Orion Oyj (ORNBV) Earnings Call Transcript & Summary

[Foreign Language] Good afternoon, ladies and gentlemen, and welcome to Orion's Earnings Conference Call and Webcast for the financial period of January-September 2022. My name is Tuukka Hirvonen, and I'm the Head of IR here at Orion. In a few moments, our CEO, Timo Lappalainen will present the results, after which you will have the possibility to ask questions either from him or from our CFO, Jari Karlson. We will be first taking questions through the conference call lines and after that, we will take questions you may send us through the chat function of the webcast. Today, we have a special broadcast or event as this will be the last Interim Report of Timo Lappalainen before his retirement. And at the same time, this is his 60th, so 60 Interim Report. I would say that -- that's quite remarkable achievement. So let's all enjoy Timo's last presentation as a CEO. And just before I let or I have the honor to last time welcome Timo on stage, I'd like to draw your attention to the disclaimer regarding forward-looking statements. But now it is my true honor to introduce Timo once more on the stage regarding this Interim Report broadcast. Timo, please.

Thank you, Tuukka, for your kind of introductory words. Now we go straight to the business of today. And focus first on the highlights for the first 9 months of the year. And it's been an eventful year for Orion thus far. Of course, many of these activities, those have been ongoing behind the curtain for a while, but now we've been able to report those and of course, first in the year when Bayer was -- updated their estimate on Nubeqa peak sales potential that was based on the data that we had released, the headlines little bit earlier before. In the spring time, we made a decision to focus our research on oncology as well as on pain. Now, there are many development activities that on-go and continue to proceed as planned, but this is for the future and longer term and our research activities. Dr. Liisa Hurme was elected new President and CEO to succeed me November 1, and of course, it's a great honor that we have the new President and CEO, who knows the company for more than 20 years, to lead the company to the next phase. Early part of the year, we also announced that we've gained rights to a natrium channel blocker for studying that for treatment of pain and we'll discuss that a little bit more today. In the summer, we acquired animal health company, more specialized on livestock called VMD, that's a legal name, but in marketing, we used Inovet and that gave us also the rights to the facility or the plant that is in the progress and will soon be completed in France, also of course new marketing territories. During the summer, we announced also a global development commercialization agreement with MSD for our compound to be studied to prostate cancer ODM-208. And also now, FDA have approved darolutamide for extended indication for metastatic cancer in a patient population for hormone-sensitive prostate cancer. So many events taken place during the first 9 months and when we also look at the, of course, the -- how the business has developed and evolved, the 208 deal will have a material impact for this year and also resulted into the earnings upgrade. However, when we look at the overall and of course, the underlying business, the product sales are developing well. We are finally in a stage where we are coming out of the COVID period. We are increasing the activity in sales and marketing. Also we have new exciting R&D projects, where we can invest for the future. And one of those is the natrium channel blocker that we've labeled as ODM-111 that has now entered in Phase II and we are taking that then also to the next phases based on, of course, the data, how that looks out. 105, that is in Phase I, has completed that and we are in the process of preparing that for Phase II, very exciting opportunity as well. While we also announced that the Easyhaler tiotropium, we've terminated development of that. We made a conscious decision based on the commercial outlook for that product compared to the situation in the marketplace, competitive situation and we think those monies are well better served in other opportunities. The operating environment, the cost inflation, we flagged that in our release by stating the roughly EUR 15 million for the first 9 months. So that certainly is there. It's not material yet, but we see that there already. And of course, there are some elements that are more impacting us than some others, but so far we've been dealing very well with that. Of course, the availability in general, everybody in the industry are talking about that. We are, so far, secured on the energy, so far things are good, but, of course, what we see is the cost inflation throughout the supply chain, but like I said, the magnitude of that for the first 9 months is roughly EUR 15 million. So when we look at now the key numbers, so certainly all of those numbers are impacted by the 208 arrangement, but bearing that in mind, the net sales proceeded very well, of course, the operating profit also we beat the target there, including the margin and of course, the cash flow was positively impacted of that, despite the fact that we continue to make certain that we have large inventories, should there be disturbances in the supply chain. When we look at the waterfall for the net sales and here, I'm really happy to, when we look at the -- all these green bars here, of course, the Simdax, Dexdor given the patent status of those and we've been telling that for the almost the past 2 years that those products are going to suffer from generic competition, but the rest are very favorable. Of course, Nubeqa it's in the early stages still, Easyhaler plowing ahead as we've indicated. Also, other businesses are doing, of course, also nicely and all moving ahead. And then we've had the, of course, the large milestone. When we then look at the operating environment, of course, the product sales benefited us, exchange rate also to an effect and of course, the milestone is the big block, but certainly we see -- we continue to see the prices to be affected and there is a pressure on pricing, especially on generics seemed to be quite a lot across the board still. And also, as I mentioned, we're finally coming out of the COVID and get back to the business, both in terms of the commercial activities as well as we have new exciting opportunities in our pipeline. When we look at the geographical breakdown and all of these numbers, they now include the milestone. However, of course, the Finland continues to be the largest single country market, but the share of that has reduced quite dramatically. And here, we see the North American growing because of the milestone, but -- and across the board, business has been very reasonable over the past 9 months and even in a tough -- toughly competed market in Scandinavia, we're pretty much at par with the previous year. When we then look at the -- from the other angle, which is from the business perspective, so specialty products is up by 5 points, proprietary products, we will look at the product wise a little bit later, animal health, of course, is enjoying now the growth from the Inovet acquisition and Fermion pretty much at par with the early on and more and more actually Fermion's capacity is geared towards the captive use. Now, the league table of the products, so Easyhaler plowing ahead as it has throughout the year. Stalevo, our Parkinson franchise doing nicely, of course, Nubeqa as it should; Simdax and Dexdor, they are going down as we've indicated. Also the HRT products, there seem to be a very strong global demand for HRT products and our Divina series is doing nicely there as is animal sedatives. Now, when we look at the proprietary products and there, the Easyhaler asset has done very nicely, Parkinson products as well, especially our supplies to partners, Nubeqa, we'll discuss that a little bit more and then the Easyhaler -- sorry, the Simdax and Dexdor going down as we've indicated throughout the years now. So Nubeqa sales, again want to remind everybody, the way this works is that our arrangement with Bayer is such that when we ship product in quarter 2 or on a preceding quarter, those product sales are deducted from then -- from the royalty payments on the following quarter. So that means that you will see the volatility on quarter-to-quarter basis and the Orion's sales are not really indicative of the quarterly sales, what happens in the marketplace. So unfortunately this makes life a little bit difficult to look at or make any extrapolations from Orion's sales how the product is doing in the marketplace, but that's the way we have arranged our relationship with Bayer. But doing still very nicely when we look at the comparable quarter last year. So growing strongly, as of course we all are expecting at this stage. Easyhaler, again doing nicely again comparing to the previous year. So as it should be, we are -- we are seeing that. We are also of course seeing across the board pretty much in Northern Hemisphere, the upper respiratory tract infections taking place, partly, of course, affects some of that to Easyhaler, but of course, more on the generic side on the antibiotics, et cetera. And then on Parkinson franchise, there is this volatility because we have a part of that business is sales to partners, but across the board, I think when we look at we are nicely at par or a little bit higher compared to last year. And then on the Simdax, Dexdor, nothing new on that front. So the sales are slowly declining and of course, probably next year the comparable is far lower base, so probably has a lesser effect than this year. Okay, then we cruise along to specialty products and these are the products that are generic prescription products as well as OTC products, either pharmaceutical products or non-pharma products, a little bit depending on the territory. And there, we were able to grow in Finland, which is very nice given the price declines that we've seen. Also, in Scandinavia, same deal, Eastern Europe also small growth and in the rest of the world also doing nicely and of course we opened up our own operations in Southeast Asia and we are seeing some of that carryover effect here now. And as said, both the prescription products as well as OTC self-care products, we saw growth in both segments and about 1/4 are self-care products and the rest are prescription products. And the largest country market, Finland, which is an important market for us and here the largest segment for us is the reference priced products and here we see that the market of that segment went down about 7%, Orion was able to grow in that segment by 11% despite the fact that we saw continued price decline of the product prices. So great job in that, which is demonstrated again when we look at then the overall market share of the reference priced product, Orion has now 24% of that in self-care, roughly 26% and in overall pharma market, we continue to have roughly 11% market share. Now, turning to research and development. So the ARASENS, which is the key study where the indication expansion is based on and where the FDA approval was based on, so that's in the regulatory phase driven by Bayer. We have another study in the similar nature of patient population with different underlying treatment that is fully enrolled now and the patients are being treated and expect to complete that in '24 or so. 208, we discussed that separately, but this is now the compound that we are collaborating with MSD, and this is -- we have an expansion on Phase II and I'm sure later on then, we will make decisions how to move that forward. On 105, which is -- there is an indication for treatment of psychiatric disorders. Here we are planning for the next phases of that program, very exciting opportunity, not to talk about the pain program. As I mentioned, this is now in Phase I and of course, in early stages, but we are in full court press here and pushing that program very aggressively forward for different indications. And as I mentioned, on tiotropium, we made a decision based on the commercial attractiveness for that product that we've terminated development of that. Of course, the responsibility is on everybody's lips and despite the fact that there is a lot of talk about the energy, we have set our goal for carbon neutrality in our operations by 2030 and we are systematically working towards that. There may be, in the short term given the energy source diversity that Europe is fighting with today that there may be some short-term increase in that, however, the goal is very clear. And of course, we have worked heavily as everybody in the industry to make sure that we have energy available and that we would reduce our dependency on non-renewables. Also, we are working with our partners in our supply chain that we are able to continue operations and of course also flagging then the carbon neutrality target. And, of course, raising awareness and it's not only that we are turning a little bit the heat down in the offices, but we have major investments in our operational facilities, where we can capture waste energy and utilize that. So thus then reducing our carbon footprint. Now, we've taken the tradition that we give you, dear audience, also idea what we think might be important elements to follow on Orion's progress and of course and given -- give you our subjective card or a scorecard on those and of course, Nubeqa is important, that business is doing very nicely. Also Easyhaler is growing faster than what we actually anticipated or what was our goal this year. Licensing in new products, this means material new proprietary type of products and there we're a little bit behind our schedule, it's work in progress. We don't have any major material to report at this time. Okay, we made one deal on animal health, so that allowed us to put the green there. We were able to find the 208 partnering. However, the Phase III program, we decided jointly with MSD that we want to first expand a little bit on the ongoing Phase II, before entering then a well-balanced Phase III program. We have now one program in clinical development, so our pain program, 111 and also the new arrangements we've been able to cut both with Alligator and now with [ eUROGEN ] -- sorry, with Jemincare this year. And after we upgraded our outlook for this year, we estimate that the net sales will be clearly higher and the same goes for the operating profit. And some of the key assumptions, of course, the upfront payment was there, on the sales side Nubeqa is doing nicely. Of course, the acquisition of animal health business is part of that story and we knew that the Simdax and Dexdor that will be put to pressure on sales development. On the same token, of course, operating profit line, the upfront payment plays a role there, Nubeqa as well and then on the negative side, of course, the Simdax, Dexdor, cost inflation as I flagged, the price competition in generics is nothing new that continues there and as said, we are coming out of the COVID, we have, again, we are able to invest in sales and marketing. We have great opportunities also in R&D. Our next scheduled event for Orion will be then the release of the '22 financial statements that will take place on February 9. And at this stage, I invite our CFO, Jari Karlson, to join me here to the podium and we will take questions first live from the lines and thereafter should you have anything, please use the chat box and you can type in your questions and Tuukka here kindly will moderate any questions you may have, please.

[Operator Instructions] We take our first caller now.

It's Harry Sephton from Credit Suisse. I had 2 questions on the cost to start with and then 2 questions on R&D. So starting with costs. Looking at the underlying gross margins in the quarter, they appear to be much weaker than we normally see in the third quarter of the year. So I wanted to understand what were the material contributors there and if there's anything that you can highlight on the gross margin, that could be a headwind into next year? My second question on the cost is on the OpEx and you highlighted that there was a big pickup. Is this level of sales and marketing spend now a good run rate to assume for the end of the year and into 2023 and for R&D, clearly there is a pickup from expanding the 208 study and the pain study, is this now a good run rate that we should assume or is there anything exceptional that you would flag for the third quarter?

Maybe these are mine. So the gross margin first. Of course, we -- even typically we have the third quarter is weaker than many of the other quarters and like discussed so many times over the years, one of the reasons is that there are the summer shut down for maintenance at our plants. And of course, looking at the numbers, one needs to remember that now we have one additional manufacturing plant. So in addition to the old plants we have had here in Finland for many, many years, we now also for the first time, have the plant in Arques, France for the animal health business. So that definitely was one of the contributors. Then, of course, the product mix is always having an impact on the businesses and even within the business units, for example, in the generics business, not all the products have had all the similar type of profit margin. So there's quite a lot of variety and depending a little bit how the sales hit, which specific quarter or month of the year, there can be quite significant variances in the margins. We already discussed, of course, the cost inflation, which has not had a major impact so far, roughly EUR 15 million on the gross margin level this year, but of course, maybe a little bit more during the third quarter than the average of the previous quarters. Also, one needs to remember there the impact of the timing of the Nubeqa deliveries. So we have the royalty, which of course is pure profit, but then when we are -- when during the months and quarters when we have reasonable quantities of the tablet deliveries to Bayer that takes down the profit -- profitability and margin of that product line and we had a fair amount of those deliveries during the third quarter. Also, there has been a change in the transfer price to Bayer as agreed years back already. That, of course, doesn't have impact in the overall profitability of the business, because the value of the tablets is deducted from the royalties the quarter -- a quarter later, but for specific quarter, that also has impact. So there are lot of different type -- type of things which have had the impact during the quarter. So no one single specific event which would have caused the somewhat lower than typical gross profit level during the summer months, but nothing which really would say that it's there to last. Of course, the cost level is now higher than it used to be, because the inflation and the current cost probably will not go down in the coming quarters either. Maybe I'll continue with the other cost elements. So sales and marketing, well, of course, there is some variability between quarters, but in principle, I'd say that this was a fairly normal quarter. We didn't have any specific items. Of course, maybe good to add that on -- like we discussed on the 208 program, we had the milestone and then there are costs related. Some of those costs are actually showing up in pretty much every line in the profit and loss statement. So this EUR 20 million of cost, main part of that is in the administration, but there are some millions in pretty much on every other line as well. So that is showing up in the numbers. And the R&D, like always, it's very dependent on the timing of the clinical programs. The underlying base, R&D is not varying that much, but what happens in the clinical trials that changes the numbers, but I'd say that the quarter probably was not unusual. So I'd say that it was a fairly normal R&D quarter, but like I said even closing down one program can have a major impact on the cost on any quarter or adding one new clinical program as well. So I guess as a summary, one could say that there is EUR 20 million related to the ODM-208 deal on the cost side, some timing effects on the other costs and then the fact that we now have one additional plant where we have several weeks shutdown during the summer. So all of those had impact on the margins and costs.

That's very helpful color, Jari. I also had 2 questions on the pipeline. So you've previously highlighted that you are reviewing the pipeline for Easyhaler and you've now decided to discontinue the tiotropium study. Can you maybe give some more detail on why you've made that decision now, given that I would expect that, given how long it's been in the pipeline that you are already well through development of that product? And then, on ODM-208, the current Phase II study is looking at some of the latest line patients in prostate cancer. Do you plan to study this product in earlier lines, should it be successful and specifically, would you look to study this product in patients with androgen receptor mutations.

Okay. If I'll take those. The timing of the Easyhaler development, it always depends really what type of data we have at our hand, what will be the next data point, how much would we need to invest to get into that data point and also, of course, we don't really look how much we've spent on the product because that's water under the bridge. We cannot do anything about that, but we look at forward and this was the point of decision when we would have needed to invest in the program a little bit more and as said, we looked at the opportunity of sales, where we think we are better served with that. In terms of the 208, here I would actually advise you to discuss the future patient populations as well as the potential Phase III with MSD, because they have the lead on this and with the existing Phase II that we're expanding that, that's also jointly agreed with MSD, but they clearly have the lead on here and you need to contact them I think you are better advised there.

Timo, I just wanted to wish you a very happy retirement on behalf of all the Credit Suisse team.

Thank you.

We now move on to our next questioner.

It's James Vane-Tempest from Jefferies. Timo and Jari, if I can just ask a question on underlying profitability in terms of the bridge, it's very helpful in the slide, having the 9 months EBIT bridge. I mean with the guidance, which you've given in terms of clearly higher, it gives a lot of scope in terms of where the number is ultimately going to land, but I guess if my math is right, looking at Slide 8, on a 9-month basis if you have EUR 399 million, you take out the EUR 228 million of the milestone, you add back some of the costs, which gets you to roughly, I think EUR 191 million, which is minus 6%. But when I look at the Q3 numbers of EUR 245 million, if you do the same adjustments, I get to EUR 37 million versus EUR 57 million last year, which a decline of minus 35%. So I was just wondering, it's obviously the milestone is very accretive to the P&L this year, but if you can give us a sense in terms of how the underlying dynamics are in the business, is that kind of assessment broadly correct and is that a right exert rate we should be thinking as we go into Q4 and into next year?

Well, here I would refer to my remarks on the quarterly statement, where we say that when we exclude the 208 impact both on the milestone as well as the cost, the year is actually proceeding as we anticipated in the beginning of the year when we had said that it's pretty much going to be at par with '21. So that's kind of where we are today. This despite, of course, that nobody knew at that time that we would have the energy inflation what we're seeing today, all of that. So I think from that perspective, we're pretty well on track on that. So and there is clearly a quarterly variation when we look at the '21, the last quarter was not the best kind, certainly the third quarter was stronger. Now this year, the third quarter was probably not the stronger ones, but you know as we said here, we expect that the or see that the year is proceeding as we originally planned.

Just if I can clarify that. So at the start of the year, looking for par underlying and I guess, minus 6% to 9 months. So is it fair to say that's kind of the right run rate we should be thinking for the end of the year or do you expect a recovery of that to get back and then how should we think about underlying profitability into next year and year-over-year changes?

I think your question is very fair. Unfortunately, we've given the guidance, which is the official guidance and we are trying to help you with the statement that the year is proceeding as we anticipated in the early part of the year, that's pretty much where we need to stick unfortunately.

And like Timo said, quarters vary. Now we had relatively weak quarter 3 when excluding the ODM-208 impact last year. We had a relatively weak quarter 4 and some other years we had weak other quarters. So one quarter is a little bit short period because there are all kinds of events, which have impact, delivery time schedule, time schedule of a plant, maintenance shutdowns and so forth and so forth. So I guess the statement Timo was saying is fairly clear that overall the business is performing as expected. Of course, there are variations, slightly higher R&D expenses than last year and inflation on the other hand, sales have been -- product sales have been higher than last year and so forth.

We now move on to our next questioner.

It's Graham Parry from Bank of America. So a couple on the underlying cost trends. So the -- when you talked about the EUR 15 million inflation over the 9 months, where in the cost lines you're actually seeing that and is most of that in Q3? Should we expect a similar number therefore in Q4 and then as you go into 2023, just based in terms of what you're seeing already on wage contract negotiation, procurement, should we expect to see significant inflationary pressure or much higher inflationary pressure in '23 than in 2022? And then on Nubeqa, where is the margin risk on Nubeqa manufacturing costs? So you mentioned that you had capacity price to Bayer increase does not run in line with inflation under the terms of the agreement or do you take some of the margin hit from higher manufacturing cost? And then lastly, just on the underlying trend on sales. If we just took the year-to-date, is that a good guide to where you think the underlying trend really is and do you think we could see pickup in the amount of sales to Bayer ex-royalty due to the hormone-sensitive prostate cancer indication?

Okay, I can maybe take the cost inflation to start with that. So I mean, like we said EUR 15 million is basically the impact on gross margins where, of course, most of the inflation type of cost hit so far because the -- for example, in Finland where the majority of our people are still located, the salary type of -- payroll type of costs are -- have not really changed yet and that will show what will happen next year. But the costs, I mean the costs were relatively high in the third quarter, but most of the changes were not related to the inflation -- inflation at all. So you cannot calculate in that sense that the cost increase is in the quarter 3 compared to the earlier quarter. Most of those were related to completely different things than the inflation. So the inflation maybe a little bit more in the third quarter than the earlier quarters, but not dramatic changes there and I don't think we expect during the rest of this year any dramatic changes either. And next year, we are not yet giving guidance for next year. So there are lots of uncertainties and we will get back to those when we are more ready with next year plans and come out with the outlook for '23.

EUR 15 million...

But yes, the EUR 15 million.

I mean the EUR 15 million for 9 months and [ not -- but ] the questions asked and had calculated that they were quite high cost in Q3, most of those -- majority of those were related to completely different things than inflation.

Then there was a question about the collective bargaining agreements. We're not there yet and no country has yet closed any of those and of course there are discussions going on. Whereas the largest proportion of the payroll takes actually still today plays in Finland. The negotiations will resume sometime probably in November. There was the arrangement in collective bargaining agreements here in Finland, was such that there was an option a year for next year where the discussion would have only focused on only one thing and which is the increase in salaries and the parties were not able to agree on those so then there will be a full round of discussions and those take their time. Also, when we look at outside Finland, there have been no official discussions yet. There are some countries where the collective bargaining agreement is actually based on the inflation. However, in our understanding, in many of those countries, the industry has taken up that is not possible, that's not feasible and are discussing with the employee representatives on that. So we don't have any good number to give you at this stage and even more so, I would be fairly vary of giving any number because of the ongoing discussions.

There was a question of the Nubeqa tablet pricing. I mean, I guess, one needs to remember that the -- remind that the structure of the deal is such that we own the royalty and we will carry all the cost of goods. So if the cost of goods increase because of inflation that's something we have to carry. The pricing of the tablets ultimately doesn't really have any much of impact on our overall revenues, but of course there is a timing effect because in some quarters, we ship more tablets and in that quarter, we are burdened with the cost of goods sold and then in the quarters where we ship less tablets and earn more royalties, then of course, the profitability for that quarter is better, but in longer run, the outcome is that we earn the royalty from Bayer, which is roughly 20% of their net sales and our cost is the actual cost of goods sold. So Bayer doesn't have any role in the cost of goods sold. If it increases, then it's our cost, if it decreases, it improves our profitability. So that's this one goes.

And then I think the last question if I noticed that was on the Nubeqa volume development and there, we need to advise you to address this question to Bayer as they are responsible for booking the sales and, of course, I trust that the interest really focuses on the U.S. and as they are on the front line here, I think the Bayer's quarterly release that would be an excellent opportunity to discuss that with them.

[Operator Instructions] We will now move to our next questioner.

It's Sami Sarkamies from Danske Bank. Can you hear me?

Yes, we can.

Okay. Yes. Couple of questions still, firstly revisiting the OpEx topic. If we look at the year-to-date costs, sales and marketing costs are up by 12%, R&D up by 27%, are those sort of indicative regarding the full year budgets you have for this year or should we expect to collect material variations going into Q4?

Well, on the sales and marketing side as well as our R&D, there are some elements in that that relate to the 208 deal. So that little bit distorts that. When we look at the sales and marketing, there has been clear ramp up of the activities and we're seeing that. We don't think that there is any substantial material variation in the activity level. Of course, there are always these timing effects and we know that month of December is a fairly slow month from the commercial activity side. Already it starts to wind down in the second week typically. So no really material impact from there. On R&D side, that is really, really dependent on the trials and how those trials, first of all, how they are initiated, in which phase, and then how they are recruiting. And the reason is because most of the R&D cost, especially in the development cost, I mean those are out of pocket for Orion, because we pay the CRO, who runs the trials and typically the CRO gets compensated upfront something and then as the patients are recruited, then there is an ongoing payment to that. So these are the major impacts of that and that is why it is not that easy to give you specific guidance on R&D, but we've tried to give that there are now opportunities and we have a full court press here that we want to progress these programs what we have now.

Okay. And then secondly, looking at the legacy products Simdax and Dexdor, Simdax down by a bit more than 20% year-to-date, Dexdor more than 40%, are these kind of reflecting the underlying trends you're seeing on the market or for other sort of some timing impacts perhaps included?

No, these -- as we are selling the product ourselves, I mean these are -- pretty well reflects the impact of the -- how the pricing is going in the market. Of course, there are deliveries again because these are hospital products. So sometimes you deliver large lumps of these products, but other than that this is the situation where we are. Of course, at some point of time, we will see that level -- that level is down as with the dexdor slowly it is becoming a fairly small product. So the variation is not that material anymore.

Okay. And then finally on ODM-105 where you have decided to move into Phase II, can you talk about this program and perhaps targeted indications?