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 2023. My name is Tuukka Hirvonen, and I'm the Head of IR here at Orion. We just roughly 1.5 hours ago published our interim report for the period and soon, CEO, Liisa Hurme, will go through the main points of the report, after which you will have the possibility to ask questions from her or from our CFO, Jari Karlson. We will be first taking questions from the conference call lines, after which then we will turn to the webcast questions. So you all have the possibility to typing questions using the chat box function in the webcast view. Kindly state your name and the organization you are representing before asking your questions. And just before I hand over to Liisa, I'd like to draw your attention to this disclaimer regarding forward-looking statements today. But with these words, it's my pleasure to hand over to Liisa.

Thank you, Tuukka, and good afternoon on my behalf as well, and welcome to Orion's Q3 webcast. Let's look at our key matters from the latest quarter. First, maybe a notion when I go through this because I'm not going to say it after each sentence. We had an exceptional third quarter in 2023, which, of course, has an effect when we compare the first 9 months to the previous 9 months, and of course, when we compare the Q3 '23, the previous one, because of the significant signing fee that MSD paid to us in July 2022. I will, remember, probably mention it at some point, but do keep that in your mind when we go through the presentation. Well, our development was positive, both in terms of net sales and operating profit when we exclude the significant upfront payment from the comparative period. Nubeqa continued its very strong growth. And related to that, we have recorded a EUR 30 million sales milestone from Bayer in Q3. Easyhaler portfolio also developed very nicely with 9% growth. And when we look at the Generics and Consumer Health division, burdened by our withdrawal from the Russian market and also Simdax and Dexdor generalization, it performed very well. It's a very resilient business in the Nordics and Eastern Europe. And good news from our development pipeline, we have initiated a new clinical study, Phase I for a ODM-212 for solid tumors. And then the latest news on our geographic expansion, not on a commercial expansion in this case, but rather on an R&D side, we have also established a new office to form a basis for future possible U.S. operations for medical affairs, regulatory and market access capabilities to build these capabilities in the markets of United States. Then to the numbers. Underlying business performed well and mostly as expected, with minor surprises that were there already in Q2. Net sales decreased 17%, but this is when we look at the numbers, including the signing fee from the July 2022. Same goes with the operating profit, minus 54.4%, but the comparison period includes the signing fee. Operating profit margin, a similar story there. Cash flow reflects mainly the increased working capital due to the Nubeqa. We are manufacturing and we have large inventories, all the different phases of Nubeqa value chain. So that is clearly reflected in our working capital. And also a good news is that many of the factors that have had an impact on Orion operating profit during the first half of this year are easing out in the form of that it's easier to compare now towards the end of the year, the latter half of the year. And this net sales bridge describes in more detail what I just said, still declining dexmedetomidine and Simdax, but it is getting smaller every quarter. And of course, next year, hopefully, as the base numbers are small as well, we won't see even this type of numbers. Nubeqa, EUR 67.6 million of product sales and royalty, a very nice first 9 months. And here is the surprise from this year, which is entacapone products. I think all the other things we were able to predict, but this was kind of a surprise and mainly caused by the delivery timing to our customers and partners, and partly due to the lower pricing in some of the territories on the globe. It's difficult to say how much is the right from which factor, but these are at least the 2 main things having an effect on entacapone. Russia, as last time described, almost EUR 28 million. Good news, as I already stated, the other products and services are also growing nicely. Animal health on a positive side together with Fermion and milestones in this figure or picture implies to the net impact of milestones. So we have all milestones from last year and this year, so this is the net one. And then the exchange rates are mainly derived from the Russian ruble, of course, there are some other currencies that also have had an effect like Swedish krone and the U.S. dollar. But the biggest effect comes from the Russian ruble. And then on the operating profit, a pretty similar story. When I want to pay attention, especially on the #2 here, Column #2, product sales margin and product mix without the exchange rate effect. Here, the biggest chunk of this EUR 62.9 million is coming from the prices actually and some part of the cost, but the prices play a big growth here. And then again, that the growth with local currencies was EUR 10.5 million. And here, the exchange rate on the Column 3 and again, a positive development on the royalties by EUR 60 million. And milestones, again, a net impact on our first 9 months and other operating income and fixed costs, some increase there as well. All in all, a very positive first 9 months and especially the third quarter compared to the previous one. An interesting thing on this slide is that our Innovative Medicines is growing its share on the Orion net revenue. It's now 19%, close to 20% and almost as big as the branded products. Let's see how the situation is by the end of the year. And respectively, the Generics and Consumer Health share is diminishing as the innovative and especially Nubeqa is growing. A lot of red on our top 10 product list, a very natural explanations for most of the products. But of course, first, I want to pay attention on Nubeqa, more than 100% of growth, Easyhaler 8.5%, a very strong performance there. Simdax, familiar story. Entacapone, I already described. Then on the Row 6, Dexdomitor, Domitor, Domosedan, Antisedan, our Animal Health sedative portfolio was -- actually, I have told me another thing that we didn't predict in the beginning of the year how our partners would behave by their orders. It clearly seems that they have filled in their stocks during the pandemic and have kind of leveled out the ordering frequence. And we'll see how the next year goes. I personally think it will start to normalize as we start the new calendar year. Divina, this is solely due to the Russia. Divigel was a big product on the Russian market. So that's a hit taken on closing Russian operations. Trexan, a very old molecule, methotrexate but going strong, a very good treatment for autoimmune diseases, a lot of cancers. And actually, even though there are more and more new biological treatments on both, how would I say, indications or areas, so methotrexate is mostly included and combined to those treatments. So there is a growing demand on these products as well. And biosimilars, a very binary business, either you win or lose, sometimes even a whole country and this year has not been that successful. But then some other years might look very, very different. And Innovative Medicines story continues strong. Nubeqa sales more than doubled. Somebody might get a bit depressed on minus 42.5 on the whole division figure, but we all know that it was an exceptional comparison period with the signing fee in July '22. So let's just celebrate Nubeqa growth at this stage. Marinus has received an approval in EU for ganaxolone already in July. We are going through pricing and reimbursement discussions in all the biggest European countries, but it unfortunately takes time, and we are planning to launch, hopefully, in Q1 next year in the first countries. Branded products catching up, clearly. Somebody might remember the percentages from the last quarter. This is accelerating and Easyhaler is the biggest factor here. We deliver all we can manufacture everything is going out. Entacapone hopefully catching up also towards the end of the year and Divina suffers due to the Russia. And Generics and Consumer Health, a great story of resilience, I would say. We are able to deliver. We are price competitive in the areas and regions where we operate, both on self-care, which is a Finnish regions and then also on the pure generics. And I discussed the Sintax and dexmedetomidine already. Maybe a few words on Finland. We are at par since we are the major company in Finland. We are at par on the whole pharmaceutical market, but especially on the reference priced prescription drugs, which is our strongest area. We grew by -- with 8.3% when the whole market went down, a very good performance. Animal Health, new sales from the acquisition from Inovet growing that business and Fermion slightly behind -- I mean, slightly growing from the previous year, which means that we are able to serve our customers even though we use a lot of capacity for Nubeqa or darolutamide manufacturing. Regarding Animal Health, the sedative business suffers both on the softness on the companion animal market and of course, the destocking of our partners, as I explained. Same is seen on the livestock market. There is a higher -- the inflation really hits also farmers, and they need to think what they pay and how they do their business. So it's actually both sites that are a bit soft right now. But of course, on the longer term, we all will eat and the livestock business definitely needs its medication and products. And I'm sure as the markets and inflation will get easier on consumers, the company and Animal Health market will bounce back. R&D pipeline, as before, except that the new cancer molecule has started now recruitment in Phase I. One slide and one theme on sustainability that we haven't discussed earlier is biodiversity. It's very important for pharmaceutical industry. We have, of course, impact on that, especially through wastewater, a possibility to have a nasty impact, but we take it very seriously along our supply chain. So we always audit our suppliers, whether for the finished goods or the APIs that they treat their wastewater as they should be. And we have 2 different separate drainage systems, one for the manufacturing and one for the whole other water usage. And of course, have many different ways to get rid of our wastewater depending on the compounds that we have there. And then the other thing is, of course, how do the drugs -- how are expired drugs handled, how do we counsel pharmacies, our customers to take care of the medication that has expired or that they are not in need anymore, that they will have to take them back to the pharmacies so that they are then disposed adequately. And we are all the time still fully and further investigating what would be Orion's footprint here and impact on the biodiversity. We specified our outlook in July, and that holds our net sales will grow slightly, will be slightly higher. And also our operating profit is estimated to be slightly higher in '23 compared to the '22. And here, it's good to remind about the numbers without the upfront payment from 2022. For the operating profit, it's EUR 233 million. And for the net sales, it's EUR [ EUR 1.113 billion ]. Upcoming events, February is the next exciting moment when we will report the whole year '23, and then we'll have the AGM in March 20th. And of course, the rest of the date for next year, you can see on this slide. I thank you on my behalf and it's now time for the questions. I welcome Jari Karlson on the stage.

[Operator Instructions] The next question comes from Anssi Raussi from SEB.

I have a couple of questions. And first, about your costs, do you think that there could be anything unusual in your OpEx items in Q4 or just basic seasonality? And on the other hand, was this Q3 as you expected when we entered the quarter? That's the first one.

All right. Well, you got it right, there seems to be always probably not only in Orion seasonality for the Q4. But right now, I don't see any unusual items on the cost side for the Q4. And when we talk about the Q3, yes, I stated, Q3 it was proceeding and was as we expected.

Yes. And maybe good to remind that last year, in Q3, we booked quite large extraordinary expenses related to the ODM-208 deal. And that's one of the reasons why the costs were lower in Q3 this year than last year. So the underlying cost base, nothing really big changes there, but the reported numbers look a little bit different because last year, we had that onetime cost burden or extra cost in the numbers.

And the next one about ganaxolone. So what is the situation with price negotiations? And have you got any results already, so we could compare the pricing with the prices in the U.S.?

Well, it's a long process, and we don't have any prices yet. And I sincerely hope that by the beginning of the next year, we would have these negotiations accomplished so that we can get this product to patients who are in need of new treatments.

And maybe the last one from me is about entacapone. So is it fair to assume that we could see some kind of slight rebound next year? Or is this the level we should expect, which we are seeing right now?

What a good question. We see prices declining actually globally. Some countries are quite okay. In some places prices decline. But also, we see that volumes increase due to the demographics, especially in the Western world, there are more and more patients. So if you think from this perspective, it should kind of stabilize at least in the mid and long term.

The next question comes from Sami Sarkamies from Danske Bank.

I have 2 questions. Starting from the sales for Parkinson's and Animal Health in the third quarter. I think this continued to surprise on the downside. You've been talking about inventory corrections during the first half of the year. I think you were expecting a return to a more normal situation during third quarter, which didn't happen. How do you view Q4 and next year when it comes to these product areas?

Well, for the animal sedatives, especially, I think, to be quite honest, I'm looking already to the next year, you know that it will level out and the market -- both the market demand and our partners will start to order the product again. The market demand would also increase. Then regarding the entacapone products, I think I mentioned earlier today that I'm also there looking already for the next year. There might be some catching up during the last part of this year when we can ship out the deliveries and the partners will start to fill in their stocks. But that's very difficult to estimate what will happen this year with that product family, I mean the Parkinson's disease drugs. But I think I would say that during the next year, it should also level out.

Okay. Then secondly, you mentioned plans to establish some sort of presence in the U.S. What is sort of driving this development? I mean, you haven't done this in the past. It's been talked about every now and then. But I mean, is there, for example, something in your pipeline at the moment that is sort of that is making this move more relevant than in the past?

Yes. We've been talking about U.S. for some time already. And I think that the action that we're taking shows that we are serious about the U.S. The main driver at the moment is ODM-111, which is furthest in our program. In general, it's very important for any pharmaceutical company even located in Europe to understand all the drivers of the U.S. market. And this is now a good moment when we have ODM-111, and we can run our own clinical studies in U.S. run by ourselves and start to see how the market works and design the studies according to the needs and according to -- even to think now the market access for that molecule in different indications. So clearly, that's one driver. And the other one is, in general, to create more understanding in the company on the U.S. market.

Okay. And then maybe one more question regarding ODM-208. We obviously don't know yet how that will sort of move forward. But just curious, you have the right to convert this into a normal license agreement between you and Merck. At which point do you think Orion will be making the decision on whether to use the option or not? Is that going to be when you know what will happen next? Or is that going to be when you will actually have some, let's say, further clinical data out on the molecule?

Well, I think both companies are evaluating the right moment. I don't think there are any critical points or anything I can say about that. So...

And in the agreement, there are certain time lines defined when the use of option is possible.

The next question comes from Graham Parry from BofA.

So I'll just going back to entacapone and Animal Health. Just is there any way you can quantify how much you think the inventory unwind impacted Q3? And what's the underlying growth that you're seeing in Q3 for those products? I know you're sort of talking about a possible return to growth in 2024, but just what was the underlying growth rate in Q3, if possible?

Well, I mean the products have been in the market for 25 to 30 years. So of course, the underlying business is relatively stable. So the impact for this year can be quite well seen when comparing the sedative deliveries to the numbers last year. So that's how much less we have been delivering to our partners. But the underlying market is, like I said, fairly stable because these are no new products. So there is a fairly established use of these products. And the assumption is that after this change, we will more or less come back to the earlier levels. Of course, taking into account that the fact that they now have these excess inventories means that over the past 2 years, they have ordered a little bit of more than they have been selling out. So that might mean that the future level is not maybe exactly how much we delivered over the past few years, but the underlying market has not as far as been no change. Of course, one needs to remember that Zoetis is the one selling in the market. So we don't have that close day-to-day understanding of what happens in the market. But that's our current assumption.

And for Animal Health?

Yes. I mean that was...

This was the Animal Health.

Yes.

So apologies, I thought I would say entacapone then. So [ I figure you were saying entacapone products ].

Well, the entacapone, it's a bit of a similar story. It's a very stable market and being that for many, many years. However, we also think that there our partners have during the pandemic filled out a bit too much stock. So we see that it will level out next year when they need to start to order again. But as I mentioned, it's not only deliveries here, the prices are decreasing in some regions. But at the same time, if you look at any data, also the volumes are increasing. There are more and more older people who suffer from this disease. So whether it will bounce totally back, it's difficult to say, but I'm quite sure it will stabilize at some point and be quite a stable business. Not the strongly growing one, but a stable one.

And then in the generics business, can you just perhaps help us to understand a little bit better what accounts for your outperformance versus the market, particularly in the reference priced products? And I think you were saying that pricing is stable there, which is obviously fairly unusual for generics businesses. So just to perhaps help us understand the dynamics of that and how sustainable is that market outperformance in generics?

Yes. Our performance has been very good for years in Finland and Scandinavia for several reasons. One is, of course, having a very good service level from our own manufacturing and also from the sources we -- the external sources that we get our products from. So we know the market very well. We know the pricing cycles and also our competitors. If you ask about the dynamics, dynamics are very different in different countries. In Finland, you do your offers 4 times a year and to get within the price band. And in Denmark, you do your offers every 2 weeks, in Sweden every month. So it's a tender type of a business where you really compete against the cheapest one which formed the kind of the floor for the reimbursement. But I would say, all in all, we have a wide portfolio, which offers also possibility to take market when somebody else is out of the market or so in stock out. So we are quite agile and flexible selling in that type of needs in our region as well. So it's flexibility service level and competitive pricing that have provided as this resilience. Pricing in itself in this market, it's not kind of stable. I think it's decreasing all the time. In Finland, prices of generics have gone down minus 10% per year on average. However, on positive side, the last cycle, the third one this year was neutral. So there was no price decrease in. So that might indicate something for the future, but that might also be an anomaly in the Finnish market.

Got it. And again it's my last point I was after. And then on gross margin, if you strip out the Nubeqa milestone, it looks as if gross margin would have only been about 52%. I think consensus sort of had a bit of a mix of a milestone or not and was about 57%. Is 52% ex-ODM milestones, a fair characterization of gross margin and what we should be thinking about into Q4 and 2024?

Well, like we have indicated for many years, the growth margins have been declining partly due to the generic price decreases, but even more so because of the fact that [ Dex ] product family and Simdax prices have significantly gone down and those used to be the high-margin production in our portfolio, and that has had a negative impact on our overall margins, and that continues. But of course, the more those products become as a part of our total and the smaller also the impact on the overall margins of the company. But I think the fair assumption is that especially excluding the impact of Nubeqa Royalties, the margins on the product sales will continue declining, not probably very rapidly after the big impact from Simdax and Dex, Dexdor is over. But still, the prices of generic products are not going to increase. They are going to decrease also in the coming years. And of course, we try to compensate as much as we can with the manufacturing cost, but unfortunately, not everything can be compensated. But on the other hand, of course, the royalties from Nubeqa are expected to grow, so that will balance this. And once the royalties stream from Nubeqa is large enough that probably can start having a positive impact on the overall gross margin for the total group level in the coming few years.

And then the last one for me is just on the cadence on Nubeqa milestones. Obviously, you had on this year. Is it reasonable to assume a rising rate of milestones every year for the next 5 to 6 years just under the EUR 280 million agreement you've got?

Well, we haven't given out the size of the milestones. Or that...