Good afternoon, ladies and gentlemen, and welcome to Orion's earnings conference call and webcast for the financial period of January, March 2024. First, I would like to apologize for the slight delay. We were facing some minor technical problems, which are now over, and we can proceed on here. My name is Tuukka Hirvonen, and I'm the head of investor relations here at Orion. In a few moments, our CEO, Liisa Hurme, will present the results of the reviewed period, after which you will have the possibility to ask questions from her and also from our CFO, Jari Karlson. We will be first taking questions from the conference call lines, and then also after that, we will take questions you can type in through the webcast chat function to us.
Those who are presenting their questions through the conference call lines, we kindly ask you to state your name and the organization you are representing before asking your question. Just before I let Liisa step in, today we have actually quite a special day today because this interim report is actually the last one that Mr. Jari Karlson will be delivering to you as the CFO of Orion Group. Jari has been the CFO of Orion Group ever since 1st of September 2002, so more than 20 years. Today is actually his 87th interim report or financial report he will be delivering. While I let that sink in to you guys, I'll draw your attention also to the traditional disclaimer about forward-looking statements, and then hand over to Liisa. Liisa, please, your turn.
Thank you, Tuukka. Good afternoon on my behalf as well, and welcome to Orion Q1 results webcast. Q1 for this year started very well with a strong top-line growth of 11%. We reached EUR 308.5 million of sales during the first quarter and EUR 56 million of operating profit with 1% of growth, resulting in 18.2% profit margin. Cash flow was clearly better than in Q1 2023. To that, transfer of pension fund was one contributor, and then a EUR 30 million milestone that we received from Bayer was eventually paid in the first quarter of 2023. And of course, good sales of Nubeqa can be also seen here with the royalties and product sales. And regarding the operating profit growth of 1%, or even being flattish compared to the revenues, we have, as planned and as communicated, invested more to R&D and also our sales and marketing.
Results of that can, of course, be seen on the top-line growth. Here, when we look at in a bit more detail, very good news regarding Nubeqa , almost EUR 12 million of growth. Also, Easyhaler, if you look at here at the column 4, almost as high growth both in percentage and in absolute value with Easyhaler product portfolio. Also, the whole other portfolio, excluding Animal Health and Fermion, grew with 7.3%, and Animal Health and Fermion were also growing nicely. We see a slight decline with Entacapone product portfolio, but clearly the decline is slowing down compared to the previous year and hopefully will clear out as we go along this year. The usual suspects on the column 1, Simdax and Dexdomitor and Domitor continued generic competition, taking sales down here.
On the operating profit, volumes are clearly growing, but margins are declining due to the previous slides' explanations on Simdax and Dexdomitor decline, very profitable products, and the new ones replacing those are not exactly as profitable. Royalties here, you can see the effect on the operating profit. Then fixed costs have grown 12.3%, and that's in line with our previous estimate for the R&D costs, sales and marketing costs. Here we can also say that some of our IT costs have increased somewhat. We have a big program ongoing with the SAP renewal, and some of our programs and data needs to be running parallel systems during that. Now, innovative medicines, 37.4%+ growth, a wonderful number. Let's remember here that we start every year from the beginning with the royalty rate. It's really a cumulative royalty rate from the beginning of every year.
So it kind of both the royalty rate and the sales will grow as the year proceeds. And we've seen all-time high product deliveries to Bayer during the last quarter of last year and actually a second highest ever during this first quarter. So the prognosis is from that aspect very good. And of course, as I said, other income is mainly from the research purposes, and we are really investing more, and I will talk more about that when I get to the R&D pipeline. And we are continuing with Ztalmy to get the pricing and reimbursement in place in Europe. Another business in very good shape, even though with the slight decline of 2.2%. If we deduct here the effect of Dexdor and Simdax and Russia from previous year, we still had some sales in Russia in 2023, especially in the beginning of 2023.
The basic portfolio in generics grew +5%. That's very healthy growth. It's assumed currently that generic sales in Europe grow between 4%-6%. So we are exactly in that space with our generic business. And in Finland, which is the biggest part of the generics, we were able to beat the competitors, especially in the reference priced market, and we're doing also well in the OTC healthcare and consumer health markets. I think that I probably, unfortunately, skipped one slide here in between. Branded products, another division growing with two-digit numbers, almost 18% growth compared to the Q1 2023. Easyhaler being a clear lead indicator and the growth product here with more than 30% growth. It is driven by the green wave in Europe, especially in the U.K., but currently we are also seeing the same kind of demand in Germany.
With Easyhaler product, we can answer to this demand in the market. Entacapone, I already discussed, almost on par with previous year. Divina series, which for us is mainly hormonal gel with estradiol, is also growing compared to the previous year. All in all, a very good start for branded products as well as for the innovatives and for the generics, which shows that all of our businesses are contributing to the growth of the group, Orion Group. Then a bit smaller businesses, animal health not being shy at all compared to the other divisions, healthy growth there as well, and Fermion keeping up with the external sales to other pharma companies. Animal health sales grew also both on companion animal side with sedatives, also launch of Bonqat in Europe, and then also on the livestock business.
Now, clinical pipeline, the change here to the previous one is that we have now completed ODM-111 phase I successfully. We are expecting and preparing to report the results at some point next year in suitable scientific congresses. Otherwise, the portfolio is as it has been this far. Sustainability continues to be a very strong item for Orion. Of course, we are preparing, as any other company, for the CSRD reporting. Here you can see some of the major themes that are important for us. It's patient safety. We look at it from the supply perspective, of course, from the wider scope of pharmacovigilance and product quality as well. But in these days, it's not self-evident that the pharmaceuticals are and the medicines are available in pharmacies when you need it. Our service level is on an exceptional level. Environment, we continue to work on that front.
We are already ahead of our 2030 carbon neutral target for Scope 1 and Scope 2 in Orion and are now expanding to Scope 3. We've also put a lot of emphasis on social responsibility, building a roadmap in the company and including our stakeholders and groups that we work with, and also, of course, the safety, putting focus on the safety of our employees. Now that you saw the quarter one result, which we are very proud of, our quarter one was better than we were planning. And based on that, we are specifying our outlook for 2024 and specifying so that we raised the lower limit from EUR 270 million -EUR 280 million. So we have a more specified narrow scope for this year from EUR 280 million - EUR 310 million of operating profit.
The outlook for net sales remains the same as it was in the beginning of this year. To this outlook and our understanding of the year that has started, it's important to understand that really all our businesses, Nubeqa is a wonderful growth driver. But as you saw, Easyhaler is as important with the fast growth and all our divisions are growing in a healthy way if we deduct and/or decline the effect of Simdax and Dexdor. All businesses are contributing to the growth of our profit. Here you can see on a slide the basis for the outlook, which I already discussed. Easyhaler, Nubeqa growth, entacapone product family more as a flattish, Easyhaler, our animal health definitely growing, and generics-based portfolio as well growing.
What is a bit challenging is really to predict the timing of Nubeqa royalties and product sales and some of the milestones. This year, it's the EUR 70 million sales milestone. So thus, we have a certain, how would I say, room for our outlook given these facts. And R&D expenses are anticipated to increase significantly, and significantly means that it's on a different level than we are used to. It is understandable as we are going to start a phase II program for our pain molecule with several phase II studies, and we have still several phase IIIs ongoing with our partners. And also, we have molecules in our research pipeline, which actually demand much more or consume much more of our budget since those are biologics, and there we need to do the CMC work from end to end.
So clearly, more emphasis on R&D and also on sales and marketing, which has resulted in growth in all divisions. And this kind of puts together what I already said, that this, how would I say, makes it concrete and gives a framework for our strategy. We clearly have growing revenues, and all divisions play an important role there. And that allows us and enables us to spend more on R&D. We want to build the company future beyond the 2030s and also invest in other ways, like sales and marketing, secure that we have enough production capacity and have enough production capacity. I'm sorry, we still have a bit of a technical challenge here. I was actually in this slide. Thanks, Tuukka.
So also, we want to invest to the production capacity as we are doing currently, increasing Easyhaler capacity, increasing our DiviGel capacity, and also our Nubeqa capacity at Fermion. So all these growing revenues enable increasing the investments, growing EBIT, and also growing our dividend. A clear package. And we really work, in this framework. And now I'm going, jumping one slide over to remind you our financial objectives, which relate to the previous slide of our strategy. Now they move totally independently. Anyway, when I say that the revenues will grow, it's growth beyond 8% on a CAGR, also that we are able to grow faster with our operating profit, keeping the equity ratio at least on 50% and return on equity on at least 25%. So this gives a very strict, nice framework for all our investments and growth initiatives.
And then the dividend payout of between 50% - 100%. Now I go back. Let's see how this works. It works well. And we come to the capital allocation focus, telling the same story, a very, very good story here: internal pipeline as a first priority, dividends, maintaining and increasing the capacity where it's needed. Then, licensing or acquiring commercial or R&D assets, whatever is then suitable at which time. And then acquisitions, if they really fulfill a criteria to produce growth in a way we want in, for example, such geographies that where we are not yet operating, or if they provide some kind of a competence or capabilities that we need to fulfill our strategic targets. Now, I think it's time to close on my half and invite Jari Karlson here with me to answer to your questions before we close the session.
Please feel free to ask any questions.
Let's hand over to the operator. So, operator, please, it's time for the questions from the teleconference lines.
If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Anssi Raussi from SEB. Please go ahead.
Thank you. Hi all. A few questions from me. The first one is about your minor upgrading guidance. Of course, you mentioned that the year has started slightly better than you had expected, but is there something which is trending more positively than you had expected, or was it something Q1-specific event, like just trying to figure out how the assumptions behind the guidance are developing?
Thank you. A very good question. Indeed, I said that the Q1 was better than we planned. It comes from many places, so I'm not going to go and say separate things here. It was a bit better gross margin or gross profit, you know, on our sales. It's slightly better Nubeqa royalties, excellent, and slightly better sales from Easyhaler. So you could call those trends as well, or those are trending. So it gave us the opportunity to be a bit more accurate on our outlook.
Okay. And now, as you mentioned, the Easyhaler, what was behind the strong growth in this product, like extraordinary strong?
Well, first of all, Easyhaler has enjoyed a strong growth since the latter part of the last year. There are several reasons, the most important being really this green agenda of health authorities in the U.K. The same agenda seems to be forming in Germany. These countries and the authorities have set a very high and demanding target for their carbon emissions, declining their carbon emissions. They have actually calculated that inhalers are the worst ones to produce carbon in their portfolio. Being able to provide a dry powder inhaler with a very, very small carbon footprint, or none at all actually, has provided us an opportunity to accelerate our sales. Of course, we need to remember that last year's first quarter wasn't that good for Easyhaler. The comparable period wasn't that strong that, of course, kind of intensifies this growth percentage for this quarter.
Okay. That's clear. And then about ganaxolone. So can you give us any timetable for ganaxolone? And have you included any expectations regarding this product in your guidance for this year?
It would be great to give a timeline. It's not up to us. It's really up to the reimbursement and pricing authorities. These processes take a long time in Europe, and you need to go country by country. We are in process, can't give you an exact timeline currently. Thus, it's difficult to give an estimate for a product either.
But like we have said many times before, this first indication for ganaxolone is expected to be anyway a very small, small, small one. So even if the launch had gone as planned, it still would have had only a very minor impact on our overall numbers.
Okay. I understand. And hey, finally, thank you, Jari. It's been a pleasure to work with you during these recent years. So thank you. That's all from me.
The next question comes from Sami Sarkamies from Danske Bank. Please go ahead.
Okay. Hi. I just wanted to start with thanking Jari for good cooperation over the years. I have five questions. We'll take these one by one. I still want to go back to the guidance that was touched in the previous question. Have you assumed any more positive development during the rest of the year, or is this guidance revision sort of backward-looking that you have just sort of updated your assumptions relative to Q1 that went a bit better than expected?
Well, I guess, I mean, that part was already discussed. But I think one thing is that we started from maybe a relatively wide range. And now when we are one quarter of the year is gone, so we gradually have a more accurate view of how the year will look like. And that's also behind. So nothing really has changed in the overall big picture. But our overall view of how the year will be going is hopefully now a little bit more accurate than at the beginning of the year. And that's also behind the specification. So we thought we're confident enough that we could narrow the guidance a little bit, and especially taking it upwards from the lower end.
Okay. Moving on to other products. If we think about Easyhaler, Stalivo, and Animal Health, are you expecting Q1-like growth rates in the full year, or other things that we should take into consideration when thinking about the rest of the year?
Well, generally, as stated already in the outlook, we are expecting Stalivo and Entacapone product family to be quite flattish. It's already the decline has stopped to some extent, you know, that the decline that we saw last year. And Animal Health should continue on the same trajectory that it's been going on to date this year. And with Easyhaler, of course, this first quarter percentage might be a bit more than we will see because the first quarter, 2023, was not good, was not at the same level as the rest of the year of 2023.
Yeah. So we really saw during last year already nice growth that when we started last year, we were actually a little bit behind the year before, and then ended up with relatively nice growth for the full year. So we really saw a very good second half of the year last year. And that's why the percentage shift definitely will not be as strong as during this first quarter. But nice growth anyway expected for the full year as well.
Okay. Thanks. Then moving on to the pipeline. Regarding ODM-208, you're planning to initiate a new phase I or two study with Merck. This will be in combination with other drugs for prostate cancer. Can you comment on which drugs we're talking about and whether this could broaden the market potential for ODM-208 significantly?
Well, indeed, yes, such a study is going to be started. Unfortunately, I'm not in place to comment that. I leave commenting on to MSD on that program.
Okay. And then just wanted to verify, are you still on track to initiate phase II for ODM-111 during second quarter?
We have stated that we will start the phase II program for ODM-111 during this year. So we are still on track with that.
Okay. And then finally, do you have any comments regarding the situation at Marinus? I'm thinking about their recent setback with ganaxolone.
Well, again, I think this is something that Marinus is the right party to comment on. So I wouldn't like to dwell in other companies' matters.
Okay. Thank you. I don't have any further questions.
The next question comes from Brian from Jefferies. Please go ahead.
Hey, it's Brian from Jefferies. I thought I'd just ask a bit more on the pipeline. So just on that Glykos partnership for up to three ADCs, have you started R&D for those programs, just trying to get a sense of timing for additional R&D and when we should expect to see something in the clinic? And then just on those three ADCs, would one of those relate to Glykos's GLK-10 asset in discovery targeting HER2, or are we talking about new targets here leveraging the MMAU cytotoxic payload, which I think is an improvement on the MMAU used by PBD and PolyDOX? Thank you.
Well, I had a bit of difficulties with the line, unfortunately. But I will try to summarize, and then you need to just ask again if I couldn't get it. You were asking about the pipeline and timing on some of the programs there and whether we are going to have new clinical programs starting this year. That we have not stated anything yet on. All programs are such that anything can happen. And thus, we don't dare to publish or tell such data. Of course, we are hoping to bring new molecules to our pipeline within the next few years. And we have the biologics there in research and pre-candidate stage. I think you were referring to those when you were asking probably on the mechanism of those. But I would probably need to ask you to repeat the question or even write it down .
Okay. Just to check, you heard it was with regards to Glykos?
Yes. We have a collaboration, yes, with.
Okay. Yeah.
Yes.
Okay. Yeah. That's it then. I think you've answered it then.
The next question comes from Graham Parry from Bank of America. Please go ahead.
Hi. Thanks for the questions. It's Graham Parry from Bank of America. Just the first one, just to kick off on Easyhaler. Was there any inventory build in there? I know you talked about the sort of easy base and then the green agenda in the U.K. and Germany. But any inventory movement or any inventory build that was driving the sales on that line?
Any inventory build?
Yeah. I guess we at least are not aware that our customers would have been building their inventories. So as far as we know, it really is coming from the actual increase in the demand for the products.
Yes.
Great. Okay. Then on ODM-208, I know you've reserved this sort of EUR 60 million cost. But as you start phase III there, at which point do you think that would be exhausted and you'd actually have to start booking R&D costs through the P&L? And would that be in 2024? Is that something you wouldn't anticipate having to actually book P&L costs until 2025, 2026, assuming, of course, this isn't converted to a royalty deal?
Well, I can start and then Jari can continue. Just to remind that the deal with MSD is now a collaboration and co-development deal. We are really developing together. However, we are not accruing costs on that development currently. MSD is paying for that. Yes, we have accrued EUR 60 million to cover those in case needed. There is an option in the agreement that either side can turn the agreement from co-development to traditional licensing agreement. Of course, if such an option would be exercised, then we could release that EUR 60 million from the balance sheet.
Yeah. So it really is dependent very much whether the option will be used or not. And so far, the arrangement is such that until that decision is done, Orion will not accrue costs. Or of course, if we would calculate that the costs in that case would our share would clearly exceed EUR 60 million, then of course, it might be a different thing. But at least not for the time being, we are not in that situation. So the decision will be made once we know whether the option will be used or not. And maybe to remind that the option is something that either party can use. So even if Orion decides not to use the option, the MSD still can do it and the other way around.
So it's the timing and the decision tree on the option then at this point. So at which point, I guess, at which point do you know whether you're going to need to start booking P&L costs for ODM-208 in excess of the EUR 60 million?
Well, if either party exercises the option, I'm sure both parties will let markets know that. But at this stage, we can't comment on that one.
I guess the only thing we can say is that we have earlier told that in this year's guidance, we have not included any of these ODM-208 costs as part of our R&D. That gives a little bit of picture of the timeframe. What happens then beyond this year, then that needs to be communicated later.
Okay. Sorry if I missed a bit. Just can you quantify the pension release benefit to cash flow?
Yes. Like you mentioned, on the last day of last year, the pension liabilities were transferred, and we gained the approval from the Finnish Financial Supervisory Authority to transfer the cash during the Q1. And about EUR 41 million worth of cash was transferred from the pension fund to Orion during that quarter. So that is included now in the positive and good cash flow for the first quarter of this year.
Got it. Okay. Thank you.
Okay. There are no more questions at this time. So I hand the conference back to the speakers.
All right. Thank you. It seems that currently we don't have any questions online anymore. And I guess that there won't be so quickly any follow-ups on the conference call lines either. So I guess it's time to state that every good story must come to an end. And unfortunately, from our side, good for you, it's now time to wish Jari well-deserved retirement. And thank you for all these years as a colleague and friend.
Indeed. I want to thank Jari warmly for these years, not only for years as a CFO working with me in events like this. Every day, we work very, very closely. I have had the privilege to work with Jari for more than 20 years as a colleague. Now we work very closely together. I couldn't find a—I hope I found a good CFO. To date, I can only say that it's really been brilliant. I have had full trust. It's been a privilege to start a CEO career with such an experienced CFO who has patience to explain things and take you through the initial steps. I wish you all the best for your coming career. Thank you so much.
Thank you, Liisa, for your nice words. I also want to thank many of the people in the audience who I have had the privilege to work with for so many years. It's great to have good analysts who know the company and ask tough questions for us to answer because that also helps us to develop our thinking. These have been very nice years. Like Tuukka said, all good things come to an end at some point. Now it's time to move forward.
Thank you, Jari. Thank you for the audience. Next time, we will meet here on August 8th with the half-year report. Have a good summer, everyone.
Thank you.