Good afternoon, ladies and gentlemen, welcome to Orion's full year 2022 results webcast and conference call. My name is Tuukka Hirvonen, and I'm the Head of IR here at Orion. Today on the agenda, we have first CEO Liisa Hurme's result presentation, followed with a Q&A session where you can pose questions to Liisa and also to our CFO, Jari Karlson. We will be first taking questions from the conference call lines, after that, we will address the questions you can send us through the webcast chat tool. Kindly state your name and the organization you are representing before asking your question. Just before I let Liisa to step in, just a reminder about the disclaimer and forward-looking statements in this presentation.
Now it is my true pleasure to welcome on the stage for the first time as a CEO to present the results of Orion, CEO Liisa Hurme. Liisa, the stage is yours.
Thank you, Tuukka. Warm welcome on my behalf as well to the Orion full year 2022 webcast, results webcast. Year 2022 was an exceptionally eventful year for us. In the beginning of the year, our partner Bayer updated their sales estimate for Nubeqa to be EUR 3 billion. Later in spring, we announced that we are going to focus our research on oncology and pain. In the autumn, we also told that we are going to change our organizational structure and introduced also changes in Orion executive management team according to some changes in the marketplace and also in our product life cycle. Then we gained rights and made a license agreement on a new pain molecule, a calcium channel blocker that we named ODM-111.
From our playbook, we finally made an acquisition on an animal health business. We acquired a company called VMD that we call Inovet. It's known as Inovet at the markets. We made a license agreement on our prostate cancer molecule, ODM-208, with MSD during last summer. This allowed that molecule to be developed fast and to reach patients as soon as possibly on a global basis. A good news from US FDA approved darolutamide in metastatic hormone-sensitive prostate cancer. We built pipeline in our specialty products, these days generics and branded products pipeline, with the partnership deal with Amneal in U.S. to commercialize their pipeline in Europe. We really laid a good foundation for future growth.
Numbers from 2022 are of course impacted on the upfront payment by Merck on ODM-208. With that payment, our net sales grew by 29%, our operating profit 81%, and margin up to 33%, and also our cash flow to grew over 100%. However, the underlying business also developed positively. The net sales without the upfront payment grew 7%, a very healthy percentage in our business. Operating margin or operating profit decreased slightly, and I will come back to those reasons later on in the presentation. Today, our board has made the decision to propose dividends of EUR 1.60 per share.
More closely, our net sales developed positively, in all fronts, except for the Simdax and Dexdor, which suffer a generic competition that has really tightened and toughened up during the last year. In the beginning of the year, we had some five generic competitors for Simdax. In the end of the year, we had more than 10 competitors. Nubeqa developed positively, EUR 48 million of product sales and royalties altogether. Easyhaler portfolio and products developed positively. Of course, the upfront payment here, as a separate sector. Exchange rate, they fluctuated during the year, from a low to high and again to a low towards the end of the year. Animal health shows a positive development. The latter half of the year included the Inovet sales in animal health business.
Operating profit also was on a positive side, I would say. It grew EUR 55 million in local currencies with all products. However, the generalization of Simdax and Dexdor hit quite hard, and also the cost really burdened us towards the end of the year for Q4. Also the prices on a generic market decreased as we know especially on the Finnish and Scandinavian market. More specifically, we here state that the currency rates varied really strongly during the year, being negative for the first quarter, then on a positive side, if as we remember on the Q2 and Q3, ending up negative in Q4, contributing partly to our Q4 result.
Other operating income and expenses include, for example, some of the payments and cost related to the Merck agreement. As I said, the underlying business without the upfront payment developed well. Specialty Products division grew by 4%, very much according to the markets. The proprietary products grew by 7% without the upfront. This is the underlying market. Animal health, we can see here the 35% growth, which is contributed mainly by the Inovet included for the latter part of the year. Fermion, and contract manufacturing, and here mainly Fermion has suffered to some extent on a capacity constraints and thus is on a minus side.
In this picture we can see that proprietary products is shown as the biggest division, and that's of course due to the fact that the upfront payment is booked on that business division. Most of our top 10 products developed very positively. Easyhaler grew with two-digit number, the whole portfolio being the biggest product portfolio in our list. Stalevo, entacapone products still growing with a few digits each year. It's a treatment that neurologists trust a lot and of course there are more and more patients looking at the demography in the Western world. Nubeqa is the clear winner here, growing more than 100%, and Simdax and Dexdor as a 10th product are clearly here. Here you can see the effect of generic competition to those products.
The Animal Health sedatives, Dexdomitor, Domitor, Domosedan, and Antisedan, here is reflected mainly the timing of deliveries and shipments to our partners. Divina series for hormone replacement therapy going strongly with the two-digit numbers. Burana, a local brand in Finland, and Solomet mainly in Eastern Europe and Finland. biosimilars is a very binary business. You either win a tender or not in a Nordic country. This year we were not that lucky. Looking at the proprietary products in a bit more detail, I already mentioned Easyhaler portfolio really, growth more than 10%. Bufomix is our flagship product, the budesonide formoterol combination, Parkinson's disease, and Nubeqa. Simdax, Dexdor, as already mentioned, taking a hit on a generic competition.
A few words on Nubeqa and how the sales are booked by Orion. The royalties are tiered on an annual basis, so we start each year on approximately on a 20% royalty, and there when the sales accumulate during the year, the royalty percentage increases after certain triggers or thresholds. As an example, if the sales and when the sales reach EUR 3 billion, the average annual royalty rate would be slightly above 25%. That would be the average, starting on the low side and ending on the high side. The variation on the quarterly sales is also caused due to the fact that the previous quarter's product sales to Bayer are always deducted from the next month's or next quarter's royalty.
This also causes some fluctuation and makes it a bit difficult to estimate. On this slide, we can see how well Nubeqa has grown, and the last quarter on 2022 was the all-time high for Nubeqa. Specialty products, which includes our generics, branded generics, and biosimilars and self-care products until the end of last year, grew with generic prescription drugs 1% and self-care plus 11%. In Finland, 4%, Scandinavia, we were in par with the previous year, and Eastern year slightly lower, and rest of the world, which for us is partner sales and deliveries to our partners, also grew. Finland is the biggest country for these products, and of course, we also face the price decreases in our biggest market.
The Finnish market is a challenging one with the price decreases as, I think, all the generic markets. this year we really bet that market, which grew by 3%, and Orion was able to grow by 4%. Even more evident was our success on the reference priced prescription drugs, where we grew by 12%, market being on a decline by 3%. market decline is really due to the pricing and/or we being able to grow the volumes, respectively to our growth percentage. self-care, a very well, growth percentage. Orion sales in Finland are very evenly distributed between the different segments for the reference priced and self-care and other products each having 1/3 of the business, so very balanced portfolio.
Finland still holds a very significant and single biggest market for Orion, representing almost 30% of our net revenue. Animal Health, as said, grew 35% by the acquisition of VMD, or Inovet as we tend to name that company. On the companion animal side, the sedatives still remain the biggest product group and the decline. Now I move to Fermion, on the external net sales, and here we only report the external sales of Fermion, is really tied to the capacity constraints at the moment. A few words on the new organizational structure that became effective in the beginning of this year and that we announced in October last year. First, why did we do it? There are three main reasons.
One is the maturity and life cycle of our own developed products, which are facing a generic competition like Dexdor and Simdax, but of which some still hold a very good brand value and will need to be nurtured in a respective way. The other thing is that markets have changed during the past years tremendously, and especially the generic market has become very, very competitive and is becoming even more competitive and global as we speak. The third one is that now we do have our own innovative molecules like Nubeqa on the market. This allowed us to establish the innovative medicines division, where also other innovative molecules belong, whether they come from our own pipeline or through in-licensing.
This new structure allows us to better position for the growth and competitiveness on a global market. I will once again go through which products belong to where. From the earlier Proprietary Products Division, Nubeqa and ganaxolone belong now to the Innovative Medicines Division. Also from the Proprietary Products Division, the legacy products Easyhaler, Stalevo, Comtess, and Comtan are now a part of the Branded Products Division. There we have a long-standing customer relationships to pulmonologists, neurologists, and also to gynecologists. The Divina series from Specialty Products Division has also been removed or is part of the Branded Products Division these days, as are the generic entacapone products.
Simdax and Dexdor, facing a tough generic competition are now part of the Generics and Consumer Health division, as is the Precedex that is sold in US and an old product called Enanton, LHRH analog for prostate cancer. Otherwise, the Generics and Consumer Health are formed on the basis of our former specialty products divisions. Animal Health is as it was with the acquisition of VMD, and same goes with Fermion. I'm proud to present our clinical, key clinical projects in our new focused R&D strategy. This is indeed very focused. There are the darolutamide and ODM-208 projects ongoing within oncology, then a pain project ongoing in phase I with the ODM-111, then ODM-105 that we are preparing for the phase II in psychiatric disorders.
Sustainability is strongly on Orion's agenda, and of course, patient safety is our top priority here. There are, of course, other things that we drive, as safety of our personnel. We have developed positively last year on that measure. Our lost time incident frequency, injury rate developed very positively from the previous year, but of course, there is still room to improve. Also, regarding the environment, we have set a target to 2030 to reach carbon neutrality, and we have several energy efficiency projects and programs ongoing, some of them already taking place, and some of them are implemented and creating savings on the energy consumption and also, of course, on the costs. This has been especially important as we've experienced the energy prices hiking last year.
Of course, for the patient safety, customer complaints play a big role. They are also a positive development. In this industry, as we all know, a lot of audits are carried out, both by the customers and by the authorities on both sides, by Orion to our suppliers and partners, and by them to us. Of course, for the ethics side, we train all the time our personnel regarding the anti-bribery code of conduct and other appropriate rules and conducts to work. Now, for 2023, the year that has started, we estimate our net sales in 2023 that they will be slightly higher than in 2022, and this without the ODM-208 upfront payment impact.
Then for the operating profit, we estimate it to be slightly higher or higher than in 2022, also, compared to the numbers without the ODM-208 upfront payment effect. Without that, the number, the comparable number would be EUR 232 million. Bases for the outlook. On a positive side, Nubeqa, Animal Health after the acquisition, and also for the underlying business, estimated milestones, and of course, the Easyhaler business. At the same time, we face the generic competition, price cuts in our key markets. Russia is a big question for all the companies. Then for the operating profit, Nubeqa milestones play a key role. Operating costs, cost of goods, and Simdax and Dexdor and other declining products of course, present a challenge for us on a profit side.
This was all from me regarding the year 2022 and the outlook and guidance for 2023. Here you can see the upcoming events. The annual general meeting will be held on 22nd of March in Helsinki, and the next interim report will be on 27th of April. Also, save the date on your calendars. We will hold a capital markets day on 25th of May 2023, this spring, actually quite soon. You are all warmly welcome to that event. We will let you know more on the details and agenda as we get closer to that date.
Thank you, Liisa, for the presentation. Now it's time to invite Jari Karlson also on the podium. We will first, excuse me, take the questions from the teleconference call line. Please, it's time for the questions from the telecon lines.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Sami Sarkamies from Danske Bank. Please go ahead.
hree questions. Starting from the outcome for last year, you didn't quite make the original unchanged EBIT guidance, adjusting for the ODM-208 milestone. Can you please discuss the main sources of deviations against your expectations for last year
Well, for the last year, for the latter part of the year, what we really saw was the declining gross margin of the product sales due to the cost, the wide, cost inflation, you know, on the whole value chain. That really accelerated towards the end of the year and Q4. Of course, the Dexdor and Simdax generalization also hit us on an accelerated rate towards the end of the year. The currency rate, as I said, was on a negative side in the beginning of the year, but towards the end of the year, we also saw the negative effect on that. Is there something, Jari, you would like to add on this?
Well, I mean, of course, like in every year when the year starts, you have a plan. With our fairly wide product portfolio, there are lots of things that go better and some things that go worse, and that was definitely the case last year as well. Of course, the inflation like which Liisa already mentioned is from the cost side definitely was something which we didn't include in our original plans. We, for the full year, the FX rates of course then compensated a big part of that. There was a lot of variances between the quarters and like the fourth quarter, we saw several EUR million of negative impact coming from the exchange rates.
I guess from the cost side, we actually ended up spending a little bit more money on R&D than we probably had in our plans at the beginning of the year. For example, we didn't include in our original plans the deal to buy the pain molecule from Jemincare. There we already started doing the phase I program, which of course costs money. Also towards the end of the year, we made a couple of arrangement in the preclinical side, like the Alligator continuation program and so forth. I guess those were the key events. Then of course, the overall numbers were a little bit of mixed up by the in...
The acquisition of the Inovet business as well, which is from the profile somewhat different than the average Orion business because it's a generic livestock product. There the margin structure is somewhat lower than what we have on average. I guess those were the key events which comes to my mind, especially during the last quarter towards the end of the year, the inflation pressure, the FX rates and some of the faster movements in some of the R&D programs than we thought, which of course is positive side, but added to the cost were probably the biggest drivers there.
Okay. Thanks. Then I have two questions regarding your guidance for this year. Starting from the costs, I think you're clearly sort of preparing for increasing COGS and OPEX also this year. Would it be possible to somehow look at this so that you would be able to describe how much is kind of the cost inflation and maybe margin pressure coming from lower prices, and then how much is coming from intentional growth bets that you will be making during this year? For example, if we think about gross margins, are the second half levels indicative of what you will be sort of looking this year?
Well, maybe.
You can start.
I can start from that. Maybe the inflation as such, I mean, it still probably will have some impact during the first part of the year, but I'd say that the larger impact probably will come from the continuous generic competition for some of the products like Dexdor and Simdax, which clearly are declining. Also we mentioned Russia, the business there is now rapidly declining and like earlier indicated, it used to be 3%, 4% of our total sales. When that level of sales is rapidly going down, of course, that will have negative impact as well.
There are some growth bets, of course, included in the sales and marketing side, but there is also some uncertainty about the timing of some of those bets because they are related to the product launches, and there are still some open questions there. As is in the R&D, so if everything goes exactly as planned, it's very likely that the R&D cost will increase. Like we always know, they are somewhat difficult to predict, especially when it comes to programs that might meet some future deadlines towards the end of the year, and the exact timing is often a little bit difficult to estimate. I guess as a summary, the probably the bigger impact likely from the negative side will come from the prices, not that much maybe from the additional inflation anymore.
Of course, on the positive side, the Nubeqa of course is expected to generate significantly more margins than we saw last year.
Okay, when it comes to gross margins, I mean, when we look at your performance in third and fourth quarter last year, I mean, is that a good indication of where you are at the moment?
Well, I wouldn't necessarily say that because the role of Nubeqa is again going to be very different. Like Bayer has indicated, it will be a significant growth there. Of course, the other businesses outside of Nubeqa, I'd say that there is no dramatic change to be expected I think in any of the areas there.
Indeed, I don't think there are any dramatic changes there. When it comes to cost inflation, it's at the moment very difficult to estimate the effect for the full year. We've seen how it was towards the end of the last year and it's difficult to say it might continue as such on the same level, you know, in the beginning of the year at least. For the full year, it's difficult to estimate.
Yeah. In this industry, the rotation of.
Mm.
of the inventories and the impact of inflation changes there is very slow. Even though of course we already now seeing signs that the raw material prices are not increasing anymore, maybe in some areas we even see some declines, but before those actually have impact on the cost of goods sold, it will be a fairly slow movements.
Indeed, before they end up in the manufacturing processes. There will be always a kind of a time gap there.
Okay, thanks. Finally, a second question regarding your guidance for this year. You have provided quite sort of clear guidance with relative wide ranges. Can you just name, you know, some of the key uncertainties going in this year? For example, it seems that on milestones there are really not that large uncertainties, but this could be in some other areas of the business.
Well, I think there are always uncertainties related, for example, to markets, you know. What type of, and how fast, for example, the generic competition accelerates for some of our products like Simdax and Dexdor. As we've seen during the past few years, it's difficult to estimate when and how. Also the generic markets, both in Nordics and Eastern Europe are challenging. You know, we know that the prices are decreasing, but how fast? Those are, I think, definite uncertainties. And then the cost inflation all in all. When it will be stabilized and when will that be seen in our figures.
Of course, even it likely is not going to cause that much deviation for our full year numbers, but the impact of the Russian business is also there are of course some uncertainties there. Then of course, like always, the currency movements. Last year, the impact was unusually large. We haven't typically have that big impact from the currencies. But again, that is of course also one risk factor included. These I guess are. Of course, I'd say that even though Nubeqa is currently on a very nice growth path, but still doubling again the sales by Bayer in the market, of course it includes risks.
Mm-hmm.
I mean, it's difficult to be 100% certain that will happen, even though of course we rely on our partners kind of an estimate on what they can do in the market. Some deviations there of course have big impact on our numbers, positive and negative-
Mm-hmm
of course.
Okay. Thank you very much. I don't have any further questions.
The next question comes from Iris de Man from Carnegie. Please go ahead.
Hi, this is Iris from Carnegie. I have a couple of questions. Firstly, based on your previous full year outlook, outlooks, is it fair to assume that your slightly higher or higher EBIT guidance for this year means an EBIT growth of 4%-13% around?
Well, I think we have some historical data on what slightly higher or higher means, and Tuukka may correct me, I think it has varied from 3.8 to up to 8% in, when, within that range. I think that's the info, only data factor that I can give at this point.
Yeah, and of course, now we have fairly large guidance. unfortunately-
Mm-hmm.
because of the uncertainties we were just discussing with the previous question, we had to give at this stage.
Mm
a year fairly wide guidance range, which we hopefully then can start narrowing as the year goes further and we are more certain of how the year will turn out. At this stage, unfortunately. It's definitely our belief is that the year will be better than last year, at least. The direction is clear, but how much? Hopefully, in the coming months, we can get a little bit more clarity on that. Maybe I can-
Okay
clarify Liisa's statement that when we are saying slightly higher or slightly lower, in the history, the actual outcome has been between 3.8% and 8%.
Mm.
When we have been talking about higher or lower, in the history, the actual outcome with those statements have been between, 10 and 13%. We are not saying that these are the ranges-
Mm
They are the actual facts.
Exactly
that have happened in history. That kind of gives you some ballpark areas where those wordings are in the percentage scale.
Definitely, as Jari said.
Okay
on a positive side. Okay. Can you still clarify that what are the biggest drivers of variation with this EBIT growth range that you provided?
In 2023?
Yeah.
Liisa already mentioned some of.
Basically, what is the largest one?
Yeah. I mean, Liisa, I guess already mentioned, of course, the final impact of the inflation, definitely a big thing. Then the other thing is that how strong the-
Mm
generic competition will be, and not only for Dexdor and Simdax-
Mm
also, for example, in the domestic markets here in Finland, which still is a very large business for us. That is the second group. Then I think the third one comes from the overall cost side. Some launch time schedule, some development, how fast some of the clinical trials actually do proceed during the year. I think those are probably the biggest drivers which each can have impact of millions of EUR and which at this point are not that 100% clear. In the history, if we think typically things have gone, some things have gone a little bit better, some a little bit worse, and the outcome has been typically slightly positive. Many of those things can develop both ways.
Mm-hmm.
Of course, in the question of R&D, it's always a question that if programs are delayed, the profitability will be better. On the.
Mm
other hand then in long run.
Mm-hmm
it's not a good news that the programs are...
Mm
are progressing slower.
Okay. In terms of your sales guidance, so basically you're guiding for only slightly higher sales. Does your guidance imply that Nubeqa is basically the only growth area this year and that you are assuming other businesses to decline? If you could just discuss that, how do you think specialty products, other proprietary products and animal health to develop this year?
Well, I can start. Nubeqa is clearly not the only growth driver. Of course, it is the single biggest for us, but our own portfolio is expected to also generate growth. Easyhalers have been growing very nicely with more than 10%. I think there is a positive outlook definitely to Easyhalers. Stalevo has also been steadily, very little, but steadily growing. In general, our generic portfolio has been growing as we show last year and the previous years also. I think that if I could use the term also that underlying business beyond Nubeqa is also growing to the large extent.
Yeah.
Much more modestly.
We have some of these relatively large areas where we will definitely see decline. I mean, Russia already has been mentioned several times, which still was last year more than 3% of our normal sales without the ODM-208. That is expected to be significantly lower this year. The generic competition for Dexdor and Simdax, which went down last year by more than EUR 30 million. The decline is expected to continue, unfortunately quite rapidly also in the coming years. The net effect is that we expect total to be slightly higher, but not more than that because some of these declining items are also relatively large ones. Thanks. A question on Nubeqa's royalty rate.
What kind of royalty rate do you expect on Nubeqa sales for this year and then for 2024 and 2025?
I guess I mean, we are still in the old statement that we are in this roughly 20%. We just updated that it gradually goes up and by the time if the sales really reach EUR 3 billion, then we can be on average annual rate at somewhere like 25%. Still, even with the very optimistic and good guidance from Bayer of roughly EUR 800 billion, we are very far from that level. We are still fairly close to that 20% on an annual level. There's no reason to change that guidance. We are not at this stage giving any estimates of how the sales will proceed in the coming years.
Because of that, it's also very difficult to give the royalty percentages because they are completely dependent on the size of the sale. Like I said, it's there are certain steps when they are reached, the royalty rate always during the year goes higher, and that's why it's difficult to say. Of course, to some extent it will go linear, but even Bayer has not disclosed which year they are planning to meet the EUR 3 billion goal. From currently to that time, I'd say that the royalty rate will go fairly linearly up.
How fast that growth will be, we'll see, and that's why we are not at this point really capable of giving any further guidance of what the percentages might be in the coming few years.
Okay, thank you. That was my last one... question.
The next question comes from Graham Parry from Bank of America Merrill Lynch. Please go ahead.
My question, first one's just going back to the margin structure over the midterm. If your and this is ex-royalties and milestones, if we strip Nubeqa ODM-208 out of the business, growth margins are under pressure, you've got very low growth across the rest of that business. Over the midterm, do you actually expect the operating income of that sort of base business to be growing? Or does the margin pressure more than offset the top line because you actually see flat to declining business there? Secondly, specifically on 2023, OpEx is increasing despite having EUR 20 million one-off cost in the base from ODM-208. Just help us understand which lines that's in.
Should we expect your G&A to fall because most of that EUR 20 million was in there, and is the increase really being driven by R&D in particular? Thirdly, just a broader structural question around the business. If you have a declining profitability base business, and all the growth coming from out licensed royalty companies, is there an argument here to separate those businesses or business streams? For example, your tail business could realistically benefit from being part of another business, so could you actually create value for shareholders by splitting the businesses? Thank you.
Maybe, if I start from the last question, and then we move backwards, you know, to the gross base business gross margin, and whether it's will be declining or what on a midterm. Yes, I see your point with the structure of the business as Nubeqa is such a strong growth driver for us and is an out licensed business. However, we also sell Nubeqa by ourselves in our, in our European organization. We manufacture Nubeqa, and we work across the organization in many ways with that. We also see that as a part of our oncology franchise, so to speak. We are all the time growing our knowledge and presence in that field.
Of course, we are looking for another products to be promoted in oncology in Europe. At the moment, I would say we don't have any intention of separating these businesses. It's an integral part of the Orion as it is.
Of course, I mean, especially in this business because we all know that the patents expire.
Mm.
At some point, so having a broader portfolio is a way to manage the, and bridge the business from one era to another. I think we have, I mean, a slightly smaller scale case years back when the Parkinson's franchise at the peak generated more than EUR 300 million of sales. If we, at that point, have separated that type of a business from the other, the outcome of that separated business would not have been very good. The Nubeqa doesn't tie up that much other than manufacture resources within Orion but provides an opportunity.
Mm-hmm.
To grow the other businesses and invest in the growth of the other businesses, which then can replace Nubeqa eventually in less than 10 years' time when the patent very likely is gone. In this industry, 10 years is a very short period of time. I think that's also one-
Aspect.
One viewpoint on-
Mm-hmm.
On that matter.
I think then from whatever viewpoint, whether you look at it from the, our portfolio outside Nubeqa or Nubeqa and oncology, I think, they kind of compensate each other in many ways, especially as we go forward in time, and the generalization will be a fact for that product as well. I think the, one of your questions related to the base business, whether the gross margins were, whether we will see a constant decline. Did I get it right? I think I wrote something like that here. I think that, of course, depends a lot, you know, how Nubeqa plays a, of course, here for the base business.
The generic market has a big implication on how that profitability will develop but also how Orion will work and how efficient we are and how productive we are in across the whole value chain. That's also something that we are, of course, all the time working, you know, that so that we can manage and compete both on the generic and the branded generic field, which are the base business for us. I don't see a dramatic change on that field.
I guess it's fair to say, like we have indicated many times that gradual decrease in the growth margins of the base business is to be expected because that's the nature of this business that in the generic markets, the prices gradually are coming down, and that's why you need the new innovative products. Nubeqa, of course, is our key product in that area as well. Of course, we are working on the other ones. That's why we are spending on R&D and the other cost elements like that, doing in-licensing investments in order to bring in new higher margin businesses as well in the portfolio.
Of course, you are correct that also we need to be careful on the cost structure, that if the margin for the business are coming down, we need to be very careful in what type of an investment we can put in those businesses. I guess it's fair to say that when we think of the already generic businesses of us, probably marketing and sales efforts are fairly limit.
Mm-hmm
...limited on those products. You had a question about the operating expenses, and there. Like I said earlier, the R&D, if everything goes right, we see that those costs probably will be some slightly higher than last year, but very dependent of course, on how some of the key programs really are proceeding during the year. Also on the, on the sales and marketing side, we are now... To some extent last year, we started to come back from the COVID time when many of the operations were down. This year it will be now the first year after the COVID started, when we actually in the sales and marketing side are expecting to have a fully normal year.
Mm-hmm.
That is shown up in the cost. Of course, the cost inflation is included there in many places around year of we are talking about easily 4%, 5% type of salary increases. That definitely is part of that there. Depending on some of the timing of some of the launches we are planning, that also will have impact there.
Also, the VMD cost will be now.
Yeah. Yeah.
For the full year.
Oh, of course.
not only for six months.
Mm.
Yeah, that's true.
That's true.
...that's both on administration-
Mm-hmm
...sales and marketing co-costs that those costs were included last year only for roughly six months, well, seven months. This year they will be there for the full year.
Mm-hmm.
Okay. Should we think about the general admin costs declining though, year-over-year? Or is that actually part of the increase? Just and it'd probably helpful if you just help us understand where the EUR 20 million ODM-208 cost were. Was that, you know, EUR 10 in G&A and the rest in across R&D and SG&A or was it nearly all in the G&A line?
Yeah. Yeah. I mean, they were main bulk of those costs were in the administration. Some in the other function line, bulk of that cost increase was part of the administration cost last year.
Got it. Okay, thanks. Just one follow-up on ODM-208 on conversion to global licensing. Why did you structure that option there, and what factors would go into Orion thinking about whether you're gonna trigger that from your side? That's my last one.
The 20, 208-
Two-oh-eight
...the option.
The option.
Yeah.
Yes. I think, the both companies really want to see, you know, how the program will progress and keep the options open, you know, for the commercialization.
Yeah. The option, conversion of the option, I mean, there are no timelines given, and that was part of the negotiation.
Mm-hmm
with VMD. There was... I mean, we cannot open it any more than that.
Mm.
That was one of the element in a very complicated agreement, and whether we will use the option or not, time will show by the time when the option can be used.
Great. Thank you.
The next question comes from Harry Sefton from Credit Suisse. Please go ahead.
Brilliant. Thank you very much for taking my questions. Sorry to go back to guidance, my first one is on the operating profit guidance for this year. I'd just like to check what you are implying for the base business. The guidance growth would target about EUR 250 million based on what you've said previously, where the growth range sits. It also includes the EUR 30 million milestone that you've mentioned for Nubeqa sales. That would imply that you've got EUR 220 million from the business. We've got guidance at around EUR 150 million of Nubeqa income from Bayer, which is predominantly profit. That would leave you with approximately EUR 70 million profit in the base business, and that base business delivered about EUR 150 million profit in 2022.
Is that the expected level of deterioration in profitability in the base business, or is there something that I'm missing in any of those numbers?
Well, I guess we cannot.
I would-
really cannot-
Sorry
discuss those numbers. What we are saying is that we will have slightly higher or higher than the last year without the ODM-208 impact, but we are not giving any guidance about the margins of Nubeqa and so forth. Unfortunately cannot help you with the exact numbers here.
Okay, no worries. Maybe I can ask about the progression of the integration of Inovet. Were there any one-off costs associated with that in 2022? Are you expecting there might be any further integration costs in 2023?
Actually, I think the actual integration costs have been relatively minimal. Of course, there were certain transaction costs and so forth involved in doing the deal, and then there are costs involved in developing the business. You might recall that they had under construction the new injection plant at the time of the acquisition, and that investment is still ongoing. That, of course, has impact on the operations and has some cost implications as well. I'd say that the something which you could call actual integration costs, those probably are not material from the group point of view.
No.
It's more the costs of continuing the building.
Mm-hmm
of the acquired business and continuing the programs that already were there when we acquired the business.
Understood. My final question is on European pricing reforms. We've seen a number of proposals across the European markets and including from the European Commission. What level of pricing headwinds are you factoring in into your 2023 guidance? I guess in your, some of your local markets, are there any material proposals which you can highlight, specifically in Finland?
To start with Finland, it's difficult to estimate exact number for the 2023. What we've actually seen past the 10, during the past 10 years is a decline of 35% of the prices. I think even the last year showed a 10%, almost 10% decrease on the generic product prices. I think that kind of gives a picture of how the Finnish market and the pricing there develops for the generics. Very similar for the Scandinavian countries at the moment. Generally, I think the Europe is a very challenging market regarding the prices also for the innovative medicines compared to the US. Of course, as we operate in our local, say, Nordic and Eastern European markets, mainly on the generic front, this applies to us.
That probably gives some range to how the market looks.
Yeah. And at least in the past couple of year, much bigger impact actually has been coming from the fact that the Lexaurin Simdax...
Mm
have been, have become generic, and the prices there have decreased significantly. The impact of those individual events has been clearly higher than the overall impact of the market pricing and development. That probably is still going to be the case also in the coming-
Mm-hmm
coming years. Of course, like we have indicated for many years, the generic business prices tend to decline.
Mm-hmm
and you very seldom see cases or countries where you actually could see price increases. I think that phenomenon will not change in the coming years either. The only thing that varies is that how fast the prices decline.
Mm.
Sometimes slower-
Mm-hmm
Sometimes faster, the direction from the company point of view, of course, is unfortunately that. That's why we need the new higher margin and innovative products to compensate for that.
Brilliant. Thank you. That's all from me.
As a reminder, if you wish to ask a question, please dial star five on your telephone keypad. There are no more questions at this time. I hand the conference back to the speakers for any closing comments.
Thank you for all the questions coming from the telephone lines. Actually, this time we do not have any questions coming through the webcast, so I guess it's time for Liisa's concluding words to end this event.
Thank you very much for your attendance, for this, 2022 results webcast, and thank you for the good discussions and questions. As already said, save the date for the 25th of May, 2023. Thank you.
Thank you.