Sandoz Group AG (SDZ) Earnings Call Transcript & Summary

Great. Good morning. I'm James Gordon, JPMorgan European health care analyst. And I've got the pleasure of introducing the Sandoz presentation and Q&A today. We've got Sandoz's CEO, Richard Saynor, with us. Thank you very much for joining us, and I look forward to the presentation.

Thank you very much. Good morning. Pleasure to be here. So I'm going to do a couple of things. Talk a little bit about Sandoz. Obviously, this is the second time I've had the pleasure of doing this presentation at an independent Sandoz. So talk about that. Really talk about what we've delivered, particularly post the Capital Market Day and more towards the midterm, and then spend a little bit of time talking about the longer-term opportunities, both from a company point of view but also how we see the market. First of all, this is Sandoz. Clearly, we're operating, I think, in a really exciting market. It's about a $200 billion market. It grows sales, growing at about 7%. Our sales in 2023, roughly about nearly $10 billion. Globally, clear top 3 player. In Europe, we're the leading player by some margin. I'll talk a little bit more about that. Very strong pipeline coverage. We cover about 80% coverage in terms of small molecules, particularly in Europe. And I'll spend more time talking about the biosimilars, but we cover about 60% of the LOE value looking forward in terms of biosimilars. And also unusually in this industry, we have a strong balance sheet, so less than 2x net debt to core EBITDA in terms of our debt and an investment grade rating. So I think as we set up as a company, it's an attractive market. We have scale. We know how to operate, and we have the freedom and the capital resources to do so. 18 months ago in New York and then in London, we made a number of commitments. And I think clearly, since then, we've tried to be incredibly boring and do exactly what we said we would do. Along the way, we've launched Hyrimoz in the U.S. to great success and clearly very pleased how that's evolved. Tyruko, natalizumab in Europe. We've expanded our pipeline around generics and biosimilars. We've got Keren from North America here, but I'm again very proud that we've stabilized the business in the U.S. and now seeing very strong growth. I'm very excited about the direction and trajectory there, and then continue to deliver progressive top line and margin expansion -- top line growth and margin expansion, raising our guidance on the top line throughout the year. So very pleased with the momentum. On top of that, we've launched ustekinumab, Pyzchiva in Europe. A very successful launch, we now have about a 43% market share. We have about 8 competitors in the market, so very much outperforming the market there. Very exciting pipeline in the short term with quite a significant number of launches. We'll spend some time talking about that, both in Europe and in the U.S. No doubt we'll have some conversations around GLP-1s. We see GLP-1s coming now quite soon, particularly in Canada and some of the emerging markets and really sort of delivering and building the momentum as we support our medium- and long-term growth. Europe. Fundamentally, we're a European company. And I think the moat in our scale about Europe doesn't really come through as often as I'd like. But I'm very proud about what we've achieved. Ultimately, we treat more patients in Europe than any other pharmaceutical company. We have real scale. We operate in over 40 markets, and we're continuing to expand our share in the generics and biosimilars market, pulling away from our competitors. It's an attractive geography. Frequently at this point, they always -- people normally ask me about the Indian generics and the Asian generics players. I've been in this industry 35 years. The Asian players still haven't arrived. They have very small market share. Ultimately, they find it very difficult to build 40 different entities across Europe. Our German business feels very German. Our Spanish business feels very Spanish. And even if you have a German label pack, you can't sell the same pack in Austria as in Germany. So really having that scale is such an advantage, and it really plays through when you see the launches we're willing to execute, particularly things like ustekinumab. Globally, I think this time last year, we became the world's leading biosimilar company. And I think since then, we've continued to execute and expand. What's cool about biosimilars is really the continued market expansion. So you see on the chart on the left is really how the adalimumab market evolved in Europe. Normally with a generic, you get a conversion. And generally, the patient volume numbers stay relatively static. With biosimilars, that's not the case. As price points come down, patients get treated much earlier in the disease cycle. So you see strong growth post the launch, many years after launch, which really supports the long-term performance of some of our products. So we've seen strong uptake to you with adalimumab in terms of our new launches. Tyruko is performing extremely well in Europe, and we see no competition in the horizon there. And then ustekinumab, ustekinumab Pyzchiva, again, very, very strong performance, strong leadership position and outperforming pretty much all of our competitors in all the markets we've chosen to operate. Then think about the commercial excellence in terms of the U.S. Again, Keren, happy to answer the questions later on. Of the biologics we've launched, about majority of them we've taken a leadership position. Worth noting things like Omnitrope, we launched 18 years ago, and that's a product that's still growing very strongly. And now we're the world's largest supplier of human growth hormone, and we're seeing still further originators pulling out of this market. So we see strong growth momentum, strong margin, highly attractive, highly profitable product, and we're continuing to serve patients even though originators are deprioritizing that. But also, we're at an inflection point. We're about to launch a significant number of products, clearly launching ustekinumab in early quarter 1 this year. Whereas Jubbonti denosumab, we have a clear pathway to launch that at the end of May this year. Tyruko subject to the JCV assay approval. And then a little bit further out, aflibercept and ERELZI. So really an exciting range of products and really starting to leverage. And I think we've shown what we're capable of doing in the U.S. market as we move forward. Internally, it's been quite a journey as well. Clearly, as we separated from Novartis, there's been a lot to really focus and transition us from being, I guess, the child of a complex parent pharma company to becoming a much more lean, focused generics business. We already started some of that work several years earlier. We've reduced our network. So now we only have about 15 sites within our overall network, which is roughly where we would expect it to be. We're continuing to consolidate our supplier base. We have an awful lot of suppliers. It gives us a great opportunity to get more efficient, reduce our inventory, improve our cost of goods and make us more flexible. And we started a significant transformation journey. We've already taken about $50 million of cost as we simplify the business, think about where we need our head count, really shaping our business as a generics company. That will have about 150 million basis point or $150 million impact this year, going up to about $200 million of savings in 2026. So a lot of execution in terms of improving the operational efficiency, the speed, but also our cost base in which we operate. That then fits into our guidance. Back in New York and London, we gave guidance that we would deliver roughly mid-single-digit growth up until 2028 and a margin expansion starting from about 18% to mid-20s by 2028. And clearly, the margin expansion journey, it's a journey, not a destination. And I'm clearly delighted with the sales momentum, having raised the guidance twice last year with our final guidance up to high single digits for 2024. So I think building strong momentum, delivering on what we committed and moving in the right direction in terms of both margin and in sales. If you think about the long term, I think the future is even more exciting than our past. There's more products coming off-patent in the next 10 years than has been in the history of this industry. And I think we're extremely well positioned to capture a significant proportion of that value. Clearly, biologics, we see a significant number of opportunities, both biologics, ADCs, bispecifics. And as I said earlier, clearly, we're looking to target 60% plus of the LOE opportunity. When we started this journey 5 years ago, we had 5 or 6 biologics in our pipeline. Today, we have 28. We add generally on average, about 2 new assets every year. And with the 11 we've launched, I think we have one of the deepest and broadest pipelines in the industry. Given our scale, both financially and technically, we can access new technologies. Many of the questions I get around, things like ADCs, these are areas that we're actively exploring. And then clearly, we see new opportunities. We'll talk about geopolitics in a moment, but there's clearly new modalities, new opportunities. So I think being a broad-based strong with a very strong commercial footprint with the capabilities and the science and the technologies to exercise, I think we're extremely well positioned to capture a significant proportion of value over the next few years. As I said, really the long-term pipeline. We have now 19 products in early-stage development, 2 are dropping into Phase III this year, so nivo and pembro. And then we say it's very significant market value opportunity. And the vast majority of these products generally fall in oncology and immunology, where certainly in Europe and in the U.S., were normally a leader. So our ability to extract value without significant commercial investment is very attractive to us. GLP-1s, increasingly, I think most meeting now, we always get questions about GLP-1. Really, I see this as a 10-year journey. And normally, the questions are around CapEx, our ability to prosecute and bring these products to the market. Really, let's think about it. So 2026, we see the data exclusivity for the diabetes indication for Canada expiring. There's only no patents filed in Canada. So clearly, there's no block to a launch, and we will aim to launch at market formation for the diabetes indication. We have a number of partners. We've disclosed one of those, but we have others as well. And also bear in mind, we're investing in our own injectable capacity as we become a stronger and stronger biologics player. So I think we're well positioned to capture the diabetes indication as that market starts to form and at other markets, whether it's Brazil, other international markets over the 2020s. Europe doesn't really start falling to sort of early 2030s, by which point then we can make a decision if we need to expand our capacity, continue to work with our partners and think about how we want to leverage that. And then really tirzepatide in the U.S. doesn't really start opening up until 2035. So this is quite a long-term journey, very much focused on bringing products to Canada, we filed. Fascinating opportunity. But again, we want to be very thoughtful about how and when we bring this to the market over the next few years. And then really to close, I think ultimately, we have a very compelling story. We're a leader in our field globally. We're the world's leading biosimilar generics company. We have an incredibly strong presence in Europe, a strong and dynamic presence in the U.S. We're capable of really extracting value, both from our own biosimilar launches, but also with partners. And we've rapidly really become the partner of choice because we can offer a scale and a capability that, quite frankly, nobody else can offer. We have numerous levers for margin expansion and growth. As I said, an unrivaled opportunity coming afford us with $400 billion of product coming off-patent. And ultimately, I think we have a very strong, credible presence, all with a strong balance sheet, discipline and execution to continue to leverage and grow. So with that, I will happily hand over to James and take your questions.

And I've not got visibility on the app. Given how many people are in there, if people want to just raise their hand if they've got any questions, that might be easiest. Does anyone have any questions they'd like to start with? I'll just get a microphone to you.

Yes. I was just wondering how you all think about with so much interest in the GLP-1 space and trying and the time it takes to build a biosimilar associated with that, the dilutional effect of so many players, of so many life cycle management, folks coming in on the oral side, on top of the injectable side. And how do you all plan for that from a forecasting and growth perspective in the future?

It's next to -- honestly, there isn't a simple answer. But first, let's break it down. I'm very thoughtful. That's why I'm careful how I phrase -- we're focusing on the -- so obviously, the data exclusivity in Canada, it's for diabetes. That's what we're focusing on. We can't -- I'm not going to promote off-label...

Go where you know you go first, yes.

And then yes, okay. But the reality, I've never known a product in 35 years where the originator can actually meet the demand. And so yes, you're right. But honestly, if we could tell -- this is hypothetical, so don't take it as a guide. But if we sell this at $50, what's the size of the market? I've got no idea. I mean I think Novo treat 14 million patients. So the unconstrained demand, if you really get the pricing right, and yes, there's going to be new therapies, new modalities. But also the data package around semaglutide is so good and so compelling that I think at the right price point. And that's not necessarily a race to the bottom because I still think this is still going to be a relatively constrained market in terms of the available capacity, particularly around fill-finish. I don't really see it like a biologic in terms of API. I mean there are plenty of API suppliers. Most of these are synthesized and the filing is more like a small molecule than a biologic. So I think from a technical point of view, I don't see it as a particularly challenging issue. Certainly, the partners that we worked with, we filed in Canada as I said.

And you mentioned the strength of the channel in Europe that you had, yes, interesting.

So it's going to -- that's why I sort of -- we don't need -- I don't need to answer some of those questions. I think Canada, honestly, I'm not giving Keren a target for North America yet. We'll see how it goes. And I think almost it's not in our guidance. So sitting here, it's all an upside for us. I'd rather be pragmatic and say, look, I don't know and be honest and say [ we'll figure it out ].

A follow-up. And so certainly, this 2026 is technically when you could launch in Brazil, Canada and Mexico. So we heard something about Canada, but could Brazil and Mexico be even further out? Or could we think next year, you actually have a product to the market in Brazil and Mexico?

I'd like to hope we have, but we'll see with the regulators and the fines.

Yes. But you filed in Canada, but you've not filed in those?

We're in the process of putting files together for those markets.

I'm not that familiar with how things work in Brazil and Mexico. Are they challenging markets to launch generics in normally?

They're different. I mean Brazil, we're already the largest biologics player anyway. So we have a big infrastructure or good infrastructure in Brazil. Brazil, the biggest prescribers for GLP-1s in Brazil are dentists. So because you had your teeth down and the Botox and then the bikini body. So it behaves -- the market behaves very differently in different markets, but we have scale there. And similarly, in Mexico, we have a good scale.

There's a hand raise over there, please, for a microphone.

Could I just ask for an update on litigation? I know there's been a couple of payments that have been announced. Or anything else that's outstanding on that front?

I guess I don't know what I don't know. But certainly, all our litigation was disclosed or ongoing litigation was disclosed in our prospectus. Now clearly, we were keen to put as many of the legacy issues behind. I think clearly, with the second payment to the injured parties following the price fixing, it gave us a position and enough clarity to build a provision really with the intent of sort of giving clarity to the Street about, okay, this is where we think the line is. And I think generally, it's been well received. And similarly, we did the same with opioids. It was also part of the philosophy of why we got out of markets like China. I think it's really making sure that we've cleaned up as many of the legacy issues or markets where we think there's greater risk.

Question here.

Yes. You said you're at 11 biosims now adding, say, 2 a year or so. Omnitrope is still growing, 20 years in the market, and scripts go up for biologics when they lose exclusivity. So if we fast forward a few years, it sounds like you need 20 separate product lines of biologic manufacturing. How do you sort of justify that on a CapEx basis and an overall maintenance basis? It's a pretty big biologic manufacturing overhead.

Generally, it's not bespoke lines for individual products. So partly, it's threefold. I mean not all our eggs in one basket. So if you look at our supply network today, we use Novartis for a lot of our capacity. That's on a cost-plus basis. That's not a CDMO relationship. We're investing heavily in Slovenia. So that site should be completed '26 and then assuming in 18 months, 2 years, tech transfer, that will start coming on stream. We use a number of partners. So clearly, Polpharma, Samsung and others. We have a deep partnership with Just - Evotec. So we'll then have the optionality to put a J.POD in our own facility and/or use their own network as well. So ultimately, it's going to be a mixture of all of those things. But certainly, I think we've invested quite heavily, particularly in Slovenia to meet what we see as a future demand, but then make sure it's a spread because I don't want all my eggs in one basket.

I see a question over there.

Richard, Sandoz is the only manufacturer of penicillin API in the Western world, which is a product category you didn't allude to, but it may very well become strategic to the U.S. and to Europe. Do you want to allude a little bit on that?

Yes, it's something I'm very proud of. I mean we've been -- so Sandoz has been in antibiotics since 1945. So it's part of our history, part of our DNA. And you're right, we're the only supplier left in the Western world in terms of beta-lactams. That gives us a unique leverage, I think. It's certainly given me phenomenal access. Most governments, including the U.S. government, wants to talk to us. I think now we need to find ways to think about a more sustainable business model to make sure that these are strategic assets. Now in the U.S., you have a stark choice. You either buy beta-lactams from India and China or you buy them from Austria. That's your choice. And without them, there's no operations. There's no dental care. And yet somehow in the U.S., we sell antibiotics for less than a packet of M&Ms, and I find that offensive. So yet as a patient, you're paying $30, $40. So someone in the middle is [ making out funny ], get into the disconnect in the U.S. health care system. So I think there's a number of opportunities. Certainly in Europe, we're having conversations with the EU regulators to look at how tenders can be shaped better to make sure they have a bigger component of local manufacturing. Certainly, governments are looking at more sustainable reimbursement models. And normally, the question parallel that I get is pricing. Pricing is hard to regulate, at least to which price fixing, as you can see, is illegal and has consequences, whereas looking at the middle part of the P&L in terms of credits for investments, infrastructure, shaping tenders and so forth. So that's really where we're putting a lot more energy. So I think certainly, we have a lot of opportunities over the next few years to leverage it. And that's something I'm very proud of.

I missed [indiscernible]. Otherwise, I'm going to ask a question. Question here.

Yes. Just thinking about the GLP-1 opportunity, you mentioned probably Canada and emerging markets are going to be the ones which will probably add to our growth and the regulated markets come later. How should we think about this opportunity in terms of it contributing to your growth? Do you think it could be material? Or it's just going to help us?

Yes. And that's why we deliberately don't guide it. I think going back to the question right at the beginning, it's very hard for us to predict. I think that's why Canada is '26. Okay, how material that will be? I mean certainly, I think by the time you get to 2030, I would think it's going to be significant. But it will be foolish of me to put any kind of number to it at the moment.

And how will the market behave as and when we see more players entering here? You mentioned there are a lot of filers, a lot of companies in India, China, who file for these products. So does the market behave like a complex generic market where with incremental competition, you see pricing coming down? And how should we think about profitability?

Honestly, I don't know. I mean I think I'd go back to my point earlier in a sense, every other product ever coming on patent generally, every patient who wants a product can have it by and large. Here, if you -- as I said, if it was the U.S. price of about $1,000 a month. If this was $50 a month, how many patients would take? But even at that price, it's still a very accretive and highly profitable product. So the dynamics are so fundamentally different. I was with the U.K. government [ bizarrely ] a few weeks ago, and they had this whole jab for jobs program that if you're unemployed and slightly overweight, could you put your own semaglutide. But that's a huge cohort of patients. And I said at the moment, Novo is treating 14 million patients. That could be 14 million patients in the U.K. So I've got no idea, the opportunity and how it will stray in terms of auto-injector, the device and how it will evolve. But we'll see. I think we've got plenty of time. And I think we will be as transparent as we can.

And you plan to have manufacturing capabilities across all of these devices as well?