Laboratorios Farmaceuticos Rovi, S.A. (ROVI) Earnings Call Transcript & Summary

Welcome to ROVI's Full Year 2019 Financial Results Presentation. The management of ROVI will run you through the presentation, which will be followed by a Q&A session. Mr. Juan López-Belmonte, Chief Executive Officer; and Mr. Javier López-Belmonte, Chief Financial Officer of ROVI, will be presenting this conference. I will now pass the word to Mr. Javier López-Belmonte.

So thank you very much, and good afternoon to everyone. This is Javier López-Belmonte, Chief Financial Officer of ROVI. At this time, I would like to welcome everybody to this full year 2019 results conference call, which will start in a moment. Let me please first introduce ROVI's attendees today. Juan López-Belmonte, CEO; Marta Campos, Investor Relations; and myself. [Operator Instructions] Let me now turn the call over to the CEO, Mr. Juan López-Belmonte, for the highlights of this full year 2019 results.

Thank you, Javier, and welcome to everybody. I'm glad to present our full year 2019 results. Performance this year has been over our expectations. Our 26% operating revenue growth in 2019 was driven by the strength of the specialty pharmaceutical business, which grew by 27%, strongly outperforming the market, and by the toll manufacturing business where sales rose 20%. Data provided by IQVIA indicate that the innovative product market in Spain increased 2% in 2019. However, sales of pharmaceutical products with prescriptions for ROVI rose 30% in the same period, exceeding the market by 28 percentage points. We forecast that we will continue to grow at a higher rate than Spanish pharmaceutical market expenditure in 2019, which according to the Ministry of Health, Consumption and Social Welfare, show a growth rate of 3%. Regarding the classification of laboratories, using data from IQVIA, ROVI was positioned 16 in terms of value and was the fastest-growing innovative company among the 16 top-ranked companies in 2019. Last year, ROVI climbed 4 positions in this classification compared to 2018. In 2019, we made an important investment effort in expanding our biosimilar Enoxaprin with the product launch in 5 new countries compared to 2018. Despite the operating cost increase in the year, EBITDA increased by 106% from EUR 29.5 million in 2018 to EUR 60.9 million in 2019, reflecting a 6.2 percentage points rise in the EBITDA margin to 16% in 2019. Net profit increased by 119 points from EUR 7.9 million in 2018 to EUR 49.3 million in 2019. In 2019, ROVI achieved as well the highest EBITDA and net profit figures in its history. Prescription-based pharmaceutical specialties, which grew by 30% in 2019, are high strategic value products and contribute to give ROVI a wider scope for the coming years. ROVI comes as driving force with its low molecular weight franchise where sales rose 46% to EUR 177.6 million in 2019. Low Molecular Weight Heparin sales represented 47% of operating revenue in 2019 compared to 40% in the previous year. We aim to become one of the leaders in the Low Molecular Weight Heparin field worldwide. We have 2 molecules, Bemiparin and enoxaparin biosimilar. Bemiparin had a positive performance in Spain in 2019 with sales up 3% to EUR 69.6 million, while the Low Molecular Weight Heparin market decreased 8%, beating the market by 11 percentage points and achieving a market share of 42% in 2019, in line with that in 2018. International sales of Bemiparin increased by 14% to EUR 27.4 million mainly due to the positive contribution of some countries where the product had already been present in 2018, such as Turkey or the Czech Republic. Bemiparin total sales increased by 6% to EUR 96.8 million in 2019. ROVI reported that [ enoxa ] has been noted in the figures for the sales of Bemiparin in and outside Spain, including the financial information for the 9-month period ended the 30th of September of 2019, which was published on the National Securities Market Commission website on November 7. Sales of Bemiparin in Spain in the first 9 months of the financial year 2019 totaled EUR 51.5 million as opposed to the reported figure of EUR 55.1 million, while sales of Bemiparin outside Spain in said period were EUR 18.2 million as opposed to a reported figure of EUR 14.7 million. Regarding the enoxaparin biosimilar pickup, we launched the product in Germany in September 2017; in U.K., Italy, France, Spain, Austria, Latvia, Lithuania in 2018; and in Portugal, Poland, Costa Rica, Finland and Sweden in 2019. Besides, in Q4 2019, we launched the product in Germany and Italy through TEVA and CABER, respectively. Besides Europe, we have signed out licensing agreements in 85 countries as part of our second stage of commercialization strategy. We have signed 2 important licensing agreements to distribute and market enoxaparin biosimilar. The first with Hikma Pharmaceuticals, who has the exclusive rights for 17 Middle East and North Africa countries, and the second with Sandoz for 14 countries' regions. We started the commercialization in Q4 2017 with sales amounting to EUR 1.5 million, and sales increased to EUR 80.9 million in 2019. So just let me summarize the opportunity here. This is a EUR 1.4 billion market with high entry barriers where biosimilars tend to reach 50% to 70% of market share and with only 2 players in the market. The latest launches were again a strong driver of growth in 2019. Sales of Neparvis with Novartis launched in December 2016, indicated for the treatment of patients with symptomatic chronic heart failure and reduced ejection fraction, increased 62% to EUR 22 million compared to EUR 13.6 million in 2018. Sales of Volutsa from Astellas Pharma increased by 18% to EUR 13.3 million. Sales of Hirobriz Breezhaler and Ulunar Breezhaler, both inhaled bronchodilators from Novartis, decreased by 5% to EUR 14.6 million. Medikinet and Medicebran from Medice decreased by 22% to EUR 5.8 million in 2019. Other product sales, such as Vytorin, Orvatez and Absorcol, the first of the 5 licenses of MSD, indicated as adjunctive therapy type in patients with hypercholesterolemia, decreased by 12% to EUR 31.8 million in 2019. In the second quarter of 2018, the active principle ezetimibe went out of patent, and the price of Absorcol was reduced. Likewise, generics formulating with ezetimibe and simvastatin were marketed in the same period, so the price of Vytorin was reduced to be competitive. Furthermore, sales of contrast imaging agents increased by 10% to EUR 32.6 million. ROVI continues being the market leader in this segment. Finally, recent product acquisitions, such as Falithrom and Polaramine fully complements our existing portfolio and have already had a favorable impact on the company's profits. Our pharmaceuticals specialty distribution business in Spain grew by 9% in 2019 compared to 2018. This business does not include our Low Molecular Weight Heparins, and we expect this business to provide us with a sustainable and profitable growth opportunity in the coming years. Regarding toll manufacturing, sales increased by 20% to EUR 65.6 million in 2019 as a result of the redirection of our toll manufacturing activities strategy towards high value-added products, backed by the high degree of technological specialization of our plant in differentiated niches, such as biological and biotechnological, immunological vaccines and long-acting injectables. In November 2019, the toll manufacturing management units, ROVI Contract Manufacturing and Frosst Ibérica, merged into a single entity, ROVI Pharma Industrial Services, which furnishes manufacturing services with highest degree of quality and competitiveness. The total integration of the production processes is expected to allow the company to attain greater synergies and levels of efficiency in its industrial operations. In this light, at the end of 2020, we expect the toll manufacturing business to have increased by a low double-digit percentage. As the company has recently informed, a very important milestone has already been achieved with this long-acting injectable antipsychotic DORIA. After the conclusion of the evaluation phase, the European health authorities have commenced assessment process to grant marketing authorization for this first product based in its leading-edge drug delivery technology, ISM. In March 2019, the company announced top line results from the pivotal study of Risperidone ISM PRISMA-3, which showed that primary and key secondary efficacy endpoints were achieved with both process tested for the treatment of patients with acute exacerbation of schizophrenia. Besides, in July 2019, the company announced the completion of the clinical trial program that will support the application for marketing authorization for DORIA for the treatment of schizophrenia. In addition, an open-label extension of the PRISMA-3 study has already finished, which will provide clinical data on the long-term use of Risperidone ISM [ 5 ] additional months. Furthermore, ROVI informed of the decision to expand its industrial capabilities for the manufacturing of toll with the incorporation of a second line for the manufacturer of the syringe containing the solvent. The addition of this second line also provides the company with the necessary flexibility to the company to initiate the preparation of the industrial filling processes of Letrozole ISM, which will require the installation of an specific sealing machine. As a result, ROVI has prioritized the submission of the DORIA dossier in Europe already done, and subsequently filing in the U.S., targeting the second half of 2020. On the other hand, the company already announced the commencement of the clinical development of Letrozole ISM, which represents the second candidate using the ROVI's ISM technology platform. This new investigational medicine is, to our best knowledge, the first long-acting injectable aromatase inhibitor intended for the treatment of hormone-dependent breast cancer. The first phase clinical trials, the LISA-1 study of Letrozole ISM, is currently ongoing. And due to the study design, dose escalation and its exploratory nature, the finalization date cannot be anticipated. Nevertheless, preliminary data confirmed that this ISM formulation provides a prolonged release of Letrozole, which produces a sustained suppression of estrogenic hormones. The company will be garnering more clinical data from this trial during the following months to better characterize the pharmacological profile of Letrozole ISM. Afterwards, in 2020, ROVI is planning to discuss with regulatory authorities these results as well as the next steps for continuing the clinical development of this novel, long-acting injectable aromatase inhibitor. Lastly, ROVI's research and development team has recently started development of a new formulation of Risperidone ISM for a 3-monthly injection, which would complement the current formulation of drug for the maintenance treatment of patients with clinically stable schizophrenia. This development is still in an initial phase. And finally, let me end with our guidance for 2020. ROVI expects a mid-single-digit growth rate for the operating revenue. We have stayed on the path of sustained growth in 2019. We increased sales by 26%, strongly outperforming the market. We expanded our Heparin franchise through the launch of enoxaparin biosimilar in 5 new countries in the year and the signature of distribution agreements for 17 additional countries. We reinforced our European presence through the acquisition of 3 new products: Falithrom for the German market, Polaramine for the Spanish and French market and sodium heparin for the Italian market. And we consolidated our pharmaceutical specialties area, thanks to the strength of our leading products, such as Neparvis and Volutsa. We achieved as well growth of 20% in our toll manufacturing business, thanks to the redirection of our strategy towards high value-added products. Likewise, we are making an effort to heavily invest in R&D, focused on our ISM technology that but we see as a new avenue of future growth for ROVI. To conclude, we believe that we are at a growth inflection point with the strong growth opportunity driven by Risperidone and Letrozole, both candidates validating our leading-edge drug delivery technology, ISM, and our enoxaparin biosimilar, which will allow us to transform our European footprint. These growth levers are firmly underpinned by a very solid ongoing business that has delivered year after year based on our leading specialty pharma franchise and our high-value added toll manufacturing services. And now I pass on Javier, who will run you through the financials in more detail. Thank you very much for your attention and for taking the time to participate in this telephone conference.

Thanks, Juan. We are very happy with our performance in 2019. As Juan already said, our operating revenue increased by 26% this year, more than tripling total revenue for 2007 when ROVI held its IPO. This growth is driven by the good performance of our heparin franchise and our leading products, such as Neparvis and Volutsa, which we intend to achieve [Audio Gap] environment. Likewise, our total -- our toll manufacturing business was an important driver of our growth in 2019. Sales of prescription-based products increased by 30%, strongly outperforming the innovative product market in 28 percentage points in 2019. Regarding our heparin franchise, we achieved a 46% growth. Sales of Bemiparin, our flagship product developing house, grew by 6% and enoxaparin biosimilar sales reached EUR 80.9 million in 2019, almost -- only 2 years after the product launch. Gross profit increased by 23% to EUR 215.9 million in 2019. Gross margin showing a decrease of 1.5 percentage points from 58.1% in 2018 to 56.6% mainly due to increase of enoxaparin biosimilar sales, which added lower margins in 2019 after the launch of the product in 5 new markets, and the increase in the heparin raw material prices due to the African swine fever, which in 2019 were running around 44% over 2018 prices. ROVI expects this upward trend in Low Molecular Weight Heparin raw material prices to increase during 2020. These, together with the uncertainty about the potential impact of the new coronavirus, makes the impact of this issue -- these issues on the 2020 gross margin unpredictable at the present day. ROVI's commitment to innovation has been reflected in the figures for 2019. R&D expenses decreased 9% to EUR 29.3 million. These figures are mainly the result of our focused investment in the ISM projects. Our investment effort in R&D is fully motivated by our firm commitment to market owned quality and successful products in the immediate future. Selling, general and administrative expenses, SG&A, rose 11% to EUR 125.5 million in 2019 mainly due to internal -- international subsidiaries expenses, which amounted to EUR 9 million compared to EUR 7.4 million in 2018, the increase of EUR 1.6 million in marketing expenses related to the enoxaparin biosimilar promotion in Spain and a larger volume of enoxaparin biosimilar production. In 2020, expenses related to international subsidiaries are expected to be around EUR 10 million. On one hand, in 2018, EBITDA was affected by nonrecurring expenses of EUR 1.1 million linked to a substantial change to Frosst Ibérica employees working conditions. On the other hand, as a result of the IFRS 16 application this year, EBITDA was positively impacted by EUR 3.6 million in 2019. Therefore, EBITDA increased to EUR 60.9 million in 2019, a rise of 106% compared to the previous year, reflecting 6.2 percentage point increase in the EBITDA margin, which was up to 16% in 2019 from 9.7% in 2018. EBIT performance followed the same trend as EBITDA in 2019. It increased by 144% to EUR 42.6 million, reflecting a 5.4 percentage point rise in the EBIT margin. Net finance costs decreased by 4% to EUR 0.8 million in 2019 mainly due to the gain related to the derivative financial issuance. Net profit increased to EUR 39.3 million in 2019, a 119% rise compared to the previous year. The effective tax rate was 6.2% in 2019 compared to minus 7.3% in 2018 mainly due to the decrease in R&D expenses in 2019 in comparison with the previous year, which led to lower research and development tax credits. As of December 31, 2019, negative tax basis of the group amounted to EUR 34.9 million, of which EUR 8.3 million will be used in the 2019 income tax. ROVI invested EUR 27 million in 2019 compared to EUR 17.4 million in 2018. This increase in CapEx was mainly due to the redirection of the toll manufacturing activities strategy towards high value-added products, which meant a higher degree of technological specialization of the plants in differentiated meters. And the second reason of the increase in CapEx was the ISM industrialization. Of the total amount of CapEx, EUR 20.1 million related -- relates to investment CapEx regarding our facilities, EUR 3.5 million relates to the ISM industrialization and EUR 3.5 million relates to maintenance and other CapEx. In addition, in 2019, ROVI invested EUR 13.5 million in the acquisition of Polaramine. Free cash flow decreased to minus EUR 49.5 million in 2019 from minus EUR 17.8 million in 2018 mainly due to increase in inventories, receivables and payables and the increase in CapEx. Regarding our debt, as of 31 December, 2019, ROVI had total debt of EUR 84.8 million. Of that amount, EUR 52.1 million is debt with banks, EUR 11.7 million correspond to debt with public administration, EUR 20.9 million correspond to financial liabilities for leases as a result of the IFRS 16 application and EUR 0.1 million correspond to derivatives. As of December 31, 2019, bank borrowings increased by EUR 29.4 million. In December 2017, ROVI announced the European Investment Bank granted it a loan to support its investment in R&D. The loan was for EUR 45 million. As of 30th of September, 2019, ROVI had drawn EUR 5 million against this credit line at a variable interest rate of Euribor of 3 months plus 0.844%. The latest interest rate paid was 0.421% at January 2020. As of 31 December, 2019, ROVI had drawn the remaining EUR 40 million. The credit matures in 2029 and includes a grace period of 3 years with a fixed interest rate 0.681%. As of 31 December, 2019, ROVI had gross cash position of EUR 68.9 million compared to EUR 97 million as last year, and net debt 15.9 million compared to net cash of EUR 62.8 million as 31 December, 2018, due to the recording of EUR 20.9 million financial liabilities for leases as a result of the IFRS 16 application of December 2019. Finally, ROVI will pay a dividend of EUR 0.1751 per share with dividend rights on 2019 earnings, if the shareholders' general meeting approves application of the 2019 profit and the proposal of ROVI's Board of Directors. The proposed dividend would mean an increase of 119% compared to the dividend on 2018 earnings and represents a 25% payout. Regarding news flow for 2020, we expect to announce additional new products to be launched in the specialty pharma area, new contracts in the toll manufacturing area and new national marketing approvals for enoxaparin biosimilar in some of the 71 countries outside Europe. With regards to R&D, we expect to release the final Risperidone ISM Phase III data in a scientific congress, and we plan to apply for the marketing authorization for DORIA for the treatment of schizophrenia in the United States in the second half of 2020. We also expect to gather more clinical data from Letrozole Phase I trial during the following months to better characterize the pharmacological profile of Letrozole ISM. In 2020, we are planning to discuss with the regulatory authorities these results as well as the next steps for continuing the clinical development. That's all regarding our financial results for 2019. We can now start the Q&A session.

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

Can you hear me?

Yes. We hear you, James, very well. Thank you.

A couple of questions, please. Just firstly, can you just give us an update on what's going on in Spain, just from a pricing and reimbursement perspective? Just wondering what price cuts potentially could be on the horizon as we get into next year and how we should think about that for your specialty business. And then the second question is, I guess, you alluded in your prepared remarks about raw pricing on [ heparin ], so I'm just curious how much supply you have. And what potentially could happen in the event that the coronavirus escalates?

James, this is Juan. Regarding your first question on the reimbursement potential cuts in the Spanish market, right now, there's a change of government, there's a new Minister of Health being appointed. We're expecting to get visibility of what sort of measures they may decide to propose. But right now, in terms of what we may say, price cuts, there is nothing on perspective. Actually, there is -- you know that the reference price scheme in Spain provides a continuous price adjustment between generics and brands when the patent expires. So usually, the month that the generic is approved of an innovative compound, the government creates what we call a homogeneous group where we have to reduce prices to the price bracket to the generic, that usually ranges between 30% to 40% price decrease. And then once every year, the reference price scheme is updated and prices are reduced to the early dosage dose price. And that usually provides further price cuts up to 60% to 70% of the regional manufacturing selling price. So far, to the best of my knowledge, there are many rumors, there are many different proposals going on. But in terms of price cuts, there is nothing right now, nothing on the table. It's true that the government wants to pass different proposals to try to boost the use of generics, that is rather more in that sense than in terms of price cuts. So we -- there are different things that are currently in discussions, such as to impose by law the active principal prescription, which, again, in our case, we'll have a very limited impact, as mostly our portfolio of biological is original compounds. And second, let me say that on top of this, we'll have this annual agreement with the Spanish government, which allows us to have a certain level of communication or to be able at least to maintain talks with the Spanish government, as the agreement with the government, what applies to all pharmaceutical companies in Spain is a payback of all the expenditure in pharmaceutical drugs that exceeds the gross domestic product growth rate. So I believe there's going to be changes because, obviously, the hospital drug deal is increasing very rapidly in order to make an [ alternative ] system sustainable all governments across Europe that implementing different measures to optimize their drug deal. But what it's -- specifically in terms of price cuts, actually, there is nothing that I'm aware of that it could have an impact in accounts for next year. Regarding the raw prices of selling heparin, I mean, that's the $1 million question. And actually, we’ll have the [indiscernible] flying through, which, again, we cannot forget it's still in an outbreak situation in Southeast Asia and in some countries in Eastern Europe. And on top of that, we have the coronavirus right now. We are not capable of providing guidance of how prices may evolve. The only thing that we can, let's say, provide some level of comfort is that we do have the right level of stocks. We don't think potential coronavirus impact will affect our supply chain in the short term or in the medium term. But like always, it very much depends on what's the length of this coronavirus, let's say, outbreak. But I have to say, I'm not really concerned in terms of potential supply disruptions because of the coronavirus, which is something different when we talk about prices, but again, the ASF project coronavirus is -- right now, it's very difficult to predict how prices can evolve.

The next question comes from Jose Maria Canovas from JB Capital Markets.

Two on my side. First of all, as regards to net debt, you didn't give a guidance. But as you said, I believe that you have enough stocks for this year. So I would expect that working capital reversion the year, maybe you going back to a net cash position. Consensus in Bloomberg, which I don't know if you, too, updated, shows a EUR 24 million net cash figure for 2020. Just wanted to know if you feel comfortable with this figure? Or should we be more conservative? And my second question is regarding the next steps for net profit. It seems like one of the options that could potentially come would be going from a Phase I to a Phase III? And I don't know if you could give some color on this point, how you feel about this? Or do you really see that as a potential outcome here or not?

Thank you, Jose Maria. This is Javier speaking. With regards to your first question, I will agree with your view in the sense that our working capital figure is high right now. So we do believe that in the next quarters, we could see a reversion of the figure. And as Juan was suggesting, we could start using up our inventories, especially for Heparin in production. With regards to the figure on Bloomberg, regarding the net cash positive position, the philosophy of the company, as we disclosed in the -- in our -- when we raised capital in 2018, it was to have a small debt figure. So we are comfortable with the current debt figure. And we feel comfortable with that a small leverage. Let me also remind you that we are investing in our second Heparin plant, API. So we'll face some important CapEx during 2020. That could affect also our cash position. With regards to the second question.

This is Juan. Regarding Letrozole. I think we are in a too early stage to provide any sort of information on how it's going to follow the potential future clinical development. We are very excited because the Phase I data that we are gathering is providing us a lot of certainty, but really our platform, that in every essence is really elevating us as expected. We expect to have, in the next several weeks maybe months, enough data to be able to approach the regulatory authorities both in the U.S. and Europe. We really discuss with them very openly, which I believe should be the next steps in terms of our clinical development. Right now to say whether we can go directly to Phase I to Phase III or from Phase I to Phase II. I mean that's something that -- we're in an early stage really to provide any information in this regard.

The next question comes from Samir Devani from Rx Securities.

Congrats on some strong numbers. I've got 3 questions, actually. Maybe one following on from the prior question. So just as you mentioned that you're investing in the second plant. Perhaps you can give us some CapEx guidance for this year? Second question is just on Polaramine and Falithrom. Just wanted to confirm that you'd launched those or not now? And then the third question was just on PRISMA-3. Perhaps you could -- if you've got any guidance in terms of when you're going to present that data formally.

Thank you, Samir, this is Javier. With regards with the first question about CapEx. We haven't provided a formal figure for CapEx for the year. As I mentioned before, we are investing on a second facility in Granada, or the API capable in -- capabilities. And that fleet is going to cost us around EUR 24 million, EUR 25 million. And we are going to -- we expect to face that investment in year 2020 and 2021, mainly. So having said that, I think the CapEx that we could expect for 2020 is going to be somehow similar to the figures we have in 2019. Second, with regards to Polaramine and Falithrom. Let me reinforce the idea that the -- those products have always been on the market. We bought from Merck and Novartis, respectively. And yes, we have already have the marketing authorization chains approved. So currently we are selling the product as ROVI manufacturer or with our production involved in all the countries, in Germany, France and Spain.

Samir, this is Juan. Regarding the PRISMA-3 date of release. We really want to make the most out of that clinical trial in terms of marketing impact. So our idea, our goal is to release the data in that important congress and maybe close to the first launching date if we get the approval. So if we expect -- we are optimistic, as we have mentioned before that we will get an approval in Europe in 2020. So again, between the approval and the first launch in the first 2 fastest market in terms of reimbursement in Europe, those would be the base in which we are, let's say, picking up a good congress with our good ROVI patent should allow us to have important leverage on the data from the PRISMA-3. We believe that's right time in to make it sure that it really help us to have a robust launch of the product in Europe. And that's why we are keeping the data right now in-house.

That's great. And I guess just following up on Polaramine and Falithrom. Can I just kind of -- did you book any revenues for those 2 products for 2019?