Sandoz Group AG (SDZ) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Sandoz call today. I will now pass on to Karen King, Global Head of Investor Relations for her opening remarks.

Welcome to Sandoz' 9 Months 2023 Sales Conference Call. Earlier today, we issued a press release and posted a supplemental slide presentation on our website to enhance today's call. You can find these documents in the Investor Relations section of our website at investors.sandoz.com. Joining me on today's call are Richard Saynor, our Chief Executive Officer; and Colin Bond, our Chief Financial Officer. Our press release, presentation and discussion will include forward-looking statements. You should not place undue reliance on these statements. Such forward-looking statements are based on our current beliefs and expectations regarding future events and are subject to significant known and unknown risks and uncertainties. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those set forth in the forward-looking statements. In this document, we present certain non-IFRS measures. These non-IFRS measures may not be comparable to other similarly titled measures of other companies and have limitations as analytical tools, and should not be considered in isolation or as a substitute for the analysis of our operating results as reported under IFRS. Non-IFRS measures are not measurements of our performance or liquidity under IFRS. [indiscernible] considered as alternatives to profit for the year or any other performance measures derived in accordance with IFRS. For discussion purposes only in today's presentations, sales refer systematically to net sales to third parties, excluding sales to Novartis Group, and our comments on growth are expressed in constant currencies. With that, I will now turn the call over to our CEO, Richard Saynor.

Thanks, Karen. It's an absolute pleasure to welcome you to our first sales update as a stand-alone company. Going forward, we will report full financial performance for the half year and the full year. For the first 3 and 9 months of the year, we will provide a sales update, which will give you an opportunity to see how we're progressing against our sales guidance. Today, I will start with the business highlights over the past 3 months and then turn it over to Colin, who will discuss our 9-month sales and full year outlook. I will wrap up with closing remarks, and we will then open up the call for Q&A. We continue to see momentum in our business, which translates to strong 9-month sales of growth and 6% in constant currencies. These results were driven by ongoing strength in Europe and in international markets and the stabilization in North America and continued strong demand for our biosimilars. I'll provide more details around our sales in a few moments, but we'll start with our recent strategic milestones. At the Capital Market Day, we highlighted the multiple drivers of top line growth for Sandoz. A key driver are the near-term biosimilar launches, and I'm excited about the advancements that we've made over the past months. First, Hyrimoz or biosimilar adalimumab was launched in the U.S. as planned on July 1, bringing the first immunology biosimilar to market in the pharmacy benefit space. We are excited to be part of the single largest loss of exclusivity event to date. Our U.S. team has made tremendous efforts to put us in a leading position in terms of market access and payer coverage [indiscernible] adalimumab biosimilars. All three major pharmacy benefit managers, Express Scripts, Optum United and CVS Caremark have announced coverage for Hyrimoz in the U.S., and we have more lives covered than any other competitor. On top of this, we've signed a unique multiyear agreement with [indiscernible], a wholly owned subsidiary launched by CVS Health to expand the reach of Hyrimoz to patients in the U.S. Hyrimoz is expected to be released and commercialized by [indiscernible] under their own private label, beginning in the first quarter of 2024. As we expected, the market will take time to form, particularly in the absence of Humira being displaced from payer formularies. However, we believe we remain uniquely positioned by offering the only adalimumab biosimilar with the same dosing options as Humira [indiscernible] to ensure broad access for patients and vertical integration for supply reliability and consistency. Our #1 position outside of the U.S. also provide us with millions of patient days of experience as well as strong expertise in this patient support services. We're also looking at enhancing our growth with bolt-on acquisitions. In August, we completed the acquisition of the leading antifungal agent, Mycamine from Astellas, reinforcing our global leading anti-infective portfolio. Sandoz is a leader in the large and growing anti-infective market. We are the last major vertically integrated anti-infective producer in the western world. Mycamine is a therapy of choice in hospitals and in intensive care units worldwide, a proven prophylactic in hematology and oncology patients, and widely used in organ transplants. This acquisition reinforces our global hospital offering and leading anti-infective portfolio. Another pillar of our strategy is our focused strategic investments to enable the future development and supply of biosimilars. This will help us rapidly meet the rising global demand for biosimilars and to make an even more meaningful contribution to the long-term viability of health care systems around the world. At the Capital Market Day in June, we talked about a $400 million investment in Slovenia to build a world-class biosimilar manufacturing facility as well as a EUR 25 million investment in the expansion of our biosimilar development center in Germany. In July, we announced an additional strategic investment of $90 million to build the state-of-the-art Sandoz Biosimilar Technical Development Center in Slovenia by 2026. This new end-to-end drug substance and drug production development center will be an important step in expanding Sandoz' biosimilar technical development capabilities. Our commercial scale, combined with development and regulatory capabilities make us a partner of choice in the industry. This status has been reinformed with several recent agreements. Earlier this year, we signed a multiyear partnership with Just-Evotec Biologics, covering the development and manufacture of multiple biosimilars. This gives us access to disruptive technologies, complementary to our existing capabilities. Over the summer, Tyruko, or biosimilar natalizumab received FDA and EMA approval. If you recall, Sandoz entered into a global commercialization agreement for biosimilar natalizumab with Polpharma Biologics and has the right to commercialize and distribute the product in all markets. Tyruko will be the only biosimilar to treat relapsing forms of multiple sclerosis, and we're looking forward to being the first company to bring this product to the market at the latest in the first half of next year. More recently, in September, we entered into an exclusive deal with Samsung Bioepis to commercialize their biosimilar ustekinumab in the U.S. and in Europe. This agreement further strengthens our position in the immunology space and expands our pipeline to 25 assets. Before jumping in the sales results, I would like to come back to a key milestone in the history of Sandoz. Just 3 weeks ago, on October 4, we successfully completed the spin-off from Novartis and became an independent stand-alone company. Sandoz shares are now listed and traded on the Swiss Stock Exchange and ADRs are traded on the OTCQX in the U.S. I would like to thank all our Sandoz employees for their hard work leading up to the spin, as well as our shareholders and analysts for your interest in our business. The successful listing marks the beginning of a new era for Sandoz as a stand-alone global leader and a European champion in generic and biosimilar medicine space. With this, I will hand it over to Colin to discuss our sales update and full year outlook.

Good afternoon, everyone. My name is Colin Bond. I am the CFO of Sandoz. It is my pleasure to be giving you our first sales update as a stand-alone company. Today, Novartis published their third quarter results with Sandoz reported in their financial statements as discontinued operations. Our comments today will be focused on our 9-month sales, as Richard indicated. I am very pleased that Sandoz succeeded in delivering a quarter of mid-single-digit growth. In the first 9 months of 2023, net sales were $7.1 billion, up 6% versus prior year at constant currencies. Volume contributed 9 percentage points of growth, partially offset by price erosion of 3 percentage points, which is lower than prior year. The growth was driven by ongoing strength in Europe and international markets, continued stabilization in our North America market and strong biosimilar performance. Our biosimilar business share increased by 1 percentage point as a result of the biosimilar growth, moving from 22% to 23% of overall sales. Moving to our two businesses. The generics business was up 5% in constant currencies, driven by recent launches and volume growth. The first half of the year was strong for cough and cold products, which contributed to our year-to-date performance. In addition, we saw continued demand for many of our recent launches. The biosimilar business grew strongly in the first 9 months, up 11% in constant currencies. Growth was broad-based across the biosimilar portfolio with Omnitrope and Hyrimoz being the largest contributors. This shows the strength of biosimilars in the market as both of these products have been available in Europe for many years, yet continue to gain momentum and expand patient access. In fact, data tells us that adalimumab market in Europe has grown at a CAGR of 14% since the launch of biosimilars in 2019, compared to 9% in the 4 years preceding the biosimilar launches. Looking now at the regions. Europe now represents roughly half of net sales with a 3 percentage point share increase compared to prior year on the back of strong growth across both generics and biosimilars. Europe showed double-digit growth in the first 9 months. The volume growth was driven by a combination of a strong cough and cold season in the first half of the year, continued demand for recent launches and biosimilar performance, particularly from Omnitrope and Hyrimoz. North America continues to stabilize ahead of the forthcoming biosimilars launches. The portfolio demonstrated stable performance with price erosion lower than the previous year and strong growth of Omnitrope. International showed continued momentum, driven by demand in key markets, including Australia and Brazil. Key biosimilar products reported strong double-digit growth in the region. The solid results were aided by price erosion, lower than prior year. As announced shortly before the spin, Sandoz received two solid investment-grade credit ratings from Moody's and Standard & Poor's. We expect to keep a net debt to core EBITDA ratio in the range of 1.7 to 2x, which places us in a strong position among our peers. We target to refinance the bridge facilities as soon as possible, subject to market conditions. Now for our full year 2023 outlook. On the back of the strong sales performance in the first 9 months, we are confirming our 2023 guidance, which we first outlined at our Capital Market Day last June. We expect mid-single-digit net sales growth at constant currencies and core EBITDA margin as a percentage of net sales of 18% to 19%. As part of our capital allocation priorities, we commit to paying a dividend in 2024 of 20% to 30% of 2023 core net income, subject to shareholder approval at our first Annual General Meeting next year. I am now going to turn the call back over to Richard who is going to make his final remarks.

In closing, I want to highlight a few upcoming initiatives. We will continue to focus on near-term biosimilar launches. Following the launch of Hyrimoz in the U.S., we're expecting to launch the high concentration formulation of adalimumab in Europe by year-end [indiscernible] extending the life cycle of the product. I also talked about our excitement of bringing Tyruko to market following the approval by the FDA and the EMA. Sandoz' natalizumab will be the launch as the first biosimilar to treat relapsing forms of multiple sclerosis and we expect to be the only biosimilar available in the coming years. On the regulatory side, we're expecting the FDA approval for denosumab, which is one of our pipeline biosimilars in bone disease and oncology. Regarding corporate events, our full year results will be published on March 13, 2024. Subsequently, the first Annual General Meeting is scheduled on April 30, 2024. To wrap up, our underlying business is performing well, with 8 consecutive quarters of top line growth. We're making progress with our regulatory milestones, and we're bringing new products to the market. We continue to see strong demand for our biosimilars and are investing in our future growth. We look forward to our year-end call where we'll cover our full financial performance and provide guidance for the full year 2024. Finally, I want to thank all our employees once again for delivering strong sales performance year-to-date and delivering on our clear purpose to pioneer access for patients and to become the world's leading and most valued generics and biosimilars company. We are now more than happy to take your questions. So let's open up the line for Q&A.

[Operator Instructions] Our first question comes from Thibault Boutherin from Morgan Stanley.

Maybe the first one on [indiscernible] biosimilar. I saw in your release that you mentioned the first half of '24 launch, I think, for both the U.S. and Europe. And so I just wanted to know if you could confirm the IP situation in Europe. And in the U.S., does it reflect your confidence in the settlement with Biogen? Or does it simply mean you are ready to launch [indiscernible] in the first half? And maybe my second question on the biosimilar [indiscernible] situation. I mean obviously, [indiscernible] done an incredible job in terms of [indiscernible] markets biosimilar so far. Just trying to understand what do you think is going to unlock this market because it's difficult for us to understand what prevents [indiscernible] a similar strategy in one year, 2 years or 3 years. So it is the question of driving down net prices to a point where it's not being interesting for them. So just trying to understand driver of market [indiscernible] in the U.S.

Okay. Thank you so much for your question. I guess two parts. Tysabri, yes, from European point of view, again, we're confident in terms of the patent position, and we're confident that we will launch in the first half of next year. In the U.S., again, we had a strong -- with the Preliminary Injunction hearing, again, we had a strong outcome in terms of that Coar case. So clearly, we would certainly consider launching at risk coming to the market, given the strength of that Coar case and our strength and belief in the patent position. So again, excited to bring a product to the market where we see a real need for patients, but also the reality is probably no other biosimilar coming into that space. Your question around adalimumab in the U.S. I mean it's an interesting one clearly. At the moment, I think something like 97% of coverage is still on the originator product. Certainly, the feedback we expect as we go through next year, and we think we've guided this pretty much from the beginning is that as formularies [indiscernible], as payers' frameworks change, we expect that to start moving. And we're starting to see some momentum. I guess what I'm happy about is today that we've got more lives covered, so all three of the PBMs have us listed. So that gives us an extremely broad coverage. But also on top of that, we -- clearly with the partnership with [indiscernible] that, effectively, that means that we have contractual volumes that we have to deliver to them, which also will underpin our business both in 2023 and into 2024 and beyond. So I think we've always guided this will be a build rather than a bank. What we are seeing, I guess, is more and more, I guess, new patients rather than necessarily switch patients at this point being put on the product. So I'm confident that we'll build a very attractive franchise over the coming quarters.

Our next question is from Simon Baker at Redburn Atlantic.

I've got a few, if I may, please. Firstly, on the split of generics and biosimilars by region. At the Capital Market Day, you said that the generic biosimilar split for the U.S. was 80-20 in '22 and 88-12 in international. Is that still the case for the 9 months of 2023? And also at the same time, you gave an aspiration of reaching 70% of sales from biosimilars and complex generics. Could you give us where we are today in terms of that split? And then I do have a question on adalimumab pricing. Within the U.S. market, you obviously weren't first, but arguably, you are best given the formulation that you've got. I just wonder how that works out in terms of pricing versus the previous players. We've seen a lot of data, particularly from Amgen about the evolution of price as additional entrants into the market. Do those dynamics apply here? Or does the fact that you have a differentiated offering give you greater pricing power in that space?

Colin, do you want to take the first two, and then I'll take the last one if that's okay?

Yes. Happy to do that, Richard. So [indiscernible] year-to-date 9 months, on which we're actually giving the guidance today or the update today, 22% is our year-to-date bio sales and 78% on generic. We break down the sales then by region, as we've committed to doing, 26% on international, 21% on North America and 53% in Europe, but we don't actually give a breakdown within the region into generics and biosimilars. Richard, over to you.

Yes. Thank you. On the adalimumab pricing, I mean, clearly, at the moment, it's a market that's being negotiated. I guess we've both gone into the high price strategy or a high list price strategy and a low list price strategy depending on what ultimately our customers want. I guess I can come back to ultimately whatever pricing at the moment we're seeing in the U.S. on aggregate, it's still significantly higher than pretty much anywhere else in the rest of the world. So this is a highly attractive market. It's an interesting question. I mean ultimately, we have a great product. We have a really good device. In many ways, we think it's better -- probably the best device available to patients. And certainly, given the intimate relationship between patients and product, we do think this product has potential to be sticky. But equally, I'm not naive to the fact that ultimately, it's what's on formulary and what insurers are prepared to pay for. So we have to be competitive in that market. And when you look at that from that lens, ultimately, you need several things to be successful in this market. Well, we're #1 ex U.S. We have millions of patient data. We're vertically integrated, and we have a good cost of goods. We have both strengths and we have a great delivery device. Nobody else really has that combination of things, either they're sharing their margin with somebody else, they only have one presentation, and certainly, they don't have the data package that we have. So we're confident that we can build this franchise going quarter-on-quarter going ahead.

Just a quick follow-up. I think you may have missed the -- and I don't know whether you want to answer it. The question on the current percentage of revenues from biosimimilars and complex generics versus the 70% aspiration.

Well, I think the 70% was very much -- we've guided over the next 5 years. So what we said over the next 5 years, we would launch about $3 billion of new assets, of which $1.5 billion will come from biosimilars. So that would give you a sense of, okay, currently, our business is what, 22% biosimilars, growing at mid-teens on which we're going to then launch $1.5 billion of new biosimilar business. So you can see that the proportion of biosimilar business is going to grow quite strongly over the next few years. We don't actually break out any further in terms of complex and simple generics. And that's something we may need to think about in the future. But certainly, at the moment, what we do is break out between the two. And I think we've given enough information to sort of give a sense of what proportion certainly over the next 3 to 5 years will be biosimilar.

[Operator Instructions] Our next question is from Graham Parry from Bank of America.

So first is on the North America stabilization. And I don't want to get specific numbers here, but can you just help us directionally in what's happening specifically within the U.S. now in the quarter? So is U.S. in constant exchange rates still declining? Is that flat or is it actually now growing? Secondly, on FX, I think you guided -- your full year guidance is at constant currencies. Looks like FX has had less of a negative effect in the quarter. And if rates stayed unchanged for the rest of the year, what do you think the FX impact on your top line would be for the full year 2023? And then a question on cough/cold that obviously helped first half growth rates. Can you just remind us, is there a tough comp for cough/cold in the fourth quarter that we should be conscious that it might slow your volume growth rates in the generics business in the fourth quarter?