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

Ladies and gentlemen, welcome to ROVI Full Year 2020 financial results. 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. Please, sir, go ahead.

Thank you very much, and good afternoon to everyone. This is Javier López-Belmonte, CFO of ROVI. At this time, I would like to welcome everybody to this full year 2020 results conference call, which will start in a moment. Let me please first introduce Rovi's attendees today, Mr. Juan López-Belmonte, CEO; Marta Campos, Head of Investor Relations; Antonio Marquina, Investor Relations; and myself. All lines are now mute to prevent any background noise. 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 year.

Thank you, Javier, and welcome to everybody. I'm happy to present our 2020 results. The year 2020 has been extremely unusual due to the COVID-19 pandemic. This crisis is not precedent 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 from 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 delays. All in all, the resources ROVI took to confront the COVID-19 pandemic and protect its employees during this year were EUR 4 million. In these exceptional times, ROVI's performance during the year has been above our expectations. Our 10% operating revenue growth was driven by the strength of the toll manufacturing business, which grew by 39%, and by the specialty pharmaceutical business, which grew by 4%. Data provided by IQVIA indicate that innovative product market in Spain increased 2% in 2020. Nevertheless, ROVI's prescription-based pharmaceutical product sales increased 6% during the year, outperforming the market by 4 percentage points. We forecast that we will continue to grow at a higher rate than Spain's pharmaceutical market expenditure last year, which, according to the Ministry of Health Consumption and Social Welfare, show a growth rate of 2.6%. Regarding the classification of laboratories, using data for IQVIA, ROVI was the fastest-growing Spanish innovative company among the top 17 rank companies in 2020. As you know, on November 27, we announced the online publication of the results of the pivotal study, PRISMA-3, on the efficacy and safety of Doria in schizophrenic patients in the journal npj Schizophrenia. The results obtained in this study showed that both doses 75-milligram and 100-milligram once a month, have achieved the prespecified primary and secondary efficacy endpoints for treatments of patients with acute exacerbation of schizophrenia. The significant statistical improvement for both efficacy results was observed as early as 8 days after the first injection without loading dose or oral treatment. According to the authors of the article, Risperidone ISM represents an effective therapeutic strategy in schizophrenic patients who are admitted to hospital with an acute episode with severe or moderate psychotic symptoms. We are pleased with these results since not only do they prove that our ISM technology works, but also because we believe that Doria will be able to help provide an unmet medical need. If we move to the operating results, our operating revenue increased by 10% to EUR 420 million in 2020. The main contributors to this growth were a Enoxaparin biosimilar, which grew 25% to an amount of EUR 101.4 million, Bemiparin outside Spain, where sales rose 21%, Neparvis, sales of which grew by 34%, and the toll manufacturing business, where sales increased by 39%. The increase in sales together, with the rise in gross margin and the drop in both promotional expenses as a result of the COVID-19 crisis and the research and development expenses pushed profitability up by 6.5 percentage points to 22.4% in 2020. EBITDA increased by 55% to EUR 94.2 million. likewise, net profit increased by 55% from EUR 49.3 million in 2019 to EUR 61.1 million in 2020. Prescription-based pharmaceutical specialties, which grew by 6% in 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 having risen by 14% to EUR 209.3 million in 2020. Heparin sales represented 50% of operating revenues in 2020 compared to 48% in 2019. We aim to become one of the leaders in the Low Molecular Weight Heparin sales worldwide with our 2 molecules, Bemiparin and Enoxaparin biosimilar. Bemiparin total sales increased by 5% to EUR 101.4 million and Enoxaparin biosimilar sales increased by 25% to EUR 101.4 million as well in 2020. ROVI continues with its internationalization plans. Sales outside Spain increased by 28% to an amount of EUR 191.1 million in 2020, EUR 52.5 million or 27% of which related to international subsidiaries, mainly due to the increase in the toll manufacturing business. Sales outside the Spain represented 46% of operating revenue last year compared to 39% in 2019. International sales of Bemiparin increased by 21% to EUR 33 million. 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. Sales of Bemiparin in Spain decreased 2% to EUR 68.5 million in 2020 due to the significant reduction in the number of surgical operations performed during the period of lockdown. International sales of enoxaparin increased to EUR 67.4 million, representing 66.5% of the total enoxaparin sales in 2020. Regarding the enoxaparin biosimilar, Becat, we launched a product in Germany in September 2017; in U.K., Italy, France, Spain, Latvia and Estonia in 2018; in Portugal, Poland, Costa Rica, Finland and Sweden in 2019; and in South Africa, Israel, Peru, Poland, Panama, and the Dominican Republic in 2020. 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 or regions. We started the commercialization in Q4 2017, with sales amounted to EUR 1.5 million, and sales increased quarter-by-quarter to reach a 25% rise in 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 2 billion market, EUR 1.3 billion in Europe and EUR 700 million in emerging countries, with high entry barriers, where biosimilars are likely to reach 50% to 70% of the market share with only 3 other players in the market. The latest launches were again a strong driver of growth in 2020. Sales of Neparvis, a specialty product from Novartis, launched in December 2016, indicated for the treatment of adult patients with symptomatic chronic heart failure and reduced ejection fraction, increased 34% to EUR 29.6 million in 2020 compared to EUR 22 million in 2019. Sales of Volutsa from Astellas Pharma increased by 7% to EUR 14.2 million. Sales of Vytorin, Orvatez, and Absorcol, specialty products from Merck Sharp & Dohme, indicated as adjunctive therapy to diet in patients with hypercholesterolemia, decreased by 11% to EUR 28.4 million in 2020. In this period, Orvatez price was reduced by 30% due to the entrance of hybrid products formulated with ezetimibe and atorvastatine. Sales of Hirobriz Breezhaler and Ulunar Breezhaler both inhaled broncodilators from Novartis, decreased 22% to EUR 11.3 million in 2020 compared to EUR 14.6 million in the previous year, mainly due to Ulunar Breezhaler price reduction of 18% in 2020. Finally, sales of contrast imaging agents decreased by 6% to EUR 30.7 million, mainly due to the significant reduction in the number of diagnostic tests performed during the period of confinement. However, sales of contrast imaging agents and other hospital products increased by 12% in the fourth quarter of 2020 compared to the third quarter of the same year, and by 5% in the fourth quarter of 2020 compared to the fourth quarter of 2019. ROVI continues to be the market leader in this segment. Regarding toll manufacturing, sales increased by 39% to EUR 91.6 million in the 2020 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 plants in differentiated niches, such as biological and biotechnological, immunological such as vaccines, and long-acting injections and the booking of the income related to activities covered under the agreement with Moderna. ROVI has carried on some activities linked to the preparing the plans for the COVID-19 vaccine production under the agreement with Moderna and the income related to these activities was booked in the fourth quarter of 2020. Likewise, by the end of 2021, ROVI's expects the toll manufacturing business to have increased between 10% and 15%, including Moderna's activities, but excluding the production of the vaccines itself. Doria is the first ROVI's product based in its leading-edge drug delivery technology, ISM. It's a novel investigational antipsychotic for the treatment of schizophrenia, with once-monthly injection, which has been developed and patented by Laboratorios Farmaceuticos ROVI, and which, as one of the first injection, provides immediate and sustained plasmatic drug levels and does not require loading doses or supplementation with oral risperidone. In March 2019, the company informed top line results from the pivotal study of Risperidone ISM PRISMA-3, and the 27th of November of 2020 announced the online publication in the journal npj Schizophrenia. The results obtained in this study show that both doses, 75-milligram and 100-milligram once a month, have achieved a prespecified primary and secondary efficacy endpoints for treatment of patients with acute exacerbation of schizophrenia. The primary efficacy endpoint, the PANSS total score, mean difference 95% improved significantly with Risperidone ISM 75 milligram and 100 milligram from the beginning until day 85, with adjusted difference of minus 13 and minus 13.3, respectively. Significantly improved mean changes for the secondary endpoint, the CGI-S score, were also obtained for Risperidone ISM in comparison with the placebo, minus 0.7 for both doses. The significant statistical improvement for both efficacy results was observed as early as 8 days after the first injection. The most frequently reported treatment emergent adverse events were increased blood prolactin 7.8%, headache 7.3%, hyperprolactinemia 5% and weight increase 4.8%. No important new or unexpected safety information was reported. According to the authors of the article, Risperidone ISM represents an effective therapeutic strategy in schizophrenic patients who are admitted to hospital with an acute episode with severe or Moderate psychotic symptoms. The company also announced in July 2019 the completion of an open-label extension of the PRISMA-3 study, which provides clinical data on the long-term use of Risperidone ISM 12 additional months. Based on these positive results and the other data from the product, ROVI previously announced the commencement of the centralised procedure for registration with the European Medicines Agency in January 2020. Likewise, at its Capital Markets Day held on 24 November, ROVI announced the filing of an NDA registration dossier to obtain marketing authorization in the USA, with the FDA. 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 I clinical trial, the LISA-1 study of Letrozole ISM, is currently ongoing. And due to the study design, dose escalation and its exploratory nature, the finalization data cannot be anticipated. Nevertheless, preliminary data confirm that this ISM formulation provides a prolonged release of Letrozole, which produces a sustained suppression of oestrogenic hormones. The company is planning, in the first half of 2021, 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 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 2021. ROVI expects the operating revenues increased between 20% and 30%, including the production of Moderna's COVID-19 vaccine. We have stayed on the path of sustained growth in 2020. We've increased sales by 10%, outperforming the market. We have expanded our heparin franchise through the launch of Enoxaparin biosimilar in 6 countries in the last year and the increase of our presence in countries where we have already launched the product. We consolidated our pharmaceutical specialties area, thanks to the strength of our leading products such as Neparvis and Volutsa. We achieved growth of 39% in our toll manufacturing business, mainly thanks to the redirection of our strategy towards high-value added products. Likewise we are making a heavy investment effort in R&D, focus 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 agreement with Moderna, which is helping strengthen our manufacturing area and is providing 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 very happy with our performance of the year 2020. As Juan already said, our operating revenue increased by 10% this year. This growth is driven by the good performance of our Low Molecular Weight Heparin franchise, and our leading products such as Neparvis and Volutsa. Likewise, our toll manufacturing business was an important driver of growth in 2020. Sales of prescription-based products increased by 6%. And regarding our Low Molecular Weight Heparin franchise, we achieved a 14% growth. Sales of Bemiparin, our flagship product developed in-house, grew by 5%, and Enoxaparin biosimilar sales increased 25% to EUR 101.4 million in 2020. Gross profit increased by 12% in 2020. Gross margin showing an increase of 1.1 percentage points from 56.6% in 2019 to 57.7% in 2020, mainly due to the increase in toll manufacturing sales, contributing higher margins to 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. Also, the improvement in Enoxaparin margins in Spain contracting the drop in the margin on international sales of Enoxaparin. And the end of the marketing of the Norgine product portfolio, which had lower margins than the group. In 2020, Low Molecular Weight Heparin raw material prices rose around 36% compared to last year. ROVI expects Low Molecular Weight Heparin raw material prices to continue to decline in 2021. Nevertheless, despite the potential decrease in raw material prices, the impact on the gross margin will continue to be negative because of the long heparin manufacturing process, in which the raw material currently used, stocked for several months was purchased at higher prices. ROVI continues to be committed to innovation. R&D expenses amounted to EUR 23.8 million last year. This figure is mainly the result of a focused investment in the ISM projects. Selling, general and administrative expenses, SG&A, decreased 1% to EUR 124.4 million in 2020, mainly due to a drop in promotion expenses incurred by the sales force and also expenses of international subsidiaries, which amounted to EUR 7.7 million compared to EUR 9.1 million in 2019. In 2020, ROVI booked EUR 4 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 4% to EUR 120.4 million in 2020. EBITDA increased to EUR 94.2 million in 2020, a rise of 55% compared to previous year, reflecting a 6.5 percentage point increase in the EBITDA margin, which was up to 22.4% in this year from 16% in 2019. EBIT performance followed the same trend as EBITDA in the year. It increased by 75% to EUR 74.7 million, reflecting a 6.6 percentage point rise in the EBIT margin. Net finance result amounted to minus EUR 2.1 million in 2020 compared to minus EUR 0.8 million in 2019, mainly due to the loss related to exchange-rate derivative financial instruments. Effective tax rate was 15.9% in 2020 compared to 6.2% in 2019, mainly due to the increase of the profit before income tax, the recognition in 2019 of negative tax bases ROVI had the right to use, and the decrease of research and development tax credits in 2020 as a result of the decrease in R&D expenses in the year compared to the previous year. As of December 31, 2020, negative tax bases of the Group amounted to EUR 25.5 million, of which EUR 9.4 million will be used in the 2020 income tax. Finally, net profit increased by 55% from EUR 39.3 million in 2019 to EUR 61.1 million in 2020. EBITDA pre-R&D calculated excluding R&D expenses in 2020 and 2019 increased by 31% from EUR 90.2 million in 2019 to EUR 118 million in 2020, reflecting a 4.5 percentage point rise in the EBITDA margin to 28.1% in 2020. In the same way, EBIT pre-R&D increased by 37%, and net profit pre-R&D increased by 21%. ROVI invested EUR 39.7 million in 2020 compared to EUR 27 million in the year before. Of this amount, EUR 25.7 million related to investment in CapEx regarding our facilities, including important projects, such as the ISM industrialization and the building of a second Low Molecular Weight Heparin API facility in Escúzar Granada. And finally, EUR 14 million relates to maintenance and other CapEx. Free cash flow increased to EUR 7.3 million in 2020 compared to minus EUR 49.5 million the year 2019, mainly due to the booking of EUR 21.6 million in the proceeds from toll manufacturing services line, mainly due to payments received that are pending to be allocated to the income statement. Increase of EUR 30.7 million in profit before income tax, an increase of EUR 7.5 million in the trade and other receivables item in 2020 compared to a decrease of EUR 20.4 million in 2019. Regarding our debt, as of December 31, 2020, ROVI had total debt of EUR 74.4 million. Of that amount, EUR 45 million is debt with banks, representing 60% of total debt, while EUR 11 million correspond to debt with public administration related to the development of R&D projects, which is 0% interest rate debt, representing 15% of total debt. And EUR 17.5 million correspond to financial liabilities for leases as a result of the IFRS 16 application, representing 24% of total debt. EUR 0.9 million correspond to derivative financial instruments. As at the end of last year, bank borrowings decreased by EUR 7.1 million. Likewise, since the beginning of the COVID-19 crisis, ROVI has signed credit policies for an amount of EUR 45 million in order to ensure the company's liquidity. So at the end of last year, ROVI has not used these credit policies, thus the group is in a very comfortable position to meet its payment obligations, debt maturities and any additional cash needs in the short and medium term. As of December 31, 2020, ROVI had a gross cash position of EUR 54.6 million compared to EUR 36.8 million as of September 30, 2020, and EUR 68.9 million as of December 31, 2019. And a net debt of EUR 19.8 million compared to EUR 38.1 million as of September 30, 2020, and EUR 15.9 million as of December 31, 2019. Regarding the dividend, ROVI will propose to the Shareholders General Meeting a dividend of EUR 0. 3812 per share with dividend rights on 2020 earnings. This proposed dividend would mean an increase of 118% compared to the dividend on 2019 earnings and represents a 35% payout. Regarding news flow for 2021, we will monitor the evolution of the manufacturing of the Moderna vaccine. We don't expect to announce any additional product launch this year as a result of the COVID-19 crisis. However, we expect to keep informing on new national marketing approvals for Enoxaparin biosimilar in 78 countries outside Europe. With regards to R&D, we expect to obtain marketing authorization in Europe and United States for Doria in 2021. And 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 the first half of this year, we expect 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 2020. We can now start the Q&A session.

[Operator Instructions] The first question comes from Francisco Ruiz from Exane.

Perhaps 3 questions, if I may. The first one is, if you could guide us a little bit on how do you spend R&D and SG&A for 2021. Regarding R&D mainly on probably the Phase III of Letrozole and SG&A, taking into account the launch of Doria, at least in Europe? The second question is on the guidance. I mean, the 20%, 30% it's including only the vaccine manufacturing revenues? Or is something that has changed from your mid-single-digit that it was previously guided? And the last question is if you could clarify that the EUR 20 million that you have on your cash flow statement is an upfront payment from the revenues that we will see in 2021 or had to do with the technology transfer of Moderna?

Francisco. With regards -- this is Javier speaking. With regards to your first question about guidance for R&D and SG&A for next year, with regards to our R&D expenditure, it will depend on very much on the clinical trial evolution of Letrozole. For that purposes, as we were mentioning, we will sit down with the authorities, hopefully, very soon, and then we could have -- then we will have more visibility. As you know, our R&D expenditure is very dependent on the different phases of our products. So if we start, hopefully, a new clinical product with Letrozole, our R&D expenditure could increase compared to the previous year. And with regards to SG&A, I think it's clear that if the company is growing from 20% to 30% on guidance on operating revenue, we could easily anticipate that SG&A expenditure will increase because it's the only way to be able to cope with this increase in the operating revenue. However, it's still early to see how the expenditure evolution of the launching phase in -- for Doria in Europe, how it will be now. It is still early as we don't have a marketing approval yet. And with the COVID-19 crisis, it's just unclear the right timing to launch the product. With regards to your second question about the guidance of the company, you were right. You are right in the sense that, I think, it was last November when we announced a potential guidance for this year of mid-single-digit growth, and that didn't include the production of the manufacturing of the COVID-19 vaccine. At that moment, the COVID-19 vaccine were not approved yet. And we didn't know whether we were going to manufacture the product or not. Right now, it's clear that the growth is approved, hopefully, for all of us. And it's clear that ROVI is already manufacturing the vaccine. And on this guidance, at this current new guidance 20% to 30%, we include all revenues for the company for the year. The last question, you're -- about the EUR 20 million upfront payment. It's related to some services that we have already provided or we are providing to some customers. However, this service has not been accrued as an income in the P&L statement because we have -- well, we have to follow accounting crits. And we have already cash and money, but the income is not yet stated in the P&L. I hope that clarify your questions.

So in that sense, mainly out of the 20% to 30% growth in top line, you will have around EUR 20 million, which will not be cash flow next year?

Well, I cannot confirm your statement. Probably those EUR 20 million will not be included in the -- all of them in the P&L for next year. It will be accounted for several years some of them because some of those services are related to some assets, and we have to accrue the income whenever the asset is depreciated. Just to give you an example. So it's not that a direct connection between that EUR 20 million to next year, EUR 20 million of this year, EUR 20 million hit in our P&L.

The next question comes from Guilherme Sampaio from CaixaBank.

Three, if I may. The first one, in your guidance, what are your timing exceptions regarding the path to return to normalized levels of activity in 2021. Second question, how should we expect the phasing of Moderna manufacturing production contribution across the year in 2021? And the third one, can you update us on the prospects for production of additional Moderna's products?

Guilherme, we didn't get your first question. So I'm going to answer the second question, and then we can get back to your first question. Regarding the phasing of the manufacturing of Moderna, I think it's clear that all companies, we are scaling up. So it's not even related to Moderna, but the rest of the vaccine manufacturers. So we hope that as the months pass, the manufacturing outcome will be increasing exponentially. So we believe that first quarter is going to be the lowest in terms of output -- of vaccine output, and this is going to be increasing, hopefully, in an exponential away. And hopefully, the last quarters will be the biggest. And I think that's related also to your third question, you were asking about production. And the new products of Moderna, we are now very focused on the new -- on the COVID-19 vaccines. As you know, all companies are working on new variants on the new vaccines. And hopefully, we will help Moderna with these new variants in the next coming months. And with regards to their pipeline, to the rest of their pipeline, as we have always tell investors and analysts, we have signed as a supply chain partner to Moderna. So we could opt to manufacture the rest of their potential product portfolio, but currently, we are still very focused on the vaccine. And Moderna, I think, they are also very focused on the COVID-19 vaccine. Could you repeat us your first question, Guilherme.

Yes. So in your guidance, what are your timing assumptions regarding the path to return to normalized levels of activity in 2021?

Well, clearly, that's why we had stated that it's very unclear, know how the COVID-19 pandemic is going to affect the companies this year. Hopefully -- meanwhile, there is confinement measures, as we have always tried to explain to investors and analysts. There are less procedures in the hospitals, and this clearly affects us in a negative way. So as soon as the life comes to normal, I think that the normalized situations will come to ROVI. So again, it will depend on the evolution of the pandemia. And as soon as we get a normal life, our P&L and our activity, we will get back to normal. So far, still our sales force are not able to call doctors at the hospital level due to pandemia. And I think that's the main point. When once our sales force can deploy their work in a normal way, we can state that we will be in a normal situation.

The next question comes from Álvaro Lenze from Alantra Equities.