Recordati Industria Chimica e Farmaceutica S.p.A. (REC) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the Recordati Preliminary Full Year 2019 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Ms. Marianne Tatschke, Investor Relations of Recordati. Please go ahead, madam.

Hello, good afternoon or good morning to everyone, and thank you for attending the Recordati conference call. Andrea Recordati and Luigi La Corte will be presenting and commenting upon our full year 2019 results as well as our 2020 targets. Mr. Fritz Squindo is also with us here today. For a better understanding of this presentation, please access the set of slides available on our website, www.recordati.com, under the Investors section and Presentations tab. At the end of the presentation, there will be a question-and-answer period for any questions that you may have. Please go ahead, Andrea.

Thank you. Good afternoon or good morning, everybody connected. Thank you for joining this conference call. So I will get down to business for 2019 preliminary full year results. We believe we have delivered another year of very strong performance with revenue growth of 9.6% and EBITDA growth of 9% to EUR 544 million. As you will see more detail later on in the call, growth has been broad-based across our businesses in all key geographies, with organic growth of roughly 5.7% mostly driven by volume, with 1.3% slight uplift, mainly U.S., Turkey and Russia and a negligible year-on-year FX impact. Operating income grew by 5.2% with a slight reduction in margin driven by increase in amortization of intangible assets and additional investments made in Europe where we established local organizations in the Nordics, Benelux, Baltics for our SPC business, and the initial investments we have made to build our new endocrinology franchise. Net income is up 18.1% versus the previous year and reflects benefits from agreement reached with Italian tax authorities in late December on the patent box benefit for our IP in Italy with a tax benefit of EUR 27 million related to years 2015 to 2018 and EUR 8.3 million related to 2019. If we exclude this benefit related to prior years, net income would have been EUR 341.9 million, therefore 9.4% above last year and equaling 23.1% of sales. The business has continued to generate strong underlying cash flow, with net debt increased to EUR 902.7 million from EUR 588.4 million, reflecting dividends distributed for an amount of EUR 190.9 million and payments for acquisition milestones and licenses for a total of around EUR 425 million. Aside from this strong performance, we also further reinforced the group with 2 important business development transaction, being the acquisition from Aegerion Pharmaceuticals Inc. for the exclusive commercialization rights of Juxtapid in Japan and the important strategic transaction which we closed in Q4 with Novartis for the acquisition of Signifor, Signifor LAR and Isturisa from Novartis, which contributed already EUR 10 million of net revenue in Q4 of last year. Before handing over to our new CFO, Luigi La Corte, who will provide more details on our financial performance in 2019, let me provide you some more update on the opportunity we have with the new endocrinology portfolio. So please, next slide, Slide 3. This acquisition from Novartis is one of the most important transactions for the group or that the group has made to date and will contribute decisively to us becoming an important player in the rare disease space worldwide. We're in the process of building an endocrinology hub in Basel to handle all regulatory supply chain, medical affairs and commercial aspects and manage commercial aspects of this new franchise on a global level. We're also setting up a specialized team in the U.S. with the objective of improving the performance of Signifor and ensure the successful launch of Isturisa once it is approved. At the same time, we're also ramping up our organization in Europe and in the rest of the world in order to provide appropriate focus for our endocrinology franchise. All told, more than 70 people are being added to the Recordati rare disease organization worldwide. Next slide, 4, please. In this slide, we focus on Signifor, a somatostatin analogue for the treatment of Cushing's disease and acromegaly, with potential peak sales of more than EUR 100 million. Last year, as you can see in the slide, Signifor grew by 4% in almost all key markets. We are proceeding with the relaunch activities linked to Signifor LAR, especially in the U.S., as Novartis has deployed limited resources in recent years, as already previously mentioned. More than 70% of sales are generated by the LAR formulation, and the switch from the subcutaneous formulation shows an increase in adoption by Cushing's disease patients as well as a strong uptick in acromegaly patients. Opportunities in new geographies are also under evaluation. We will be able to sell directly to the market once the marketing authorizations are transferred from Novartis to Recordati Rare Diseases. This transition is expected to take place in Q1 in the U.S. and in early Q2 in Europe, with other key markets following in Q3 of this year. Next slide, please. So we're obviously very excited with the recent developments related to Isturisa, the new therapeutic option for Cushing's Syndrome recently approved by the European Commission in January of this year and for which orphan drug status was confirmed late last year. We have started market access activities and plan to launch in selected European markets during late Q2 and early Q3 2020. For U.S. markets, we have a PDUFA date on the 7th of March of this year, which could lead to a potential launch in 2020. In line with this, we are already gearing up our organization to support both the relaunch of Signifor as well as the potential 2020 launch of Isturisa in the U.S.A. Regarding the Japanese market, we're planning to file in Q2 2020. Isturisa is a potent inhibitor of cortisol production, with the majority of patients achieving and maintaining normal cortisol levels at the end of the 8-week withdrawal period, as demonstrated by the LINC-3 study results. A strong clinical profile and acceptable side effect profile lead us to be optimistic that this could be a very successful product with interesting potential sales level, which could be materially above the EUR 100 million preliminary evaluation already communicated. In May at the Capital Markets Day when we will present our new 3-year business plan, we will provide a firmer estimate for the whole of our endocrinology franchise going forward. I now leave the floor to Luigi to take you through our 2019 results in more detail. Thank you.

Thank you, Andrea. And once again, good afternoon and good morning, everyone. I'm delighted to have this first opportunity to comment the Recordati 2019 results. I will start with revenue on Slide 6. As Andrea said, total revenue grew by 9.6% in the year with a strong contribution from our corporate products, including rare diseases, which overall now account for 68% of revenue. We are very pleased with the performance of the lercanidipine franchise in 2019 with combined sales of EUR 193 million, which is ahead of plan set out in May last year. Zanidip sales grew by 11.3% driven by growth in Germany, Italy, Turkey and Poland. But we're also very pleased with the performance of Zanipress, our combination with enalapril, which we covered following generic entry and we started growing in the second part of the year, ending 2019 broadly in line with last year. Urorec sales are also slightly ahead of plan with sales growth of 6% due to the good performance of the product in all the main markets and significant growth in Turkey and Russia. Livazo sales growth of 16% is also in line with plan, with good performance of the product in all of the main markets, in particular, Spain, Russia, Greece, Switzerland and Turkey. We've also stabilized the revenue of the metoprolol franchise acquired from AstraZeneca, with the franchise also providing a great platform to establish our organization in geographies where we didn't have resources on the ground, particularly Nordics, Benelux and other markets. Other corporate products grew by 11.8% driven by strong growth of fenticonazole, CitraFleet, Procto-Glyvenol and other OTC products, but also thanks to the contribution of Reagila, a new treatment for schizophrenia, with sales of just under EUR 8 million for the year. Sales are slightly -- of Reagila are slightly behind our initial expectations due to initial challenges and the delays that we have with market access in various European markets. But we're now very encouraged with the trend that we see in markets where we've launched and particularly pleased with the early trajectory of markets where we launched more recently, being Spain and Portugal. Drugs for rare diseases generated EUR 249.9 million of sales, a growth of 16.3%, and included contribution of EUR 10 million of net revenue from Signifor and EUR 10 million from Juxtapid. Signifor, of course, up until the point of market -- marketing authorization transfer, we report under net revenue, the net margin is transferred by Novartis. Switching to Slide 7, which gives a picture of our portfolio. Drugs for rare diseases have gone to 16.9% of total, up from 15.9% last year. OTC drugs have grown to 18.6%, up from 15.7% next -- last year, thanks to the growth of Procto-Glyvenol, Casenlax, Magnesio Supremo, our new product which was acquired from the acquisition of Natural Point in the -- in Italy, and of course, from the integration of Tonipharm in France. Our reliance on the local product portfolio, as proceed in plan, has decreased from 20% last year to now 17%. That remains an important part of the business. Moving to Slide 8 and looking at revenue by geography. Great, obviously, to see all of the major markets contributing to growth in the year. Sales in Italy are up 5.4%, reflecting the full year of the Natural Point business, but also thanks to the good performance of Cardicor and Urorec and the launch of Reagila. Sales in France are up 19.4%, thanks mainly to the addition of the product portfolio of Ginkor and Alodont, products belonging to Tonipharm, the French company acquired in 2018. In Germany, sales are up by 1.3% despite the competition from generic versions of Zanipress and Ortoton. Worth mentioning is the strong performance in market of lercanidipine and metoprolol and also the good performance of the OTC portfolio. And again, here, a good contribution from the launch of Reagila in the spring of 2018. Revenue generated in Russia, Ukraine and other CIS country is EUR 120.2 million, up 13.8% versus last year and includes an estimated positive FX gain of EUR 3.4 million, mostly in the later part of the year. Sales in Russia in local currency are up 11% with strong growth of corporate products, Livazo, Urorec, Zanidip and Procto-Glyvenol. Sales in the U.S., which, as you know, is dedicated to products for treatment of rare diseases, are up 8.5% or 2.8% in local currency, with strong growth of Carbaglu and Cystagon, offsetting competition from generic entries eroding Cosmegen -- erosion, which we are pleased to say has now stabilized in the later part of the year. Spain sales are EUR 94.7 million, up 6.5%, mainly due to the performance of CitraFleet, Livazo, Virirec, Casenlax and Urorec and also of our OTC portfolio. Turkey had a very strong year, with revenue growth in local currency of over 33% driven by both exceptionally high price increases realized at the beginning of the year but also -- of around 20% and also strong underlying volume growth of the business, both of our corporate products and also our local product portfolio. The significant increase in sales in other European countries is mainly due to the growth of sales in Poland and Czech Republic as well as the direct commercialization by Recordati organizations in the Nordics, Benelux and Baltics where sales were previously through licensees. Other international sales growth of 1% reflects the integration of the local portfolios in the local markets, as just said, which offset strong growth of lercanidipine and pitavastatin in international markets. North Africa, as was the case in prior quarters, slightly down due mainly to import challenges in Algeria, which offset the underlying growth in our local Tunisian business. Moving on to Slide 9. As you will see, our distribution of revenue remains well balanced across different geographies, with Italy now accounting for less than 20% of total group revenue. Well, it's nice to see contribution of markets with stronger underlying growth being Russia, Ukraine, Turkey and other central region European markets slightly growing in terms of total percentage of the group sales. As commented, international sales decreasing because of the localization of business where we used to, in the past, sell through distributors. Moving to Slide 10 and to the P&L. I commented already on revenue. Gross profit of 70.5%, slightly lower to gross profit margin last year, as commented in prior quarters, due mainly to mix and currency effects. SG&A of 30.1% includes selling expenses at 25.2% of sales, up 11.8% due to the marketing expenses for the launch of Juxtapid, Reagila and the new commercial organization we've established in different markets already mentioned in Europe as well as the reinforcement of our rare disease organization during the fourth quarter in order to grow sales of Signifor and prepare a successful launch of Isturisa. G&A remains at around 5% of revenue. R&D expenses of EUR 130 million are in line with the target of being between 8% and 9% and are up by 18.5% due to the advancement of the development programs and the amortization of amounts allocated to intangible assets following the acquisition of Natural Point, Tonipharm during 2018 and the 2-month worth of the amortization of the intangible paid to Novartis for the acquisition of Signifor. EBITDA of 36.7% is EUR 544 million, an increase of 9%, with amortization charges of EUR 53 million and depreciation charges of EUR 24.9 million, which, as mentioned in the past, also reflect the application of IFRS 16 as of the beginning of this year. Financial charges in the period of EUR 21.1 million, an increase of EUR 3.2 million, mainly due to the additional borrowing in the second half of the year to fund the transaction with Novartis. Net income, as Andrea explained, of EUR 368.9 million reflects the exceptional benefit achieved through the finalization in late December of an agreement around patent box benefit for our Italian affiliate, which is, in total, EUR 35 million, of which EUR 27 million relating to previous years, period 2015 to 2018, and EUR 8.3 million related to 2019. Moving to Slide 11. As we said, treatments for rare diseases now account for close to 17% of revenue and now account for over 22% of EBITDA and 23.5% of EBIT. Our share which is -- we expect to further grow in line with our planned ambitions in 2020, thanks to the addition of the new businesses. Some reduction in margin for rare diseases over the course of 2018 due to investments that we've made to support these new launches and for the increase in amortization arising from the recent acquisitions. Margins on specialty and primary care remain broadly in line with last year. Turning over to Slide 12 in terms of -- and looking at our net financial position. Net debt of EUR 902.7 million is an increase of EUR 314.3 million versus 2018 but with less EUR 190 million paid in dividends during the year and EUR 425 million paid for acquisitions and milestones, mainly EUR 26.4 million which were paid for the license agreement with Aegerion Pharmaceuticals for the exclusive rights to Juxtapid in Japan, milestones of around EUR 47.5 million paid to Helsinn for the license agreement for Ledaga and EUR 350 million paid to Novartis for the acquisition of Signifor and Isturisa. Net financial position also reflects, as previously commented, impact of application of IFRS 16, which adds EUR [ 37.7 ] million to our net debt. Group's underlying cash generation, excluding dividends and transactions, remained strong and around 100% of net income. On a pro forma basis, adjusting for a full year EBITDA of the acquired Signifor business, net debt to EBITDA will be around 1.5 to 1.6x, which is in line with the target we set for our plan. So once again, a strong year of financial performance. And now I hand over to Andrea, who will discuss the outlook for 2020.

Okay. Thank you very much, Luigi. So moving on to the guidance for 2020. The first slide, Slide 13, basically recaps all the financial or key assumptions behind the guidance. So as already indicated in our business plan, which was announced last May, we will be facing generic competition starting this year for 2 of our products, Urorec and Livazo. However, the continued underlying volume growth of the rest of our specialty and primary care portfolio is expected to offset the impact of the entries of generics for these 2 products. We also expect double-digit growth for our rare disease business, thanks to the good performance of Ledaga, Juxtapid and Cystadrops, offsetting the expected erosion of PANHEMATIN in the U.S. due to the launch of givosiran. And also, clearly, we're expecting this double-digit growth due to the incremental revenue from Signifor -- from the Signifor franchise and the initial launch of Isturisa in Europe. No U.S. sales histories are included in our guidance at the moment. As already mentioned, our targets include additional investments also to support the relaunch of Signifor and launch of Isturisa. R&D costs increased to between 9% and 10% mainly due to the amortization charges related to recent asset acquisitions and the ongoing endocrinology products clinical trials. There is a slight improvement in EBITDA margin due to a product/country mix and stable operating income margin, which shows the sustainability of our margins also in 2020 with a slight improvement, actually. Income tax rate is expected to decrease to between 23% and 24%, thanks to the patent box tax benefit in Italy. And in our numbers and guidance, as always, we have not included any acquisitions of business development initiatives for 2020 targets. However, we do have a rich pipeline of opportunities under evaluation currently. Our 2021 planned financials announced at the Capital Markets Day in May last year for 2021 is confirmed. Moving on to the last slide of the presentation with the actual guidance targets. As you can see, we are -- the 2020 targets show, based on the preceding assumptions that I just showed in the slide before, we expect revenues between EUR 1.550 billion and EUR 1.580 billion, an EBITDA between EUR 580 million and EUR 590 million, an EBIT between EUR 490 million and EUR 500 million and a net income between EUR 360 million and EUR 370 million. Again, we have not included initial sales and we have not included full promotional costs for Isturisa launch in the U.S. We have obviously included some premarketing activities in preparation for the launch but no fully fledged promotional costs that you would expect in a launch plan. And as I mentioned before, and I would like to stress this one last time, these targets do not include any business development initiatives of any sort, being active deals, acquisition of companies and so forth. So this takes me to the end of the presentation. And I think that at this point, we can open for the Q&A session of our presentation. Thank you.

Operator, please open the Q&A session.

[Operator Instructions] The first question is from Niccolo Storer with Kepler Cheuvreux.

First question is on 2020 guidance. If we go -- if we can go a little bit more in that because if I strip out the impact of Signifor, I would basically be left with very, very moderate growth. So which assumptions you used on your main products and in particular on Urorec and Livazo, which are expected to go off patent? And the second one is on cash generation. Basically, if I start from your net income plus G&A, I end up with EUR 450 million roughly, minus dividend, minus the EUR 425 million of M&A and related activities, minus IFRS 16 impact. At the end of the day, I'm still some EUR 100 million short of your EUR 900 million reported. So if you can elaborate on that.

So in terms of -- so this is Luigi. Thank you for the questions. I'll take them to start with. In terms of assumptions on products, going back to the slide that show about the growth drivers for this year, which basically remains valid for 2020, with the exception obviously of Urorec and Livazo. On Urorec, we have seen generics enter the market as expected, and we expect the generic impact of around EUR 40 million for the net revenue for the year. And on Livazo, we're still expecting generics as of August of this year with an impact of around EUR 7 million. So that's to address your question with regards to generic impacts. In terms of cash generation, I'm not sure on the math you've done. Let me just point out that on net income, obviously, the EUR 35 million of tax benefit, which we have highlighted, is a noncash item for 2019. We will see the benefit in terms of cash flow mostly in 2020 and then 2021.

Let me just add to the topic. So obviously, we're expecting the numbers that Luigi mentioned on potential impact on sales of the generics of Urorec and silodosin. However, like I mentioned before, we do expect continued underlying growth also in SPC. This is mainly driven by moderate growth on some of our key corporate products, let them be lercanidipine, metoprolol and the Casen portfolio. We are expecting to double the sales of cariprazine in 2020, and we're also seeing strong growth coming from our OTC portfolio, especially in Central Eastern Europe. Some -- also some key local portfolio products and some of our subsidiaries, you know that we have some key local products, are also performing and growing on last year. And obviously, also, let's not forget that we have Central Eastern Europe, Russia, CIS and Turkey, which are still showing strong underlying growth. Finally, clearly, like I mentioned in the presentation of the assumptions that we're seeing and expecting double-digit growth in our rare disease portfolio. This is an idea of what the growth drivers going forward in 2020 are expected to be.

The next question is from K.C. Arikatla with Goldman Sachs.

I have 2, please. The first one, you mentioned that your guidance includes expected PANHEMATIN erosion in the U.S. given competition from givosiran. Can you give us a sense of how big the product is for the -- in the U.S. for you? And also, how are you thinking about erosion in 2020? And how should we think about it going forward? Is it only going to be a 2020 event? Or do you expect it to last for several years? And the second one, looks like on osilodrostat, you're advancing your time line guidance in the U.S. from 2022 to 2020. How do you think this will impact Signifor franchise, please, if any -- if there is any impact at all?

Okay. So thank you, K.C., Luigi again here. I'll start with the first question. In terms of givosiran impact, I think it's -- we see it obviously will take time for the product to have impact. So to your specific question, is it more a 2020 event or beyond, we see it as being more beyond 2020. We do think PANHEMATIN will remain an important treatment option for patients. Not all acute intermittent porphyria patients will have a number of attacks that will justify givosiran use. And where it will be used, patients will still require hemin during acute phases. So to -- we're not going to give specific numbers on PANHEMATIN sales for the U.S. But let's say, we have built in a level of erosion this year, but we expect the majority of erosion to happen in 2021 onwards. Your second question, I think, is around revised guidance for Isturisa. And just to be clear, we have said -- what we've said today is that we are cautiously optimistic around the potential launch of Isturisa in 2020. Of course, we are waiting now for final feedback from the FDA with a PDUFA date in March -- on March 7 of this year. We do see continued opportunity to grow Signifor, particularly in acromegaly, and to position Isturisa as a key treatment options for patients in Cushing's -- for Cushing's disease. I hope that answers your question.

It does.

The next question is from Martino de Ambroggi with Equita.

The first question is on 2021 guidance because you include some acquisitions undisclosed, while 2020 already includes the acquisition announcement. My question is, are you able to achieve the 2021 targets under the current perimeter? Or we should expect additional acquisitions in order to achieve the 2021? And eventually, what is missing in terms of, I don't know, sales roughly or EBITDA?

Martino, Fritz speaking. We -- on the call, Andrea has confirmed the strategy to continue to develop the company also through inorganic development, and we would like to continue to do -- to close new -- to acquire new assets going forward. As usual, in the target for the current year, we don't include M&A because it's a short term. And we have also stated this in the Slide 14 that the target of 2020 exclude any new acquisition, and we continue to pursue this kind of deal. While, for clarity, we have also confirmed that in our plan, we expect to continue to do acquisitions and then we expect to achieve, not only through the current portfolio and the acquisition of Novartis deal but also through other deal, the target in 2021. Then the answer is in the objective in 2021, we have still included the new deals that we expect to close going forward.

Okay. I was asking you this question because looking at Bloomberg consensus is already close to the target without announcing any other acquisitions.

Then I cannot comment on the Bloomberg consensus. But for sure, the Bloomberg consensus in some analysts include M&A, some other, they don't include M&A. Then for sure, the statement of the company is this one, target 2020 are without the new deals; target 2021, in line with our plan, include other deals that we expect to close going forward. Maintaining our objective is to have essentially a level of debt which is in the region as we have stated in 1.5 our EBITDA.

Okay. Very clear, Fritz. The second question is on the 2 new products you bought from Novartis because, Andrea, in your initial remarks, you mentioned for both the potential is in excess of the EUR 100 million that you guided at the beginning. And for 1 of the 2, if I remember correctly, you even underlined significantly higher than EUR 100 million...

Material. Material. Material [ order work ]. So I mean, if you take, let's say, the 2 already commercialized products, Signifor LIAM and LAR, these products grow, like we saw in the presentation, around EUR 74 million in 2019, okay? And I obviously stated that our expectation is to continue to drive growth due to the lack of promotion that Novartis put behind this product in recent years. So we still see some upside and we expect this product to have in excess of EUR 100 million of peak sales. These are the 2 already marketed products. For Signifor -- for Isturisa, we had already stated during the -- when we announced the acquisition that we were expecting product sales around EUR 100 million of peak sales. But now we have -- we feel convinced, even though, as I said, we will communicate a firmer kind of outlook on this franchise, which includes all products in the endocrinology franchise, but we expect this product to be materially above this EUR 100 million peak sales going forward.

If I may, just a follow-up on this, you are guiding for EUR 70 million additional sales for the 2, Isturisa and Signifor LAR. How much of this is for Isturisa this year in 2020?

We don't tend to disclose this sort of detail, as you know, very well on the product. It's a small part. Let's consider that in 2020, as I mentioned before, we did not put any numbers for the U.S. because we still haven't had the approval in the U.S., but we are cautiously optimistic we will have the approval in March. But until we get it, we cannot build this into the numbers. And in Europe, due obviously to the whole pricing reimbursement kind of pathways that we need to follow for market access, having just got the approval of the product in January, we expect to start launching late Q2 and onwards in a selected number of countries, which allow, let's say -- which have market access pathways, which are faster than in a majority of European countries. So we don't expect to have significant sales for Isturisa in 2020.

And just to be clear, just to add on what Andrea said and make sure the point was clear. 2020 revenue for Signifor does include up -- will include up to the point of marketing authorization transfer a sort of net profit transfer from Novartis in net revenue. So it's not a sort of full sales number.

As we're expecting, we are planning to receive marketing authorization in the U.S. in the first quarter 1 of this year. And so we're going to start booking sales from that moment and full sales. And for Europe, it's going to be in Q2, sometime in Q2 or towards the second half of the Q2. Okay?