Good day and welcome to the Almirall Q3 financial results and business update presentation. Today's conference is being recorded. At this time, I would like to turn the conference over to Pablo Divasson. Please go ahead, sir.
Thank you, Jody. Good morning, everyone. Welcome to the Almirall Q3 2019 financial results conference call. This presentation was released earlier this morning and is available on our corporate website. Presenting today, we have Peter Guenter, Chief Executive Officer, and Bhushan Hardas, Executive Vice President, Research and Development, CSO. Peter will make some introductory remarks about the nine months and will provide you with details on the financials, and later come back to sum up. Bhushan will update you on our recent announcement on our pipeline. After that, we will open for a Q&A session. Before we move ahead, I would like to remind you that certain statements that we will make in this presentation are forward-looking statements. The forward-looking statements reflect Almirall judgment and analysis only as of today, and results may differ materially from current expectations based on a number of factors affecting our businesses.
With that, I will pass you over to our CEO, Peter Guenter.
Thanks a lot, Pablo, for the introduction, and good morning to everyone on the call. First of all, this is the first call without our former CFO, David Nieto. I would like to thank once more David for his contribution over the last two years and a half, and I wish him all the best in his future endeavors. Since it is the first day of Mike McClellan as our new CFO, I will take care of the financial part of the presentation. Since we have Mike with us today, Mike, I would like you to say a few words.
Yeah, good morning, everyone. I'm very excited to be here with Almirall. It's my first day, so I won't be very active on the call, but looking forward to getting to know the investor community and everybody in the near future.
Thanks a lot, Mike. Going back to the business, I am very pleased to say that there is continued good business momentum of our growth drivers. I will update you on the financial details shortly. In the first nine months of the year, we continue to see good growth in our European psoriasis franchise. I will provide you with more details on Skilarence and Ilumetri in a moment. We have been very encouraged by the strong data since the launch of Seysara in the U.S., where the product continues to gain market share in dermatology. I will elaborate on this shortly. This quarter, we have made significant progress in the late-stage R&D pipeline.
As you are aware from our recent announcements, we have finalized and initiated the phase III trials for lebrikizumab, submitted two dossiers to the marketing authorization holder in Europe for finasteride and androgenetic alopecia, and terbinafine for onychomycosis. Finally, as announced at the AAD in Washington, D.C., tirbanibulin for actinic keratosis completed two phase III studies, which have achieved their primary endpoint and moves forward to registration. Bhushan will be discussing this in more depth later. In summary, we are very pleased with continued momentum generated by the business during Q3, and therefore are confident in meeting our upgraded guidance for 2019. Moving to Skilarence, we are very pleased to see our recent launches gaining good momentum in their respective markets.
Within our psoriasis franchise, Skilarence continues to gain market share with strong performances in Germany and the Netherlands, which is an important market due to the significant previous DMF experience there. We have achieved over 80% market share in Germany for the 30 mg initiation pack for new patients. The Q3 seasonality impact is in line with our expectations. Unit sales continues to gain good momentum in countries where we have launched. For example, the Spanish and Italian markets continue to drive overall unit sales momentum, with Italy surpassing 300 units a week in September. We are confident we will continue to grow the brand, although at a more gradual pace compared to last year, because last year in Q4, we benefited from a very strong launch in the Netherlands.
Turning to Ilumetri, the good initial uptake of Ilumetri in Germany continues with sequential monthly growth in number of patients treated. Our commercial teams have been very active this quarter, continuing the extensive European rollout campaign. National healthcare systems have published positive comments on the use of the product, including NICE in England and the national Spanish authorities. At the European Academy of Dermatology Congress in Madrid, we presented the results of two extension studies that confirm the long-term safety of tildrakizumab and showing high and durable PASI and PGA response rates, supporting the strong commercial foundation for this product. This quarter, we have successfully agreed a final price negotiation in Germany, which was in line with our expectations at EUR 12,000 a year, which will come into effect as of November the 1st.
Turning to the US, we have been very encouraged by the initial uptake of Seysara, where early into the launch, Seysara became the number 1 branded product in the US oral acne market. That momentum has continued in Q3, where we have increased our market share in the branded and generic market, achieving 5.8% TRX market share of total prescriptions driven by dermatologists. That's an additional 1.6% gain in market share quarter-on-quarter. Market coverage has also increased quarter-on-quarter, with around 59% restricted and 37% unrestricted coverage. The utility and effectiveness of having an oral antibiotic approved for a wide age range of patients continues to receive excellent feedback from KOLs and patients.
Our promotional education program has reached over 2,500 providers, and this positive feedback is captured in the data with over 4,200 dermatologists having prescribed Seysara in the third quarter, with 89% prescribing at least two scripts. Again, operationally, Q3 continued to see good momentum. Let me now guide you through some of the financial highlights for the quarter. We have delivered what we believe is a very solid set of financial results for the first nine months of the year. Key highlights are total revenues and net sales growing at 15% and 17% respectively at constant exchange rates, driven by our recent launches and the acquired products in the U.S. A positive evolution of the gross margin with a year-on-year improvement of 280 basis points at constant exchange rates driven by our improved product mix.
Despite the significant investment in key product launches, we continue to exhibit good cost control and achieve the 3% CER decrease in SG&A spending versus last year. With this, we delivered strong operating leverage with an EBITDA growth of 55% and a major improvement in the year-on-year margin. Importantly, our operating cash flow was up to EUR 149 million. Regarding key challenges we faced during the quarter, while we experienced year-to-date growth of Ciclopoli sales in Europe, we had a weaker performance in Asia due to the increase of competition for that product in that market. On the next page, you can see the main contributors to net sales over the period. In particular, I want to highlight the strong contribution from our new product launches as they gain momentum in their respective markets.
We expect meaningful contribution from these products in the near term as we continue to gain market share in key geographies. On the negative, you can see a small adverse impact on our existing product franchise, which comprises Ciclopoli in Asia, as mentioned previously, and Immunoryz also in Asia. In summary, a strong CER net sales growth of 18%. Going through the P&L, you will see here in some detail the 17% net sales growth that I just mentioned. As expected, other income was a touch higher given milestones from AstraZeneca. Gross margin, as I've already stated, continues to benefit significantly from the favorable product mix. Regarding R&D, our spend increased relating to phase IV studies for Skilarence and Ilumetri. However, we continue to invest at a similar rate to last year in terms of percentage of sales.
All of this led to an excellent EBITDA growth of 55% at constant exchange rate. Just a brief comment regarding SG&A evolution. You can see over the year, we continue to manage SG&A expenses tightly while investing in our new product launches. The meaningful savings made in the quarter of EUR 13 million are compensated by our launch cost for Q3. Going further down the P&L, the combination of growth, improved product mix, and strong cost control provided operating leverage with solid EBITDA and EBIT margins increase. With this, we generated a net income of EUR 97 million and a normalized earning per share increased to EUR 0.0064 per share. With that, I'll turn it to Bhushan for the R&D update.
Thank you, Peter. This quarter, we have made significant progress in our late-stage pipeline. I will talk you through it. As announced at the 2019 American Academy of Dermatology annual meeting in Washington, D.C., we have finalized the last piece of information for our product in actinic keratosis, tirbanibulin, which takes us closer to submission of the dossier, both in the U.S. FDA as well as EMA in Europe. Additionally, this quarter, we finalized the design of phase III clinical trials for lebrikizumab and announced the initiation of the program ahead of schedule. finasteride for androgenetic alopecia and terbinafine for onychomycosis, remind you both of them are topical products, were filed in Q3 to the European authorities. The finasteride filing puts us on target for first national phase approval estimated in late 2020 or early 2021. Now looking at lebrikizumab.
As you know, we recently announced the initiation of the phase III clinical trials. These two twin studies designed to demonstrate the best in disease profile of moderate to severe atopic dermatitis. Approximately 800 adults and adolescent patients ages 12 and over with moderate to severe atopic dermatitis will be enrolled in about 200 sites in the U.S., Europe, and Asia. In the initial 16 weeks induction phase, all patients will be dosed at every two weeks with initial loading dose. Responders from this phase will enter 52 weeks maintenance phase, where these will be dosed at every two weeks or every four weeks. This design will give us data on flexibility of dosing for long-term maintenance of the patient. I would like to remind, atopic dermatitis is a chronic condition and needs long-term maintenance of these patients.
The top-line results for the 16-week induction period will be expected in first half of 2021. Now, coming to tirbanibulin. We have recurrency data, which is the last piece of information we require for the regulatory filing. We will file the NDA in early 2020 to the U.S. FDA, and then after to European EMA. As announced at the 2019 AAD meeting, both phase III studies, 003 and 004, achieved their primary efficacy endpoint. The primary endpoint is defined as 100% of complete clearance of the actinic keratosis lesions on day 57. Complete clearance was observed in 44% and 54% of the patients treated with tirbanibulin, while in the 5% and 13% in patients treated with placebo. Very good results indeed. Most important local skin reaction is erythema. Only 3% and 10% of the patients reported severe erythema. Excellent results as compared to most of the product on the market.
Now we have one-year recurrency data, as shown in the slide. I would like to take a moment to put it into perspective. We remain very optimistic about the product profile, which we believe is very competitive given its compelling efficacy and excellent local skin profile. Importantly, all the KOLs and the practicing dermatologists that we have consulted with in the past few weeks remind us that actinic keratosis is a chronic disease, and therefore they regularly retreat the patients on a day-to-day basis. We are conducting a retreatment study as requested by the EMA to be included in the label. That being said, of course, we would like to make tirbanibulin even more competitive. We will begin to assess the benefits of more intensified treatment regimen. This will further improve the efficacy and substantially reduce the recurrency rate.
All that said, we strongly believe that we have very competitive product as it stands today. We plan to launch this in the U.S. market in first quarter 2021, followed shortly thereafter in Europe. We would like to remind you, as mentioned initially, peak sales potential for this product is over EUR 250 million on the basis of the profile as it stands today. As I mentioned earlier, there is a potential to further improve the profile, and timing and the cost will be disclosed when we finalize the program. Now I hand it over back to Peter for closing remarks.
Thanks a lot, Bhushan. As you have very clearly heard from us this morning, we have delivered a strong operational performance as the business continues to perform well in line with our expectations across our key markets, Europe and the U.S. We enter into Q4 with strong momentum, where we are confident in Almirall's growth drivers as Skilarence and Ilumetri continue their good growth patterns and Seysara continues to gain market share from brands and generics in the U.S. dermatology market. Furthermore, as you have heard from Bhushan, our late-stage pipeline has achieved significant momentum this quarter. Finally, as you heard from us before, a key component of our strategy remains the search for additional external opportunities to further complement our current growth profile and to generate sustainable value for our shareholders. With that, I'll hand back to Pablo to open the Q&A.
Thank you, Peter. Jodi, back to you for the Q&A, please.
Thank you very much, sir. We will now begin the Q&A session. To ask a question, please press star one on your telephone keypad. Please ask just one question to start with to allow everyone to ask a question, and then you can press star one again to re-queue. Our first question for today is from Jo Walton from Credit Suisse. Please go ahead.
I'm just going to chance my arm with two despite the instructions there, please. If you could just clarify what the sales were for Seysara in the third quarter. You hadn't, I don't think, given us a 1Q number. We've sort of been guessing the 1Q, 2Q, therefore we can get a 3-quarter number, but we can't get a sense of how much incremental revenue there was in the third quarter. Perhaps you could expand a little bit on that in terms of how you're managing to remove the patient assistance program, sort of what level you'd achieved in the third quarter, and how you think that that will continue into the fourth quarter. My second question would be about SG&A going forwards, not so much necessarily this year, but looking into next year.
Originally, you said you could do something like flat SG&A on a cash basis, you've been able to do down 3% for the nine months. You've managed to take out lots of productivity savings to match your launch costs. As we think about modeling 2020, how should we be thinking about those SG&A costs going forwards? I'll rejoin the queue for more questions. Thank you.
Yeah. Thanks a lot, Jo, for the question. Let me take them one by one. First question on Seysara third quarter. The third quarter net sales is actually EUR 7 million, which is actually a little bit lower in terms of net sales growth compared to the prescription growth. The reason for that is that we took a provision for returns in the third quarter. I think the better way to look at it is really the prescriptions moving forward, and you have seen, again, a nice increase in both in prescriptions and market share. In terms of potential impact of changes of the couponing program, well, it's a bit early to say because we have basically remained more or less stable with our couponing program since we launched the product.
I can tell you that early next year, we will make a change in the couponing program because we feel comfortable we can start to do that now that we have close to 40% unrestricted coverage and more than 60% total coverage. We will give you more color on that in the next quarter. On SG&A, you're right. We have been extremely disciplined this year and of course, we will continue to remain disciplined. However, I would tell you that repeating a decrease of SG&A in a year with ever more launches, which will be 2020, with some pre-marketing costs for tirbanibulin and lebrikizumab, is of course, going to be a bit of a heavy lifting. We will give you, again, more color and more information when we announce the guidance for next year.
I think that you should model to some degree, some increase of our SG&A for next year. Thank you.
Our next question for today is from KC Arikatla from Goldman Sachs. Please go ahead.
Hello, everyone. Thanks for taking my questions. I have two. The first one on Ilumetri. Can you talk about the lack of sequential growth from 2Q here, please? More broadly, how do you view the biologic treatment market for psoriasis, just given increasing competition here? The second one, it's a housekeeping question. Can you confirm that your EBITDA guidance of EUR 300 million-EUR 310 million is on constant currency? What's your expectation for currency headwinds or tailwinds this year? Thank you.
Thanks, KC for the question. Let me take the second first. Yes, the guidance that we have given has always been at constant exchange rate. I wouldn't go in the crystal ball and give you any information how I think that the currencies are going to move. We just communicate on constant currencies. Your question on Ilumetri, well, you may remember that actually the way Ilumetri is administered is a once a quarter injection. Especially since we are still fresh after the launch of the product, you may see some, I would say, quarterly aberrations in net sales, which are actually not confirmed by the patients that we capture on a quarterly basis. That's why we gave you that slide in the deck where you see a very nice monthly increase in patients, actually. We continue to gain patients in Germany.
We have been launching in some other countries during the summer. We think it's more relevant to look at those patient increases on a monthly or quarterly basis rather than the net sales because of that specific dose administration every quarter of Ilumetri. Your broader question on what's the impact of the biologics on the whole market dynamics. I think you can look at it both ways. It's clear that the number of competitors we have is increasing, I would say every year. As you know, there are now three IL-23s that have been launched in the German market.
On the other hand, it's also very clear that the IL-23 seems to be the winning class and we have a lot of research indicating that especially for patients without concomitant psoriatic arthritis, so let's call it a pure PSO, psoriasis patients, that the IL-23 is in the eyes of many, many doctors to be preferred class. Of course, we think that all IL-23 ships will rise with the tide and that we will benefit from that. It's also true, obviously, that it's a very competitive market out there. What we also start to see is a further acceleration of the overall biologics market because of the new price proposition of many of those products.
We also think that there will be a general increase of use of biologics in countries like Germany, for instance, because of that push of many companies and also the new price points of, for example, biosimilar adalimumab. Thank you.
Thank you.
Our next question is from Peter Welford from Jefferies. Please go ahead.
Hi. Thanks. Sorry, I'm going to just flaunt the rules and ask a couple if I can do as well, please. Firstly, just on Aczone, I wonder if you can give us an update. Should we still anticipate a generic by year end? Just on Seysara, I wonder if you could just outline, presumably you've negotiated now payer coverage for 2020 already. Can you give us any sort of outlook as to how those rates may improve or are those rates likely to stay pretty constant now going into 2020? Just finally on Ciclopoli in Asia, any comment on how you could potentially mitigate the impact there? Should we anticipate those headwinds now to continue for the next few quarters? Thank you.
Thanks a lot, Peter. Three questions. I'll provide you the answers to the three. First of all, on Aczone 7.5 generics by year end, this is still accurate as an information. It will be around indeed, the transition into the new year that you will see the generics of Aczone 7.5 coming in. That's confirmed in what we said last quarter. Seysara coverage 2020, I think it's a little bit early to answer that question. Of course, we will do everything we can to further increase the coverage for next year. We hope we will give you more color on that during the next earnings call. Then Ciclopoli mitigation, yes, we are working on that. Basically on Ciclopoli, you have two blocks. You have the Asian block and you have the European block.
We are putting into place a certain number of plans to continue to drive Ciclopoli double-digit for next year. We are confident that both in the Asian block and in the European block, we have solutions for next year to come back to double-digit growth for this product moving forward. Thank you.
Our next question is from Guilherme Sampaio from Saxo Bank. Please go ahead.
Hello. Guilherme Sampaio from Saxo Bank, CPI. Just one question on cash flow generation this quarter. If you could provide more color on the headwinds behind the working capital evolution, if possible. Thank you.
On the cash flow generation, well, overall, I think we had a very good cash flow generation, so we're very happy with that. On working capital in the U.S., there has been a slight change in payment terms with the big wholesalers, so that has driven a little bit of a negative twist to the working capital in the U.S. I would say it's now absorbed and moving forward, this will remain constant. Thank you.
Thank you.
We have a follow-up from Jo Walton from Credit Suisse. Please go ahead.
Thank you. If I could just follow up on the currency question that you had earlier. Far at the revenue level for the nine months, you were up 17%, but on constant currency, you were up 15.5%. Should we assume that, just short of 2% impact at the sales level is also reasonable at the profit level, and that's what we should be thinking of, crudely speaking, for the full year as your currency impact? Could I ask for a little bit more, just a clarification, I think, on your actinic keratosis product. There was a comment that a retreatment study was needed for the EMA filing.
Presumably, you're happy that the data that you have is enough for that, but you are looking to do an incremental study that you will be telling us about next year to try and tease out a bit more about that retreatment. Do you think that second study that you are planning is going to be required to get the coverage and pricing that you want? Or is it just a nice-to-have that you can bring to the market after you've got your initial approvals? Thank you.
Thanks, Jo. Again, on currency, I wouldn't speculate on what's going to happen and what are the differences between constant exchange rate and real exchange rate. I think we just communicated in terms of forward-looking statement on currency, sorry, on constant exchange rate. We'll stick with that. On AK, I'll turn it on to Bhushan, but I think before giving it to Bhushan, I think the key message we wanted to convey with you is that number one, retreatment is a thing that doctors are absolutely used to. This is a chronic disease and they are used to retreat those patients. We think we have an opportunity by doing some of those additional studies by not only cutting the retreatment down, but also further improve the value proposition by having even better efficacy at day 57, so short-term efficacy.
Bhushan, is there anything you want to add on that?
Yeah. Thank you, Peter. To your first question, the European agencies asked us to create the data on what will happen if you retreat the patients once they have a recurrence at one-year period. I think we are generating that data, so that we can have in our label that the patients can be retreated because this is what the physicians want on a day-to-day basis. That is completely different issue, and I think we are pretty much geared up to that. The second study that I was talking about, which is intensifying the treatment. That is, as Peter said, it is only to further improve the product profile. Today it doesn't affect what risk profile that we have from reimbursement or pricing perspective. This is completely add-on, later on, when we have this data. Do I make it clear?
Yes. Could I just also ask, please, for a comment on the net financial income. You had a very strong exchange benefit in the third quarter, so that you had net financial income rather than a sort of traditional net financial expense. Should we think of that as a one-off, and we should return to a normal EUR 4 million to EUR 5 million of quarterly net financial expense as we go through the end of this year and next year?
Yeah, Jo. You're right. In the net financial income for the third quarter, the EUR 9 million improvement is largely driven to a positive exchange rate impact. Again, moving forward, I refuse to make any speculation on how this could look moving forward. That's basically what I would like to answer to your question.
Thank you.
Thank you. Next question.
Our next question is from Francisco Ruiz from Exane. Please go ahead.
Hi. Well, almost all my questions has been answered, but I have another one on the cash flow. Could you give us an idea of how much of the milestones from Astra are included in this quarter? Thank you.
Okay. As you know, Francisco, we have announced a further milestone that will be paid by AstraZeneca, which is related to the combo launch in the U.S. We have not collected that as of yet. This will be collected in Q4. However, you will of course see the cash impact, that's very clear. In terms of other income impact, this will be very marginal, since we have already forecasted that revenue in our models.
Okay. Thank you.
Thank you.
The next question is from Jamie Escribano from Santander. Please go ahead.
Hello, good morning. I have one question. Could you elaborate a little bit more on Ciclopoli performance in Asia? In terms of competition, what is exactly what you are facing, and can you confirm that Europe is doing okay, or do you also see increasing competition in the European block? Thank you very much.
Yes. Thank you, Jamie. First, on Asia, the point is that in Korea, we have 2 types of new competition. First, we have some copies of Ciclopoli that have been launched by local companies. Second, there is also a new chemical entity, so a different product that has been launched. Basically, it's about intensification of the competition. What we have done with our partner in Korea, which is Menarini, we have looked at a specific action plan to mitigate these factors and to come back to growth for Ciclopoli as early as the Q4. In Europe, it's a different ballgame. As you know, the biggest market in Europe is Germany. I think we have a very competitive position with Ciclopoli in Germany.
The reason why you have seen a slower growth rate this year compared to last year, when you look at the European dermatology business, you will find the Ciclopoli isolated performance in Europe. The reason is that the overall market of onychomycosis in Germany, which traditionally was growing 5%-10%, is this year growing at a very low single digits. I don't know whether this is a thing that we will see in the future, we remain very competitive and we continue to defend our number 1 market share in this market. We have also recruited a new head of the business unit of OTC in Germany, who actually comes with a very high and deep knowledge of the OTC market in Germany. She has worked all her career at GSK.
We're very happy also to have been able to recruit the top-notch talent there, to further drive our Ciclopoli business in Germany moving forward.
Okay, thank you.
Confident with double-digit growth for next year for Ciclopoli. Thank you.
Okay. Sorry, just one further follow-up question on the guidance. Bearing in mind the milestone and the other income that you expect to book in Q4, should we expect an upgrade in the overall EBITDA guidance, or do you stick to the current guidance?
No, Jamie, as I mentioned, to be collected milestone in Q4 is actually much more relevant when it comes to the cash than with the other income. We have already in our models, recognized that other income to a very, very large extent, so it will hardly impact our EBITDA for the quarter to come.
Okay. Thank you very much.
Thank you very much.
Okay. If there are any further questions, please press star one on your telephone keypad. There are no further questions that are coming through. I will hand the call back to Pablo Divasson. Please go ahead.
Thank you, Jody. We are now going to close our Q&A session, and with this, we will complete our conference today. We want to thank you for your participation. You may now disconnect.