Ipsen S.A. (IPN) Earnings Call Transcript & Summary

Good day, and welcome to the Ipsen's H1 2023 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand you over to your speaker of today, David Loew. Please go ahead.

Thank you, operator. Good afternoon or good morning, everyone. I'm delighted to welcome you to our H1 results presentation. As you just heard, I'm David Loew, Chief Executive Officer of Ipsen and it's a pleasure to take you through our performance in the first half of the year. Note that our presentation is available on ipsen.com. Please turn to Slide 2. This is our safe harbor statement, which outlines the routine risks and uncertainties contained within this presentation. Also any commentary on growth you'll hear today will be based on constant exchange rates, unless stated otherwise. Please turn to Slide 3. For the presentation and for the Q&A, I'm joined today by our CFO, Aymeric Le Chatelier. Please turn to Slide 4. Here is the agenda for today's call. I will start the presentation with an overview of the business, after which Aymeric will take you through our financial performance as well as our upgraded 2023 guidance. After concluding our presentation, we'll be happy to take your questions. Please turn to Slide 5. So let's begin with the business overview. Please turn to Slide 6. Today's headlines illustrate how we are continuing to deliver on the strategic roadmap. In the first half, we produced a total sales increase of 7.4%. Our growth platforms, again delivered a double-digit performance led by Dysport and Cabometyx. These growth platforms along with our newly acquired medicines now represent around 2/3 of our top line. In the first half, we also delivered a solid core operating margin of 34%. We completed the acquisition of Albireo at the beginning of March, and the integration is progressing well. On the pipeline, it was a product this previous filing of the Onivyde sNDA in first-line Pancreatic ductal adenocarcinoma was accepted by the FDA, which also approved Bylvay in its second indication, Alagille syndrome. There was a favorable outcome from the FDA's Advisory Committee meeting regarding Palovarotene in FOP. While at the end of June, we announced that the primary endpoint was met in elafibranor Phase III relative trial in second-line primary delivery cholangitis. Finally, given Ipsen's performance in the first half, we are today upgrading our full year guidance on both total sales and the core operating margin. We now anticipate total sales growth greater than 6 in 2023, along with the core operating margin of over 30%. Please turn to Slide 7. Our growth platforms are continuing to excel, outlying the gradual decline of Somatuline. In the first half of the year, they grew by 18%, led by strong performances from Dysport and Cabometyx. Our newly acquired medicines also delivered meaningful contributions with Bylvay to stand out. Somatuline now at around 1/3 of total sales continues to decline gradually in line with expectations. I'll now take you through our sales performance in more details. Please turn to Slide 8. Looking at our growth platforms in more detail, Dysport's momentum continues. Growth of 32% in the first half reflected a strong aesthetics performance by both Ipsen and our partner as well as continued strong double-digit performance in therapeutics. As you know, there was a favorable supply comparison to that in H1 last year. We anticipate the opposite dynamic in the second half. Cabometyx sales up by 26% were supported by strong volumes in Europe and the rest of the world despite adverse price impact, mainly in Germany. The growing contribution from the first-line renal cell carcinoma combination with nivolumab continued, including the recent launch in Italy, where we have already achieved strong levels of total patient share. The Cabo/Nivo combination is now reimbursed in over 20 markets. Decapeptyl grew in the first half by 6%. There was a particularly strong results in Q2, especially in rest of world with China exiting the impacts of COVID. Growth in Europe was more subdued in the first half, however, partially impacted by adverse pricing. Finally, Onivyde continued to deliver strong underlying growth in the U.S. North America sales increased by 19% in the first half as we continue to make market share gains under the current label. We're now accelerating our prelaunch activities ahead of the regulatory decision in first-line PDAC in the new year. Please turn to Slide 9. Somatuline sales fell by 12% in the first half. This was further evidence of its gradual long-term decline profile as illustrated by the chart, you can see. In North America, sales fell by 10% in the first half. Volume demand and the market remained in solid growth, but pricing continues to be impacted by the level of commercial rebates and adverse movements in channel mix driven by the increased effect of 340B. Europe, where sales declined by 22%, now presents less than 1/3 of Somatuline sales. Here, the volume and pricing impact from generic competition continues, though we do anticipate a slightly sharper lower decline in Europe in the second half of the year given the baseline effect. Finally, in the rest of the world, solid underlying growth continued with several geographies performing well, including Latin America. Please turn to Slide 10. Turning to our recently acquired Epizyme's Bylvay has delivered a strong performance since we acquired Albireo at the beginning of March. Growth of 140% year-on-year reflected momentum in both North America and Europe, and we continue to see an increasing number of patients treated for PFIC. Sales of Tazverik amounted to EUR 19 million in the first half with commercial sales up by 18% year-on-year. As you know, relaunching a medicine takes time. sales in the U.S. will, therefore, see a gradual increase as we are repositioning the medicine in all comers and for elderly unfit patients in the office-based setting, which has not been the case before, and where we now see increasing sales. Please turn to Slide 11. Turning now to the major elements of our pipeline. There were a number of favorable developments in the first half of the year. Firstly, the FDA accepted the filing of Onivyde, NALIRIFOX regimen in first-line PDAC and approved Bylvay for the treatment of cholestatic pruritus in patients from 12 months of age with Alagille syndrome. The FDA's Endocrinology and Metabolic Drugs Advisory Committee also voted in favor of palovarotene as an effective treatment for people living with FOP. Positive top line data from the pivotal Phase III trial of elafibranor in second-line primary biliary cholangitis were published at the end of last month. The trial met its primary endpoint and full data from the trial will be presented in due course. Finally, we plan to add more patients to the Phase III Bylvay BOLD trial in biliary atresia to maximize the probability of success. We estimate a readout in around 2026. Please turn to Slide 12. We have plenty more pipeline news following in the coming months, including several potential regulatory approvals. Following the outcome of the advisory committee meeting I just mentioned, we anticipate a regulatory decision in the U.S. on August 16 for palovarotene in FOP. We also continue to expect Phase III date this year in respect of Cabometyx plus atezolizumab in second-line metastatic castrate-resistant prostate cancer. Given the recent use of a positive CHMP opinion for Bylvay in Alagille syndrome for the negative comp opinion on orphan drug maintenance, we anticipate a delay to the regulatory decision. Following the publication of top-level results from the Phase III ELATIVE trial, we plan to file for Elafibranor in the United States and Europe by the end of the year in second line primary biliary cholangitis and finally, a decision by the FDA on Onivyde is anticipated in mid-February. I'll now hand over to Aymeric, please turn to Slide 13.

Thanks, David, and hello, everyone. Please turn to Slide 14. Our financial results in the first half of the year reflects sustained top line improvement, investment for growth and a solid cash flow generation. Total sales increased by 7.4% at constant exchange rate as presented by David, a solid core operating margin at 34% of total sales, a decline of 5.6 percentage points, mainly reflecting investment for growth fueled by the rest of acquisition of Epizyme and Albireo, note that Albireo was consolidated in 2023 for 4 months since March. We have also a core EPS declining by 6.6% to EUR 4.73 per share. This is in line with the evolution of the core operating income and the free cash flow increasing by 10%, we'll come back to that. Please turn to Slide 15. Looking at the detail of the core P&L performance. The growth in total sales at 7.2% was marginally impacted by the evolution of currency in First semester. The gross margin ratio improved by 0.5 percentage points to 88.1% of sales, benefiting of higher other revenue from an upfront related to the grounding of license rights to Onivyde in the first-line PDAC indication from our ex-U.S. partner, which has offset the increase of cost of goods, driven by adverse mix in royalty pay. R&D costs increased by 40% to reach a ratio of almost 19% of total sales, in line with our ambition to invest more in our pipeline, including the asset from the acquisition of Epizyme and Albireo. SG&A costs increased by 13% with the ratio reaching 36% of sales, reflecting the commercial investment to support growth as well as several launches, including Tazverik in the U.S. and Bylvay in the PFIC indication in the U.S. and in Europe. As a consequence, core operating income declined by 7.9% to reach EUR 523 million. Please turn to Slide 16. Looking more in detail at the dynamic of the core operating margin, you can see the component of its evolution in the first half versus the record level reached in H1 2022 of 39.6% of sales. First half base business was almost flat in margin, driven the strong momentum of the growth platform and despite the gradual decline of Somatuline and the level of investment to support prelaunch activity and the investment to support our growth in the rest of the world markets. Secondly, the dilutive impact of 7.6 percentage points is coming from the acquisition of Epizyme and Albireo. This is fully aligned with our expectations with more synergies to be realized from H2 2023. Thirdly, the positive impact on group margin in H1 of 2.1 points of the Onivyde license rights upon from ex-U.S. partner for the first-line PDAC indication outside the U.S. And lastly, you know that the currency evolution had also a minor favorable impact on the profitability. As a consequence, Ipsen maintained a strong level of profitability in H1 with a core operating margin at 34% of sales. Please turn to Slide 17. Turning to core operating income to consolidated net profit, I wanted to highlight several movements. There was a significant increase in the amortization of intangible assets from EUR 46 million to EUR 91 million, mainly related to the new IP assets recognized for Bylvay and Tazverik. Restructuring and other operating expenses for EUR 125 million, mainly impacted by the integration and production costs related to Albireo and Epizyme acquisition but also the transformation program within Ipsen and the discontinuation of clinical trials. As a consequence and after a lower level of income tax, IFRS consolidated net profit declined by more than 50% while the core EPS only decreased by 6.6% with an effective tax rate at 20.4%. Please turn to Slide 18. We continue to deliver strong cash flow and maintain a very robust balance sheet after the acquisition of Albireo. As you can see, free cash flow grew by 10% to EUR 317 million, benefiting from some management of working capital and CapEx despite higher restructuring costs from the Epizyme and Albireo acquisition and lower EBITDA in line with our core operating income. Net debt at the end of June amounted to EUR 272 million after the payment of dividends for EUR 100 million and the acquisition of Albireo for almost EUR 1 billion. As a consequence of firepower for external innovation transaction, which remains our capital allocation priority, has increased to EUR 1.7 billion at the end of June 2023 based on the guidance of 2x net debt to EBITDA. Please turn to Slide 19. Based on this strong momentum, we are now upgrading our full year guidance for 2023 as David said in the introduction. We are now expecting total sales to increase by more than 6% at constant exchange rates this year. Our growth platform are set to continue performing well, and we will have further contribution from Tazverik and Bylvay in the second half of the year. Note that we now assume a 3% headwind from currencies based on the average level of exchange rate in the month of June as compared to 2 points before. We anticipate also a higher level of core operating margin at over 30% of total sales. We will continue to see the dilutive impact from the acquisition of Epizyme and Albireo, mitigated by the ramp-up of cost synergy and higher sales. In H2, we expect also an increase in R&D investment and increased commercial investment to support the potential launch of new indication and line of therapy, including Elafibrinor, Onivyde, Bylvay and palovarotene. Note that this guidance does not assume any incremental external innovation production in H2. Thank you very much. I will now hand back to David. Please turn to Slide 20.

Thank you, Aymeric. Please turn to Slide 21. Before we go to questions, please let me conclude. The ongoing execution of our strategic road map is consistently driving our growth story. The progress we are making means that we're continuing to deliver strong results. Our growth platforms are performing well, and we are seeing the benefits of our external innovation strategy, adding to the top line. Despite the significant investments in growth, we produced a strong core operating margin in the first half, while further cash generation is supporting a robust balance sheet underpinning our external innovation ambitions. The pipeline is also progressing nicely with several programs added this year accompanied by a number of favorable developments. We look forward to sharing further pipeline news flow with you in the coming months and give you more details on Ipsen's growth journey as an anticipated Capital Markets Day in London on 7th of December. Please turn to Slide 22. Thank you for listening to our presentation. We now have time for your questions. Operator, over to you.

[Operator Instructions] And the first question is coming from the line of Brian Balchin from Jefferies.

Just first one. Just thinking about full year core operating margin, should we expect any more license income from Servier this year? And just how should we be thinking about cost phasing in the second half, presumably step up? Then second on elafibranor, does your EUR 500 million peak sales guide bake in competition from [indiscernible] just given the Phase III about this Q And it already looks quite derisked. And if it does bake in, do you think it will help us with your assumptions there just trying to get a sense of potential upside of the and downside?

Okay. We start with Aymeric on the first 2 parts, the full year [query] and the cost savings, and then I will answer on elafibranor.

Yes. So regarding your question, as you see, I mean, the first half was impacted by this milestone received from [indiscernible] . So under the agreement that we've signed, and I can't give you all the details, there are additional milestones, we don't know exactly what will be the timing of those milestones. So we have factored on a risk-adjusted basis, some limited, but the biggest one has been booked in H1. Regarding cost savings, yes, we continue to deliver consistently on our efficiency program. So we should continue to see impact of the efficiency program in H2. I think the more important will be the ramp-up of synergies that we expect also from the integration of both Epizyme and Albireo. As you remember, our guidance was more on a 12- to 18-month time line. So we will start to get some of the savings from Epizyme in the second half, and this is more in 2024, but we should get most of the synergies on the cost base to be materialized.

Regarding your third question on elafibranor with the EUR 500 million guidance. Of course, we have taken into account the data that we have seen so far, including competition. That means now that we are waiting for the [indiscernible] And we have to really, really see the details to be then be in a position probably post AASLD, which is happening in November to provide you updated guidance. So we will come back with guidance. And in regards to upsides or downsides, we can really then only comment at that time point.

And the next question comes from the line of Alistair Campbell from Royal Bank of Canada.

I hope you can hear me. I just had a couple, if I may. First of all, on fidrisertib, now that palovarotene looks very likely to get approved in the U.S. Does that have impact on the Fidrisertib development program? Will it need to be -- what you hope to see if you sort of look at fidrisertib versus palovarotene would you even have to consider head-to-head trials in terms of profiling that product appropriately? And then maybe I'll just chance my arm on the core EBIT and take it a bit further. I know we're too early for guidance for 2024. But as we look at sort of how things are evolving, costs stepping up in H2 this year, you still have to fully annualize the impact of the Albireo acquisition going into 2024. Can you maybe give a hint of sort of the broad trajectory for the core net margin in 2024? Is it kind of down, neutral, up?

Thank you, Alistair. So I will take the first and Aymeric the second question. On fidrisertib, fidrisertib we're going to -- we are now in the pivotal trial. So we have to wait for the readout. Fidrisertib has a somewhat different profile than palovarotene. So we'll have to see once we see the full data, how we are going to position the drug. So it's too early to speculate about head-to-head or combinations, et cetera. We really have to cross the bridge when we have seen the full data of the readout of the pivotal study. And then core EBITDA 2024?

Yes. So thank you for the question. As you indicated in your question, we're not going to provide a guidance for 2024. And maybe just to help you on some of the elements. You're right to say that there will be 2 additional months for Albireo as we consolidated only starting from March. But you have to take into consideration, as I said, that there will be increasing level of synergy, there will be increasing level of sales for the 2 acquisitions. So as we said when we announced the 2 deals, those 2 deals, it will take 2 years to break even from a margin and core operating income contribution. So we see less dilution, more synergy, more top line towards 2024, while at the same time, we are also investing and I said about elafibranor and Onivyde being the 2 biggest investments. And we expect also to start getting some sales -- in additional sales in 2024. So these are elements to guide on the margin. As you know, also, the [indiscernible] milestone that was a question before, is not going to be recurring, and we have also some FX impact as we talk about it in the updated guidance.

And our next question comes from Manav Mastorakis from Deutsche Bank.

First question was if you could give a bit of color on the guidance increase and what to expect in terms of the sales mix in H2 because you alluded to this port to potentially reversing the trend that we've seen in H1? And if you can tell us which products are most likely to drive most of that guidance increase. But also the you've had a string of a positive events recently. And just wondering how has that changed your overall corporate strategy and appetite for further BD and M&A?

Okay. So Aymeric is going to answer on the first one, I will take the second one.

Yes. So regarding your comment on the top line growth. So as you know, we delivered 7% in the first half, we're guiding for greater than 6%. So we see a similar profile in the second half of the year. But you're right to point out that the breakdown by product is going to be slightly different, mainly on Dysport, where the baseline was very low in H1, which explained to some extent, as David pointed out, the strong performance in H1. We still see a very dynamic market for Dysport. But clearly, the baseline not only was pretty low in H1, but we have catch up last year in H2, so the baseline is going to be higher. On the other way, we see increasing contribution from the newly acquired product, Bylvay and Tazverik. And we see also some further growth for Onivyde and normalization for ex-U.S. sales of Onivyde, you've seen they were negative this semester, due mainly to the ex-U.S. contribution we did that to normalize in the second half of the year. I hope it will help you to guide by product the view by the end of the year.

And then on your second question regarding the positive events, you're right. So we were very happy to have those. So that bodes well for future growth and accelerating our external innovation add-ons that we have, but also our underlying base business with the growth platforms, for example, on Onivyde, or, of course, also with the new products on Alagille that we're going to launch in elafibranor. So that's very exciting. . In terms of future BD, that's not going to change. We still want to continue to fill the pipeline. So we are going to be active on the external innovation. You have seen that we are building up very rapidly, again, our firepower even after the acquisition of Albireo. So we have a strong cash generation. So yes, we are going to license or acquire potentially more medicines also in the future. That's our model, and we're going to continue to execute on it.

And the next question comes from Delphine Louet Societe Generale.

Three on my side, if I may. Looking at Somatuline loss over the semester, which was roughly EUR 70 million in revenue and the base business being up EUR 140 million. When I look at your Slide 16 and looking at the base business contribution to the core, can we think that it's effectively the breakeven point in terms of balance in between the base business and Somatuline and -- this is a way to look a bit further for the margin and for the margin dilution in the future? Second question is the one on Decap and Cabo. Decap, how should we think about the Chinese business right now? Can you give us a bit of a granularity regarding the reordering of the quarter plus any news on the pricing? Can you also detail why Germany is weak? Secondly, regarding Cabo, can you share the breakup in between the first and the second line? And/or can you give us some indication looking forward regarding the growth or the market share, whatever?

Thank you, Delphine. So Aymeric is going to take the Somatuline question. I will take up the Decap and Cabo.