L'Oréal S.A. (GALD) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to Galderma's conference call. [Operator Instructions] Please be advised that today's conference will be hosted by Dr. Flemming Ornskov, CEO; and Thomas Dittrich, CFO. It is planned for 30 minutes, and it is being recorded. There are no slides for the call today, and please note that the press release was published this morning and can be consulted on Galderma's corporate website at any time. I would now hand you over to Dr. Flemming Ornskov for opening remarks. Flemming, please go ahead.

Thank you very much, and welcome to Galderma's investor call following the announcement that we have signed a memorandum of understanding with L'Oréal to pursue a new scientific partnership and that we welcome them as a new long-term shareholder. We are proud of this endorsement in Galderma by L'Oréal, the global leader in beauty, which clearly recognizes Galderma's strong growth trajectory since becoming an independent company end of 2019 and now the self-care category leader in dermatology globally. Fueled by our unique and proven integrated dermatology strategy, Galderma has demonstrated growth, innovation and leadership. Based on my discussions with Nicolas Hieronimus, the CEO of L'Oréal and his team, I can say on behalf of Galderma that we look forward to welcoming them as a shareholder and to working together towards a new R&D collaboration, which has the potential to further advance Galderma's category leadership in dermatology. With this memorandum of understanding, we've agreed together with L'Oréal to pursue an R&D collaboration in the form of a scientific partnership. The undisputed expertise of both companies, L'Oréal with expertise in skin biology, diagnostic tools and evaluation methods and Galderma with expertise across the spectrum of dermatology in Injectable Aesthetics, Dermatological Skincare and therapeutic dermatology, together has the potential to benefit the customers, the patients and the consumers we serve across the globe every day in dermatology and beauty. The envisioned collaboration would be focused on a complementary research project, which could be mutually beneficial based on our shared focus on skin as well as our commitment to growth and innovation. While it's at very early stages, this collaboration could provide new avenues and accelerate innovation in the field of dermatology, which could enable both companies to expand and enhance their respective product portfolios. In that context, any envisions R&D collaboration would maintain the operating and the strategic independence of both parties. I can confirm that Galderma remains committed to dermatology category leadership and its three strategic pillars. Advancing science and innovation remains a cornerstone of our growth for both new pipeline assets and for our factory brands. As for our shareholder base, we are delighted to welcome L'Oréal as a new shareholder. With L'Oréal taking a 10% stake at an undisclosed premium, it is a testament to Galderma's unique growth-based integrated dermatology strategy, its proven track record and its attractive outlook. The agreement between the L'Oréal Group and the EQT-led consortium of shareholders is subject to customary provisions for an investment of this type, while also reflecting L'Oréal's commitment to our operating and our strategic independence. Following the transaction, no changes to the Galderma Board of Direction and its governance are envisioned. In addition, L'Oréal has also agreed vis-à-vis, the EQT-led consortium of shareholders to a customary standstill and tender obligations for L'Oréal. As we continue to build on our strong shareholder base since being publicly listed on March 2024, and with the closing of the transaction expected to be completed in the coming days, we welcome L'Oréal as a ratable strategic partner with a minority stake in Galderma. In closing, Galderma's purpose remains unchanged, advancing dermatology for every skin story. Over the course of its 40-plus-year heritage, Galderma has shown an unwavering commitment to the science of skin. With our continued investment in R&D, Galderma has remained at the forefront of the latest innovation in dermatology. This has enabled us to successfully strengthen our scientific differentiation and advance the innovation pipeline across the full spectrum of our fast-growing and the fast-growing dermatology market overall. Galderma's leading science and innovation capabilities are and will remain a key pillar of its prudent growth-focused integrated dermatology strategy. This concludes the opening remarks and would now like to hand back over to the operator to open the call for questions. Operator, can you please open the line for the first question.

Now we're going to take the first question and it comes from the line of Thibault Boutherin from Morgan Stanley.

First question, just a clarification on the scope of the scientific partnership. Is it about technology sharing and then each company develop their own products? Or is there scope for entire new brands or product families to be codeveloped by Galderma and L'Oréal? And then the second question on the -- just the competitive situation in professional skin care because on their call, L'Oréal management seemed to be mostly excited and interested in the aesthetic market and wanting to learn more about it. So just if you could clarify how you can help L'Oréal here without losing competitive advantage for your own professional skin care portfolio as you are directly competing with them with elastin against SkinCeuticals and Skinbetter Science?

Well, thank you very much for your question. Yes. So I've been deeply involved in drafting and executing the memorandum of understanding and had several discussions with our counterparts on the L'Oréal side. The full scope of the R&D agreement is yet to be finalized, but it could include some of the things you said. We are about driving innovation, there about driving innovation. And if this leads to products or tools that benefit patients or consumers, we're all for it. We've had some preliminary ideas about where we could best supplement each other. This is about supplementing each other. This is about bringing new products, new tools to market and building on the strong expertise of both companies which I would say during the several meetings I've had is really complementary in many areas, and I take it also as a strong complement to our strong focus on innovation. Yes, we are competitors, and we will continue to be strong competitors, whether it's in the consumer space, whether it's with elastin, I don't see that change. I think, in my interactions with L'Oréal, they have a broad interest in many areas that we are in. There's a lot of overlap. We're both totally focused on the dermatology market, which is highly fragmented, lots of growth opportunity, lots of adjacencies also, of course, between aesthetics and consumer. So I think both companies can benefit significantly from that. And I think with new innovation, which drives growth in this market, we both stand to benefit from it.

[Operator Instructions] The next question comes from the line of Matthew Weston from UBS.

Two questions from me, please. The first, Flemming, is whether you can ever envisage a commercial relationship with L'Oréal, particularly where you could have help from their extensive sales force, particularly with marketing your Injectable Aesthetics portfolio, whether it be in specific markets or across the board? And then secondly, on the L'Oréal call, they were asked whether there were additional terms of the shareholder agreement and the CEO answered that there were standard provisions, but also other provisions which people should address to EQT. I think one question, in particular, was whether or not L'Oréal has first right to refusal of purchasing any other elements of the EQT stake. In your opening remarks, you mentioned a standard standstill agreement. Are there other provisions that Galderma shareholders should be aware apart of the holder agreement with L'Oréal?

No, there's a standstill and then there's also a tender obligation, which we have outlined in broader terms. I cannot comment on the agreements that there may be between L'Oréal and EQT on this particular issue. But the two important things, I think, for our shareholders and for the full transparency belongs to this tender obligations in particular and also that there is a prolonged standstill. So I think that's all well covered. This is an agreement that is focused on the memorandum of understanding, talks about an R&D agreement, which I'm very excited about. So I think that's the only thing that I can comment on right now. As you know, Galderma is all about innovation. Our growth is driven by innovation. You saw recently we got QM-1114, or now called Relfydess. We got a positive nod in Europe. So I think we're all about innovation. We are working hard on the rest of our pipeline. I think that has clearly attracted the interest of L'Oréal and I think, in particular, the innovation we want to continue to drive. And this is what this memorandum of understanding outlines and that's what the agreement should be focused on. We want to be concrete and specific and ideally develop products and tools that can benefit patients in the dermatology market going forward.

[Operator Instructions] The next question comes from the line of Richard Parkes from BNP Paribas Exane.

My first question, I just wonder your knowledge and expertise in the prescription dermatology business. Is that likely to contribute in any way to the R&D collaboration? Or is it going to be very much focused on aesthetics and beauty skin care? And then just given the -- we're sat now so close to what people are estimating for the PDUFA for nemolizumab, could I just -- because I didn't get quite an opportunity to ask you on the 2Q call. Can you confirm that manufacturing inspections for -- ahead of the approval have been completed and whether there are any 483 observations? Just obviously, came to understand your confidence out of that PDUFA date now it's so imminent.

Yes. So on the latter question, we have been going through multiple interactions with the FDA, including manufacturing interactions. I won't comment on the details, but, no, 483 has been issued. As I stated previously, we feel ready. Once we get approval, we're ready to take the next steps, but I'm not going to comment on that. The situation with the R&D collaboration. I think it's important to understand that Galderma has an integrated R&D organization. So we don't really differentiate whether something contributes to specific products and consumer aesthetics or in a therapeutic dermatology business. It's quite obvious that within IL-31 receptor alpha that particularly has a strong impact on each, we will benefit for that insight and knowledge in other parts of the business. So we've not agreed on the specific projects we will work on yet with L'Oréal, but our integrated innovation organization will be involved and then we'll select a specific project. So any insights we have, we will share into those specific projects. But it's too early. We have to agree on the projects, but I see it as, if you could call it, a backhanded, maybe even more than that, complement to the strategy we've had to the growth, the outlook of Galderma. But also if someone of the caliber of L'Oréal with significant investment in R&D, extreme knowledge in this field is willing to collaborate with us that is much smaller and somewhat, you could say, younger in building out significant scientific expertize. I see that as a big complement also to my R&D organization. I share the complement, but I think they should feel really good about the fact that such a reputable company with strong insights into skin -- skin biology is willing to work with us. I take that as a huge complement to our R&D organization.

The next question comes from the line of Peter Welford from Jefferies.

I'll stick with the two. That seems to be the norm. Firstly, I wonder if you just sort of stepping back, if you could give us an idea how this collaboration came about as far as L'Oréal approach Galderma approach you to instigate this? And I guess related to that, how the equity became a part of it because, I guess, ultimately, these are two separate parties in the sense there is an R&D collaboration and then there's the buying of the stock from the shareholders. So curious here how this came about to be structured in the way it is and whether one was a pre-requisite for the other? And then the second question is just on what you mentioned about the intensity of R&D. Appreciating, obviously, L'Oréal is a very big company and therefore has a very big sort of budget. The sort of intensity and the way perhaps R&D is managed, I would imagine is quite different insofar as it doesn't perhaps do R&D. And perhaps the way normally is acquired for drugs that need to go through regulators like FDA for the things like, I guess, either Injectable Aesthetics or particularly the therapeutic section as well. So I guess just curious how you envisage the two companies working together in that sense, given perhaps the budgets may be very different. But I'm guessing as well the way in which R&D is managed and organized is probably quite different between the two companies?

Yes. So on the first question, which had two parts. So the first part was pertaining to when and how did they interact with EQT. I think EQT should respond to that. The second part was when and how did they contact Galderma. I also don't think that I need to go into the details here. I've said I've had several meetings with the CEO of L'Oréal and also other colleagues on that side, including the Head of Technology and R&D. So these have been very productive meetings. They have been very focused meetings. That's a memorandum of understanding was agreed to and where we started the first discussions about which R&D projects would be relevant, and we will involve and have already started to involve a broader group of compliant colleagues on both side. So I think that's all going along. And my understanding without going into details from the meetings I've been on is we both are concrete people. We both want to develop something that leads to concrete outcomes and we want to progress as fast as we can. So I'm very confident on that specific aspect. Yes, it is clear that both organizations have a different approach to R&D, but also a lot of similarities because we are both incredibly focused on skin, skin biology, understanding skin, skin aging. There's also a lot of focus on skin aging. So I'm sure that despite some of the organizational differences in the R&D organization or technology organizations on both sides, this is beneficial from both sides. It's all about the projects. It's all about the focus. It's all about the dedication to skin. And I think both of us are incredibly growth-focused, so we wanted to develop something that can further grow, meet more unmet needs in the marketplace. And I'm sure that's going to be the top of what we are focused on. So I'm very comfortable. We are not changing any guidance we have given on outlook and expenditure on R&D. So this will be prioritized within all the other things we have to do. But I feel very optimistic and I see it, as I mentioned before, a very big complement to our organization, but of course, also to their organization.

The next question comes from the line of Chris Shibutani from Goldman Sachs.

Two questions, if I may. One relating to sort of thinking about the R&D strategy on the forward. One aspect of the construct for R&D did involve some uncertainty given the ongoing dispute you have with Ipsen for R&D in the Injectable Aesthetics business. When we think about the interplay across aesthetics and consumer and the derm side, do you believe that this agreement with L'Oréal led to leverage certain costs that perhaps could be allocated towards more independent R&D in those realms where there's uncertainty? Secondly, is there a path to L'Oréal to increase their stake and potential influence, for instance, gaining a Board seat if they sought to? Or are there issues from a competitive standpoint that perhaps may interfere with considering this as a possibility?

Yes. I think on the latter part, there's an agreement about a 10% stake. We also clearly outlined the other conditions, so I don't want to speculate about what the future is going to be. I'm very much focused on the here and now, which is to establish the best possible R&D collaboration, learn as much and hopefully have products and/or tools that can be brought into the market and learn as much as we can from this incredible, competent partner we have. We approach this as we approach any partnership with utmost seriousness and with the perspective of trying to get something out that can benefit all parties in the end. With Ipsen, we have an excellent relationship with Ipsen. There has been some discussions on some of the pipeline products, including in the neuromodulator space. That happens in all partnership. I think we've shown with also the recent EU approval -- or recommendation that we are in quite capable situation in terms of understanding the biology of neuromodulators and other products that can get approved. But we have a productive relationship with Ipsen. So I don't think that the L'Oréal agreement will have any impact on whatsoever. The discussion with Ipsen is a productive one about pipeline and investment and what to be done with future projects. And as we stated, when the two parties don't immediately agree, it goes to arbitration, that sounds worse than it is. It's just, I would say, a structured forum for exchanging opinions and hopefully reaching a conclusion. So I feel good about that, and the L'Oréal agreement does not change with that. And we have funds enough to do what we need to do with neuromodulator development.

The next question comes from line of Joffrey Bellicha Meller from Bank of America.

It's more of a clarifying question, please, Flemming. Could you clarify what you mean by the premium that they paid -- or the undisclosed premium that they paid compared to your share price? Was that a premium to closing price last Friday? Or was that a premium to your IPO price? Or is it a premium to another reference point that you may have?

Yes, I only know as much as you do, which is that there was a premium paid, but there was a premium paid to EQT, not to Galderma. So I think EQT should answer that question or L'Oréal. They did not pay us a premium because the exchange was between EQT shares and L'Oréal. So I was not party to that transaction.

[Operator Instructions] The next question comes from the line of Matthew Weston from UBS.

Flemming, I'm still struggling a little bit with the comments from the L'Oréal CEO, that the most attractive piece of the business was Injectable Aesthetics, but particularly that the JV or the R&D would focus particularly on the intersection of Injectable Aesthetics and Dermocosmetics. And during the IPO process, Galderma made expressly clear how unique your position was in terms of being one of the market leaders in Injectable Aesthetics and how you hope that you could lever that, in particular, using elastin. So I just love an explanation as to why sharing that unique position with one of your largest competitors, is an advantage?

I don't think that there's any notion about sharing things. We're still competitors in -- with elastin and we're competitors as pertains to Cetaphil. But there are lots of other areas where the biology of the skin is rapidly developing where there are many other opportunities to invest and develop new products and tools that could be beneficial to the products. We're still competitors. That will not change with this particular agreement. And I think what L'Oréal expressed in terms of what they find the most attractive, that's something you should ask them about. They have acquired a significant stake in the company, so they must, I assume, find the company, its growth prospects and the outlook very attractive. And I can only concur with them. If I look at how we perform, what growth prospects we have and our consistent delivering on the pipeline. But there's multiple on several calls that has been discussed. So I don't think it's just focused on the area you mentioned. Both parties clearly recognize that we are also competitors.

And Matthew, if I may just add, Thomas, here. I mean, it's really a point for us around the integrated dermatology strategy. We look at dermatology in an integrated fashion across the whole spectrum. We drive R&D across that from a single R&D engine. And that, of course, gives you very deep insights if you look at the skin holistically, may be a skin that has any diseases or not or aesthetic treatments, et cetera. So that's really a testament to our integrated dermatology strategy. And I think that's what L'Oréal finds very attractive as well.

Because there are no further questions, I would now like to hand the conference over to your speaker to Flemming Ornskov for any closing remarks.

Yes. First of all, thank you so much to all of you for joining the call today and from your very insightful questions. But of course, on behalf of myself, of my colleagues at Galderma, I want to welcome again L'Oréal as a shareholder, and we look forward to working together towards a mutually beneficial R&D collaboration in the form of a scientific partnership. Thank you so much, and have a great rest of the day.

This concludes today's call. Thank you for participating. You may now all disconnect. Have a nice day.