Earnings Call: Q2 2015

Jul 16, 2015

Ladies and gentlemen, welcome to the presentation of the Q2 Results 2015 for Sobe. I will now hand over to Jeff McDonough, CEO. Please go ahead. Thank you, Eleonore, and good afternoon and good morning to all of you who are joining us and thank you for sharing the second quarter and first half results for Sobeys. It's been a very solid first half, one marked by quite strong operating momentum across the portfolio and one that sets up quite a good platform for the second half of the year, where some of the components from our pipeline will come into play, most notably the launch of Elocta. And we'll dig some highlights in today's comments about our preparations and readiness for that. Of course, other nice milestones in the first half and particularly in the second quarter this year have come with the approval of Orpadin liquid and 20 milligram capsule as well as the filing for Alprolix. So as usual, I'm joined today by our Chief Operating Officer, Alan Raffensperger and our Chief Financial Officer, Matsola Feline. And in turn, each of them will review the operating portfolio and the financials before I return to close the call before Q and A. So from a highlights perspective, as I said earlier, the pipeline had some nice highlights for us. We've worked for quite a long time on the oral suspension and 20 milligram capsule for Orphanin. These are formulation and formats, which will allow for more precise dosing in pediatric and adolescent patients. And in our view, we'll make a real contribution to more sustainable adherence for patients around the world. The filing for Alprolix came in earlier this month and was validated by the EMA and it's part of a wave of data and visibility that the company and these products have had over the last 6 months, in part culminating as well with 23 abstracts at the ISTH meeting in Toronto a couple of weeks ago. We also decided to terminate further development of SOVIO-two in favor of a novel C5 inhibitor, which we're advancing into preclinical development. So that allows us to maintain our commitment to the space, but to take advantage of a new molecule that has several additional features, which we think will give it an advantage going forward. After the period this morning, we did also exercise our opt in right for Alprolix based on the triggering events of the MAA filing. From a results perspective, total revenues increased 15% in the quarter, quite a significant contribution of exchange with a 4% growth at CER. Product revenues grew at 25%, twelve percent at constant rates and RIBACCO as we expected had a slight step down compared to quarter 2 last year, mainly due to phasing effects as we'll touch on. Gross margin came at 63% based mainly on mix and EBITDA came in at $74,000,000 Cash flow from operations were 79,000,000 dollars If we now take a year to date lens on the results, you can see that the first half compared to last year grew 32% and 20% at CER coming in at SEK1.6 billion with about a 39% growth on the product revenue side, 25% at constant rates to deliver a result of $1,200,000,000 Refacto compared to last year and the first half grew 14% and so far this year has delivered $404,000,000 Gross margin for the first half in total was 61% and EBITDA has been $247,000,000 with cash flow from operations at $249,000,000 So very stable platform both in terms of the momentum and pace of the top line, but also stability on the gross margin and continued positive cash generation. If you take a look at this on a full year to date basis by category, you can see now that each of these segments continue to maintain their rough quality and size. Each of Refacto partner products, genetics, metabolism and inflammation living in this SEK 350,000,000 to SEK 400,000,000 range on a half year basis. You can see that on the half year basis, the growth rates here at constant exchange rates are quite good in each of the segments, again speaking to the strength of the diversity in our overall operating business. Nice and important also to see that we have a growing contribution from the hemophilia line. On the refacto side, I think the moving 12 month total and the quarterly chart kind of tells the story about how lumpy or episodic this business can be. Revenue this quarter coming in at $172,000,000 down 8% versus the same quarter last year. And again, I think the chart gives a view of how unusual the Q1 was in this particular year. Revenue for manufacturing was $99,000,000 and royalty revenue was 73 dollars And on a full half one basis, the total, as I said before, was $404,000,000 So with that short introduction, I'd now like turn the floor over to Alan Ratzberger. Alan? Thank you very much, Jeff. Let's first take a look at our KINRAV performance for the Q2. We booked a revenue of CHF171,000,000 which is an increase of 15% over quarter 2, 2014. Compared to the first half of twenty fourteen, our results reflect a growth of 36%. However, please remember that quarter 1, 2014 was weaker due to Q4 2013 stocking effects. The Q2 increase reflects continued volume growth across most European markets. In addition, our U. S. Demand continues to be steady. We have been able to effectively manage the distribution shift to a premier patient centric specialty distribution model, which will allow us to better support our patients and our health care providers. We expect to see the positive incremental effects of this change during the second half. Moving on to orphodim. We booked DKK189,000,000 in sales, which is an increase of 35%. First half year results reflect 71% growth. Here again, there were some 2014 Q1 effects due to the change in the distribution model in North America. Supporting these results, we see stable growth in major markets with positive revenue impact from direct sales modeling in the Americas. 2 important milestones occurred in the quarter, or fitting liquid formulation in the 20 milligram capsule were both approved by the European Commission. Revenue for our partner products portfolio landed on SEK175,000,000, which is an increase of 10% over Q2 twenty fourteen. On the half year, our growth reached 16%. The increase was driven by growth of COMETRIQ, YONDELIS and XIAPEX. We are also results, we estimate royalty revenue of C18,000,000. This estimate is based on 2% of the latest consensus from the Biogen analysts. One important highlight for the quarter was that the marketing authorization application for Alprolix was submitted in June. We anticipate that the approval of Alocta will occur during quarter 4 of this year. I would now like to take a few minutes to frame the market dimensions for hemophilia A and our preparations for the launch of Olocta. In 2011, the hemophilia A market size in Soviet territories is estimated to be roughly US3.3 billion dollars or US23 billion dollars based on 20 11 exchange rates. In addition, it is also important to note that the hemophilia market is concentrated to select a select group of main treatment centers in our territory, which will be supported by our highly focused and dedicated team. We already resourced well for this opportunity. The size of our team needs to be appropriate. However, the a fully dedicated launch ready organization of 75 strong with broad experience. Many on our team already have deep confidence within the hemophilia sector. They have been recruited from most companies active within the sector as well as other rare disease companies. We already operate in a fully dedicated and tight way to be able to address the needs of payers, the scientific community and customers. We are fully staffed trained and prepared for launch. This is mission critical, so we can make the most of the approximate 18 month window between the expected approval of Elocta and the expected entry of our first of the first potential long acting competitors. It is a great responsibility to be the first to market as patients will likely not switch from long acting to other long acting products. Now I'd like to hand over the earnings call to our Chief Financial Officer, Matt Solofolay. Thank you, Alan. Turning over to the profit and loss statement. As Jeff said initially, our revenues came in at 7 €64,000,000 for the quarter, which is an increase of 15% versus the same period last year. Gross margin came in at 63%, which is an improvement of 2 percentage versus last year. Sales and administration increased expenses have increased versus the same period last year. And this is due to that there is a buildup of the specifically the marketing, the medical and the patient access organizations to prepare for the planned launch of the hemophilia programs. You can also see on the headcount in our report that AFTs have increased substantially during the first half. At the end of December 31, Sobe had 5.84 FTEs. And at the end of June 30, the same amount was 6 48. In addition, the currency effects have been substantial on the top line, but they have also been substantially on the sales and administration line. And this has impacted the cost with 7% unfavorable. EBITA came in at €74,000,000 for the quarter versus €86,000,000 for the equivalent quarter last year. Looking at the half year, the 1st 6 months, our revenues came in at EUR 1,629,000,000, which is an increase of 32% versus the same period last year. And at constant exchange rate, the increase is 20%. Gross margin came in at 61% for the 1st 6 months, which is an improvement of 2 percentage shifts from 59% the same period last year. EBITA for the 1st 6 months came in at EUR 240 7,000,000 versus minus EUR 202,000,000 last year. However, last year was impacted by the Kibrina write off of €325,000,000 And excluding this write off, EBITDA was €123,000,000 last year, meaning that the EBITA has increased with 100% during the 1st 6 months. Turning over to the balance sheet. The balance sheet has been quite stable during the 1st 6 months. The only line item that has changed substantially is cash. And Sobe has been able to consolidate the position here and the cash has increased to EUR 763,000,000 at the end of June versus €503,000,000 at the end of 2014. Looking at the net debt. We can see that now that the net debt has is at €57,000,000 which is the lowest net debt for Sobe ever. However, I would like to draw your attention to that whether in this quarter. Also as a preparation for the Elocta launch, so we will now start to build inventory for Elocta. By that, I hand over to our Chief Executive Officer, Jeff McDonough. Thank you very much, Francois, and thank you also, Alan. As usual, I'll just close by touching on the summary and a couple of areas of focus going forward. From an outlook perspective, as you've seen, we've decided to slightly raise our guidance on the top line to $3,000,000,000 to $3,200,000,000 we now believe the margin will land in the range of 59% to 61%. We've made no changes to our expectations on OpEx as we do expect to continue to invest to bring ourselves to a point of readiness for both the Alocta and subsequently for the Alprolix launches. But we now feel more dollars to 400,000,000 So I think from the point of view of our key areas of focus, not much has changed and I expect I'll show this slide again in another 3 months or so. We continue to believe that a diverse and growing and consistently profitable business on our core geographic areas and platforms is a foundational part of the business. But now as you've heard in this presentation from Alan and from myself, we're really focused solely on being ready to take full advantage of all that the long acting hemophilia factors have to offer patients in a next generation therapy for the disease. And then I think as we look forward, we'll be increasingly focused on how we build our portfolio and franchise beyond our current base. But that's a focus that won't take hold in a serious way until the end of the year or early next year. So in summary, we now present results in the first half, which show very solid operating momentum. The pipeline events around Orphan and Alprolix, I think, were quite welcome in the second quarter and came in as planned them to. And as I said a couple of times, we're very focused on bringing ourselves to the point of launch later this year. So with that, Eleonore, I'd like to conclude our formal comments and open the Q and A process. Thank you. Okay. Thank you, Jeff. And we have a first question coming in from Ms. Yin Yang. Please go ahead. Thank you. Good morning, good afternoon. So Jeff, you mentioned that you discontinued the SOVI-two, but you have a novel C5 inhibitor. Is this another product also based on antibody technology? Yes. Hi, Ian. So it is still based on the Off Body platform. It has a different configuration and a few different features. As soon as we have the patent stay consolidated for the molecule, we'll be happy to talk much more about how it's designed and why it was designed the way it is, but we feel quite good about it at this point. Okay. And then in terms of hemophilia product launch, once Elocta is approved, how long do you think it will take to secure a reimbursement from various governments? Yes. Well, we've been quite thoughtful about that. Obviously, I think there's still a few markets in Europe, which will go relatively early in the launch sequence where pricing and reimbursement is relatively free or local matter or some combination of the 2. So we could sales relatively quickly once final labeling and distribution is in place following the approval. But of course, then there's a spectrum in Europe beyond that, where some countries will require a relatively short value dossier and pricing negotiation process and others will take the same process out to a duration of 18 to 20 months. So we expect that the launch in Europe will unfold over a totality of around 24 months once we start the launch. Okay. But then once the elopta reimbursement in place, do you think that Aprolix launch expected in the second half of next year will be faster upon approval? That's a great question. I think every case is treated the same, but there's certainly an advantage to having a second product on the same platform come to market when another has been through the process. So to the extent that payers are wondering about how the product works or where it should be positioned or what its advantages are, in that sense, I think Elocta will certainly set the place or set the table for Alprolix. I hope that does translate into it moving more quickly, but we'll know better how it's going by a lot more or less by this time next year. Okay. Thanks. My last question is on hemophilia gene therapy. So you are in discussion for potential partnership. Is that both hemophilia A and B? And also is that I mean, can you comment whether it's a clinical or preclinical compound, particularly on hemophilia B? Yes. No, we're not at a specific stage yet. And I think it's more to say that we're certainly open to partnerships for next generation therapies. I think at the it's not clear at least to me yet set an approach from a gene therapy perspective for hemophilia A is going to be feasible, although we're very open to have a view on that. I think for us in the next generation for the short term, we're very focused on the Xtend Xtend platform with Biogen. But of course, we'd like to be thinking about this franchise in a 30 or 40 year timeframe. So we're looking beyond that as well. Okay. Thank you. Yes. Thanks, Ian. Okay. And we have our next question on line coming from Mr. Richard Parks from Deutsche Bank. Please go ahead. Hi. Yes. Thanks for taking my questions. Congratulations on the good set of results. The first one, I'm just wondering how much interaction you've been able to have with payers in Europe about market access prior to the launch and what the feedback has been on where you see sort of challenges and the low hanging fruit there? And then secondly, just in terms of sort of longer term strategy, I mean, obviously, the success with Alokta and Alprolix moving to market and Sobe 2 termination kind of highlights the gap in the pipeline. I'm just wondering how much focus you're having on business development to address that? Or is that too much of a distraction for management time given execution on the launches in the near term? So those were my 2 key questions. Yes. Thanks, Richard. So I'll take them each in turn. So on the payer side, the access and the ability to discuss these products has been extremely good. It's surprising. It has been surprising for to learn when we started to engage with payers 24 months ago, how open they were to have a discussion about a product that was 24 months away. But the doors were open. The discussions have been fluid. We've had several visits with most payers in our Tier 1 market. And appreciate. So I think the main feedback has been around the relative size of their commitment to the hemophilia treatment market already and their desire to understand how these products will be positioned, how they will be used, what value they will bring, will they be mainstream or will they be more niche in nature. And these are the kinds of factors that determine for them how much of the budget ultimately should be potentially set aside or thought about when it comes to the value discussions and negotiations. So I think I can say quite positively at this point that we have a very firm understanding of where payers are and that in return they have a good understanding of where these products will enter and how they will be taken up. So I think so far so good. And of course, we'll come to much more concrete discussions once we have a CHMP recommendation later this fall. On the longer term pipeline side, I think you asked a really important question there. It's one we spend a lot of time thinking about. I think we have 2 approaches in mind. 1 is to really rejuvenate and accelerate our early stage work and we have several assets in hand, which we'll talk more about later this year. But obviously, as you pointed out, we are going to need to either partner or acquire mid stage and later stage assets. We are quite active in that space, but we are not focused on deal making in the next 3 months at least for exactly the reason you point out, which is management bandwidth and focus on the launch. So we know that's an important part of story, but we want to do deliberation before we come to the point of deal making there. Great. That's perfect. Just one follow-up. On Sobe-two, I wondered how confident you were that the issues that you've seen didn't have broader implications for the technology platform? Yes. It's a good question. I think what we came to was a fairly deep understanding of the specific issues with the molecule that we were working with, Tobia-two. And we believe we've really addressed those with the design and the composition of the molecule we'll take forward. One of the challenges is that SOVIO-two is a bivalent molecule, which has yet a third valence of interactions that is binding to albumin. And as a result, it's really impossible to draw conclusions that would be platform wide on the basis of what we saw with that molecule in particular. Okay, great. Thank you. Yes. Thanks, Richard. Okay. And the next question comes from Mr. Ioannis O'Neuos from Swedbank. Please go ahead. Good afternoon. Thanks for taking my question. Ioannis O'Neuos from Swedbank. First on the sort of preparation for the launch, clearly, there is a substantial increase in sales and marketing you gave us earlier indication that you are well underway to prepare. Can you say something about are you sort of have you got 80% of the sort of sales staff in place or is it more now? Yes. So I think I've had this question a couple of times, Ewan, where people are asking is this ramp something that should be projected in the future or is this kind of a new base that will run? And I would say it's a little bit of both, but the reality is that the ramp in costs has been steepest to where we are today. So we are mostly at the run rate from an SG and perspective that we would expect to be at support the launch in our Tier 1 markets. It will incrementally ramp from here, but at a much lower rate than what you've seen up to now at the end of Q2. Okay. That's useful. And what about the gross margins? There is a royalty effect, I presume, in this quarter. If we would normalize that would it still be an uptick in the gross margin? I'm not sure I totally understood the question. You're asking if you normalize which part of the royalty? Sorry, I'm not thinking about the royalties coming in from Bahia. Presumably, they will continue and continue to increase. But you have some royalties relating to Refractor as well and that's Matsuno Falin here. I'll try to answer your question. We had a very good gross margin in this quarter. And historically, Sobe has always had the highest gross margin in the second quarter due to the contracts that we have relating to Refactor, which means that we will have the highest royalty revenue in the Q2 due to the contract setup. So we do not anticipate that 63% will be in the coming quarters. And also as you can see from the outlook that we estimate to be in the range of 59% to 61%. Yes. And to follow-up then even if we would sort of disregard this refractive effect, is it still an uptick in the gross margin? Or is it falling off? We have had positive currency effect, which slightly has impacted our gross margin positively. There's also a natural component of product mix, Jan. So in any given quarter, the more higher margin products we sell versus lower margin, I mean, that's partly what accounts for the variability we see in the margin in the business at the moment. And another one for housekeeping. The financial net and the taxes is sort of a bit unusual in this quarter. Could you give a bit more explanation on that? [SPEAKER STEPHEN ROBERT BINNIE:] The financial net is impacted of negative exchange rates currency impacts. And this is due to that some of the balance sheet assets that are impacted, the currency effect there impact the financial net. And as you can also see that we have other negative exchange rate effects in other operating revenues or in fact in other operating costs. Okay. Should we expect that to continue for the rest of the year? [SPEAKER STEPHEN ROBERT BINNIE:] The currency is really difficult to forecast honestly. We can see now that the Swedish krona has weakened slightly during the 1st weeks of 1st week of July. But how the future looks on the currency, it's really hard to predict. Indeed. And what about the tax? Tax is where we can over amortize on our intangible assets, which has a positive impact on our tax line. Okay. That's useful. Thank you very much. Okay. Thanks, Jan. And we have our next question online coming from Mr. Samu Devani from Rx Securities. Jeff, I was just coming back to the royalty on refacto. Obviously, it's a very strong quarter for the royalty income. And even factoring in the weaker crown, it seems substantially higher than I think you've had before. Can you just help us understand why it's jumped so much over Q1? Yes. It's actually a very simple explanation, Sameer. It's that we have a royalty rate, which actually varies across the quarters in year. So the actual rate that's returned to Sobeys highest in Q2 and then goes back to a lower base oil rate through the year. So it's not a what I'm trying to say, it's not an organic reflection of the business per se. It's just the way the agreement works. I suppose the my question comes because in Q1 you had SEK 24,500,000 versus SEK 26,000,000 in Q1 last year. And it's gone from SEK 753,000,000 to SEK 73,000,000 this year. So it seems as if there's been almost a phasing effect there as well. Is that right? That's exactly right. The terms of the agreement had been reset in the same time frame. So you're just seeing the evolution of the agreement through that period. Okay. And final question just coming back to the R and D and obviously the current state of the pipeline and you talked about having some plans to sort of supplement that. But assuming that you did not in license anything next year, would your R and D spend fall from the level that you'll achieve this year? Well, it's the answer is probably no. Although the R and D line as we have it set is not only covering the early stage work that we do. We have in the same line a broad suite of activities that support life cycle management activities for the approved products, support for the scientific and medical community around those products as well as the core medical support functions like parco vigilance, regulatory, medical information, medical affairs, etcetera. So since many of those investments are also ramping for our later stage products and for the hemophilia franchise, I don't expect that we will see a big step down per se. That shift that you're sort of leaning towards or thinking about really occurred when we took the write down for KeyArena this time last year, where we really reallocated much of our R and D organization away from late stage projects. Okay. That's great. Thanks. Yes. And the next question comes from Mr. Lars Ring from SEB. Please go ahead. Yes. Thanks. Can you just clarify when you said your comment about expecting 4th quarter approval for Eloctane in Europe, does that relate to the first recommendation for approval, I. E. The announcement from the CHMP meeting? Or is it does it also include the formal recommendation from the approval from the European Commission? Yes. Thanks, Lars. We're thinking about the formal approval. Okay. Thanks. And then also to I mean, as you mentioned about the inventories buildup starting now, could you give some indication to what the amount that you would expect ahead of the Q4 launch? I think at this point it's I mean partly because I don't have a number on the top of my head Lars and partly because I don't want people to think that they can read into our launch expectations with the number. I'd rather not give a number just now. But I think you can expect that the size of the inventory position will be substantial relative to our size as a company, partly related to the size of the market and partly related to the value. Okay. Thank you. Sure. We have a last question on the line coming from Ms. Yin Yang. Please go ahead. Yes. Thank you. I just have a quick follow-up on a couple of our pipeline products. So in the past you presented SOVIO-three for enzyme replacement therapy and then also IL-one antibody product. So can you give us update on the status of those 2 products development? Yes. Thanks, Ian. So, so, so, as you might recall, we've been waiting to talk a little bit more about that program because we wanted to consolidate the patent position. We've decided to try to do a series of additional experiments to supplement the patents that has become locked in April. So we expect to be able to talk more about that program in Q3, but we feel very, very good about it, very excited about it. But again, as excited as you can be about an early project, but we'll certainly talk more about it in detail later on this year. And the follow on projects that we have for Kineret, essentially, we'd like to be able to bring forward a new version of KINARET with some different attributes and qualities to it. Both of those efforts are in the preclinical stage, but moving along well. So as soon as we're able to say something about them moving into formal preclinical development, then we press release around that and talk about them more fully. But both are still underway. Thank you. Yes. Thanks, Ian. Okay. There are no further questions so far. And we have one more question on the line coming from Peter Sehestaed from Handelsbanken. Please go ahead. Yes. Hi, it's Peter from Handelsbanken. Hope you can hear me. Yes. Hi, Peter. Hi, there. Just a couple of housekeeping questions, please. Have you in your guidance, your revised guidance for 15, assumed a launch in Q4, I. E. Change in royalty rates, booking of the one time credit, etcetera? Yes. Thanks, Peter. So we try to be careful in the guidance to exclude any income from the launch or from the royalty payment mechanism precisely because we haven't been able to give exact timing and we also wanted to give visibility into the base business. So if we are able to make a first commercial sale in 2015, then you will see a significant one time income on the top line that will drop through the P and L in the Q4. But we have not guided towards that and we have not included that in our guidance. Okay. But just to check if that is the case, the 10% one time credit that it would be booked in Q4 if you were able to launch that, is that correct? Absolutely right. Yes. Okay. If you'd personally be interested in purchasing a vial of Veloxca in late December, please let me know. Well, I don't think there will be compliance, but if you write a nice letter to me in jail, I could probably do it. No, and just one follow-up then. How should we think about your R and D costs in the medium term also given the pipeline? Yes. I think in the medium term, you should look at them as relatively steady. Obviously, there'll be some incremental growth on that line related to the factors I was just speaking to a little bit earlier to Johan's question. I think the R and D investments for hemophilia are not over. I think as we've been building the core medical team to support the franchise, we're also now transitioning into the investment curves for life cycle management and further scientific support. So that line will continue to grow, but incrementally. So I think we're in a relatively steady state today. Obviously, once we're fully operating under the terms of the collaboration agreement when we are the marketing authorization holder, there always be some additional costs that come in to support Alachta and then subsequently for Alprolix as well. Okay. And I also didn't catch the answer to Johan's question regarding the SG and A costs. Should we consider the $346,000,000 as a run rate for the remaining of the year? I think you should view that as the base for the remainder of the year. We will incrementally continue to grow from that base, but it will not reflect the growth rate that has brought us to this base today. Okay. Thank you. That's it. Thank Thanks, Peter. Okay. All right. There are no further questions on line. Therefore, again, it is 1 to ask your question. Okay, Eleanor. Well, while folks are thinking, if they have a last question, let me say thank you again for everybody's time and sharing these results from the first half here at Sobeys. We will certainly look forward to connecting again for the review of our quarterly results in Q3 in late October. Has anyone else come forward with a question, Eleonore? No, there are no further questions. Okay. Well, with that, let's just say thank you to you Eleonore for hosting and wish everybody a great weekend and a great summer vacation.