Sandoz Group AG (SDZ) Earnings Call Transcript & Summary

Good afternoon, everybody. Welcome to this afternoon session at the Jefferies Global Healthcare Conference. My name is James Vane-Tempest. I'm Jefferies' European Specialty pharma analyst. Delighted to be hosting Sandoz this afternoon, and we've got Craig Marks, who's Head of Investor Relations. Format of this is a hybrid format. So we'll have a few slides in terms of the overall business, and then we'll get straight into a discussion. So with that, thanks very much, Craig, and over to you.

Thanks, James, and hi, everyone. It's a real pleasure to be here and to have the opportunity to finally bring some British weather to New York. So good to be here. As James says, I'm going to be spending just a few minutes going through some basic slides on the company, highlighting some recent results just so we can put the conversation with James and his amazing questions into context. If I skip forward, so this is a kind of combination of some of the slides we presented recently at JPMorgan, Q1. And you can see here some of the headlines we delivered with our full year presentation when we published on the 5th of March. So broadly where Sandoz is as a pure-play generics and biosimilars company with the world's leading biosimilars pipeline is that we're really fulfilling upon our commitments. So I'll talk about our midterm outlook a little bit later on, on how we're driving this business towards improving our sales performance, improving our margin, generating more cash flow and increasing the level of dividend we're paying out. But you can broadly divide our recent results in 2024 in 4 key columns that represents really the direction of travel for the business. So first and foremost, we're advancing our pipeline and predominantly within biosimilars. So generics today makes up around 72% of our sales, but our strategic focus you could argue is more on biosimilars, where we have 28 biosimilars in our pipeline. We're getting more and more approvals around the world. And as you can see there, we have numerous opportunities to increase our coverage. On coverage, right now, we're covering in terms of losses of exclusivity for the next few years, broadly just over 60%, but you could argue there are more opportunities than we can handle in terms of biosimilars, and we can go through that. And that doesn't even include the opportunities within GLP-1. The second element is driving that top line. So last year, we delivered over USD 10 billion of sales for the first time. And within that, the biosimilar performance was extremely strong at 30% constant currency. And nicely -- it's nice to see that all our regions are contributing strongly to our growth. So I'll go through our regional split a little bit later on. We are improving the margin. So last year, we hit 20.1% core EBITDA margin. We're guiding to around 21% this year. And longer term, we have an opportunity to drive the margin even further. The way we're doing that partly is through mix. So biosimilars tend to have a better margin profile than generics. So mix is becoming more important as we drive that core EBITDA margin. We're also making progress as we pull away from Novartis, which we did in October 2023. There are still outstanding links on things like biosimilars manufacturing on IT that we're working our way through, but we've transformed our business and made good progress so far on ensuring that we are becoming a much more agile, lean and focused business, really, really focused on concentrating on that development, especially within biosimilars. And then lastly, on the financials, we've now introduced ROIC into management incentives. We're deciding around 30% of management incentive payouts. And we've improved that, as you can see on screen to around 12%. And we are improving our dividend as well. So our dividend now represents about 24% of core net income, and we want to get that to between 30% and 40% of core net income by 2028. So we're well on track to do that. And all of this is allowing more generation of free cash flow that really should start to kick in from next year. Our one-off costs as part of the separation from Novartis were $700 million in total as one-off costs last year and should actually be much, much lower from next year. You'll see a decrease this year, but more of a decrease next year. And that means with the free cash flow generation, improving margin, increasing profile and further operating leverage that we're then able to invest in multiple growth opportunities. We've got more opportunities than we can handle, as I was saying. So in terms of LOE opportunities, you can see on screen, there's so many across generics and biosimilars. It's nice that we are in a position where we can cherry pick. So there are more losses of exclusivity over the next 10 years than in the history of the industry. There are many off-patent biologics in the market where there is no biosimilar. And one development that we can talk about a little bit later on is potential moves by the regulators to move towards regulatory streamlining and possibly removing -- and we've seen evidence of this already, removing the requirement for Phase III trials, which can account for almost 50% of the cost of developing a biologic, which we could open up a significant number of opportunities for us. So as I was saying earlier on, we have a nice generics pipeline. There are multiple opportunities, and we're covering around 2/3 of the market. But biosimilars is really where the strategic focus is. And that's across a number of therapy areas. We actually therapy area indifferent. But you'll see over the next few years, for example, some IO opportunities. We have pembrolizumab. We have nivo. We just signed a deal on ipi with a Chinese company called Henlius. So -- and then further on, we'll have Tecentriq and then Enhertu, an ADC and so on. So many opportunities, some weighted towards oncology, but immunology is also a key backbone for us as well. So the strategic focus is really, as I say, getting towards the focus on biosimilars. So we're now at 28% of our sales in biosimilars. We wanted to reach 30% by 2028. I'd argue we may get there a little bit sooner, and that clearly helps our margin in terms of mix. On regionals, quite justifiably, 95% of the questions we get as an IR team and management get are around the U.S., which is less than 20% of our business. It's a key growth driver for us, but coming off a reasonably low base. We are a European champion. Over half of our sales are in Europe, but we also have a very attractive rest of world business. Now we did pull out of China last year. We divested our China business in May of last year, which is a little bit of a headwind for us in terms of sales comparability, but we are nicely balanced as a business regionally. This is a cut from our Q1 performance deck. So I won't dwell on that. But if you see, as an example, our biggest seller, Omnitrope, 19 years after coming to market and grew double digit last year. So a nice performance there. Tyruko, our TYSABRI biosimilar doing well in Europe, and we're hopefully going to be launching that by the end of the year in the U.S. This week, I'm pleased to say that we launched denosumab or Wyost/Jubbonti in the U.S., and we'll hopefully launch that in multiple sclerosis in Europe in Q4. Sorry, I'm thinking of Tyruko. So for Hyrimoz, our adalimumab biosimilar, performing well, both in Europe, but also more recently in the U.S. with regard to our private label contract that we have -- agreement we have with Cordavis. Pyzchiva, this week, we are again pleased to announce in Europe that we have launched the first auto-injector in that space. So we're very pleased to announce that. We've already taken significant share in the biosimilar part of that market in Europe, and we've launched a few weeks ago in private label in the U.S. for biosimilar STELARA or Pyzchiva. So it's going to be difficult to give you an idea of how that launch is going in the U.S. because we're a few weeks into it, but we'll do our best when it comes to the Q2 print. And then finally, the Eylea biosimilar or aflibercept, you can see at the bottom right. We will launch in Europe in Q4 this year. We're not quite sure because of dealings, obviously, around the originator medicine. We're not sure when they'll launch in the U.S., but hopefully in the next year or 2. We recently refinanced the balance sheet. So we had -- we've replaced our revolver, and we've also replaced some term loans that we had. So we refinanced there, bringing down interest costs, extending the maturity profile with a debt-to-EBITDA ratio now of around 1.6x as of the end of last year. So a good place in terms of our investment-grade credit ratings, nice level of gearing gives us firepower to do more bolt-ons like the ipilimumab deal that we did recently. And we'll continue to look at opportunities as part of our capital allocation priorities. Our capital allocation priorities are broadly threefold. First is to reinvest in the business through OpEx and CapEx. The second is to ensure that we are paying 30% to 40% of core net income as a dividend by 2028, and we've increased our dividend per share by around 1/3 earlier this year. Then finally, allocating some capital towards BD and potential M&A opportunities. We have so many opportunities for organic growth. I wouldn't expect us to conduct transformational M&A deals tomorrow. But having said that, we'll probably do that, knowing my luck, but hopefully not. I'll just kind of finish up with a couple of slides. Our priorities in 2025 are really to get those launches away, keep delivering on the pipeline, drive our financials and just maintain that unrelenting focus on execution. We do have various competitive advantages. For example, our European moat that we call it, which is the extent of our commercial and distribution capabilities in Europe, where we have multiple offices, multiple sales teams within each country in Europe that's fully resourced, been there for a long time with established relationships, not only with physicians and hospitals, but also the pharmacy chains, for example, where other distributor -- where other developers can come to market, but they don't have that kind of capability commercially. So they tend to struggle. And then finally, really on the midterm outlook. So we think we -- after delivering 9% growth in constant currency in sales last year, we think we can deliver a mid-single-digit CAGR over the midterm. And then in terms of the core EBITDA margin, you can see there a broad split of how we'll deliver margin improvements. I mean essentially, you can almost condense it down to operating leverage and mix. So plenty of opportunities as you see biosimilars becoming a bigger and bigger part of our sales to drive -- help drive that operating leverage and deliver that 24% to 26% margin for 2028. And we had a quick look at the latest consensus this morning, and it's 24.7%. So I think the Street is pretty much in line with our midterm outlook. So that was longer than 5 minutes. I'm really sorry, James, but very happy to answer your questions as well.

Thanks so much for the introduction, Craig, and to talk about the business. I guess you mentioned more than 90% of your questions' on the U.S., which is 20%. So I might as well start with the U.S. to not disappoint. Yes, maybe to start, you -- you're one of the few companies that have actually quantified the potential impact from tariffs from what we know at the moment, which is to be commended. I think from the discussions with your U.S. teams, how are you seeing the situation evolving from here? And the White House also seems quite keen to prevent the risk of shortages just given generics are such a high proportion of volume. So I know your U.S. Head of the U.S. is sort of part of the association, which probably gives you a unique lens. So I'd love any thoughts on that to start.

Yes. In a public forum, it's always difficult to talk about what we think the White House might do. So I might reserve some comments there. But certainly, we haven't seen biologics, biosimilars and generics impacted to any significant extent. So far, we've seen the original 10% on China plus the additional 10% more recently impacting our business. At a COGS level, we think that's fairly minimal in the low millions. So we can absorb that within our guidance for the full financial year '25. If the EU was faced with a 20%, for example, tariff and generics and biosimilars were included on that. And we think that potentially may be less likely than it was maybe 3 months ago, but who knows, then we think if it was a 20% tariff, given the size of our U.S. business and a few other factors, we think the total tariff impact, including China as well on an annualized basis would be up to $65 million on a COGS basis. So given -- and that's pre-mitigation such as price increases. So we think we're nicely insulated from that perspective. However, you never know what's going to happen. We are insistent not only as part of the generics and biosimilars sector, but also, as James was saying, we -- our Head of North America is Head of the lobby in the U.S. And she is very insistent and the lobby is very insistent that if you do see tariffs in this space, given the level of pricing in the U.S. and some of the margins achieved on some medicines in the U.S., that you may well see shortages and no one wants to see that. So we are making that case clear, but who knows what's going to happen.

On the subject of known unknowns, I guess, investors are sort of concerned about most favored nascent pricing impacting the IRA, particularly more on the branded side, but the prices come down, how do you see that evolves for you guys in terms of we might have to take price cuts there?

Yes. So I mean, it's a good question. Right now, most government business is quite -- is a very small proportion of our U.S. business. Our U.S. business is predominantly commercial. So any kind of MFN impact right now is fairly limited. But we are launching -- if you look at the profile of what we're launching over the next few years, particularly some of the monoclonal antibodies in oncology and immunology, then you may see government business increase as a proportion of sales. So we're not -- we won't be immune to the fact that we may be working off a lower base of originator final pricing before they get to patent expiry. So we are conscious of that. But right now, it's a fairly limited exposure because of the level of government business that we do.

Switching to generics, again, in the U.S. Small molecule generic pricing trends, at least for you guys, still seem to be quite favorable. I think you sort of said the low single digit, which does seem to be better than some of your peers are kind of seeing. So I'm just kind of curious why that is with your portfolio. And similarly, if trends persist there because I know many companies like yourself like to be conservative how they think about pricing. If they maintain at that level, is that upside to your guidance this year?

Yes. I mean I never take the approach and Sandoz management doesn't take the approach of sandbagging to look like here. We try to provide the market with a realistic impression of how we'll perform. So we are seeing overall this year, we do anticipate worsening pricing levels versus last year, not just in the U.S. but globally. So last year, we saw prices decline overall by 1%. We think it's going to be more like a return to normal this year of low to mid-single-digit declines. And broadly, we are -- where we are with our generics business, particularly in the U.S., we are launching at a rate of not. We launch multiple generics per year, but they tend to offset pricing declines. So our business in the U.S. is more of a low-growth business. I'd suggest going forward, what we're doing differently I am not quite sure, I'm sure it's the brilliant execution of the team in the U.S. just in case they're listening. But yes, I'm not sure there's any kind of secret sauce. I mean, I guess it's our strength, our scale, our level of distribution, our level of relationships we have to the market and maybe the mix of our portfolio as well.

So the introductory presentation, you covered a lot of materials, but perhaps if we could just focus a little bit on GLP-1 just we do get a lot of questions on that and recognize it's a staged opportunity. So what role does that essentially play in your pipeline? And how do you see the opportunity evolving? Investors are quite -- not concerned, but quite keen to understand the level of investment in terms of CapEx, use of partners, how much risk you take on board, et cetera.

Yes. No, it's a great question. So we see the GLP opportunity in phases. So next year, we will launch in diabetes in Canada. We frankly don't know how that market and that opportunity is going to pan out. We know at market formation, there will probably be a number of competitors because it's GLP-1. So we're anticipating significant levels of competitor activity. We want to ensure it's just Canada and it's just diabetes. And then after that, there are opportunities in Brazil and potentially Mexico as well. Now that's not within our guidance. If those opportunities do well, there would probably be upside. But we are using partners. We're not manufacturing ourselves. We're using almost kind of a test case like an experiment to see how the opportunity pans out. But the next wave then really comes in terms of the weight loss opportunity, which is obviously in a number of years' time you're into the 2030s. So we definitely want to be the market formation. How we achieve it in terms of CapEx and how much we make and how much we buy, we haven't disclosed to the market yet. Any implications for CapEx, we haven't disclosed. But clearly, the opportunity for a company the size of Sandoz with our position in the market and being one of the strongest generics and biosimilars companies in the world, we would absolutely want to take a very strong position. Now the question we then get is, well, other originators struggle with capacity and fulfilling the demand. And it's the first time we see originators struggling to such an extent to fulfill demand. We are not looking to fulfill demand for the whole market. If we take a small part of that market, that market could be enormous. I mean if you take, for example, the price of Wegovy in the U.K. at, say, GBP 200 a month, GBP 250 a month, you can imagine how much the price would come down once it's gone off patent and then the expansion of the market from there on in. And then you multiply that by however many countries. So it's going to be an enormous opportunity. The market will be -- Rupert and I were chatting with an investor yesterday who was saying that he's spending $330 a month for his New York gym. And he said that could easily -- he could save some money by taking some GLP-1 when it comes off patent. So yes, the market could clearly expand significantly. If we're a small part of that, that could be very lucrative for Sandoz.

Switching gears to the biosimilars business. You mentioned also in the presentation upfront that there's more opportunities than you can handle. And I guess also alluded to potential regulatory changes. And that's also a theme we've heard as well throughout the conference in terms of companies focused in this area. And some numbers we've heard is it could be as much, say, normally to do $200 million, $250 million to develop a biosimilar, but actually, you remove the Phase III, it's $40 million to $70 million or so. So that cost massively comes down. The reason why I'd like to pause and think about that for a second is when we think about what you've outlined to achieve over the next kind of few years, on the one hand, that could be potentially a margin opportunity for you in terms of the costs you've laid out with the guidance you've given. But then on the other hand, if you keep those costs, then that's a revenue opportunity going for products, which historically you haven't been able to go for. So how should we think about the push-pull levers of that and the viability of some of these other products? And if it's about bandwidth, is it staff? Is it resources? Is it money in the budget? So a few things in there around the same kind of theme around this legislation and the push-pull levers for the P&L.

I mean my answer is going to be incredibly unhelpful because we haven't fleshed it out yet. And the reason we haven't fleshed it out until to the market about it yet is because regulatory streamlining is at a very, very early stage. And we're not -- we're unsure as to how it's going to pan out. We know the MHRA in the U.K. has dropped the requirement for a number of years for the requirement for a Phase III. We know a German company, Formycon, that many of you probably heard of that I think didn't continue with their pembrolizumab Phase III trial earlier in the year. I think they announced that. We've done the same thing. We've closed off the new recruits in our pembrolizumab Phase III trial based off we had communications with regulators. The EMA recently published a paper, I think, in March or April, they call it a reflection paper that you'd be able to Google, I'm sure, and it talks about potentially moving away from the requirement for Phase III. Now that hasn't happened yet. So we're almost kind of in the speculation stage right now. So we don't want to promise the earth. And so if we get more clarity from the regulators at some stage, and we know that other regulators around the world have fed back that they will effectively follow FDA and EMA, meaning you can cover other markets as well, so you can be sure that you've got markets where you can go to. Once we get more clarity, then we can give the market more clarity as to how it's going to work. But again, it will just be a really nice problem to have. If we've got 28 assets in our biosimilars pipeline right now, we could potentially, as you say, reduce the cost of our development and regulatory build, but then reinvest that back into more assets. And there are so many assets we can go after. Someone yesterday had a nice jab at us by saying, why haven't you got assets like Tagrisso? Why haven't got this out? Why haven't got that asset? And it's a case of we can do anything we want, but we just can't do everything. And this just opens up the door potentially longer term. It would be transformational for the industry. And that's a really long answer that I'm going to make even longer now, so James. But -- the question we then get from people is an obvious question is, okay, well, if you're reducing the cost of developing biosimilars, doesn't that then mean you'll potentially get more entrants coming to the market, you'll get more developers and you'll get more of a commoditized market like in, for example, in various parts of the generics market. And the answer is no. I mean, if you're still looking at maybe $100 million, $120 million to develop a biosimilar, that's still expensive. That's an expensive hobby. How many people -- how many companies can do that. You still need huge amounts of technical expertise. You still need to develop a biosimilar, which is not a generic. It's a little bit more complex. And there are a number of companies that can do that. They can develop these assets. Can they commercialize? That's the real trick. Have you got the distribution? Have you got the relationships with the PBMs, with the GPOs? Have you got the relationships with the doctors, the hospitals, the pharmacy chains? We have how many developers have. And that's the real trick. And that's why we are not so concerned about the risk of increased competition if you get this regulatory streamlining.

That's very helpful. A few questions on some individual products in the time we have. We understand you recently launched biosimilar STELARA through [indiscernible] Can you give us any thoughts on the initial uptake on that and how material this opportunity could be given competition?

Yes. I mean so it's really difficult because we're a few weeks into it. So it's quite difficult. And obviously, we can give the market an update when we print, unfortunately, in August, which kind of ruins a lot of summer holidays. So sorry about that. We're fixing that next year. But certainly, if you look at a proxy of how STELARA or biosimilar STELARA has performed in Europe, versus the HUMIRA launch, the biosimilar launch is actually performing better at this stage in terms of penetration than we saw with HUMIRA. And that's because doctors over time are getting more and more comfortable with biosimilars. That's the feedback we get. There's clearly some reluctance, some hesitation around biosimilars, I would assume partly because it's got the word similar in it rather than exact. So I'm sure there's been some reluctance, but the feedback we get is that doctors are just getting more comfortable prescribing and using and administering a biosimilar. So I can't really give any update right now on biosimilar STELARA. We're very happy that we've launched in the U.S., and we'll give the market an update as we go through the year. it's worth saying that we're unlikely to get huge amounts of switches on day 1. It's going to take time. If you look at the biosimilar HUMIRA launch or HYRIMOZ as we call it, it did take a number of months before you then saw the jump in switches. It depends when the taps get turned on, and it may well be the case with biosimilar STELARA.

Understood. A couple of quick questions on adalimumab, if we can, especially since the loss of kind of IQVIA data for Cadarvas. Can you give us a sense in terms of how the trends of that are progressing? And I guess also related to the deal on that, I know there's not much you can say on specifics, but we understand that maybe that was renegotiated before you gave your margin guidance. We definitely get a lot of questions on that in terms of understanding if that's like 1 year, multiyear, thinking about volumes, et cetera. So to understand the risk parameters to the business with that over time.

Yes. So adalimumab or Humira in the U.S., it's definitely still a growth opportunity. We know the level of competition is intense. If you look at the ex private label market, we do tend to -- sorry, the ex Humira market in biosimilars, we do have a very commanding #1 position in that space. There's nothing to suggest that, that won't continue through this year, but we know the level of competition can potentially intensify. However, we know that the originator has said publicly that they may well lose market share as they lose some formulary access. That gives us an opportunity, given our very strong position already in biosimilars to take some share. And the market continues to expand as well as access improves. So I think given the size of the market and the dynamics at play there and given the originator's potential loss of formulary access puts us actually in a good place. We did come to market at the Q1 print, and we did talk about the fact that there was a step down in pricing for adalimumab. And we enjoy very strong volumes. We enjoy a great deal of visibility. We're able to plan effectively. Obviously, we're not spending the cash in any kind of similar way on SG&A to promote. So we enjoy a very strong position with HYRIMOZ, and hopefully, that will continue.

Excellent. Final question, I think we're going to be running out of time just on denosumab. Given the high level currently in [indiscernible] therapy, what are the key levers to gaining share? And I guess also the opportunity if you are kind of first to launch, we know it's a competitive space.

I think that probably the most important thing right now is the fact that we have obtained a Q code where we have effectively exclusivity in the U.S. until October on reimbursement. That's effectively how it's going to work. So we are in a commanding position to be first to market. And hopefully, we can consolidate that and get a strong position before we see others achieve that reimbursement at a patient level. So it's really about that. And again, we can update the market as we go through the rest of the year. But again, we're very confident. We're very pleased to bring a biosimilar to market. And I wouldn't discount the importance of the launch in Europe in Q4. That's very important for us. And again, just broadly and overall, Europe is 3x the size of our U.S. business in terms of sales. So that is a very important launch for us for denosumab as well.

Thank you very much. I try not to make the questions 90% U.S., but we covered a lot of materials. So Craig and Sandoz, thanks very much.

Great. Thanks, James. Thanks, everyone.