Lotus Pharmaceutical Co., Ltd. (1795) Earnings Call Transcript & Summary

Good afternoon, everyone. Thank you for joining today's Lotus Pharmaceuticals Second Quarter 2 and First Half '26 Results Webcast. This is Jack Lin, China biotech and Taiwan healthcare analyst at Morgan Stanley. Today's webcast will be conducted in both English and Mandarin. Management's prepared remarks will be delivered in English with Chinese subtitles available. The Q&A session will be conducted in both languages. [Foreign Language] www.morganstanley.com/researchdisclosures. [Foreign Language] Before we begin, please note this call is intended for Morgan Stanley clients and not for members of the press. If you are a member of the press, please reach out separately. For important disclosures, please see www.morganstanley.com/researchdisclosures. We'll begin with prepared remarks from management, followed by a Q&A session. [Foreign Language] Lotus delivered another strong quarter in second quarter of '26 with both quarterly and first half revenue reaching new records, driven by acquisition of Alvogen and B2B sales with second quarter profitability also improving sequentially. [Foreign Language] We're very pleased to have the management team with us today to walk through the second quarter and first half results, recent strategic progress and the outlook for the remainder of 2026. Joining us today are Petar Vazharov, CEO; Tunie Zaku, Group CFO; and Jeffrey Tsang, Head of IR. [Foreign Language] And with that, I'll also turn the call over to Petar to begin with the prepared remarks. Please go ahead, Petar.

Good morning and good afternoon, everyone, and thank you for joining us today. I'm pleased to report that Lotus delivered record revenue in the first half of the year, reaching TWD 17.5 billion, an increase of 84% year-on-year. In the second quarter, revenue also reached a new quarterly high of TWD 8.8 billion, up 2% from the first quarter. Adjusted EBITDA also grew strongly in the first half, increasing 50% year-on-year to TWD 6.3 billion. Second quarter adjusted EBITDA reached TWD 3.3 billion, representing a 13% increase compared with the first quarter. The strong performance in both revenue and EBITDA reflects the strength of our underlying business, supported by the successful acquisition of Alvogen and continued growth in our B2B markets. Turning to adjusted net profit, which excludes foreign exchange losses and certain one-off tax items. We also saw sequential improvement in the second quarter. Second quarter adjusted net profit reached TWD 790 million, representing a 13% increase compared to the first quarter. On the same adjusted basis, first half adjusted net profit was TWD 1.5 billion, down 42% year-on-year. The year-on-year decline was mainly driven by the higher finance costs following the Alvogen acquisition. Adjusted EPS followed a similar pattern. Second quarter adjusted EPS improved 13% quarter-on-quarter to TWD 3.04, while first half adjusted EPS was TWD 5.74, down 42% year-on-year. I'm pleased with the progress our team delivered in the first half. Through disciplined execution, we achieved record revenue, strong profit growth and sequential improvement across all financial metrics in the second quarter, providing a solid foundation for continued growth in the second half of the year. For the remainder of the year, our focus remains on execution. This includes executing the remaining planned launches and progressing our capital structure optimization and refinancing initiatives as we work to lower finance costs and strengthen financial flexibility towards year-end and into 2027. Beyond the financial performance, we continued to advance our R&D pipeline products and transactions. Cabozantinib, one of our most important oncology pipeline products, continues to advance as planned. Our 505(b)(2) application has been accepted for review by the FDA with a regulatory target date in December 2026. We also filed with the Paragraph IV certification, and the window for the innovator to bring a patent action has passed with no suit filed. Therefore, no 30-month stay applies to our application. This is a milestone because it gives us a clearer regulatory path for important U.S. oncology opportunity. In addition, we successfully filed the first generic version of Xofluza, an oral antiviral treatment for influenza. Our Baloxavir tablet has now received U.S. FDA approval, representing an important addition to the influenza antiviral treatment options in the U.S. market. Commercial launch will be within the terms of a confidential agreement for this product. Importantly, both Baloxavir and cabozantinib were developed internally, underscoring the strength of our R&D organization and our capabilities to advance complex programs from development to regulatory approval. In addition to these products, we have filed 2 more products in the U.S. While we cannot disclose the products at this time, I can share that one of them is a potential first-to-file generic opportunity with 180 days exclusivity, and the other is a key 505(b)(2) product. Both are high-value products in our pipeline. More broadly, our R&D team continued to make strong progress across the development pipeline during the first half. We initiated 3 new development projects, completed 8 pilot bio studies, completed 4 submission batches and completed dosing in a Phase I study for an orphan indication project. On the business development front, in May, we signed the acquisition agreement for Uro-Vaxom in Korea, an oral immunotherapy for the prevention of recurrent urinary tract infections, with an established clinical profile and a long history of use in the market. According to IQVIA, its market size in Korea was around USD 12 million in 2025. We began distributing the product in July, while we await the marketing authorization to be transferred later this year. Once the MA transfer is completed, we will assume the commercial responsibility for the product. This will allow us to leverage our existing market presence and customer relationships, improve execution and maximize the value of the product. We also plan to initiate the technology transfer and manufacture the product in-house, which should improve plant utilization and operational efficiency. Together, these actions are expected to improve product economics and margins over time. We have also received approval for SERPLUMA in Korea for the first-line treatment of extensive-stage small cell lung cancer. SERPLUMA is an anti-PD-1 immuno-oncology therapy. And this approval brings an important new treatment option to patients with significant unmet medical need. It also further strengthens our oncology portfolio in Korea and reinforces our position in specialty care. Finally, on M&A, we completed the acquisition of Sandoz' Philippine business in July. This acquisition adds a local commercial platform, expands our branded generics and biosimilar portfolio, and brings a highly experienced local team with strong market relationships. The Philippines is one of our key markets in Southeast Asia, and this transaction strengthens our access to hospital and specialty care channels, while providing a stronger foundation for future growth in the country and across the region. Let me now turn to our pipeline progress so far in 2026. Year-to-date, we completed 59 submissions, received 49 approvals and launched 250 SKUs. I will focus on some of the key items for the second quarter. Starting with filings, our key new filings included VIZZ, or aceclidine, in the Philippines. As a reminder, this is an innovative FDA-approved once-daily eye drop for the treatment of presbyopia in adults. We also filed our in-house developed product, [ Bosutris ], or bosutinib, in Thailand. Both products are innovative in their respective markets, and they reflect our continued progress in expanding higher-value product opportunities across Asia. Moving to approvals. We received 2 important approvals in the United States during the quarter. First was the approval of nintedanib, supporting our day 1 launch in the market. We also received U.S. FDA approval for Baloxavir tablets, as I mentioned earlier. Moving on to launches. Our key launches in the second quarter included nintedanib in the U.S. and Taiwan, Bostini, or bosutinib, in Taiwan, and enzalutamide in South Korea and Brazil. Overall, our team executed well across the product life cycle during the quarter, achieving important milestones from filings and approvals to the successful supply of products to the market. I will now turn to an overview of our active pipeline projects. Today, we have 135 active projects across the pipeline. These projects originate from both internal R&D and business development activities. Collectively, these projects address a market opportunity of more than USD 125 billion. Importantly, the strength of the pipeline is not only reflected in the number of projects, but also in the size of the opportunities. More than 80% of our active projects have a strong competitive profile at launch. These are projects where we expect a more favorable competitive environment, whether through anticipated exclusivity, limited competition or participation in the first wave of market entrants. Approximately 1/3 of our projects have already been filed or approved, reflecting a well-balanced pipeline between advanced stage programs and those currently in development. Turning to launch timing. We currently have 50 projects expected to launch in the near term through 2028, representing more than 1/3 of our active pipeline. A further 49 projects are expected to launch in the midterm period between 2029 and 2031, while 36 projects are expected in the longer-term period from 2032 onwards. This balanced profile provides both near-term launch opportunity and long-term sustainable growth. From a market standpoint, the U.S. represents the largest share of our market opportunities, reflecting the scale and attractiveness of the U.S. pharmaceutical market. The Alvogen acquisition has further strengthened our U.S. growth platform by adding a broader U.S.-focused pipeline, more BD opportunities and direct commercial capabilities, which can support better launch economics over time. Beyond the U.S., the pipeline remains well diversified across Asia with strong representation in markets where Lotus has established commercial operations, including Taiwan, South Korea, Vietnam, Thailand and the Philippines. We also continue to pursue product opportunities in B2B markets through our extensive network of partners. Let me now turn to some of the key projects driving value across our pipeline. While we are unable to disclose product names for competitive reasons, I would like to provide additional insight into several of our most important pipeline assets. This is not an exhaustive list of projects. Rather, it highlights a selection of high-value opportunities and demonstrates the meaningful progress we are making across our portfolio. Before discussing these projects in more detail, I would like to note that the target launch time lines shown on these slides are indicative only. Given the nature of our industry, actual launch timing remains subject to a range of factors, including development progress, regulatory review time lines, intellectual property and litigation matters, as well as evolving market conditions. Starting with the 2026 to 2027 launch window, all the opportunities shown here have already been filed and are now under regulatory review. So these are no longer early development projects. Much of the development and submission work has already been completed. And the key remaining step is regulatory approval before we can move towards launch, subject to agency review time lines. Focusing on the more near-term launch opportunities, we have 2 high-value generic products filed in the U.S. First is Project A, which is already tentatively approved, pending U.S. court decision. Project B is filed with the FDA, pending regulatory approval. We remain hopeful to have positive decisions on both products later this year. Moving down the list, the next 4 products are high-value products with target launch dates in 2027. Two of these are 505(b)(2) products in the CNS space. And importantly, they are designed to open new market opportunities rather than simply compete in the existing generic markets. This is exactly the type of differentiated opportunity we want to build around. It also plays to our existing strengths as we already have an experienced sales and marketing team in CNS, which we can leverage to support these assets as they move towards commercialization. Finally, VIZZ, which we introduced earlier in this call, is also part of this launch window and adds an innovative product in Asia to our near-term pipeline. Looking into the 2028 to 2030 period, we also have additional opportunities that could support the next wave of growth. Most of these products are still under development, and our teams are working hard to continue advancing them towards filing. Many of them are expected to have strong competitive launch profiles, including exclusivity protected opportunities, which could make them meaningful contributors over time. Importantly, 3 of these opportunities are biosimilars, further diversifying our pipeline beyond differentiated generics and 505(b)(2) products. This broadens our product mix and adds another strategic growth lever to support long-term value creation. This slide represents only a selected view of our broader pipeline. The U.S. is more prominently represented because of the size of the market and the scale of the opportunities. But as we showed earlier, Asia remains a very important part of our pipeline and future growth strategy. This selected opportunity gives us confidence in the next waves of growth beyond 2026. And with that, I will now hand over to Tunie to walk through the financials for the first half.

Thank you, Petar. Turning to our financial performance for the first half of 2026. As Petar mentioned earlier, we reached another important milestone, delivering record revenue for both the first half and the second quarter. Consolidated revenue reached TWD 17.5 billion, representing an 84% year-over-year increase. This was mainly driven by the expanded U.S. market following the Alvogen acquisition, as well as strong growth in our B2B markets. Moving down to gross profit. We recorded TWD 9.1 billion, up 60% year-over-year. Gross margin was 52.2% for the first half compared to 60.2% in the same period last year. This year-over-year decline was largely attributable to changes in product mix in the U.S. market with lenalidomide sales being a key factor. Importantly, we saw sequential improvement in the second quarter with gross margin improving to 53.7% compared to 50.7% in the first quarter. Operating income increased 33% year-over-year to TWD 4.3 billion. Operating margin was 24.6% for the first half compared to 34% in the same period last year. Similar to the trend we saw in gross margin, operating margin improved sequentially during the second quarter, increasing to 26.5% from 22.7% in the first quarter. As a result, at the operating level, we continued to deliver strong growth, while also improving profitability quarter-over-quarter. Moving below the operating line, net income totaled TWD 1.2 billion with EPS of TWD 4.65. Adjusting for one-off tax items and foreign exchange losses, adjusted net income was TWD 1.5 billion with adjusted EPS of TWD 5.74. Compared with the prior year, adjusted EPS declined 42.3%, primarily due to higher financing costs in the U.S. As we have highlighted previously, reducing finance costs remains a key priority. We continued to make progress on our capital structure optimization and refinancing initiatives, including advancing discussions with key banking partners during the quarter. Our objective is to lower our financing costs, enhance financial flexibility and further strengthen the balance sheet over time. Turning now to revenue. I'll cover the key drivers of our performance over the next couple of slides. For the first half of 2026, consolidated revenue increased by approximately TWD 8 billion or 84% year-over-year. The largest driver was the U.S. market, where revenue increased by TWD 7 billion or 180% year-over-year. B2B markets also delivered very strong growth with revenue increasing by approximately TWD 1 billion or 245% as compared to prior year. This was mainly driven by nintedanib and enzalutamide, including new launches across selected markets. Asia remained broadly stable with revenue increasing by 1% year-over-year to TWD 5.3 billion. Within Asia, Southeast Asia continued to grow, mainly driven by Thailand and Vietnam. Korea, our largest market in Asia, was slightly lower as a result of the transition in the Qsymia sales model. Taiwan was also slightly lower, mainly reflecting the standard annual reimbursement price review. Turning to the next slide. We've broken down revenue in a different way to provide additional insight into the underlying business trends. This slide represents our revenue mix from 2 perspectives: by therapeutic area and by market. On the left-hand side, you can see that our revenue remains well balanced across therapeutic areas. Oncology and immunology was the largest contributor, representing approximately 1/3 of revenue in the first half of the year, followed by primary care and lifestyle, which accounted for around 30%. We also generated meaningful revenue from CNS and other therapeutic areas. The diversity of our portfolio across both specialty and established products helps to reduce concentration risk and supports the resilience of our revenue base. On the right-hand side, we show our revenue mix by market. The U.S. represented 62% of revenue in the first half and remains the group's largest market. Asia contributed 30% of revenue and continues to provide an important and stable foundation for Lotus. B2B markets accounted for the remaining 8%, supported by recent product launches. From a product perspective, revenue continues to be predominantly driven by generics, while branded products also represent a meaningful contribution to the portfolio. Overall, this slide highlights the diversity of our business across both therapeutic areas and geographies. We have a larger U.S. platform, a stable and growing presence in Asia and an expanding contribution from B2B markets, supported by a broad portfolio across multiple therapeutic areas. This diversification helps strengthen the resilience of our business and provides multiple avenues for future growth. Moving on to adjusted EBITDA and leverage. Adjusted EBITDA increased by 50% year-over-year to TWD 6.3 billion in the first half of 2026. This reflects the stronger scale of the business following the Alvogen acquisition, as well as continued contribution from our broader portfolio. Adjusted EBITDA margin was 36% compared with 44% in the same period last year. The year-over-year decline was mainly driven by changes in product mix, including the lower contribution from lenalidomide. That said, we believe the margin remains healthy and reflects the increasing diversification of the business. Today, our earnings are supported by a much broader product portfolio and are less dependent on any single high-margin product, providing a stronger and more sustainable foundation for longer-term growth. On leverage, pro forma net debt to LTM adjusted EBITDA was 2.97x as of June. This is higher than last year, mainly reflecting the Alvogen acquisition, but remains at a manageable level. Importantly, the business continues to generate strong adjusted EBITDA, which supports our ability to manage leverage over time. This concludes the financial review. I will now hand it back to Petar.

Thank you, Tunie. Let me close with a quick recap before moving to Q&A. During the first half of 2026, we delivered record first half revenue and EBITDA, supported by the Alvogen acquisition and strong growth in B2B markets. And we saw clear sequential improvement in second quarter profitability, driven by a more favorable product mix. At the same time, our strategic growth initiatives continue to progress well. We advanced important R&D milestones, strengthened our specialty portfolio through business development, completed the Sandoz Philippines acquisition, and continue to move key pipeline opportunities closer to commercialization. As we enter the second half, our priorities are clear. We remain focused on executing our planned launches, achieving further R&D and BD milestones, and progressing our capital structure optimization. We have already secured SFB approval for the planned ECB issuance. And we continue to work on lowering finance costs and strengthening financial flexibility. Last but not least, as we showed today, Lotus has a strong pipeline of high potential product opportunities over the next several years, including differentiated 505(b)(2) products, biosimilars and generics with strong competitive launch profiles. We are very pleased with our year-to-date performance and very excited about the company's growth potential. We remain focused on our disciplined execution to deliver sustainable growth and long-term value for our shareholders. Thank you, and we are now happy to take your questions.

[Operator Instructions] [Foreign Language] I think this is a question that has been asked by multiple investors online, right? So you mentioned that Lotus has received SFB approval for the planned ECB issuance. Would you give us a bit more color update on timing or any additional details that might be possible? [Foreign Language]

Thank you for the question. So yes, the convertible bond, or ECB, process is progressing well. So one important milestone has been completed, and that is getting the required regulatory approval. As we move into the next phase of the process, we will work closely with our financial advisers and other stakeholders. So, as you would expect, for a transaction like this, there are several factors to consider: I mean, market conditions, [ overall terms ] that we can achieve. So I'd say it's premature to commit to a specific time line, but we will obviously evaluate all of these factors in considering the appropriate time. Maybe just one quick reminder, and as we have discussed and disclosed previously, any proceeds from the issuance of the ECB will be used to pay down existing debt with the goal of reducing our cash interest payments and supporting our broader objective in lowering our finance costs. So we'll provide further updates as and when there are material developments to disclose. Thank you for your question.

[Foreign Language]

[Foreign Language] So thanks, Tunie and Petar, for the response earlier. And just kind of following up on that line of question, which in addition, there's also multiple investors on the line having questions about this part. But what about on the refinancing part? And if management can share more in terms of how -- when and how we should be start seeing the finance costs to start to come down?

Sure. So following the same logic here. From a refinancing standpoint, we are advancing our discussions with our key banking partners. I would say, this is the furthest along we've been in the process. So I can't say anything definitively today. We do remain hopeful and, I'd just say, on track in addressing the high finance costs. So given where we are in mid-August overall, we will see the full year impact on [indiscernible] and finance costs mainly in 2027. Thank you for your question.

[Foreign Language]

So I think based on the question, we may will switch gears a little bit and talk a bit more about kind of the company operations, right? So I think these 2 -- I mean, I'll group the questions a bit together. So these are kind of about the key launches and also kind of upcoming potential launches, right? So generally, would you be able to update us on kind of the key launches and the progress for 2026? How are they progressing? And also, I think earlier, you mentioned there are 2 new U.S. filings. Would you be able to give us more details on what they are, how big they could be, what they may contribute to the company's business outlook? [Foreign Language]

Thank you. I will take this question. Basically, I'll start first with the launches. As we discussed already earlier this year, we have several important launches in 2026 already completed. I refer here to nintedanib and enzalutamide. And these launches, they have gone extremely well. And this obviously reflected to our strong business-to-business performance during the first half of the year. So they were basically, especially, nintedanib, the key driver for the growth in this specific business segment. Demand has been very strong for both products, nintedanib and enzalutamide. And basically, we see this also from the replenishment orders. I mean over the next 2 to 3 years, we expect nintedanib to continue to expand in new markets, based on the regulatory progress. I refer here markets like Japan, Southeast Asia, hopefully, Middle East. In the U.S., we have launched Duloxetine in July. It's a 505(b)(2) product in the CNS space that indicated for major depressive and anxiety disorder. This is the first high dose brand formulation of Duloxetine that's currently approved in the U.S. and fits very well with our CNS portfolio. And then, we have 2 near-term products close to launch in the U.S. One of them is already [ tends ] to be approved, pending a U.S. court decision, while the other one is filed with the FDA. We responded to the CRL, and we are expecting regulatory approval later this year. And upon approval, we'll be able to launch the product. Maybe, Jeff, you can translate, and I can cover the second part of the question afterwards.

Yes, sure. Okay. I'm translating this part right now. [Foreign Language] Petar, I'm done with that one.

Thank you. So then, I will continue on the question regarding the 2 new recent filings -- U.S. filings. I would like to highlight here that we are not yet in a position to disclose the product names, indications or specific launch times. But these are significant opportunities from a sales profitability perspective. This is what I can say. One is a potential first-to-file generic opportunity. And based on our intel, we think we may be positioned as the sole first-to-file applicant for this product. So if approved, basically, it may be eligible for 100 days of generic market exclusivity in the U.S., subject, of course, to regulatory and legal outcome. It is a very sizable opportunity. The branded product has been forecasted by the market analysts to reach more than USD 2 billion in peak sales. And I think in quarter 4 this year, we should be able to disclose the filing, the product name, and of course, give you more information on whether eventually we are likely to be eligible to 100 days exclusivity, where we have the first product. But again, very excited about it, and it demonstrates our capability to move quickly in developing such products because time is very critical here. The other one is an important 505(b)(2) addition to our portfolio in the U.S. And again, we don't want to disclose at this point of time. And I mean, I can just tell you that this is obviously complementary to the existing portfolio. So it falls into the category of depression anxiety disorder. I think, Jeff, over to you.