Sandoz Group AG (SDZ) Earnings Call Transcript & Summary

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

Hello, everybody. Welcome to Sandoz's First Quarter 2024 sales results. Earlier today, we issued a press release summarizing our sales performance in the first quarter and published a supplemental slide presentation on our website, which we will follow on today's call. You can find all 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. As a reminder, this will be Colin's last quarterly results call. Remco Steenbergen, our new CFO as of July 1, will be joining us on our half year earnings call on August 8. 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 belief 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. They should not be considered as alternative to profit for the year or any other performance measures derived in accordance with IFRS. For discussion purposes only in today's presentation, sales in this document refer systematically to net sales to third parties, and our comments on growth are expressed in constant currencies. And with that, I'll now turn the call over to our CEO, Richard Saynor.

Thank you, Karen, and it's a pleasure to welcome you to our first quarter 2024 sales results. We saw a strong start to 2024, thanks to the relentless effort of our more than 20,000 employees. Our sales grew 6% in constant currencies, driven predominantly by our biosimilar business. And I'm also delighted that we saw growth in all 3 regions. We also completed the acquisition of CIMERLI ahead of our anticipated time lines, and we continue to show progress on our manufacturing investments with the opening of a new antibiotic production facility in Austria to increase our capacity for essential medicines. This puts us in a strong position to deliver on our full year guidance. The first quarter was our tenth consecutive quarter of top line growth. Our biosimilar business grew 21%, driven primarily by the ongoing launch of Hyrimoz in the U.S. and the acquisition of CIMERLI, which added 1 month of contribution during the quarter. Our generics business was up 1% despite a particularly strong first quarter last year in 2023. All our regions contributed to growth, a testament to the strong execution across the organization and the ability for us to use our scale to deploy our portfolio. Now let's turn to the business. Generics grew 1% on a constant currency basis in the first quarter. The generics experienced volume growth from solid demand in our base business in Europe and international. Growth was also driven by the acquisition of Mycamine and sales resulting from the transfer of mature brands from our former parent. This was partially offset by 3 items: first, the impact of apixaban. If you recall, apixaban sales peaked in the first quarter of 2023, and due to IP litigation, we had to withdraw the product in the Netherlands in August of 2023. As such, this created a year-over-year headwind, and we're still waiting for the final decision from the Dutch Court, which will determine our ability to relaunch this product in this country. Secondly, we had an exceptional cold and cough season in the first half of 2023 and a more average season in 2024. And thirdly, our North generic -- North American generics business declined in the first quarter due to the timing of new launches, which is skewered to the second half of 2024. In the first quarter, we inaugurated our new antibiotic facility on our main production site in Kundl, Austria, the EUR 50 million investment in the plant, and it will provide operational efficiency means that we can now manufacture 240 million packs this year. This represents a 20% increase in capacity over 2023 and more than double the volume of 2021. The automation and innovative technologies allow the production of 1 billion more penicillin tablets, a doubling of output for key pediatric formulations. This is in line with our ambition to serve more patients with critical antibiotics and our commitment of EUR 150 million invested in what is today the last vertically integrated antibiotic facility production in Europe. Our biosimilar business grew 21% on a constant currency basis in the first quarter, driven by the ongoing launch of Hyrimoz in the U.S. and the acquisition of CIMERLI. This acquisition builds on our leading ophthalmic platform in the U.S. and lays an even stronger foundation for future product launches. Omnitrope continued to experience strong customer demand in a generally constrained supply environment, and we expect the situation to continue for the remainder of the year. Tyruko, or our biosimilar natalizumab, is gradually contributing to sales in Europe. At the end of the first quarter, the product was available in Germany, Spain, Norway and Finland. In April and May, we launched Tyruko in 5 additional markets across Europe. We're also progressing well on other key biosimilar value drivers. During the quarter, Wyost, Jubbonti, our biosimilars of denosumab, received both U.S. FDA approval and a positive CHMP opinion in Europe. Wyost and Jubbonti are the first and only FDA-approved biosimilars in the reference medicine. Last week, we announced the agreement with Amgen that resolves all patent litigation related to our U.S. denosumab biosimilars. This clears the part for a launch of Wyost Jubbonti on May 31, 2025, or earlier under certain circumstances. In April, Pyzchiva, our biosimilar ustekinumab, received European Commission approval. Pyzchiva is the first biosimilar ustekinumab approved in Europe and strengthened our immunology offering. We're targeting a launch in Europe in the second half of this year. Now let me provide more color on the Hyrimoz launch in the U.S. In the last 2 quarters, I highlighted the tremendous effort of our U.S. team to put us in a leading position in terms of market access and payer coverage amongst adalimumab biosimilars, and that we have preferred access to 65% of [ CVS Caremark's commercial templated lives. I also discussed how we are uniquely positioned by offering the only adalimumab biosimilar with the same dosing options of Humira, 2 presentations to ensure broad access for patients and a vertically integrated supply chain offering reliability and consistency. These efforts are now starting to shine through. Biosimilars have now 15% of the adalimumab market, including both originator and biosimilar products. And Sandoz has secured the leading share position amongst biosimilars with over 80% of total prescriptions according to IQVIA data as of the week ending April 26. And with this, I will hand over to Colin to provide more details on the sales performance and discuss our guidance for 2024.

Thank you, Richard. I'm pleased to be with you today to discuss our first quarter sales performance. As Richard mentioned in his opening comments, we had a strong start to the year, with sales growing 6%. Volume contributed 10 percentage points to the growth, while price erosion of 4 percentage points remain below prior year. FX had a limited impact on our sales versus prior year, with a negative 1 percentage point coming mainly from the depreciation against the U.S. dollar of a number of currencies in our international region, partially offset by the appreciation of the euro and Swiss franc. With another quarter of strong double-digit biosimilar growth, biosimilars increased as a proportion of total sales to 25% compared to 22% last year. Our regional sales mix remains relatively stable, with over half of our business in Europe, where we hold a strong leading position, and the remainder divided between the North America and international regions. Let me now deep dive into our sales by business and by region. Starting with sales by business. Generics remained in line with prior year levels. Solid volume demand in Europe and international was partly offset by the impact from the withdrawal of apixaban in the Netherlands in August 2023, an exceptional cough and cold season in the first half of 2023 and the timing of launches in the U.S. Biosimilars delivered very strong growth of 21%, primarily due to the ongoing launch of Hyrimoz high concentration formulation, the acquisition of CIMERLI, as well as continued strong demand for our first-ever biosimilar, Omnitrope. Regarding Hyrimoz, we continue to supply Cordavis as part of our unique multiyear agreement and started to see an acceleration in sales of our own branded Hyrimoz, an unbranded adalimumab, following the displacement of Humira from CVS templated commercial formularies on the first of April. Moving to the regions. All 3 regions delivered solid performance in the first quarter. Europe grew 2% despite a very strong first quarter of 2023. And gains from generics volume and continued strong growth for Omnitrope were partially offset by the year-over-year impact from the withdrawal of apixaban and the exceptional cough and cold season last year. North America grew 6% and benefited from strong biosimilar performance, primarily from the launch of Hyrimoz and the acquisition of CIMERLI, which closed ahead of anticipated time lines in early March. This strong growth was partially offset by a decline in the U.S. generics business due to the timing of launches. While we did not have any material launches in the first quarter, we expect to see full year growth in our North America generics business as we launch more generics products in the second half of the year. In addition, we also had a onetime year-over-year gross to net adjustment, and the quarter was impacted by the timing of shipments. Our third and fastest-growing region, international, was up 12% due to the strong volume growth across the businesses, with contributions from Mycamine and favorable pricing dynamics. Moving to our full year 2024 guidance. On the back of the Q1 sales performance, we are confirming the guidance we provided during our full year 2023 earnings call in March. Net sales to third parties are expected to grow mid-single digit in constant currencies. Core EBITDA as a percentage of net sales is expected to be around 20%. I would like to reiterate the phasing of the core EBITDA margin in 2024, as there will be a significant increase in the second half of the year versus the first half. This is due to favorable mix as biosimilars become a larger proportion of our sales and the timing of operational improvements and transformation initiatives, which will accelerate in the second half of the year. With this, I will hand it back to Richard.

Thank you, Colin. A couple of milestones this year regarding biosimilars are the launch of Tyruko in the U.S. in late 2024. The FDA responded to our JCV essay submission and have asked for additional information. On top of this, we expect to launch Pyzchiva, our biosimilar ustekinumab, in Europe in the second half of the year, as we previously disclosed. Regarding our next financial update, we will host our half year annual results on August 8, 2024. Prior to handing over to the operator, I would like to express my sincere gratitude to Colin for his last earnings call with Sandoz. It's been a pleasure to work with you over the last few years. You've made an incredible contribution to the company, and I've been able to learn a lot from you through the span and in the early months as a stand-alone company. I wish you all the best in the new chapter ahead. And with this, I will ask the operator to open the line for Q&A.

[Operator Instructions] Our first question comes from Emmanuel Papadakis at DB.

Perhaps I'll kick off with 1 on Hyrimoz dynamics. Maybe a couple there. Would be very able if you could talk a little bit about the relative economics of direct sales versus those sold via the partnership you've struck with CVS, Cordavis, i.e., your margins comparable? And then in terms of the volume outlook from this point forward. Is there a ceiling in terms of the percentage of covered lives that you expect to reach over the coming months? And any thoughts you have in terms of the pending CIMERLI launch, in particular, would be of interest. Is there any risk of volume reversion once we have any changeable available? Is there any overlap with the volume that will be covered by the Signa, [ Colin ] deal struck for that biosimilar? And then maybe a quick question for Colin, just -- congratulations on your brief tenure as CFO. Perhaps you could give us some parting comments in terms of the relative drivers for the mix? You mentioned the H2 SKU on EBIT. To what extent is it the biosimilars inflection versus the cost opportunities you mentioned that are driving that?

Thank you so much for the question, Emmanuel. So the Hyrimoz dynamics, see, there's not a really significant difference between whether it's direct label or third-party label. So we don't see a significant difference in the 2 streams. The volumes, your guess is as good as mine, and we -- to be broadly honest. I think we're pleased with where we've landed. We always said this is going to be a build rather than a bang. There are 3 PBMs. We expect to continue our journey with CVS and continue to expand the volume there. And we'll see how the other PBMs go forward and whether they choose to go on label or whatever over the next few quarters and into 2025. So I guess we'll see the weekly numbers, and we'll take it from there. Colin?

Yes. Thank you. As this is a net sales call, I'm going to refer that to the earnings call in March. We were clear that the expansion in the margin during the course of 2024 would be driven by biosimilar volumes with the higher margin. And secondly, the operational improvement and transformation and operational -- organizational efficiency initiatives that we were committed to at the Capital Markets Day as those started be implemented and take an impact, that, that will deliver an expansion in the margin.

Our next question is from Vineet Agrawal at Citi.

Just a couple. First, on the U.S. generics. Can you possibly quantify the impact from the gross-to-net adjustment and the phasing of shipments? And do you see this to wash out through the remainder of the year? And then on your biosimilar Humira, in particularly the Cordavis partnership. I think in the past, you mentioned that the co-pay on the AbbVie supply product will be higher. But we have seen a sharp increase in the scripts for that product too. I just wanted to check if the pricing on it has dropped, such that the co-pay for patients is similar to, let's say, someone on your biosimilar? Or is it more a reflection of the remainder 35% of CVS commercial formularies where you are not there yet?

Thank you, Vineet. I guess the second part of your question, broadly, yes, I think it's the 35% that remains is not -- we don't see any significant pricing differences in terms of co-pay. Your comments in terms of U.S. generics, yes, you're right. So the U.S. small molecule generics business really had 3 impacts. Most of our launches are in the second half of this year. So that will certainly help with the washout. There was a gross to net impact. And then clearly, shipment timings in terms of Q1 coming into Q2. So over the year, I don't see any concerns in terms of the overall performance of the business. So I see it washing out, as you described.

Our next question is from Thibault Boutherin at Morgan Stanley.

Thank you. So first question is on the future of the Cordavis contract. I think you mentioned it's a multiyear contract. Just wanted to know if there was a renegotiation time for a period where it comes to be renegotiated between you and your partners? And is there a time horizon where Cordavis could potentially add additional manufacturers to the -- the co-branded biosimilar? Second question, just on the guidance. I mean, 6% growth in the first quarter against complicated base, in particular for U.S. generics, biosimilar Humira contribution accelerating in the rest of the year. I just wanted to know what prevents you from upgrading your guidance on the top line at this stage of the year? Is there any kind of specific headwinds we need to keep in mind? And something for -- I mean, a similar question on generic outlook. Tough comp in Q1. But from the second half of the year, you're going to have a your base. So just if you could help us understand the dynamics of the generics business in terms of phasing this year.

Yes. Thank you so much for the question. I mean, CVS, look, it's a multiyear contract. Really, we're pleased. I think both parties are pleased how the contract's moving forward and the patients lives in the switching. So like any contract, there's always points that we would potentially look at renegotiating and/or changing it, but we're happy with the contract that we have, certainly for the short to midterm going forward. So no real changes there. I think your question on guidance, look, I think we're still -- first quarter in the year. As always, as you say, there's puts and takes. I think at this point, it's important that we build credibility as a new company. So I'd rather be prudent and see how the next quarter evolves and look at that going forward. Also bear in mind, we saw a very strong growth in Q1 last year, particularly on things like anti-infectives and a number of launches in Europe, which clearly the wash through as we come through into this quarter, we talked about apixaban. And then we see, I think the previous question, the small molecule business broadly continuing as we see with the stabilization in the U.S. And then the biosimilar launch is really back-end loaded towards the end of the year, particularly ustekinumab in Europe and natalizumab in the U.S. So we'll -- I guess we'll look at guidance and look at the business in the middle of the year.

Our next question is from Harry Sephton at UBS.

I hope you can hear me okay. So my last question was on the agreement with Cordavis. So we started to see more pairs entering into these type of biosimilar exclusive agreements. So I was hoping that you can maybe help us understand why these type of exclusive agreements are more attractive to payers? It would seem that this type of agreement is economically more interesting to them or give them more confidence in the security of supply going forward compared to, I guess, the previous payer dynamics where you saw these big rebate wars impacting the launch of biosimilars. So yes, I think the first question is really why have payers moved towards these type of agreements? And do you expect that this is very much going to be how you get biosimilar access in the pharmacy benefit channel going forward? Then my second question is in the results, you flagged the number of dynamics which contributed to the first quarter generic sales. So the weaker cough and cold season, the apixaban headwind and then also the offset by the acquisition of Mycamine. So just wanted to get an understanding of what you saw as really the underlying dynamics within generics, if you were to try and exclude some of those impacts? And then also help us understand what some of those headwinds could look like for the rest of the year, especially with the apixaban withdrawal. That would be great.

Thank you, Harry. I guess, look, you're particularly seeing these agreements in the pharmacy benefit space, not in the hospital benefit space. So I think they're there, the relationship between PBM, the patient and the physician is very much more aligned. So I think it's much more about the nature of the product. I think you're right, it's about ultimately securing supply, the opportunity to strengthen that relationship and get a more secure business in relation to that. And I think we'll see how -- whether other PBMs follow suit in terms of this as a strategy. So it's an interesting movement. And I think we're clearly pleased with how we're seeing it evolve, but also, we also have a nice strong franchise of our own right in terms of our own product. In terms of the Q1 dynamics, as you say, I mean, apixaban, that should wash out -- but I guess it will wash out in 1 of 2 ways. Ideally, the ideal way is we reverse the court decision in the Netherlands, which I always thought a little bit bizarre, and we relaunched the product, which I guess is then a nice pose position. Outside that, I'm assuming -- and we've assumed we're not launching it at the moment, that would wash out in the third quarter in terms of the negative impact to the growth. And then as you say, there's always sort of puts in that, puts and takes. I think what we're seeing is nice underlying performance in Europe in terms of winning share. Again, looking at the launches in the second half more than the first half. We've always got variability around the strength of the cough and cold season. So it's always prudent to take a softer view at this point. But clearly, we have a stronger inventory position as we go into '24-'25 cough and cold season. And then we talked about the U.S., which really sort of 2 or 3 onetime impacts and the gross-to-net impact that I mentioned earlier that they -- most of the launches in terms of LOEs on the small molecules come in the second half of the year. That's just the nature of when the LOEs are. And then there were some shipment timings in the first quarter. So broadly, we've always said the small molecule business is always going to grow, I guess, low single digits when you look at it in an amalgamation of all the 3 regions. And clearly a much stronger accelerating biosimilar business, A, the size of the launches, but also, B, coming from a lower baseline, except as a percentage terms, it's always going to be much larger.

Our next question is from Victoria Lambert at Berenberg.

It looks as if the CIMERLI shares came under pressure in the U.S. over Q1. Is this because of the change in ownership of the U.S., right? Or are there some other factors driving the decline? And then just on the generics launches expected in H2. Could we get a bit more color here, please? Are these weighted towards complex generics or simple? Do you expect to see a contribution from generic Victoza at this stage? That would be useful.

Yes. We don't break out the small molecule launches we never had until the point that we launched for all sorts of reasons. So unfortunately, I can't give you the color in terms of the split between simple and complex. But certainly, most of the LOEs are more focused, particularly in the U.S. into the second half of the year. We -- your question on CIMERLI, we'll have to come back to you. We don't see that view. I mean, certainly, we see the performance pretty much in line with what we saw when forecasted is broadly stable with slight growth, which is pretty much what we anticipated when we acquired the business. So we'll have to come back to you.

Our next question is from James Gordon at JPMorgan.