Hikma Pharmaceuticals PLC (HIK) Earnings Call Transcript & Summary

Welcome everyone to Hikma's interim results Q&A. We have Said Darwazah, our CEO; Khalid Nabilsi, our Chief Financial Officer; and Riad Mishlawi, President of Injectables, and our incoming CEO. So welcome everyone. We hope that you have all had a chance to review the presentation. And we will use this session for Q&A. [Operator Instructions] With that, I will hand to Said.

Again, good morning, everybody. And welcome to Hikma's results for the first half. As you can see, we think that every division has performed extremely well. The Injectables have shown good growth. And I will explain later that there were some extra costs on that division. I will explain in detail what they were. But the growth in sales was good, launch of products was good. We are able to launch a lot of what we call 505(b)(2) products. And these are products typically that are new to the market. So they are like in between a generic and the branded for instance, cefazolin is usually used in 1 gram and that's the originator and that doesn't come at a stronger strength, but we got approved 2 and 3 grams, 2 and 3 grams. So it's something new for the hospital and there are many, many products that we got approved. So they are really good products, but they need a bit of promotion. So there's somewhere between, as I said, branded and generic, but we think that they will do extremely well because they really address what patients need and what the hospitals need. Europe did extremely well. MENA did extremely well. The U.S. is doing fine and picking up and Riad will explain a little bit more later on. MENA, again, although we have some very, very difficult headwinds with the currency situation in Egypt and Sudan, unfortunate, happening in Sudan, we still managed to give a very good result with growth almost 17%. So that is very, very good. We were able to deliver a lot of the oncology tenders in the first half. So that gave a big, big boost and those are very high profitable -- highly priced profitable products. And the generics, the 2 things, obviously, first was that the portfolio, the regional portfolio, we have done much better. The question everybody is asking is what is going on in that market as are the prices improving. And the reality is the mixed drug, at least from our perspective, we've seen some products prices still go down and we've seen some product prices go back or stop being reduced, for instance amoxicillin because of the shortages, its price and many others. But we've also seen an uptick in volume. So even the ones that had price reduction had a lot of major increases because of the volume increases. So obviously, demand is picking up again. We believe that there is softening now. I don't think there will be a lot more pressure. We are seeing the FDA still doing the following inspections, still issuing out the warning letter to many of our competitors, which obviously can create more opportunities and shortages moving forward. Cash flow is fantastic...

Yes, a growth of 31%.

Everything is good. We are ready. I'm ready to hand over to Riad. Riad is ready to take actually -- and I'm ready to hand over to Riad. It's been a very smooth transition. Obviously everybody knows the company extremely well. So there have been no glitches at all. And with that, I will hand over to my colleagues and they can give you some more details.

So the questions or [indiscernible] because Said gave a good, I would say, breakup about all of the segments. So I think maybe we'll open it up for Q&A and the growth in the branded business.

It's Victoria Lambert from Berenberg. So I'll start with the first most obvious question, which is just about how Hikma may benefit from some of the supply issues that there may be from the tornado impact on Pfizer from the North Carolina facility. Yes, that would be helpful.

Well, I mean, we have to start by saying that it's a really unfortunate event. And I hope that will not cause shortages to patients. We did communicate a lot of our customers, if they face any shortages they will be willing to step in. But you all know, our capacity has been utilized well. So this is a very temporary -- if it happens, we still haven't seen the impact yet. But if it does happen, that will be temporary and we will have to kind of take it one by one and see if we can step in and how can we step in? And what would be the -- at the end of the day at the consequences of this event. But we haven't really seen a substantial uptake right now or demand, increasing demand. I think Pfizer has multiple facilities. And as we did communicate to the market that some of those products are made in several facilities and they might be able to produce them in other facilities. [indiscernible] panicking, customers are not panicking. So the picture seems very horrific. And we know a parental plant, aseptic plant like this without a warehouse, even if you have the production facility in fact, you still need to do some fixing before you go back to production. It will take some time. Whether this is going to yield to significant shortages that will allow to us or opportunities for us to not -- we still don't know.

[indiscernible]. Sorry, Peter, Citi. I'm just pushing on that prior question on -- we don't want to go through exact capacity utilization right now, but ballpark, can you give us a sense of how tight it is or flexibility to maybe step in?

Well, the good thing about it is that we always seem to be ahead of the curve in some way. So we did install 2 fast lines in our -- both facilities in Portugal and in Cherry Hill. The Cherry Hill line went online -- the Cherry Hill line went online a month ago, a 1.5 months ago. It will take some time to ramp it up, but it's a very fast speed line. It will give us significant increasing capacity, liquid capacity. And an identical line is being installed today in Portugal and that will be online in the material, I think, by the end of September. So we are adding to the -- we are adding capacity to the system. We operate by making sure that all capacity is utilized in any circumstances. But as you know, when you have a temporary opportunity, you're not going to drop your own product to take on -- they don't have to come back and take a while to come back. So we really manage those things very delicately. And I think we're just fortunate we know that we're adding capacity to our facilities. And if it happens that we can pick up some more capacity, some more opportunities from this we're ready.

Just one last one before I hand the mic over. Just on those opportunities, I think, can you just talk a bit more about what you did with [ Acon ] when you picked up some lines or equipment, I don't know whether you've picked up products, but just Said was talking about it 2 to 3 months ago about the environment for you, given your balance sheet to sort of pick up some interesting opportunities. Just give us a sense, talk about Acon and then more broadly, the opportunity to do more activity there?

Sure. I'll say a few things, and I think Said might have to add things. I think from our point of view, the opportunity that Acon has given us is we have -- we've put our hands on equipment right away. As you know, in this industry, if you want to order lines, it takes 3 years before they deliver it and installed. And in this case, we got lines that we really need. As you heard Said many times saying about our intention to increase the CMO. To increase the CMO means you need more equipment, you need more capacity in line and that was something that we can utilize immediately and that's exactly what we did. So the lines already have been transferred to our facilities, been installed, now in the phase of qualification. And I think we already have a -- we have a purpose for them. So I think from that point of view, I think it really served the purpose. We did also pick up some ANDAs. And as you all know, it takes some time for us to transfer into the facility and turn them into additional revenue, but that's the intention. So that's -- and Said, want to add anything?

Basically the equipment that we got, a lot of it will be going to Columbus whereas the engineering team has already installed them, it's amazing because you stay for too much longer time, they need to be qualified, that shouldn't be very difficult. And it will be very helpful. It will add significant CMO business for the Columbus facility. In addition to the 7 ANDAs, of course, as we said, the text time, we've identified the first batch that we are working on to move both the Injectables and the orals. And it will give us some new technologies that we didn't have like --

It's all old ANDA that we kept, we are probably rising there...

Equipment, there is a liquid equipment, there is a liquid single door. There's a small management equipment. So it's a very nice pickup. It's very nice pickup. And obviously, by them going out of the market, they created shortages that we benefited from also.

Alistair Campbell from RBC. Just jump in. Could you touch on generic Xyrem, obviously, an increase in guidance in generics and it sounds like some of that's from increased confidence about generic Xyrem sustainability going into H2. But then you also got a better underlying generics business anyway. So I know it's early for 2024 guidance, but what should we be thinking about your role forward? Have you got any bigger headwind because Xyrem is doing so well? Or actually, is the underlying business strengthening enough that we should be quite comfortable about progression in the 2024 please?

Xyrem has been -- like we said from the beginning that Xyrem is included in our guidance for this year. And it's an opportunity and it's more weighted towards the first half and affects the profitability and the second half royalties to Jazz is going to increase. So the profitability will go down. But we always said that this business is a business that will deliver between $100 million to $120 million in profitability. We are confident our ability to maintain this going forward. We could see some opportunities. Now this year, we have seen some contract wins. We've seen some favorable pricing environment. So across all of our base business, some products we've seen competition from products we've seen that we are able to do better than expected. And this is why -- this is one of the reasons we are upgrading our guidance. Now we will assume that second half will continue to sell Xyrem, but again, just reiterating that it's going to be at a much lower, I would say, profitability.

Emily Field from Barclays. Riad, you mentioned relative to Rocky Mount that the FDA is not panicking and customers are not panicking. But before the tornado, it seemed like there was a little bit of panic at least in the medical press about the shortages of platinum chemotherapies. And I think that the FDA was allowing for some implication from China. So maybe just kind of wrapping up, we'll do what it's going to do and come back online is online, but maybe just kind of a higher-level question on the status of injectable drug shortages overall, because I think that over the years, we've talked about that as just being something that hasn't gone away. In your mind, is that getting worse? Is it getting better? And then my second question just on branded. It sounded like some of the oncology tender wins were realized in the first half and perhaps had been inspected in the second half. So just a question on sort of cadence of the branded segment from a top line basis from first half to second half?

I'll take the first part of the question. In terms of shortages, nowadays, I think it's this part of the business. It's just not going away. It's just a matter of how we need to manage them. And I think the government is looking at a lot of different solutions. I don't think they really hit the right solution yet. I don't think they found it. I think they're trying, I think there was a bill 2 or 3 weeks ago to -- for, I think, to fund $500 million for manufacturers to stock more APIs and more products for critical products just to alleviate some of those shortages. But it is part of the business and there are reasons for it. The main reason, especially when it comes to Injectables is a capacity cost money and you're not going to leave capacity that's idle. So if you get the product that goes below a threshold below your cost, you're just going to drop it and move on. So -- and I think this is the problem. The problem is with the competition coming in and the pressure on the cost, or the pressure on the prices all the time, I guess to a point where manufacturers need to choose and unfortunately, shortages happen. This is one for it. And it's particularly when it comes to cytotoxics and the cancer drugs, it happens to a point where one company has picked up most of that type of products. That one company get in trouble, and they just got a warning letter just yesterday. And basically, they had an input alert by the FDA. And of course, they could not make any more product. They have to fix their problems and that create a shortage, not only in the U.S., worldwide. I think Europe is also struggling with this. But this is the problem. The problem is systematically of how this business goes, the reliance on one supplier for a critical product like this, I don't think it's something that I think that governments have learned from it. I'm not sure what they will do, but definitely it's a lesson learned. We, in our plant in Germany, which is dedicated for these products, we can't make enough. We try to increase. But as you also know, it is very difficult. This is not -- it is a very slow business, rigid business, regulated business, you can't just decide to pick up and make product, it takes time for you to get the raw materials, it takes time for you to increase. So as much as we are making, we are benefiting from that, but still there are shortages in the market, unfortunately.

It will continue to be. For the branded, as we said, the first half in spite of very, very strong headwinds and major currency devaluations in Egypt and then maybe [ Khalid ] will give more detailed numbers and Sudan, obviously, a big, big mess in Sudan. We were able to have an extremely good first half, I think you saw from the results. A lot of that attributed to delivery of oncology tenders, but also markets like Algeria, Egypt, are doing extremely [indiscernible]. Actually Egypt in units is doing astronomically well, but in dollars it's not. Algeria and Saudi Arabia are doing very, very well. What we were saying, we're reiterating guidance for the full year, which means that we expect the second half to see more headwind. The actual currency and we said we're not going to talk too much about that will...

And I'm just adding to what Said just mentioned. If you look into the branded business delivered a growth of 11% in the first half, 41% in profitability. But across all of our markets, we had significantly good growth across all of our markets, including Egypt and local currency. Now the way to look into this that you have some pull forward of some of the tenders, let's assume 50 million ticket from the second half to the first half. If you look into the profitability of these, it will be almost evenly distributed. So it's nothing I would say that would continue affecting the second half. Second, we were able -- we maintained our guidance despite significant reduction in sales coming from Egypt, probably impact of $50 million, and Sudan another $50 million. So total $100 million and we are able to maintain our guidance for the branded business. This is -- there will be some as well investments in the second half in R&D. There will be some investments in sales and marketing. And maybe if you look into H1, H2, what the implied guidance for it, you would see like a dropping margin, but it's shifting some of the sales, investing more in R&D, investing more in sales and marketing, but all of our markets are doing very well. At the same time, the launch of the products, the focus on chronic diseases, that is the growth in chronic diseases is delivering good results.

Can I -- sorry, Edward Thomason from Liberum. Can I just have a follow-up on what's going on in Egypt? So if you look through the statements, you obviously record some bad debt in Sudan, that's understandable, the conflicts yet to actually account for any in Egypt. There's also been an increase in net trade receivables. Are you having any problem extracting cash from customers? Are they paying on time? Have you noticed that in Egypt that's...

If you look historically, if you look at -- Egypt is not the issue of collecting on the receivables. The issue more is finding dollars to pay for your raw materials. So this is the issue. It's not our views to our third party rather than collection. Collection is perfect in Egypt, even better than any other market. It's the availability of dollars. Now we managed to find ways to working with third party to get like banks from outside Egypt to get us dollars. So we are paying our dues and things are getting into better in terms of paying to our suppliers. It was an issue at the beginning of the year and now it has been resolved. So we continue to supply. And at the same time, we are increasing our exports from Egypt to get foreign currency used to pay for our raw material. In MENA in general, we don't have any issue with the receivables in terms of bad debt, maybe $1 million, $2 million discrepancy in tenders, but all in all, we never had a major issue, but the issue is the length of the payment term. This is where we have in tender. So we have to invest more in working capital. So some governments they pay after 2 years, 3 years. So we take this in our calculation even and when we submit for a tender that it's going to be paid in, let's say, 2 to 3 years. So I would say we have no issues related to, I would say, receivables. Some of it is very minor, I would say, bits and pieces here and there.

And then just 2 other questions, just more strategic. Firstly, are you still enthused by the opportunity for biosimilars in the U.S.? There's clearly a lot of competition that's accelerating. How would you look to grow this going forward and potentially adding capacity -- manufacturing capacity yourself? Is that still on the table? And then secondly, just is there any update on the launch of sterile compounding and how is that going?

So 3 pieces, one related to the biosimilars and then one related to the compounding and the one related to the capacity, is that what it is?

Yes, biosimilars were you still infuse the sterile compounding and just generally how you look to expand the capacity there going forward?

Well, for the biosimilars, it's -- we were just discussing it actually the other day, how the polarity between companies, some companies are to take everything into the biosimilars and other companies are just exiting the biosimilars. So it's really depending on some of the people that had entered early on, some people that had entered in the midway. I think from our point of view, we really haven't changed. We have good partners. I don't think we want to do it on our own. I don't think we want to go into the development of biosimilars, but also, we don't want to lose the opportunity to be part of the biosimilars. So we are investing and partnering with partners. We have 2 today. We are understanding more, but this year, it would be very interesting to see what's going to happen to Humira and how the biosimilars as we're going to come out when you have 7, 8 competitors in the market, although it's a huge product, but still. So there's a lot of learning that is happening, a lot of explanation that's happening why people are exiting and what people are doubling on it. I think our -- so far, our strategy is the same. We want to partner with good partners and we want to benefit from our distribution strength. And sometimes from our manufacturing, we could see manufacturing the finished dosage in our facilities. At the same time, we will be also looking to expand what we have today. We have 2 products and we would like to see if we can expand a few more. And we're looking and we're looking for partners to do so. In terms of the compounding, I just need to remind you that the compounding is a greenfield project. It is not something that we had bought, greenfield means that you have to build the facility to make sure that they all get equipped with the right equipment. Until today, I think next month, we start installing the water system. So we're still in the process of furnishing this facility with the right equipment. And then the most and out-of-hand type of -- out-of-control biggest is getting the regulatory part. It took us a long time for the FDA to come and visit us and they visited with us and came up very, very well, which is great considering what's happening with the market today. The last victim is now CAPS, CAPS is struggling with their compounding. I think they temporarily closed their facility in Pennsylvania, you know what happened with Nephron. So all indication shows that we are on the right track. We want to build -- this is a very interesting business, very complementary to what we have, but it is different. It is something that we have to grow. It is something that we have to get clients to -- although we service all the hospitals, you have to remember that the hospitals in the U.S. had been burned several times with compounding. I mean the last one is Nephron, not too long ago. So they're very hesitant in going just because you're Hikma and you have a good reputation and getting finished goods is going to change the compounding strategy and suppliers too. It takes a while to get them to come in. They want to come in, most of them, they want to come in and see, especially the IDNs, they want to come in and inspect themselves even if you had an FDA inspection and the pharmacy inspection and all that. So it does take time to grow the clientele. It does take time to grow the system. And -- but the confidence is still the same. We think that this business is a good business, very complementary. We know it very well. We know how to do it very well. We just need to also get the confidence of the customers there. So I think the interest is not any less than it used to be.

The couponing will do very well. We're very, very comfortable with that. It's just a question of time, unfortunately, 2 of the big states, California and which -- New York still have not and they are where the biggest. So to be successful, you need to have all the states giving you. So we're comfortable with that. Biosimilars, it's [indiscernible] the market is split as consolidating. Many are getting out selling and others are -- so we've actually been following very, very closely. We've been working with partners like McKinsey and others to now gather as much intel about the compound because there will be opportunities. There will be companies that for sale, there will be a portfolio for sale. So there might be opportunities in the future. As I said, we're really monitoring very, very closely trying to gather as much information, seeing what's going to happen and so on. In the MENA, obviously, we're doing very, very well with the biosimilars. As we said before, the nice thing about what we've done is we haven't really sort of taken market share from the originator. We've expanded the market by doing better promotion, expanding promotion and having much bigger access, patients have a lot more access now to biosimilars and they're being used much more actively. So it's doing very, very well, very, very profitably, and we have a great partner there.

Okay. Can I ask --

[indiscernible].

Give the question, but we have you here around together. So I mean there's a clear strategy on a group and a divisional level and your execution on it. But at the same time, you're taking the helm in a matter of a month and every CEO wants to put his or her mark on the next chapter. So just any early thoughts as to how you're thinking where your focus is going to be? What you might do? I'm not saying anything needs to be done differently, but how are you going to make your mark and where you think your areas of focus would be?

Well, I mean the good thing about it is, I've been with the company for quite some time and the strategy of the company, I was part of the strategy of the company for all this time. So --

[indiscernible]. Embarrassing [indiscernible].

No, I do think that we have a great strategy. I think we can do better maybe on execution. I think there's always room to improve. There's always room to get to nitty-gritty things. And I think this is what we want to concentrate on, maybe more tactically how we can improve to implement the strategy faster. But as far as the direction and what the strategy is, I'm not sure if there is big difference there.

Sorry, it's Victoria Lambert again from Berenberg. On a similar note, last year, you guys were talking about maybe selling off the generics part of the business. Now things are improving there. So what is your, like, feeling or view on what you're going to do with the generics business? Is it -- yes.

As we explained that before, we feel that we have some really strong advantages over other manufacturers. So instance, we feel the CMO is going to be a big part of the business. We are already over 100 or something...

15% here almost.

Yes. And we're already -- I mean, it's already a big part of the business. We are securing new contracts. We are being visited by a lot of potential clients. But it's when you want to move a product from one company to other, as you know, it takes 1.5 years to do that. So there are contracts in place and we are trying to implement and getting them done. It is a business that will grow and it will create less cyclicality to help balance. The other thing we've said that we're working very hard to grow the specialty business, which we also will create less cyclicality. The generics themselves, we all have to remind ourselves that 80% or more of what's prescribed and used in the U.S. is generic. So they are not going to go away. [indiscernible] who's going to be [indiscernible] and who is not. We've seen a lot of the American competition exit the market. They've taken decisions to exit the generic market. A lot of the Indian competition decided to concentrate on India, they're finding that India is more profitable for them. So I think that we have done a great job of navigating even in the most difficult year which was last year. We still ended up doing mid-teen EBIT, good I think, among the best margins in the industry. And we've shown that the 0 able to come back. So it is -- so far, it is a business that will stay strategically part of the group.

I think to add to that, this is a business that service the U.S. and it is made in the U.S. It has an incredible quality record all these years. It makes a critical product. And as you all read the news and I think the local manufacturing in the U.S. is something that the U.S. wants to grow and wants to focus on and wants to help. So I think we are sitting in a very good spot to take advantage of that.

Thibault Boutherin from Morgan Stanley. Just related to what you just said on the U.S. generics. Just trying to understand your thinking about how pricing is going to evolve in the midterm? Because so far, we've seen the cycles of strong pricing pressure and then improvements. So just wondering if there's something structural this time as we see companies go bankrupt and you just mentioned some changes in the industry. Or if you think ultimately still we are seeing a good phase of the price cycle today and ultimately down the road in maybe 2 or 3 years, you think this big pricing pressure could come back? And my second question is on the U.S. Injectables business, something we've been talking about for some time. Do you think we are getting through a phase that we are going to see less losses of exclusivities from injectable products and so maybe a bit less opportunities for you or this is something you're not seeing on the midterm?

So quickly if can pick up the injectable.

Yes. As we have said, it's the government and Congress, the government was trying to address these -- the FDA was trying to address these shortages and trying to understand why, and again, as we have said, they're taking decision, but unfortunately we still haven't -- a lot of these are due to pricing pressures. The FDA, when we did PDUFA instead of approving new products, they approve more and more of the same products and then suddenly had 10 competitors and the price just good. But what's happened is that many [indiscernible] this is where we are going to do that. And I think that the buyers themselves have also realized that by squeezing and creating -- being a big part of the creation of the shortages, the parties themselves, they know that they're losing out also. So there we see more tendency to work more long-term to try to make longer-term contracts and so on. So I think we will continue to see some prices go down, some prices go up. But overall, like the really cut that we saw last year, I think I don't think we'll see again. So prices will stabilize. And you just have to realize if I can do this at this price comfortably and successfully, we can go on. I think as we increase our output, as we do more manufacturing, whether contract manufacturing or for our own as we increase our portfolio and so on, we will bring our prices down and become more competitive. So we've really learned how to thrive in a really cutthroat market, which we want to thrive in it. And I think we do it very, very well. In addition, I think there will be benefits to being made in America. We're probably one of the very, very few that are still doing it in America, doing it profitably because the others went bankrupt, we're still doing it profitably, we're still doing it well. And we've talked a lot about our track record when it comes to the FDA, the FDA of our facilities are training ground for their own inspectors. So with high quality, excellent track record, still doing it very profitably. And I think we will be one of the companies that will continue to be, as we say, last man standing or last company standing, we will be there.

In terms of the Injectables, this is not recent exclusivity has been definitely reduced to very minimal now. It's not a big benefit anymore as it used to be. I remember at the time when 20 years ago, when the [indiscernible] and the likes, they would have 10, 15 products on exclusivity basis and they make a lot of money of that. This time this has gone for many reasons. The biggest reason is the baddest company are defending those very, very well. By the time you get the exclusivity, it's pretty much the challenge, oh, sell the -- sometimes also there's a generic also in the market. I think we never depended on the drought, although we have a few. This year, we have one. It's not really a big boost for us. I think what we depend on is the number of launches that we have and the quality of the products that we are developing. This year, we already have 11, 12 approvals so far and they are quality products, although they overflow as Said mentioning, those are a little bit different than the conventional me-too type of product. There are prefilled syringes, a lot of them are bags, a lot of them are 505(b)(2), so it takes some time for that to pick up. But we're focusing on -- we're focusing on quality development, something that we call [ NTEs ] and it's a bit more new to the market. And I think this is what we feel that our growth is going to be in developing those specialty products rather than just waiting for an exclusivity that we can get for 6 months and the product goes away.

Christian Glennie with Stifel. Following up on generics, can you give us a bit more of insight or flavor in terms of market shares that you had in the first half? And how you see that evolving in the second half? You seem to be saying that you've seen one entrant of the generic entrants so far, but I think we previously mentioned about 4 were lined up. But any particular reasons why you -- there are some technical reasons why those other entrants might not come in, in the second half?

In terms of Xyrem, I think the consensus had like $100 million in sales for Xyrem for the full year, probably $70 million coming in the first half. I would say, probably we are guiding towards higher than this. We are not giving any specific usually specific related guidance on certain products. But all what I can say that it's the first 6 months in line with what we have guided or the consensus has with a high margin. The second half is going to be probably in terms of sales similar to or higher than what we -- what the market of consensus has with the royalty, I would say -- anything else...

In terms of the other potential launches of competition?

Yes. We are the only AG that -- we were the only AG that didn't have any market share constraints. So the other potential AGs to come in had some market share constraints. Only one of them so far has launched. And so they have the opportunity to only to take limited volumes. So we've been very happy with the market share that we've taken. It took us a couple of months to ramp that up. But now we're very happy with how the sales are going. We haven't disclosed a lot in terms of what our market share is or we're not going to disclose the revenue by product, but we are comfortable that we can continue to sell and at around the same levels that we are at the moment. So we feel that we should have a good contribution from this product in the second half, albeit at a lower margin due to the higher royalties.

Okay. And then in terms of the -- talk about exclusivity periods on the generics side, is there anything in the pipeline that could be a significant product in, say, next couple of years with an exclusivity period?

So our team has been actively looking into how to bring specialty or complex products in the market. So there are certain plans, but nothing I would say we can now explicitly talk about. But yes, there are some that we are working on and we know that there are a few products that will come in the future.

We also took the opportunity this year, having such a good year, such a great opportunity with Xyrem, we wanted to take the opportunity to leverage some of the benefit of that to invest back into the pipeline. And that's why the margins in the second half of the year will be lower because we're going to meaningfully increase our investment in R&D in the second half of the year. And that's -- it's a great opportunity having the results that we are achieving this year to be able to enhance the pipeline.

[Operator Instructions] Our first question comes from James Vane-Tempest from Jefferies.

Just a couple on the branded, please. So Sudani taken an impact of this business. The quite small scale, it seems to have an impact every period. So given you've written it down, can you see it stepping down, neutral impact? Second question is just on the gross profit margin of [indiscernible] in loss at this level 2009 or so, I mean you mentioned combined margin [indiscernible] one-off should we think about those continue here in our profitability in this business? And then related to that, [indiscernible] in that business. So what would you see in [indiscernible]?

What's the first question? I did not get it...

Should we all future impact...

Yes. Sudan I would say -- thank you, James. Sudan has had more sales, especially in the second half of last year. And now we don't expect to have sales and this year we have seen no sales for Sudan. Now is it a market that we are not going to continue to sell? We don't know at the moment. Usually, in certain situations in the past, you would continue to sell medicine, but maybe the business model which hits more towards selling either directly to government or sell directly to certain distributors. I don't think that will be operational, even if we're the worst of today, it's going to take 1 or 2 years to come back to operations. So this is why we are saying we are holding our decision to operate till we have a better view on what would be next. It could be a need for our medicine, of course, but it's not assumed in our guidance. In terms of the gross margin, as I mentioned earlier, we had -- you have to assume that you take out approximately $50 million from the first half, put them in the second half. Margin will be almost similar gross margin. So there's, I would say, benefits as a result of the scale or that we have seen in the first half. And we've guided to say that our -- I would say our sales and profitability would be in line with last year and on a reported basis because of the impact of Sudan, Egypt, so we've done and we are doing very well in constant currency. And I just want to highlight and repeat it's like the impact of Egypt alone is around $50 million in sales and the impact of Sudan is over $50 million. So total, we are able to compensate over $ 100 million, and we are maintaining our guidance. Anything -- anything else, James?

I didn't quite catch the answer on the profitability.

Can you repeat the question on profitability?

Yes, sure. The gross margins were north of 53%, I think, so just to help us kind of understand the push and take factors there? And is this a new profitability for that segment? Sorry if you answered it, I missed it.

I would say there's no change to the historical profitability levels that we've seen. It's just phasing out some of the sales from one half to the other half.

Our next question comes from Harry Sephton from Credit Suisse.

My first one is on the U.S. [indiscernible] performance. So you talked about increasing competition. But if you look at the organic growth within the first half and you take out the cost of an annualized benefit, it looks like you had an organic decline there. Can you maybe just touch on where you're seeing the competition coming from? I think we're anticipating there'd probably be a few tailwinds from some of the implication bands we had from Indian generic suppliers last year. My second question is on the strong MENA Injectables performance. So last year, we saw a very strong wait into the second half of the year. With the performance being so strong in the first half of this year, is there a similar dynamic to what we've seen in branded where there's a timing of tender contribution? And so actually, this year, you might expect a more even waiting from what the first half to the second half for 2023? And then just my third question is an update on the contribution from your specialty portfolio. So Kloxxado and Ryaltris, I haven't seen any further detail provided in the results. So it would be interesting to get an update on the performance of those products.

If I start with the Injectables, I think, yes, in the U.S. sales, you have Injectables, you can see that year-on-year maybe it's a little bit softer, although there is a growth of about 5%, but we've had -- yes, we have some competition. Pfizer was one of them that was competing with us on the controlled substances. Our price, the difference is dramatic there. So the competition is -- it's hard to manage in a way. But the other products also, the product mix is very important here and we've seen it. But also, I think from the volume point of view, which is also important, we haven't seen that -- we have seen a pickup in demand. We actually are trying to build capacity as much as possible to respond to that demand. There's also demand in contract manufacturing, which we can do more of because of capacity. We're not being able to. So now that we have increased the capacity significantly in the liquid, we hope that we can pick up some to that one. But I don't think it's dramatic. I think it's just depending on the period, depending on the product mix. I think the profitability in a way, considering that the Injectable is financing the compounding business without getting any benefit from it yet, considering there is some disbenefit to that one, disbenefit of the euro, which was also significantly there. So we had a lot of awful headwinds that we had to manage. And coming up with the mid-30s results and growth of 5%, I think it's...

You're seeing competition from India. I think one of the start of -- or is it more Pfizer...

It's hard to say when you say from India is a product made in India or just a companion company. So by mix now. So they come from all over. I think in India, you can see some competition, and you can also see some opportunities. [ Sun ] has given up some opportunity because of the problems that they are in. On the other hand, also we have Chinese now that they have finished goods that are coming in, companies like [ Schilo ], for example, that have been coming into the U.S. now and they’ve taken over some of the products that we had. So competition comes and goes. I think our size is big. Our portfolio is growing. We are at 150 now and more. We introduced already 9 this year, and we're planning to introduce more. So I don't think it's any specific where it's coming from. It's coming from all angles, and we just have to be ready.

I just want to reiterate what Riad just mentioned that our guidance assumes that there will be some softening in the first half for some of the U.S. business. So we knew and this is why we've guided towards 36%, 37% in margin. We knew that there are certain factors that would impact our margin. As Riad mentioned, we are saying for investing in Dayton, which is costing some money which affects the margin by almost 1 percentage point. At the same time, Sudan has a sale close to $20 million, which is no longer there. So it has some profitability for the Injectable business. Euro for the full year will have an impact on currency. It's -- but we've never mentioned when we had gains. So last year, we had gains, this year we are having an impact on margin, but it affects as well 1 percentage point. So the fundamentals for this business still impacts one of the highest margin in the industry compared to our peers. And we always said that in the mid-30s and if we have some opportunities from capitalizing on certain shortages, it will go up to the higher than the 35%. So nothing has changed our expectations. Everything is delivering in line with our expectations so far for the Injectable business. At the same time, the more growth we have in Europe and in MENA, which has a lower margin than the U.S., it affects the margin in total for the Injectable business. So it used a little bit the margin. What's the other question, sorry? Is there any?

Sorry, yes. The second question was on the MENA Injectables performance. So last year, you saw it very much weighted to the second half of this year -- sorry, the second half of last year. So this year, are you expecting more even performance given the strong performance in the first half?

Yes, yes. I think we will see some phasing as well similar to the branded business. We had a very solid growth in the first half. But MENA continues to grow and it's in line with the guidance that we give overall for the Injectable business.

Sounds great. And then sorry, the third question was on the specialty portfolio and whether you have an update on the rollout with Kloxxado and the launch of Ryaltris and what that contributed to the performance in the generics business in the first half?

Yes. So both products are delivering in line. They are growing nicely. I would say Ryaltris, we are growing -- we are seeing a growth in prescription, but we have like to convert this into dispensing is something that we are working on. There's an increased insurance coverage on it. So it's performing, I would say, in line with our expectations. We are seeing some good growth. Take --it's both. They are, I would say, now marketed as a brand product. So it takes a gradual increase in sales. Kloxxado is delivering and we are seeing -- nicely, and we are seeing a month-on-month growth, and it's delivering according to our expectation.

We currently have no further questions. I would like to hand over back to [indiscernible].

Okay. Maybe kind of just following up on some of the comments that you made on Xyrem. You talked about kind of taking a couple of months to scale up volume. And at the first quarter trading update, the commentary was that everything with Xyrem was going according to expectations. Obviously, quarter, way ahead of the guidance raised for generics. So what's the bigger driver, the continued revenue expectations for Xyrem or more of the base business performing better, both?

Yes. Thanks, [indiscernible]. Definitely, the better-than-expected -- the better-than-expected growth that we saw in the first half, we would attribute to the base business and not to Xyrem. Xyrem came in pretty much bang in line with what we expected. But we were cautious as to the outlook for Xyrem for the second half of the year because of the potential for other AGs to come into the market. But we now feel a bit more comfortable with potential to continue to deliver some good -- to achieve some good revenues from that product in the second half. So I would say primarily the upgrade at this stage is because we expect to have a better contribution from Xyrem in the second half of the year. And then there's a little bit from the continued benefit from the base business.

Thank you, everybody.

Thank you.

Thank you.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines. Thank you.