Orion Oyj (ORNBV) Earnings Call Transcript & Summary

[Foreign Language] Good afternoon, ladies and gentlemen, and welcome to Orion's earnings and -- earnings conference call and webcast for the financial period of January-June 2020. My name is Tuukka Hirvonen, and I'm the Head of IR here at Orion. Like in April, this time, we are also holding this event from studio with no live audience here with us. But of course, you are able to follow us through the webcast and also through the conference call lines. In a few moments, our CEO, Timo Lappalainen, will represent the results of the period, after which you will have the opportunity to ask questions from him and also from our CFO, Mr. Jari Karlson. We will be first taking questions through the conference call lines, and after that, we will turn to questions which have been received through the webcast tool. And before I let Timo to step in, I'd like to draw your attention to the safe harbor statement we typically have in our presentations. But without any further delays, it's my pleasure to invite Timo to the podium. Timo, please.

Thank you, Tuukka. The first half of this year is really a tribute to Orionees who have been in an exemplary way, done great work, be that, at the front line of the operators in the labs, logistics, taking care of the patient safety, managing clinical trials, doing work in the back office and actually also continuing the normal operations. So it's been a magnificent effort by the entire organization during the first half of this year. So if we look at the highlights for the period. Certainly, the COVID-19 that's on the lips of everybody, and that is in the backs of our mind all the time. And certainly, from the pharmaceutical demand perspective, we saw a spike to the end of first quarter and also in the beginning of first quarter. Now the demand has leveled off, and we have seen that. Now for Orion, as the net sales increase, the loading of our plants increased also. We saw also the operating profit increasing simultaneously. Of course, we also, for the second quarter, we recorded milestones that flow directly in our P&L. The important event was also the launch of Nubeqa that we are jointly commercializing with Bayer in Europe, and also the launch took place by Bayer in Japan. We've also noted that there are new data that was provided in ASCO regarding the legacy study of ARAMIS on Nubeqa. Now moving forward, the REFALS study, which is for the ALS, symptomatic treatment of ALS patients, that study has been completed, and the validation of the data is ongoing as we speak. So the full effect of COVID-19 is, of course, we don't know that yet. But if we look at a little bit what took place in the first half, we put utmost care in taking care of our colleagues because only by that, can we then secure the rest of the operation, providing products to the marketplace, responding to the customer demand and so forth. So the continuity of the operation and the patient safety, of course, comes on the top of our minds. The March spike in the demand, especially in the generics and in OTC products, we saw that, and that is now, since that has been leveling off. The strong demand for Dexdor, which is used in ICU setting and, of course, for the COVID-19 patients, especially, that there was a great demand for the product towards the end of March and also that continued through April. But now that has leveled off, and we are at the normal situation. Of course, that is on the back of the COVID-19 situation calmly -- being much more calm here in Europe. Also, at the same time, Easyhaler, where there was a great spike, that also the demand has leveled off. Now if we try to picture what might lie ahead of us. So the 2020, we expect that the demand has leveled off, but also the disruptions of the global supply chain, those are probably at the lower risk what we estimated a few months ago. That has not gone away, but it is at the lower level. So far, we've been able to manage in the second quarter the prioritization of our own production very well, and there are no bottlenecks in our supply chain or in our production at this time. There are -- we expect that there will be some delays in some of the R&D programs, at least for the time being. Can we then catch up with those? As the development goes on, that remains to be seen. But from our own internal targets, there is some delay. The key numbers for the first half in terms of the net sales, there was -- on the back of the strong demand, we recorded close to EUR 600 million, so topping with 16% for the comparable period. Operating profit, strong EUR 180 million with a 70% increase over the comparable period. Also, the margins were healthy, and this is on the back of the high loading of our facilities. Cash flow was strong for the first quarter also with EUR 0.90 a share. When we look at the waterfall, how the net sales evolved over the period. What we actually see is that most of the bars here from a comparable period than to this period are actually on the blue side, when we look at the milestones, of course, had a considerable effect. Then the Parkinson's products, Easyhaler, also all proprietary products, also the business here in Finland grew. Where we saw decline or losses were in the exchange rates, but most of that EUR 8 million actually incurred also already in the first quarter. Then when we look at the operating profit line, of course, on the back of the strong sales, the overall volume and the product mix, they were the drivers for the improved profitability, but also, of course, the milestones and royalties. In terms of the geographical split, due to the high demand of the products outside Finland -- Finland is now a little bit smaller than it traditionally maybe have been. But when we look at regionally, it's been across the board in all the regions how Orion defines the world, we saw a growth. In terms of the -- if we look at then the businesses and from the Specialty Products perspective, we saw growth there, also in Proprietary Products. In Animal Health, we were very close to the -- at the par compared to the very, very strong first half last year. And then Fermion also a little bit higher than the year before. When we look at the league table of the products, Easyhaler continues to plow ahead with 17% growth over the period. Stalevo, strong growth, and I will come back to that. Simdax at par and Dexdor also at par, which is a good achievement. And on animal sedatives, as said, we had a very strong first half last year. So that took a little bit of an unfair comparison it is here. And then when we look at the biosimilars, we've informed early on that the biosimilar year will be tougher for us as we have not won any major tenders, but that as we are on the declining line on that, and we know there are no new openings in that front this year. So if we first look at the Proprietary Products, what's going on there. The Easyhaler franchise, as I said, had a nice growth over the period. Parkinson's products as well and Simdax and Dexdor maintained their position. In terms of the others, of course, now the situation is very different compared to last year. Then we -- in the second half, we've recorded the milestones there, especially for the darolutamide. Now the Easyhaler products, the budesonide-formoterol continue to plow ahead, very strong, but also that carried the rest of the portfolio with it with 11% growth. So that was a nice overall growth for the franchise. In terms of the Parkinson's products, we are aware that as we are changing our partnerships in large parts of the world, there is some stockpiling for the product for the first half, and the second half, I think we will see a little bit lower demand. So one should not multiply this by 2, that will give you a too rosy picture for this franchise for the entire year. Then Dexdor and Simdax. So certainly, Dexdor, as that was used for the COVID-19 patients for -- in ICU and actually those -- many of the patients, they stayed in the ICUs for extended periods of time. So the utilization of the product, which was very high, that contributed to the growth for the first and second quarters for the product. Simdax, overall stable for the first 6 months. Now if we turn over to Specialty Products. So that is the product category where we have the prescription products we have the OTC products, both pharmaceutical products and nonpharma products and also the small tiny piece of biosimilars. So in Finland, the business grew. Finland is by far the largest business for that. In Scandinavia, we suffered from the loss of tenders for biosimilars. And then in our Eastern European and Russian business, we went plowed ahead compared to the period last year. The market developed in Europe on a positive note for the first 6 months of this year. Orion's greatest business in this market is actually the reference priced products. And there, we -- compared to the overall market, we were at par pretty much for the first 6 months. Then when we look at the overall structure of how Orion's business is building up here in Finland. So it's actually in 3 facets: the self-care products, reference price products and all the rest. And the reference price products, those are our largest single category and there, our market share is 1/4, which is at the same level as for self-care products. And in overall, the market share of Orion products in the Finnish market was 11%, at par with the previous year. In terms of the research and development, there has not been change in statuses of the of the -- this chart, with the exception of darolutamide as the main markets, the product is now launched. It's not anymore in the regulatory phase. Of course, there are new approvals coming along, but the key markets have already been launched. And in ALS, as I mentioned, that this data is now under validation. And we'll see how soon we can report those top line results. In the beginning of the year, we informed our key targets, business targets for this year. And of course, the commercialization of darolutamide ARASENS trial are important milestones for the company. And now the -- we have realized the first commercial sales of darolutamide, both in Japan as well as in Europe. We've also noted that the fully recruited ARASENS trial, which is the next trial to be commenced with the darolutamide, that estimated completion has been pulled forward from '22 to '21. In terms of the REFALS, we note that we are assessing the potentiality of Orion launching the product in the U.S. for ALS, and we continue the search for development partners for some of our oncology compounds. And here in Finland, of course, we want to strengthen our position. This is an important market. And the competitive portfolio is part of that, and we continue to be the leader in the self-care products as well as in the reference priced products. And in the self-care products, our market share actually grew in this period. And then the Easyhaler continues to plow ahead as been planned. And the larger in-licensing opportunities or be that in M&A, we have nothing to report at this time, of course, working on that. Also, in these times, of course, the sustainability is a very important part. And the patient safety, reliable supply of our products, services is an important part. And with a great, great effort, we were able to respond to the spike that we saw in demand. We had to make prioritization of our -- in our supply chain, use of personnel capacity, also, of course, ensuring the availability of materials for us and then, of course, keeping these patients safe who are enrolled in our clinical trials. Having then the -- our employees in a safe environment, feeling safe, that has meant that there's been a remote work for the people who can do that. And many, many specific measures have been taken to secure the operating environment, be that in the labs or in production lines for people who cannot operate remotely has been done. And our sustainability report was published during the quarter, and I invite you to take a look at that. There's a lot of good data on sustainability activities of the company. And when we look at some of these targets that we have set for ourselves, and we don't have a numeric performance of this, that is readily available in our report, but we just for the convenience of visual aids here, we omitted that. So of course, the patient safety, that's an important element. I think we are there in a good track in meeting that. In terms of the environment, we are well underway there, but there is still work to be done. Unfortunately, the lost time injury frequency, so-called LTI 1 there, we still have ways to go. We are not there yet, and we need to work on that. And then, of course, the business ethics and transparency, especially in our line of business is very critical. And there, we are well underway. In terms of the outlook, we updated the outlook on July 8. And we repeated the net sales, so we expect the net sales to be at a similar level as 2019. So a little bit north of EUR 1 billion. In terms of the operating profit, we estimate now the operating profit to be slightly higher or higher than 2019 when we recorded EUR 253 million. We've also published then some of the forthcoming events for the company today. So the third quarter, we will report in October, and that will be the normal scheduled conference call or webcast again. And hopefully, by that time, we are able to resume our normal way of doing this webcast. But let's see how things will evolve. And at this time, I would invite Jari Karlson, our Chief Financial Officer, here to the podium with me, and we are happy to take any questions, thoughts that you may have. Please?

[Operator Instructions] Presenters, we have a question already in the queue. So the first question is from Jo Walton from Crédit Suisse.

Can't hear you. I wonder if you are on mute.

Certainly not on mute.

Okay. Now we can hear you.

Sorry about that. I've just got a couple of questions. So in your outlook, you say that you are putting EUR 5 million in your outlook for possible marketing expenses for your ALS drug if the Phase III comes good. I wonder if you could just expand a little bit more on what you're thinking of doing. And whether that would be -- it seems a little bit early to be hiring a sales force before you've even submitted it to the FDA, but a little bit more on that, please. And secondly, you've highlighted that you are expecting EUR 40 million of milestones this year, of which you had EUR 33 million. I think consensus was for about EUR 35 million for the year. Are these milestones that you're expecting earlier than you might otherwise have done relating to Nubeqa? Or are they to do with other things? And if you could tell us a bit about that. And then finally, I have a question about the Finnish market. Particularly for next year, do you envisage that the Finnish government, like all governments that pay for health care, is going to need to look at expenses more critically next year? And would you expect another ratcheting down of pricing in that market given it's important to you?

Thanks very much. Let's do that. I'll take the first one. Maybe Jari can take the middle one, and I'll take then again the very last one. For the potential launch of ALS in the U.S., of course, because we don't have any infrastructure there yet. So there is none. So all of this is actually preparation for potentially setting up the infrastructure creating contacts with the patient organization, organizations, et cetera, et cetera. And depending how the decision goes, provided, of course, that the data supports that, we are likely not to hire sales force at this time. So that will not have an impact for the remaining part of the year. But just to build up the management capability in terms of the marketing, in terms of the handling the sales transactions, logistics, et cetera. So this is for setting that type of infrastructure. And then the actual sales force, that's for then time to come. So that's basically the -- where the allocation of these funds are.

And part of that EUR 5 million is also headquarter-type of expenses for the overall branding and marketing materials and so forth required to prepare for the launch. And as you know, of course, one needs to start this type of an actions already before the market authorization has been granted because it could be all too late by that -- to start by that time. So about the milestones? So like always, we have some big ones, which this year, like last year are related to Nubeqa. And on top of that, we typically generate some millions per year for the sales and marketing rights for our existing and old products. And this year, bulk of the difference between the EUR 40 million, we are now putting in our outlook and the Nubeqa related to finding the new partner for the entacapone franchise, so Stalevo compound all around the world. So no addition on Nubeqa-related milestones. So the EUR 28 million, we already have received is everything related to Nubeqa in this EUR 40 million.

And then about the Finnish market. Now our main business in Finland is in reference priced products, which is actually a reverse auction every third month. So that's how that market operates. And there are some actions that the payer has taken. And one is the pricing band that was taken or narrowed some time ago. There are, of course, some other type of systems in place for generics in some other countries. But basically, this is already a market that operates under market conditions. And also the same would go for the OTC products, which are, of course, exempt from a reimbursement or regulatory oversight for the pricing, where -- potentially, which is much more easier for the regulator, of course, to put their hand on or for the products where the pricing, you have genuine pricing discussions or negotiations with the payer. But that would be products exempted from the reference pricing. So basically, those would be products under patent or in some specific indications. Epilepsy is one of those, quite a few psychiatric products are in those as well. But most of the reference price, those are already in the market pricing conditions. Having said all that, I think the notion is correct. I'm sure there will be pressure on pricing across the board, including Finland. But we have -- we are not aware of any specific actions in regard to the pricing of the pharmaceuticals in Finland as we speak.

So we have the second question from Mr. James Vane from Jefferies.

It's James Vane-Tempest from Jefferies. Three, if I can, please. Just a follow-up to the pricing question. I'm just wondering if you can give any incremental color on what you've seen in Central and Eastern Europe and the CIS countries. Second question is, how much of the delay is expected to come back next year in sales and marketing? And also R&D, you mentioned that some of those programs are on hold, just so we can try and understand, what is essentially going to catch up next year? And then the final question is you mentioned that validation sort of ongoing on the ALS trial and when do you actually expect to get the data?

Thank you. In terms of the pricing in Europe, I don't know who has the crystal ball. The only thing that we've seen so far in terms of the real actions are in Norway, where for the 3-month period, June, July, August, there's a 15% hike for the generic products. Whether that continues or whether this was only for that specific period, remains to be seen. We have not planned for that. Other countries, we are not aware that there would be general price increases, neither for the price cuts. So as we speak, we are not aware of that. What was the second question? I didn't quite get it. What was it?

Basically, there are delays in the R&D and so for this year. So how much that will be then increasing next year, of course?

Difficult to say because what actually happens is, I mean, they are just moving ahead. And of course, depends on which phase they are. So I will say that they probably are not material when we are seeing that transition.

I mean the sales and marketing, there are so many other things which have impact on that like the life cycle of the different products, that is difficult to say that if there are, for example, a little bit of less traveling this year, and traveling comes back, that, of course, might increase the cost, but on the other hand, there are for many other things. But of course, it's true that if the ALS product is successful, and we decide to launch it on our own in U.S., that would, of course, increase next year cost in Europe quite a lot from this year. I mean not that much that it would really have a major impact on the group overall finances. But definitely, we are talking about several million additional costs, but that's, of course, a completely different matter. So when it comes to the impact of some delays this year. It's probably very difficult to say that you could automatically see any impact for next year's cost levels.