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

Welcome to ROVI First Half 2020 Financial Results. The management of ROVI will bring 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 pass the word to Mr. Javier López-Belmonte.

Thank you, Denise, 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 first half 2020 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; Antonio Marquina, Investor Relations; and myself. [Operator Instructions] The conference will also be webcasted on ROVI website. After the presentation, as the operator said, there will be a question-and-answer session. Let me now turn the call over to the CEO, Mr. Juan López-Belmonte, for the highlights of this first half 2020 results. Juan?

Thank you, Javier, and welcome to everybody. I'm happy to present our first half 2020 results. The first 6 months of 2020 have been extremely unusual due to the COVID-19 pandemic. This crises has no precedence, and each day presents new challenges to all of us. Across our company, we are working hard to tackle the challenges that COVID-19 poses. We have focused our efforts on 3 things in particular: ensuring the health of our employees, continuing to supply our medicines to patients worldwide and supporting our society with resources and our expertise. Across the value chain, the COVID-19 pandemic had no critical impact on our daily business as we were able to continue the production of our medicines at all our facilities; supply our medicines to all the patients in need, mainly our low molecular weight heparins, which were recommended by the World Health Organization as essential medicines for people hospitalized in intensive care units due to COVID-19; and continue with all our research and development projects with no delay. All in all, the resources ROVI booked to confront the COVID-19 pandemic and protect its employees during this first half of the year were EUR 2.5 million. In these exceptional times, ROVI's performance during the first half of the year has been above our expectations. Our 8% operating revenue growth in the first half of the year was driven by the strength of the specialty pharmaceutical business, which grew by 4% and by the toll manufacturing business, which grew by 31%. Data provided by IQVIA indicate that the innovative product market in Spain increased 4% in the first half of this year. Nevertheless, ROVI's prescription-based pharmaceutical product sales increased 7% during the first half of the year, outperforming the market by 3 percentage points. We forecast that we will continue to grow in line with the Spanish pharmaceutical market expenditure in the first 5 months of 2020, which, according to the Ministry of Health, Consumption and Social Welfare, show a growth rate of 3.4%. Regarding the classification of laboratories, using data from IQVIA, ROVI was positioned 16 in terms of value and was the fastest-growing Spanish innovative company among the top 16 ranked companies in the first half of 2020. As you know, on July 9, we announced the collaboration agreement with Moderna for large-scale commercial fill-finish manufacturing of Moderna's COVID-19 vaccine candidate at ROVI's facility in Madrid. As part of the agreement, ROVI will provide vial filling and packaging capacity by procuring a new production line and equipment for compounding, filling, automatic visual inspection and labeling to support production of the vaccine candidate intended in principle to supply markets outside of the U.S., starting in early 2021. We would like to mention that we are very happy about the collaboration with Moderna, whose vaccine against COVID-19 is one of the frontrunners in the race to solve this health crisis. We would be thrilled for ROVI to form part of the solution to this pandemic that is affecting all of us and to support Moderna in supplying it on a wide scale. Our proven experience and capabilities as a toll manufacturer of injectables has allowed us to reach this agreement, which would help strengthen our manufacturing area and would, in all probability, provide us with a significant growth opportunity in the area. Operating revenue increased by 8% to EUR 191.1 million in the first half of 2020. The main contributors to this growth were the Enoxaparin biosimilar, which grew 35% to an amount of EUR 49.3 million; Bemiparin outside Spain, where sales rose 88%; Neparvis, sales of which grew by 43%; and the toll manufacturing business, where sales increased 31%. The increase in sales, together with the rise in gross margin and the drop in both promotion expenses as a result of the COVID-19 crisis and research and development expenses push profitability up by 7.3 percentage points to 22.2% in the first half of 2020. EBITDA increased by 60% to EUR 42.4 million. Likewise, net profit increased by 83% from EUR 16.2 million in the first half of 2019 to an amount of EUR 29.6 million in the first half of this year. Prescription-based pharmaceutical specialties, which grew by 7% in the first half of 2020, are high-strategic-value products and contribute to give ROVI a wider scope for the coming years. ROVI considers its heparin franchise as one of its driving forces. Sales have risen by 23% to EUR 104 million in the first half of 2020. Heparin sales represented 54% of operating revenue in the first half of the year compared to 48% in the first half of 2019. We aim to become one of the leaders in the low molecular weight heparin field worldwide with our 2 molecules: Bemiparin and Enoxaparin biosimilar. Bemiparin total sales increased by 14% to EUR 51.6 million in the first half of 2020. Enoxaparin biosimilar total sales increased by 35% to EUR 49.3 million in the first half of 2020. ROVI continues with its internationalization plan. Sales outside of Spain increased by 37% to EUR 86.5 million in the first half of 2020, EUR 26.5 million or 31% of those sales, of which related to international subsidiaries, mainly due to recognition of Enoxaparin biosimilar sales. Sales outside Spain represented 45% of operating revenue in the first half of 2020 compared to 36% in the first half of last year. International sales of Bemiparin increased by 88% to EUR 18.3 million, representing 35% of total Bemiparin sales in the first half of 2020. This significant increase was mainly linked to the increase in transfer prices to some partners due to the rise in low molecular weight heparin raw material prices. ROVI expects international Bemiparin sales to increase by a high-teens percentage in 2020. Sales of Bemiparin in Spain decreased 6% to EUR 33.3 million in the first half of 2020 due to the significant reduction in the number of surgical operations performed during the period of confinement. International sales of Enoxaparin increased by 20% to EUR 34.2 million, representing almost 70% of total Enoxaparin sales in the first half of 2020. Regarding the Enoxaparin biosimilar, Becat, we launched the product in Germany in September 2017; in U.K., Italy, France, Spain, Austria, Latvia and Estonia in 2018; and in Portugal, Poland, Costa Rica, Finland and Sweden last year. Besides Europe, we have signed out-licensing agreements in 88 countries as part of our second stage of our commercialization strategy. We have signed 2 important licensing agreements to distribute and market Enoxaparin biosimilar. The first with Hikma Pharmaceuticals, who have 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 quarter-by-quarter to reach a 35% rise in the first half of 2020 in a very difficult environment due to the reduction of the hospital activity during the period of confinement. So let me just summarize the opportunity here. This is a EUR 1.4 billion market with high entry barriers where biosimilars are likely to reach between 50% to 70% of market share and with only 2 other players in the market. The latest launches were, again, a strong driver of growth in the first half of 2020. Sales of Neparvis from Novartis, launched in December 2016, indicated for the treatment of adult patients with symptomatic chronic heart failure and reduced ejection fraction, increased sales 43% to EUR 13.8 million compared to EUR 9.6 million in the same period last year. Sales of Volutsa from Astellas Pharma increased by 9% to EUR 7 million. Vytorin, Orvatez and Absorcol, the first of the 5 licenses of MSD indicated as an adjunctive therapy to diet in patients with hypercholesterolemia increased by 4% to EUR 15.9 million in the first half of 2020, despite Orvatez price was reduced by 30% in the first half of 2020 due to the entrance of hybrid products formulated with ezetimibe and atorvastatin. Sales of Hirobriz Breezhaler and Ulunar Breezhaler, both inhaled bronchodilators from Novartis, decreased by 21% to EUR 5.9 million, mainly due to the 18% price reduction in Ulunar Breezhaler in the first half of 2020. Finally, sales of contrast imaging agents decreased by 14% to EUR 14.4 million, mainly due to the significant reduction in the number of diagnostic tests performed during the period of confinement. ROVI continues to be the market leader in this segment. Regarding toll manufacturing, sales increased by 31% to EUR 34.8 million in the first half of 2020 as a result of the redirection of our toll manufacturing activity strategy towards high value-added products, backed by the high degree of technological specialization of our plants in differentiated niches, such as biological and biotechnological, immunological vaccines and long-acting injectables. As we already mentioned, we have unified the toll manufacturing area, which will allow us to take better advantage of the synergies between the plants and enhance their efficiency. In addition, we would like to highlight the fact that thanks to the deal with Moderna, ROVI will incorporate one new filling line for vials. Following along the same line, by the end of this year 2020, we expect the toll manufacturing business to have increased by a high teens percentage. As the company has recently reported, a very important milestone has already been achieved with its long-acting injectable antipsychotic, Doria. After the conclusion of the valuation phase, the European health authorities have commenced the assessment process to grant marketing authorization for this first product based on our 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 doses 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 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 and will provide clinical data on the long-term use of Risperidone ISM. Furthermore, ROVI informed of the decision to expand its industrial capabilities for the manufacture of Doria with the incorporation of a second line for the manufacture of the syringe containing the solvent. The addition of this second line also provides the company with the necessary flexibility to initiate the preparation of the industrial filling processes of Letrozole ISM, which will require installation of a specific filling machine. As a result, ROVI has prioritized the submission of the Doria dossier in Europe and, subsequently, the filing in the U.S., targeting the second half of 2020. Furthermore, the company has already announced the commencement of the clinical development of Letrozole ISM, which represents the second candidate using ROVI's ISM technology platform. This new investigational medicine is, to the best of our knowledge, the first long-acting injectable aromatase inhibitor intended for the treatment of hormone-dependent breast cancer. The first Phase I clinical trial, the LISA-1 study, of Letrozole ISM is currently ongoing. And due to the study design and its exploratory nature, the finalization data -- date cannot be anticipated. Nevertheless, preliminary data confirms that this ISM formulation provides a prolonged release of Letrozole, which produces a sustained suppression of estrogenic hormones. The company will be gathering more clinical data from this trial over the next few months to better characterize the pharmacological profile of Letrozole ISM. Afterwards, in 2020, ROVI is planning to discuss these results with the regulatory authorities, together with 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 Doria 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 the first half of the year. We increased sales by 8%, outperforming the market. We have expanded our heparin franchise through the launch of Enoxaparin biosimilar in 3 new countries in the last 12 months and the increase of our presence in countries where we have already launched the product. We reinforced our European presence through the acquisition of 3 new products: Falithrom for the German market; Polaramine for the Spanish and French markets; 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 growth of 31% in our toll manufacturing business, thanks to the redirection of our strategy towards high value-added products. Likewise, we are making a heavy investment effort in research and development, focused on our ISM technology, which we see as a new avenue for ROVI's future growth. To conclude, we believe we are at a growth inflection point, with a strong growth opportunity driven by Risperidone and Letrozole, both candidates validating our leading-edge drug delivery technology, ISM; our Enoxaparin biosimilar, which will allow us to transform our European footprint; and thirdly, the agreement with Moderna, which would help strengthen our manufacturing area and would provide us with a significant growth opportunity in the area. 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 hand you over to 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 extremely happy with our performance in the first half of this year. Our operating revenue increased by 8% this semester. This growth is driven by the good performance of our low molecular weight heparin franchise, Bemiparin and the Enoxaparin biosimilar. Likewise, our toll manufacturing business was an important driver of our growth in the first half of 2020. Sales of prescription-based products increased by 7%, outperforming the innovative product market by 3 percentage points in this semester. Regarding our low molecular weight heparin franchise, we achieved a 24% growth. Sales of Bemiparin, our flagship product developed in-house, grew by 14%. And Enoxaparin biosimilar sales increased 35% to EUR 49.3 million in this first half of the year. Gross profit increased by 10% to EUR 112.3 million in the first half of 2020, the gross margin showing an increase of 1.4 percentage points from 57.4% in the first half of 2019 to 58.8%, mainly due to the increase in toll manufacturing sales contributing higher margins to the group sales; the increase in Bemiparin prices in hospitals due to rises in both low molecular weight heparin raw material prices and the demand for the product in hospitals to treat COVID-19; the improvement in Enoxaparin margins in Spain counteracting the drop in the margin on international sales of Enoxaparin; and the end of the marketing of the Norgine product portfolio, which had much lower margins than the group. In the first half of the year, low molecular weight heparin raw material prices rose around 35% compared to the same period last year. ROVI continues to be committed to innovation. R&D expenses decreased 27% to EUR 10.8 million. These figures are mainly the result of our focused investment in the ISM platform. ROVI expects R&D expenses to decrease for the full year by a low double-digit percentage. Our investment effort in R&D is fully motivated by our firm commitment to market our own quality and successful products in the immediate future. Selling, general and administrative expenses, SG&A, decreased 3% to EUR 59.1 million in the first half of the year, mainly due to a drop in promotion expenses incurred by the sales force and expenses of international subsidiaries, which amounted to EUR 4 million compared to EUR 4.8 million last year. In the first half of 2020, ROVI booked EUR 2.5 million in personnel and other expenses related to the COVID-19 measures implemented. Excluding expenses related to COVID-19, SG&A would have decreased by 7% to EUR 56.6 million in the first half of the year. In 2020, expenses related to international subsidiaries are expected to be around EUR 9 million. EBITDA increased to EUR 42.4 million in the first half of the year, a rise of 60% compared to the same period previous year, reflecting a 7.3 percentage point increase in the EBITDA margin, which was up to 22.2% in this semester from 14.9% in the first half of last year. EBITDA, excluding expenses related to COVID-19, what we call recurrent EBITDA, increased to EUR 44.9 million in the first half of 2020, a formidable rise of 70% compared to the same period of the previous year, reflecting a 8.6 percentage point increase in the recurrent EBITDA margin. EBIT performance followed the same trend as EBITDA in the first half of the year. It increased by 85% to EUR 32.9 million, reflecting a 7.2 percentage point increase in the EBIT margin. Net financial result amounted to minus EUR 0.03 million in the first half of 2020 compared to minus EUR 0.3 million, mainly due to the gain related to exchange rate derivative financial instruments. The effective tax rate was 9.9% in the first half of 2020 compared to 7.5% in the first half of 2019. Research and development tax credits decreased in the first half of 2020 as a result of a decrease in R&D expenses in the first half of the year compared to the same period of the previous year. So at the end of last year, negative tax bases of the group amounted to EUR 34.9 million, of which EUR 8.3 million will be used in the 2019 income tax and EUR 4.1 million in the first half of 2020. EBITDA pre-R&D, calculated excluding R&D expenses in the first half of 2020 and 2019, increased by 29% from EUR 41.2 million in the first half of 2019 to EUR 53.2 million in the first half of this year, reflecting a 4.6 percentage point rise in the EBITDA margin to 27.8% in the first half of 2020. EBIT pre-R&D increased by 34% from EUR 32.5 million in the first half of 2019 to EUR 43.6 million in the first half of 2020, reflecting a 4.5 percentage point rise in the EBIT margin to 22.8% in the first half of 2020. Net profit pre-R&D increased by 32% from EUR 29.8 million in the first half of 2019 to EUR 39.3 million in the first half of this year. ROVI invested EUR 7.3 million in the first half of 2020 compared to EUR 8.6 million in the first half of 2019. Of this amount, EUR 3.6 million related to investment CapEx regarding our facilities, EUR 3 million relates to ISM industrialization concepts, and EUR 0.7 million relates to maintenance and other CapEx. Free cash flow decreased to minus EUR 22.3 million in the first half of 2020 compared to minus EUR 19.4 million in the first half of 2019, mainly due to an increase of EUR 77.3 million in the inventories line in the first half of the year compared to an increase of EUR 28.3 million in the first half of last year. Regarding our debt, as of first half of 2020, ROVI had a total debt of EUR 75.4 million. At this date, bank borrowings decreased by EUR 7.1 million. In December 2017, ROVI announced the European Investment Bank granted it a loan to support its investment in research, development and innovation. The loan was for EUR 45 million. In September 2019, ROVI had drawn EUR 5 million against this credit line at a variable interest rate of Euribor at 3 months plus 0.844%. The latest interest rate paid was 0.551%. At December last year, ROVI had drawn the remaining EUR 40 million. The credit matures in 2029, includes a grace period of 3 years with a fixed interest rate of 0.681%. Likewise, since the beginning of COVID-19 crisis, ROVI has signed credit policies for an amount of EUR 45 million in order to ensure the company's liquidity. As of 30th of June 2020, ROVI had not used these credit policies. Thus, the group is in a very comfortable position to meet its payment obligation, debt maturities and any additional cash needs in the short and medium term. At this moment, ROVI had a gross cash position of EUR 37.3 million compared to EUR 68.9 million at the end of last year and a net debt of EUR 38 million compared to EUR 15.9 million as last year. Regarding the dividend, the Board of Directors agreed to set the date for holding its ordinary general shareholders' meeting in October 2020 and to maintain the proposed dividend of EUR 0.1751 per share, which was communicated to the market in February 2020. Lastly, regarding the news flows for 2020, we will monitor the evolution of the Moderna vaccine. We don't expect to announce any additional product launches this year as a result of the COVID-19 crisis. However, we expect to inform on new national marketing approvals for the Enoxaparin biosimilar in 70 countries outside Europe. With regards to R&D, we expect to release the final Risperidone ISM Phase III data at 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 the year. Also, we 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 also planning to discuss these results with the regulatory authorities, together with the next steps for continuing the clinical development. And that's all regarding our financial results for the first half of the year. So now -- we can now open the Q&A session.

[Operator Instructions] The first question comes from Harry Sephton from Jefferies.

It's Harry Sephton from Jefferies. So firstly, on the Moderna deal, please, can you help us understand the potential economics of this deal? So if you are planning to produce hundreds of millions of doses of the Moderna vaccine, what is the potential revenue contribution from that? And then along that, what is the cost of the new injectable line that you're looking to build for this? And will you start to invest in this line prior to the results of the Moderna vaccine? And if so, do you have any sort of backup plans for if the Moderna vaccine is unsuccessful? And then similarly, on the margin contribution for this product, do you expect that, that will be similar to the current injectable toll manufacturing services you currently do?

Harry, this is Juan. Regarding the Moderna deal, honestly, it's very difficult to provide any guidance in terms of potential revenue or what is going to be the positive impact of this deal in accounts for this year as there are still many uncertainties that need to be solved. We believe this is going to be a very important contract for the company. But still, there are several milestones that have to be achieved by Moderna, such as the Phase III and the review by the U.S. and the European authorities. So again, we're very happy to be in the front race and to be the company chosen by Moderna to be their fill and finish hub initially for all countries outside Europe. But really, we don't have the means or the basis really to provide you with an accurate or even a hit in terms of guidance of how this would be impacted. I think as time passes and we get more visibility by Moderna on what would be the final role on the -- and to what extent -- what are going to be the quantities I would be filling, I think we'll be able to provide more information to the market. But right now, it could be -- it would be more a wishful thinking rather than accurate data that we could provide to you today. Regarding the -- your second question, the cost of the line, we have pretty strong confidential clauses in our agreement with Moderna that it doesn't provide us the capability to disclose this information, but be sure that there are scenarios in -- by which in case that Moderna doesn't succeed with the Phase III clinical trial, doesn't succeed in getting an approval, ROVI gets a certain level of compensation by the cost of the creation of the new line. I'm sorry, I cannot be -- I cannot give you further clarity, but again, I think as we get close to the end of the year, we'll be able to provide and to share with you more information as events may develop. And regarding the margins, yes, definitely. I mean I think we -- both Javier and myself, we have shared with you something which is very important for us in regards to the toll manufacturing business. We have completely redirected the strategy of the operations to high added-value product. Definitely, the Moderna COVID-19 packaging is the perfect type, and we are talking, for sure, in margins on the high end of our current 16 business in toll manufacturing operations.

That's really helpful. And if I can just ask a few questions on Becat and Doria as well, please. So firstly, on Becat, we saw slightly lower contribution this quarter compared to last. Is that more because of this lower hospital activity you're currently seeing? And from what you're seeing in the market at the moment, are you seeing a quick recovery in the demand there? And then just also on the margins -- or the contribution margins for Becat, we're hearing about this oversupply in the global swine market. Are you seeing a decrease in the cost of heparin raw material as a result of that?

Harry, this is Javier. I think you are fully right. I mean the decrease in sales or the, let's say, the less increase of the sales of Becat this last quarter was fully in line with your separation. I mean with the impact of the COVID-19 crisis, the hospitals have been focused only on coronavirus patients and, I mean, all pharmaceuticals product has faced a slight decrease in the usage. And Becat has also been impacted. So we expect that the sales could recover the trend in the following months if there is no more -- hopefully, no more pandemic impact. As regards with the margins in the raw material, I think it's still early to predict a big reduce of the price of the sodium heparin. This year, it's been very, very difficult. I mean we have the swine fever, flu, plus the COVID-19 effects, so it's difficult to predict what is going to happen. But we will agree with your view that we still hope or we believe that in the next few quarters, we could see a slowdown or a decrease in the prices of the raw material, at least it's what our feedback from the field sales are.

That's really helpful. And just a quick question on Doria. You've explained very well in the past about the sort of potential benefits for the product in terms of not requiring cold storage, the fast onset of therapeutic dosing. Can you maybe give us some insight into maybe smaller points, such as what is the needle bore size compared to other treatments in the market? And then also the dosing options and choice of injection site for Doria?

Harry, this is Juan. You really got me on that. I mean I think the needle size gauge is identical to the other products on the market, but we can send you the technical details. Basically, it's an intramuscular injection. And in terms of gauge, we -- [ fundamentally ] the 25.5 G or 27.5 G, but it's really the standard needle size for this sort of treatments. In regards to the dosing, I mean, our dose study has been tested on the clinical trial, 47.5 milligrams. So -- but again, we can send you as well the draft protocol that is in the workplace in ClinicalTrials.gov, which is very well specified. We expect to -- some -- we expect to release further data of Doria on an important congress. Unfortunately, COVID-19 has put a lot of pressure on dates for congress that were scheduled before the year-end, but we expect that before we get the approval to be able to release in one of the major congress all the data. And there will be some important information regarding all these minor points like the pain on site and things regarding to the dosage as well.

The next question comes from Samir Devani from Rx Securities.

Congrats on a good quarter. I've got 3. I'll just give them one at a time. I'm surprised by the strength of the gross margin in the quarter at 63%. I'm just reading through the report. Doesn't seem to be any reason why there's any exceptional element to that. So is that a fair run rate going forward for Q3 and Q4? So perhaps a bit more color on the gross margin.

Thanks, Samir. This is Javier. You're right, we had an extraordinary quarter in terms of gross margin. I think, as we described, the main reasons was the tremendous growth by the contract manufacturing activities. So hopefully, we expect that the specialty pharma sales will increase more in the next following quarters if there is no impact from the COVID-19, or less impact. So probably in the following quarters, we'll see a more normalized gross margin with stronger sales from the specialty pharma franchise, which will have less or minor gross margin. Again, third quarter is -- usually is good for us in terms of gross margin, but overall, I would say that this quarter has been extraordinary. And overall, we expect a more normalized gross margin in the rest of the year.

Okay. That's great. And then just what was the reason for the 18% price cut for Ulunar Breezhaler?