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 2024 First Half Results Conference Call. [Operator Instructions]. At this time, I would like to turn the conference over to Ms. Eugenia Litz, Vice President of Investor Relations of Recordati. Please go ahead, madam.

Thank you, and good afternoon, everyone. I'm pleased to be here today with Rob Koremans, our CEO; and Luigi La Corte, our CFO. Together, they will present results for the first half of 2024. Also joining for the Q&A session will be Alberto Martinez, Executive Vice President of Specialty and Primary Care; Scott Pescatore, Executive Vice President of Rare Diseases; and Milan Zdravkovic, Executive Vice President of R&D. As always, the presentation is available in the Investors section of our website. It is now my pleasure to pass the call over to Rob. Please go ahead.

Thank you, Eugenia, and good afternoon, and thank you for joining us today. I'm very pleased to share once again excellent results for the first half of the year with net revenue of EUR 1.185 billion, up 30.5% versus last year or 10.2% on a like-for-like at constant exchange rate. This reflects strong growth across both our Specialty and Primary Care and our Rare Disease business. Specialty Primary Care was up 7.6% on a like-for-like constant exchange basis and Rare Disease 15.9% on a like-for-like at constant exchange rate business. Luigi will talk through in more detail what the business units have been performing and give you more details in just a moment. But I would like to emphasize that our results are not only outstanding in absolute terms, but there also highlight our consistent outperformance in expanding markets, which is truly remarkable. We continue and consistently delivered sector-leading EBITDA margins of 38.2% for the first half, a clear reflection of our strong revenue and operating leverage and despite facing a bit less positive products and country mix. This, coupled with the consolidation of Avodart and Combodart slightly impacted the gross profit margin in the second quarter. Our adjusted net income was EUR 301 million, up 4.7% versus previous year, effectively absorbing the increase in the interest expenses and tax rates. Thanks to these results and the strong cash flow, we ended the quarter with leverage of just below 1.8x EBITDA pro forma. In terms of R&D, we are delighted to announce the submission of the Isturisa sNDA for the Cushing's syndrome label extension in the U.S. in June. This is ahead of our schedule and expectations. We expect a regulatory decision by mid '25, and are very excited about the overall opportunity in Cushing's. And with the strong momentum across our business, we are pleased to adjust our full year 2024 financial targets upwards across all absolute metrics, reflecting our confidence in continued growth and success. And now it's my pleasure to turn the call over to Luigi.

Thank you, Rob, and good morning, good afternoon, everyone. I'm pleased, as always, to counter through and provide a bit more color on the first half results. As usual, we'll start with Specialty and Primary Care, which once again confirmed in the first six months of '24, its ability to sustain mid-single-digit growth at constant exchange rate. And in fact, did better than that in the first six months of this year, with like-for-like growth at [ CR ] of 7.6%. Of course, within that with a significant contribution from Turkey, but really good solid performance across the portfolio. We continue to see volumes of key products growing ahead of the relevant markets rather than markets, which themselves remain relatively healthy and growing. Urology was, of course, the key driver and the star, if you like, of the first six months, thanks to continued double-digit growth of Eligard, which is fantastic, gaining momentum on the back of the rollout of the new device, but also with a return of growth of silodosin and clearly, the strong contribution of Avodart and Combodart, for which the transitions are absolutely complete. But equally pleasing and noteworthy is the resilience of our legacy cardiovascular portfolio. In fact, in several markets, both metoprolol and pitavastatin have returned to growth. Their [ Cilnidipine ] franchise was broadly stable and we continue to see a gain in market share in [indiscernible] in what is a significant and fast-growing market in France for the product. As many other companies have commented, we did see this year a somewhat milder flu season than it was the case in 2023, which clearly affected a little bit the cough and cold and also some of our GI products, which, however, had registered a very, very strong start of 2023. And we're also somewhat depressed by adverse effects in relevant markets. And finally, strong performance in Turkey of the local product portfolio, growth of Magnesio Supremo, Reagila and other products in the portfolio drive the growth in our broader therapeutic areas at the bottom part of the bar chart. So a very strong performance of SPC and also equally so of rare disease unit on Slide 5 which, in fact, you would have seen has accelerated in Q2, posting growth both on a reported basis and a constant exchange rate of just under 16%, up from 13% in Q1. And that's really driven by very robust and continued growth of our two key growth franchises, endocrinology and oncology, but also pleasingly, with the degree and the pace of erosion on the metabolic portfolio, starting to ease down a little bit. We're very excited that Isturisa which closed the first six months just under EUR 100 million of revenue is poised to potentially become a EUR 200 million product this year. Obviously, excited about the fact that we did file for the label extension in the U.S. and see a significant opportunity there. And obviously, Signifor continuing to grow double digit alongside also our oncology franchise, which thanks to a continued penetration of Qarziba and growth of Sylvant is continuing to grow above 20%. We really do feel these two franchises have significant further growth opportunity ahead. And as we know, we have also some catalysts across both. We mentioned the filing for Isturisa. We're very pleased with the discussions we've had with the FDA on dinutuximab and potential regulatory pathway towards a BLA for the U.S. there. We will have to provide some additional analysis and clinical data and look forward to discussing that with the FDA in mid-2025. So it will take a little bit longer, but very pleased that we are aligned and seeing a significant unmet need for these patients, which dinutuximab can help address. REC 0559, unfortunately, did not pair out as we hoped. And we did successfully complete the study, but the study top line results suggest that primary endpoint was not met. And we'll just be discussing next steps for that with our partner, MimeTech, but did take in the first six months, a small impairment of just above EUR 2 million to reflect the top line results. So really strong growth and momentum across both business units. And as you will see from Slide 6 also across all geographies very happy, obviously that all, but one line on the chart on Slide 6 shows a positive momentum. In fact, most lines showing double-digit growth. U.S., of course, is not just the #1 market. But as you see, is accelerating with growth over 20% and really fueled by the strong momentum of both Endo and Oncology. And as I was saying earlier, with the erosion of metabolic starting to reduce. Italy continuing to grow double digit. And of course, a significant increase in Spain, reflecting the strong contribution of Avodart and Combodart, which in Spain is worth just over EUR 30 million, EUR 13 million in Italy. France, we commented already in Q1, is obviously comparing to a very strong performance at the beginning of last year with very strong sales on the cough and cold portfolio, which had also benefited from in part from temporary out of stock of competitors and that somewhat softer cough and cold season also accounting for what is still growing, but at a slightly lower rate, Russia business with growth in local currency of just over 4%. Turkey was obviously a strong contributor to the results in the first half of the year with -- usually we see growth in local currency terms, very much in line with Q1 at over 80%. 11% growth is in volumes and the balance really being a reflection of a stronger price inflation, which is only in part offset by the devaluation to date, resulting in a very strong growth for the quarter, whereas you may recall, Q2 2023 we witnessed a very strong devaluation of Turkish lira, which also distorts a little bit the -- enhances the growth figure. So very strong revenue performance, both in -- if looked at by business and by geographies. And that, combined with continued cost discipline. On Slide 7 you see leads to a strong operating leverage, allowing us to post double-digit revenue and EBITDA growth for the first six months, with EBITDA margin remaining above 38%. As commented at Q1, adjusted gross profit is down versus last year, mainly due to the consolidation effect of Avodart and Combodart which are dilutive at the level of gross profit, but contribute to operating leverage at the level of SG&A, which you see is down to 27.1% of revenue. And we did see in Q2 a somewhat adverse product and country mix, which contributed to that slight reduction in gross profit margin versus the first three months of the year. As I said, SG&A expenses continue to show the benefit of the growth in revenue and some of the efficiency improvement initiatives we have undertaken -- was R&D expenses grew slightly in line with plan, with most of the increase actually being down to the additional amortization, which comes from the Avodart and Combodart deal, with, excluding amortization, R&D expenses remaining below 7% of revenue. Again, all of that contributing to a very strong EBITDA results, adjusted net income at 25.4% of revenue and up close to 5% versus last year, is absorbing the significant increase in financial expenses over half of which, however, is due to differences across the two years in FX gains and losses. First half of '23 benefited from almost EUR 5 million of unrealized gains, which then unwound in the later part of the year. In the first half of 2024 is impacted on the other hand, by just over EUR 7 million of mostly unrealized FX losses. So all in all, that accounts for more than half of the increase in financial expenses. Leading to, as I said, adjusted net income growth of 4.7%. And those results combined with, as you will see on Slide 8, continued strong operating cash flow, which offsets the higher interest and tax payments leads on Slide 9 to leverage, which is just below 1.8x EBITDA with a very strong once again, balance sheet and positioning us very well for continued profitable growth in line with our strategy and business plan. And with that, I will turn over back to Rob to update on the outlook for 2024.

Thank you, Luigi. And closing with our full year 2024 guidance with the strong performance in the first half of the year and a continued robust momentum going forward, we are pleased to adjust our financial targets upwards. On the top line, we confirm expectations of double-digit top line growth, increasing versus our previous guidance and reflecting mid-single-digit growth of SPC and double-digit growth of rare disease. And this is largely driven by the Endo and Onco franchises, which show further growth and potential. We're also confirming our sector-leading EBITDA margins at around 37% and are very confident to take further opportunities. And with that, I would like to end this presentation and turn over together with Luigi, Alberto, Scott and Milan to the Q&A and give you room to ask questions. Thank you.

[Operator Instructions] The first question is from Charles Pitman King with Barclays.

Couple from me. Firstly, just in terms of Qarziba, I think probably frustrating for you guys as well just to see that pushed out another year before we see kind of progress. So just if you could give us a bit more detail on exactly what it is the FDA wants to see in terms of further data and analytics to really kind of push that forward. That would be great. And then maybe just a second question on REC 0559. Kind of how are you thinking about R&D capital allocation following this failure? Like you obviously highlighted previously, you wanted to slightly uptick your spend on R&D. Is that potentially going to reverse now given this pushout and the REC 0559 failure or failed to meet the primary endpoint I should've confirmed. And then maybe just a very quick one because I think I know the answer is going to be you can't comment. But just in terms of the [ CVC stake ] and [indiscernible] recently refinancing his debt, that would suggest that they're no longer considering a bulk sale of ownership as was rumored recently in the press. So I was just wondering if you could provide any comment on -- or context on CVC's options from here either to remain kind of in Recordati or [ sell ] off part of all their stake. That would be really helpful, but anything you can give would be great.

Thank you, Charles. I think you guessed rightly that, for us, it's not so -- and we're not going to comment on the options of CVC. They are a very happy and committed shareholder and as you noted correctly, they were very successful in refinancing their bonds. So I think also that gives them the option of continuing, but I don't see any need for us to comment on this. I do believe that the refinancing of the bond actually does show a very strong track record and financial position, and I'm very happy with that. And I agree that we have good results. I'll ask Milan to talk a little bit in a second about the R&D commitment. But just one thing on that, in all -- I mean we've conducted the trials and build the capabilities. And when you do trials, you do know that sometimes even with a good product, things can go wrong. Obviously, we're disappointed. It doesn't change our improved commitment in the sense of bringing with a slight increase in expenses, some products to market and new indications, and we feel very well positioned to be able to do that. And in fact, the fact that we're moving faster with the sNDA in Isturisa and also the first very positive interactions in China make us feel very confident. And on Qarziba, the support. I'll let Milan explain a bit further. But the FDA sees the clear unmet need that is there. And on the back of what we are doing, I feel very optimistic about the opportunity there. The value behind it doesn't change with a slight delay. But I'll let Milan explain both on the Qarziba and REC 0559 questions, Charles.

Yes. Thanks, Rob and Thanks for the questions. I'm Milan Zdravkovic, Head of R&D. So on dinutuximab data in relapsed/refractory [ glioblastoma ], as we indicated, we had a very successful meeting with the FDA. It's quite clear that FDA recognizes the unmet need that dinutuximab beta offers potentially also against existing therapy. So we're very encouraged by the dialogue we had with the FDA and what we are planning to do is we plan to meet with the FDA towards mid of 2025 to discuss the additional analysis that was requested based on the existing data and also the tap down we would do from a planned ongoing clinical trial with dinutuximab beta and relapsed/refractory patients. So this is the path. As I said, we are encouraged by the dialogue with the FDA, and we will, you can say, update as when possible. On REC 0559, I agree. I think fundamentally, it is a disappointment, but sometimes that's how Phase 2 plays out. It was a well conducted trial. We did, unfortunately, not meet the primary end point, but all you can say the fundamental commitment towards R&D continues. And as Rob mentioned, we did successfully submit the sNDA for Cushing's syndrome for Isturisa, and we're excited to continue that dialogue with the FDA.

The next question is from Martino De Ambroggi with Equita.

The first question is a follow-up on the R&D. Just to check you guided for 100 bps of increase of R&D costs this year, but I didn't catch if the REC 0559 failure is changing this and this is probably one of the reason of the revision in the guidance? My first question. The second one is on the performance you achieved in Rare Diseases in the first half, because basically, if I multiply by 2, the end of franchise and the oncology franchise sales in the first half, you already achieve in both cases, the guidance you had for 2025. So my first question on this subject is if you can provide any update on this? And the last one is connected to this because if I look at the 2025 guidance that you confirm, it means just a few percentage points, 2, 3, 4 percentage points of growth in 2025, which is achievable stand-alone by Isturisa or by [indiscernible] altogether in terms of growth. So I was wondering if I missed some, I don't know any, but increase adverse effect from a payback system in Italy or what else justifying such a reduction in the organic growth for next year?

Martin, maybe I'll start on both, it's [ 3G ]. So first of all, on R&D cost, no, we didn't guide for 100 basis points increase in R&D cost this year. If you recall, that was the increase that we estimated for the 3-year planned period. So any one year, would've been a fraction of that and yes, the fact that we will not be progressing this year a Phase III on REC 0559 may take out some costs, but we're looking at other projects as well. You will have seen in the appendix, we're talking about -- and we've said before, a couple of other potential indications, which are under evaluation. So I wouldn't expect that to be a sort of a significant change. So again, it was 100 basis points over the planned period, not in one year. With regards to 2025, I will just reemphasize and we said this before, the guidance we've given is for revenue above EUR 2.4 billion. So we didn't say EUR 2.4 billion. So I'm not sure what number you're taking, but we haven't put a ceiling as such on that. We just said it's going to be above EUR 2.4 billion with the current portfolio. We did also say that as you rightly point out, the oncology and endocrinology franchise had some really great momentum. And we do see them as having significant growth potential. We're not providing an updated midterm sort of forecast today. But for sure, those two franchises are doing well. And again, the guidance for 2025 that we set out is above EUR 2.4 billion. So depending on what number you pick above that, that would lead to a different percent growth. I hope that addresses the question, Martino.

Yes, if I may, on this subject for 2025. Historically, your organic growth was mid-single digit. So probably, I'm sure you will not provide any figure. But am I right in assuming at least mid-single digit considering the upside potential of the rare diseases that you have in your portfolio right now?

What I would say is, over the last 10 years, I think we've delivered a cumulative annual growth of around 8% per annum. Half of that was organic, half of that was business development. If history is a good predictor, your ballpark is right, but we're not going to say more than that.

And in terms of negative adverse effects, could be payback system in Italy or other things. So there is nothing going ahead, particularly relevant?

There's really nothing, if anything, and that's what Luigi also indicated in Q2, we've seen an acceleration of growth in the rare disease business. I don't see why all of a sudden things change, and there's nothing in the systems that we are worried about. So the future looks good for us. But you also know that we typically are prudent, and I don't think we're not here yet to give an update on the '25 figures. But from everything we see, we're very happy with how the business is performing. And there is nothing in dark clouds on the sky that all of a sudden make us revise our optimistic view of the future.

The next question is from [ Shan Hama ] with Jefferies.

So I just have a few questions mainly on REC 0559. So when should we expect to get detailed data for the study? And then could you please outline a potential path forward. So I mean, I know you mentioned some other indications, but would you continue pursuing in neurotrophic keratitis, perhaps is giving the product back to MimeTech an option? And then also, do you think this makes a deal within Rare Diseases more relevant sooner rather than later?

Thanks, [ Shan ]. This is Rob. So we're in current discussions with MimeTech, so I don't want to really make any guess on how that is going. But clearly, we need to understand the data and together with them, look at everything. We are absolutely sure that the studies have been conducted, like Milan said really correctly and very confident on that. I don't want to speculate now on what's going to happen there. But clearly, we need to understand what's that. It is intrinsic to the nature of doing clinical development. This was the first ever attempt to show efficacy for this product in comparison with Placebo. And that's the results, unfortunately, were not positive. And that's always been there, right? So we've always been a bit prudent on this. Let's not speculate now on the next path forward. And I want to give Milan and the team at MimeTech an opportunity to really get through the full details of this which will definitely take a couple of months to really analyze and do that. But for the moment, and that's very clear. I don't see how the top line results will change. So that's going to be a non-positive outcome there.

The next question is from Niccolo Storer with Kepler.

Two questions. The first one is on guidance. I see you upgraded your revenues and EBITDA indications for the year. Is it fair to say that the upgrade is mostly to a more positive view on FX headwinds, which when you presented Q1 results were indicated 2% to 3% and today are just 2% minus? Or is there something else we should be aware of? The second one is on the trend of SPC growth. If we surpassed the effect of Turkey, Q1 was up 2.7%, Q2, 2.2%. Are you happy with this performance? And are you expecting maybe an acceleration in the second part of the year?

On guidance. No, it's actually -- the guidance is based on the fantastic performance of the business. So it's not at all related to any change perception on FX and we've seen very good momentum across the two businesses, and that's why we improved and increased our guidance there. I'll let Alberto comment on the question on SPC.

Thank you for the question. We are very pleased with the performance of SPC so far this year. This is consistent with what we've seen in previous year, particularly on the products that we promote, we see a very strong double-digit growth as Luigi commented on top of a market that is growing in mid-single digits. This is particularly driven by Eligard, which shows a 15% growth, a product that was declining only three years ago. And obviously, the first half of the year compares to a much stronger cough and cold season last year, and this is partly why the growth overall is not at the mid-single-digit organic, although Turkey is a very strong contributor to our business and not only a contributor in terms of pricing, but also as Luigi described, in terms of volume with significant volume growth. So hopefully, this addresses your question.