DEE Group, the developmental and epileptic encephalopathies, they can occur. The etiology of them are basically based on 3 different broad categories, acquired, syndromal or genetic. The genetic ones are basically best illustrated by Dravet syndrome, where we have dominant mutations in the sodium channels. When it comes to the acquired ones, they could be due to brain trauma, tumors, and other effects of the brain like infections while the syndromal ones come across a number of different syndromes that are metabolic or due to other causes. So if you look at the DEE space, it contains a lot of different causes of epilepsies and seizure conditions. And it's only actually 4 of those that are today treated with any medication. So it's a big sea of DEEs that are not reached today with approved therapies. Dravet Syndrome, I mentioned that the dominant mutation in sodium channels, primarily in this case. Here, we have a number of drugs since several years back. Lennox-Gastaut is actually a more narrow down indication space than it used to be and it's more defined now through its EEG recordings. But it's also quite well served by drugs, but still many, many patients that are not responding to treatment well. Tuberous sclerosis complex is an indication where we recently have got a couple of drugs to the market, but it's still tremendously underserved. Then we also have seen new drugs in the CDKL5 or CDD disorder very recently. But as you can see on this list, which is just an example of the many different DEEs, there are many even not served by approved drugs. Next slide, please. So then if we look at the numbers of patients here. You have the approved therapies in darker blue here on the left side in the 4 indications I just mentioned. But as you can see, there are many other DEEs that are not served today by approved treatments, and that's approximately 100,000 patients today that are not served by any approved therapies. Bexicaserin has the potential to address across all DEEs, and that's why we are particularly interested in this drug. Next slide, please. So then if we look a little bit what made us very interested and excited about this drug. First of all, it has a very unique selectivity for 5-HT2c receptors. This is believed to be the validated receptor for its efficacy. And the interesting thing about the relativity here is that it's conveyed by a pretty well-understood structure activity relationship. It's in the tricyclic structure with the mid group on the [ position ] that really conveys that selectivity. Selectivity has also been seen by the major metabolites of the drug, which is very important to also look at. So this means that this drug avoids some of the in-built liabilities you see with 5-HT2b or 5-HT2c agonistic properties. So through that selectivity, it doesn't have any major in-built liabilities to have any of those cardiovascular and valvular pathology liabilities or psychiatric type psychosis liabilities that may occur also with 2a agonistic approaches. So the preclinical evidence is pretty standard. There are a number of animal models that have looked at this and they showed good efficacy across a number of models. And that, of course, trigger clinical development program in the Phase I program that looks at the safety [ for the ] interactions and drug interactions, which are very important because patients are often on multidrug therapies, poly-drug therapy. So it's very important to see that it doesn't interfere with standard of care. Based on this, the PACIFIC Study was done, which was a Phase Ib/IIa proof-of-concept study with multiple DEE populations, and the topline data we communicated earlier this year, and that triggered, of course, our interest and it was well recognized by the scientific community as well. And this also triggered the company, Longboard, to continue with initiating a Phase III program. There is also an open-label part of the specific study that have been quite recently reported. So I'd like to drill down a little bit more on the results of the PACIFIC trial. So if you go to the next slide, please. So on the left side here, you see from the PACIFIC study, the overall effect of the bexicaserin in reducing the accountable notice issues. So here, we're looking at one type of readout, which is the most clinically relevant when you look at motor induced seizures, basically epilepsy that leads to motor effects. And here, you see a quite pronounced effect against placebo. And I'd like to call out that placebo here are patients on standard of care. So on the overall population, we see almost a 60% reduction in the accountable motor seizures versus 17% in the placebo-treated standard care patients. If one then looks a little further at the different subpopulations and this was a mixed-group study. So obviously, it varies a little bit how many patients that were included in the various subgroups. But I think this is very interesting to look at because if you look at the bigger group, Lennox-Gastaut, it was still a very robust, over 50% reduction of the countable motor seizures. In other DEEs, where quite a sizable group of patients also included, there was a 65% or almost 66% increase in the countable motor seizures. And then interestingly, in the smaller set of patients that were involved, this was a very pronounced reduction of the countable seizures. So this, of course, is very encouraging data and is the basis, of course, for the initiated Phase III program. It also in interest of the FDA because the company has obtained a breakthrough therapy designation on July 1 for these -- for patients at 2 years or older age. So with this, I'd like to hand over to Joerg with the next slide.

Thank you, Johan. This is truly a transformative and value-creating acquisition, accelerating our strategy to become a focused innovator. From a transaction details perspective, we're talking about a purchase price of USD 60 per share in the form of an all-cash transaction. The USD 60 per share constitute a 54% premium to the closing price of Longboard Pharmaceuticals as of last Friday, October 11. The total consideration for this transaction amounts to USD 2.5 billion net of cash which is approximately USD 17 billion, thereby making it the biggest deal in Lundbeck's history. We fund this transaction basically through existing cash resources and existing committed credit facilities. We see this transaction carrying deep value for Lundbeck and believe bexicaserin is a derisked asset with compelling Phase II data from its PACIFIC study. The Phase III program has been initiated last month and bexicaserin has an opportunity for a series of indications supporting continued growth due to its unique pharmacological profile that can deliver an unprecedented efficacy and safety profile across the DEE patient population. We estimate peak sales potential between USD 1.5 billion to USD 2 billion. The Longboard acquisition will significantly bolster our late-stage pipeline and drive growth through the next decade. We expect closing for this transaction in December '24, and we expect to recognize integration cost in the amount of approximately USD 80 million, which amounts to roughly USD 550 million, which predominantly will impact '24 and will be adjusted for in our adjusted EBITDA financial reporting. As a result, we do not see an impact to our full year 2024 adjusted EBITDA guidance. This transaction is, of course, also attractive from an EBITDA accretion perspective that we estimate to be 2 to 3 years after launch in Q4 2028. Bexicaserin, together with other programs in our current portfolio, such as anti-PACAP, amlenetug and anti-ACTH complements Lundbeck's long-term growth potential while addressing the LoE of Rexulti at the same time. From a capital allocation perspective, we do not see any significant impact to our priorities. We remain committed to our dividend policy, targeting a payout at the existing 30% range of net profit as well as the maintenance of an investment-grade rating at all times. Even that this is a very sizable deal for Lundbeck, we still have capacity for additional BD from a debt perspective, in line with our focused innovator strategy. On all of these topics, we will elaborate further at our Capital Market event on October 23 next week. With that, I will hand over to Charl for some closing remarks.

Yes. Thank you, Joerg. And if we can go to the final slide before I invite you for questions. Let me just leave you with the key points. Again, it, of course, reinforces our strong position in neuroscience as a focused innovator. With this acquisition, it really perfectly fits into that strategy and contribute significantly to our long-term growth perspective. We see an adequate risk profile, in fact, scientifically quite derisked as a late-stage asset with multiple indication opportunities. It rebuilds depth and strength in our neuro-rare portfolio as one of our key pillars. We want to continue to build as a future option for Lundbeck. And of course, as Joerg had mentioned also here, strong solid balance sheet here, also post transaction. So with that, I would like us now to go to questions and open up. Back to the operator. Thank you.

And the first question comes from James Gordon from JPMorgan. It seems like he may have issues with his microphone. Then we will go to the next question, which comes from Charles Pitman King from Barclays.

Two from me, if I may. Just to get started, could you just give us, Johan, maybe a little bit more information around how we should be thinking about current standard of care for these rare epilepsies and how the competitive environment has developed over time. And why particularly bexicaserin is well placed to kind of beat these out? I mean, where in interim paradigm should we really be expecting it to place? And then just secondly, a question in terms of the kind of premium suggested to be being paid for this asset. What is it about this asset mix, that kind of roughly 80% premium seem appropriate? Is this the level that we should be expecting for valuations of focused innovative biotech deals that you'll be looking to do in the future? Thank you very much.

Yes. So I can start with your first question then, and thanks. It's a really good question. And obviously, we think it has a pretty unique space in the [ armamentarium ] of standard of care because it's profile, the binding profile, et cetera of this molecule. But if I walk you through a little bit more of what we have in terms of our competition, there is no drug approved for this broader label of DEE. And what one would be aiming for here is an indication for DEE basically for children about 2 years or something of age. That would be a very encompassing indication label. But if you look at the specific different diseases, of course, Dravet has had a number of drugs on the market for many years. Epidiolex is there since 2018 and fenfluramine also came through 2020. So there are some pretty efficacious medications out there. But the little data have so far on the molecule in Dravet syndrome indicate that it has -- if you eyeball, there is a very impressive reduction of the motor seizures. So that's why we hope the more data and the company Longboard has already initiated a Phase III trial in Dravet syndrome. When it comes to the other big indication in this space -- subindication in this space, Lennox-Gastaut syndrome, there are probably about 8 approved drugs. And you have also drugs like fenfluramine there and cannabidiol. So those drugs are active also in that space. Fenfluramine got approval quite recently in 2022. So here, we have an efficacy that also definitely works against those drugs at a similar level, if not better. What we like to see here is of more data and also with the differentiation here that I hope will play out very much in the eyes of the prescribers and the patients and caregivers is the broader safety profile that this drug should entail by selected 5-HT2b agonistic effect -- 5-HT2C agonistic effect and avoiding the 2b. For tuberous sclerosis, which is a little odd indication in this big family, there are a couple of approved drugs. 2020, Epidiolex again and then a new drug that came, an mTOR inhibitor in 2018, which came through treatment of tumor attacks and then the CBD indication has, as I mentioned, a new drug. I think overall, biggest potential of this is that here, you don't have to really look at the various subsegments. And here, you offer a therapy that actually can work across any kind of DEE, some of them very, very rare, and that is what we intend to do in coming trials that start off in phase III. So then I hand over to Charl maybe to handle the next part of the question.

I can take that. First, I think, Charl, to come back to your question. I think we're talking about an attractive acquisition price, which is below, you can say, factor 1.5 of expected peak sales. If you compare that with precedent M&A transactions somewhere in the range of USD 1 billion to USD 5 billion post POC data and pre-Phase III data, then it's very much in line with -- from a premium perspective, whether you look at unaffected 52-week high or 30-day VWAP. And it is actually even more attractive if you compare it to some of the precedent rare epilepsy transactions. But besides multiples, I think it's much more important at the same time to look at the -- as Johan said, the derisked nature of the asset and the quantity of the commercial case that we have been able to put together, which sits on the back of achieving a broad label and is, of course, work out of a diligent -- due diligence have done together with Langkawi pretty much, you can say, since January of this year. So it is a strong drill down into expectations we have on an expected price, market share, launch and LoE in '41.

And the next question comes from Xian Deng from UBS.

Two, please. I guess the first one for Johan, please. On Slide 12, so the p-value of the Phase II trial, it actually crossed the threshold of 5%, yet the magnitude seems to actually be very big for the active arm. So just wondering, why is that the case? Is that due to multiple diseases? Or is it just high variance with individual patients? And how does it translate to your expectation for the Phase III -- your degree of confidence of Phase III success? That's the first question, please. And the second one, just sort of wondering your level of confidence of achieving that peak sales of $1.5 billion to $2 billion. Because if I look at the Fintepla, the consensus -- with several sort of similar overlapping indications, the Fintepla consensus is actually around -- is actually below EUR 1 billion. So just wondering, given your expectation is a lot higher given the very similar mechanism. But just wondering, do you think [indiscernible], do you think you're going to have more indications or you think you actually have a better drug, so you will have more market?

Yes. Thanks very much for that. Good question. So if you look at the PACIFIC study, obviously, it was a proof of concept study more smaller, and it didn't include so many Dravet patients, just a handful -- less than a handful. So the bigger population, as I mentioned before was Lennox-Gastaut syndrome and other DEEs, reasonable sizable other [ DEEs ] group, but they obviously come with many different sub-indications here. I think the confidence we have really going into Phase III is that it was consistently shown across the populations to work. Remember, this is still a fairly small proof-of-concept study. So p-values are not really the critical aspect here. It's really the extent of effect and the variability you see almost at an individual level. So even in the few patients that were included from the Dravet subgroup, there was a very consistent effect. Now one needs to look, particularly the Dravet group had a bigger population, and that's really what has been initiated now. I have to say I have a very strong confidence that this will work out very nicely across populations. And why is that? Well, first of all, hidden in this drug is a validated mechanism with 5-HT2C agonistic effect, while this is a super agonistic effect. So if anything, more potent, it's a very potent drug on that receptor with a remarkable cell activity. So there is no inbuilt sort of break in dosing here. Physicians and us in clinical trials shouldn't be really concerned about liabilities inbuilt in the molecule. So that's one aspect that I think is really very interesting with this molecule because other drugs have a little more traveling side effects or even REMS programs that try to avoid problems with other side effects that could occur, like also what has been described with, for example fenfluramine with the 5-HT2b liability. It took many years for that drug to build up its dosing and go into this indication space. Here, we don't have that concern. One could go straight out and really test the drug at reasonable doses. I hope that answered your question.

And the next question comes from Martin Parkhøi from SEB.

Yes, Martin Parkhøi from SEB. Just a couple of questions. Firstly, just on your potential for initial launch in the fourth quarter of '28. Would that be on the broad use? Or do you need to get a single indication in the beginning and then you get add-on indications like we are seeing and hopefully we will continue to see on Rexulti. And then just secondly, do you have any interest on other parts of the pipeline of Longboard? Or is this just a single asset acquisition. And this context was a licensing deal or a single asset sale, was that on the table as well? Or was it a full acquisition which was necessary? And then finally, to Joerg, how do that -- how would the -- with the additional R&D cost that you've taken, how would it impact your midterm margin targets?

Yes. Maybe I can start and then maybe others can fill in a little bit. Yes. So first of all, I think it's very important to note that the breakthrough designation that the FDA has provided here is really for DEEs -- unspecified in some of the DEEs. So that is, of course, the label one would aim for. So that would then compass, of course, Lennox-Gastaut [indiscernible] and tuberous sclerosis or whatever one may have in the trial. We really are going to aim for that sort of, what you say, broader label initially. So there is no slicing here. The idea is really to encompass the whole DEE population. Obviously, there are various variants of this and the way you run the trials could lead up to various subindication also being labeled or at least mentioned because those populations are studied in the clinical section of the label. Other pipeline assets, yes, there is one S1P modulator that is in Phase I. That is the asset that I would say is not any driver at all for this deal. This is a compound that is on a mechanism that is quite frankly also validated Gilenya and other drugs. But it's a very late comer, and this is something we did include in our valuation of this deal really. I hope that answered part of your questions, but I think there could be also other parts that others can add to.

I can add, Martin, to your question around what type of deal structure was available. Of course, many of these are considered if it's in licensing or outright acquisition. Of course, it depends also on the seller. And in this case, it was an outright acquisition that was really the deal structure on the table. Joerg, do you want to comment?

I'm happy to comment on the midterm targets. I think we feel comfortable to be able to handle this within the, you can say, existing bottom line range or margin targets we have given. Of course, R&D costs are going to increase, but that's also not something new. We've seen that also this year, and that's also in line with our long-term guidance. So that should be clear.

Can I just have a follow-on to Joerg, maybe the peak sales estimate of USD 1.5 billion to USD 2 billion. Is that -- how was that regionally split, just broadly?

I think it's very fair to say that the U.S. has more than a super majority in this case.

The next question comes from Manos Mastorakis from Deutsche Bank.

So just looking at [ royalties ] history and prior ownership, is there anything you can share about royalties. Any royalties that you owed to other partners in the past? And second question would be on general confidence you have in approval of this deal going ahead in antitrust approvals and different comments on this point?