Earnings Call: H2 2020

Mar 12, 2021

Hello and welcome to the Media and Analyst Conference. Today, we're going to be presenting Backend's Full Year Results for 2020. My name is Nicky Parsons. I work here at Backend and I have the pleasure to be the moderator for today's session. So joining me here today, we have Thomas Meyer, our CEO and Alain Schafter, our CFO. Due to corona, of course, we couldn't Do this event in person this year. I hope you understand. Luckily, don't worry, we have a great virtual setup for you today. We're actually in one really big room. So we have plenty of space between me and the other panelists. And luckily, we can then talk to you without masks, all completely compliant with corona regulations. Just before we get started, we have a couple of housekeeping rules. The first is, if you ever have a technical issue, a technical question, you can always write us in the chat at any time. My colleagues are standing by and they'll be happy to If you have a question you'd like to pose to one of our panelists, it's absolutely welcome because we're going to have lots of time at the end of the session, and I'll be happy to put your questions to the panelists. Just write us in the Q and A at any time, and then we'll have that time at the end of the session. And the last thing is, of course, Zoom is used very prominently nowadays. But if you are new to Zoom, you can, of course, change how you see the system, you can move the speaker pictures around in case something is covering an important graphic, not to worry. So again, if you have any issue, just write us a message in the chat We're happy to help you. And with that, I will turn it over to our CEO, Thomas Meyer, for some welcome introduction. Thank you very much, Nicky, and welcome everyone to this afternoon session here in Switzerland for the full year result of Bakken. I'm together with Alan Schachter and we put All right. So welcome everyone to This full year result of Baaderm, we put around 25 slides together. It will take us about 20 minutes To go through that, then we have time for Q and A. 2020 was a corona year, the pandemic. It's us as a business. We had to adjust our way we operate and And it brought a lot of hardship to many people's life. 1 year back, I remember very clearly on 13th Of March, it was a day where the government in Switzerland decided to close the schools, and we presented our results of 2019. In the room, of course, there were good mood about the good results, But there were also questions about the pandemic, how we're going to do, how long will it take that we get a vaccine and how will it be when our kids Don't go to school anymore. Luckily, today, we have answers. We do have a couple of vaccines. And at least in Switzerland, the kids are allowed to go to school again. Today, Alan and myself, we want to deliver answers on how we achieved this excellent result in 2020. When the year started, the leadership Team here at back end sat together, analyzed the facts, analyzed the forecasts, and we came to the conclusion that we can break out of our usual growth pattern and deliver more growth than what we have seen in the years before. And so we did. And this clearly is the result of many years of preparation, of many years of investment in our technology, in our capabilities and that spurred this wonderful result. When you look at this result, you should also always consider That over the last 9 years, 9 consecutive years, every year, Bakken has grown in the top line. So this year, we Accelerated even more in 2020. And for the first time, we had sales over CHF 400,000,000. If you look at that from a relative perspective, we have seen growth of 35%, 34% in local currencies, which then turned into a growth of 28.1% in Swiss francs. The reason for that is that we consolidate in Swiss francs, but in 2020, more than half of our sales were in the U. S. And most of them were paid in U. S. Dollars, while a larger part of those sales was produced in Switzerland and the costs were in Swiss That's the reason why the number in CHF is somewhat lower. This growth is volume growth. So that means it was achieved with relatively stable pricing, and it was achieved, as we do all business here, In our company, we are working in manufacturing shops, in laboratories, And we have infrastructure that we use and we need people to execute that business. So it's really a remarkable growth for a CDMO business and everybody in the team, back end is very proud about what we achieved in 2020. Furthermore, and I will highlight throughout the presentation, this growth is a broadband growth. It's not on one product. It's not on one customer. It's really across the board, in product categories and in geographical segments. Okay. So I have to address the camera. We have an issue with the camera. All right. Apologies for that. Hope this is any better. In addition to the Categories and segments, we also had a strong pipeline development. We currently have 14 drug substances in Phase III clinical trials or under review. Growth per se is not what we are looking for. We want profitable growth here at back end. And so I'm even more happy to That EBITDA at €122,600,000 is an increase of 40.5 percent. And we stepped over the 30% EBITDA margin, which was one of our goals. EBIT was at €96,700,000 a plus of 55 percent and in local currency, we would add another €12,800,000 The EBIT margin in Swiss francs is now at 24%, a substantial increase from 99.9%. Net income is CHF 78,100,000, a plus of 44.1%. At Bakken, we are always thinking long term. We want to create value in the long term, and so we were for all stakeholders. So it was even more important for us that we were declared essential business in all manufacturing areas, and we were allowed to continue production even through the lockdowns. In addition, we invested CHF 76,400,000 in future investments for our growth, mainly in manufacturing equipment and installation. And we created 272 new jobs, which are 2 0 1 in Switzerland. Looking at the key figures, it is really a very nice development of the growth. If we go back to 2018, we were at €287,000,000 revenue in 2019, €313,700,000,000 and now €402,000,000 This led to a very high capacity utilization, which in turn influenced all profit Marks positively, as we just explained. We have reached an earnings per share of 0.0558 And we generated an operating cash flow of CHF 115 1,000,000, a plus of 79%, which is very welcome to pay for the investments. Our total number of employees at the end of 2020 was 1529 employees, which is converted in 14.75 FT feet feet feet feet feet feet feet feet feet feet feet feet feet feet Feet Es. I said this is a broad growth and so it's a growth in all product categories. The API business is continuing to be the strongest business and it grew with 30 point 3%, whereas the Research Chemical business has a growth of 12.2%. API growth was driven by selected products and projects. Via Research Chemical growth was mainly driven by bulk sales and by API related custom synthesis. We are geographically balanced. All geographic regions participated in the growth. We had a growth increase in Europe of 15%. In Asia, we have seen 28% growth. We added new customers there in Japan, South Korea and also in China, helped by the local sales office in Tokyo. And in North America, we had the best sales performance with almost 50% growth. On this slide, we talk about customer and products. You see 3 years, 'eighteen, 'nineteen, 'twenty for customers and products. And in each graph, you see the top 5, the top 10 and the top 20. You see that there's not so much of a development clearly indicating and proving that there is not just one customer, not just one Product that brought this excellent results and growth, but a whole lot of good products and good customers with strong relationship that has driven our numbers and our earnings. Coming back to COVID. COVID, as I mentioned last March, there was a lot in flux. Many actions had to be taken, and that was also the case for back end. Of course, we set up a global task force And local and all local sites had an emergency team that took care that workers were always safe, that we have the necessary protection, resume prepared and that employees were safe while they work. At the same time, we got the essential business status in each manufacturing site. So we secured work during the lockdown period, and we could help customers and ultimately patients who needed our drug substances in very dire situations. We had additional demand. And for that, we ramped up our shift systems. We turned to a 20 fourseven shift for one product that was in high demand. So in total, we had some work to do. We added complexity to how we act and how we proceed, that we also had positive effects of the pandemic, Mainly, it clarified once again how important our work is for each and every one of us. It motivated us to do that work and to help the patients. And in addition, we have seen growing sales due to additional demand. We estimate that sales to be less than 5%. At the same time, and we have to balance that out, of course, We also have seen delays in clinical trials, delays in drug approvals and slower launches of products because of the pandemic. Overall, we say it's a net zero impact on our result. And the more impressive We think it is that we achieved the growth we had and also the profitability we could achieve in 2020. Bakken has a worldwide presence. We produce in Torrance and Vista in California, in Saint Helens non GMP material and in 2 GMP sites in Switzerland. In addition, we have a sales office in Japan. And together, we are the global back end team. For me as a CEO, it is very rewarding to say that on all 4 manufacturing sites, we add additional capacity because this is in demand and we have the need to add more capacity. The mission of back end is very clear. We are the leaders in peptide drug substance manufacturing, and we aspire to become the leader in oligonucleotide drug substance manufacturing. And for me, as CEO, It is, of course, a great honor to lead that very strong team and to present those great results. But even more, What really energizes me and motivates me every day is to see the potential we have in that company, the potential for a future business that is profitable and sustainable and the potential to work together with pharmaceutical companies to make modern and very precise medicine that helps people in need. This energizes the whole back end team. On top of that, oligonucleotides and peptides are very complex molecules. They're within the most complex molecules produced by chemical synthesis. Our process chemists are world leading when it comes to produce them, And we combine that knowledge in process chemistry with equipment and installation that are tailor made for oligo and peptide manufacturing. And together, that adds value for our customers and is very remarking to see What we can achieve with the customers and with the chemistry we do. That energizes me and gives the power to the entire team and lets us achieve those great results. With that, I turn it to Alan, who looked further into our numbers and will explain them in the next minutes. Thank you, Alain. Thank you, Thomas. And as a new CFO, it's, of course, A pleasure to present such good numbers. So as a quick reminder, these are the key figures that Thomas showed already at the start, and I want to go a little bit deeper on some of them. So first of all, the EBIT margin that increased from a 99% 24%, what are the key drivers? First of all, it's a big impact from our COGS. It's driven by our constant review and optimization of our processes, and it's Well, we always try to get a scaling effect out of it. Marketing and sales, the contribution, we need to be careful. It Was a year, the 2020, where we were not able to travel that much. We had less roadshows. We had almost no exhibition and fairs. The R and D part, it's showing our commitment to invest in our own pipeline into our growth strategy and always to be sure that we Try to fill our pipeline in this year, especially on the oligo side. On the G and A, it's our goal and we take all measures to ensure that we have a stable G and A number and is always under proportional to our growth set. On the cash flow, we increased our operational cash flow by 79% to EUR 115,000,000 in 2020. It's mainly driven by 2 factors, Which are offsetting more or less each other. It's one is the inventory. So we have produced a lot of products to make sure That we can deliver on time our products to our customers. So there is we have a higher number in the inventory. On the other hand, due to the growth, we also had to purchase more material. This reflects in a higher number for accounts payable but Also, a higher number for from our prepayments from the customers for 2021 products. So the SEK 150,000,000, what have we used it for? It's on one part. It's the investing, the capacity. It's a SEK 70,000,000 roughly what we have spent to support our growth. And there is another SEK 43,000,000, which is mainly driven by the dividend we paid out in spring 2020 for the business year 2019. This in total led us to a cash increase cash on hand increase by CHF 2,000,000. Our growth or our cash is also we have 3rd party loans in our books. As we can see here, we were able to keep it stable at the same level. The loans are covenant free, and we pay an average annual interest rate of about 0.35 percentage. And traditionally, with Bakken, we have a stable and high percentage on our equity ratio. Coming to my last slide, the overview of the investments over the last 5 years, and we can see here it's the commitment To invest in our future, we have the CHF 76,400,000 this year, and we plan also to invest Another CHF 400,000,000 over the next 5 years into our capacity to support our growth strategy. With that, I would like to give it back to you, Thomas, for the outlook 2021. Thank you, Alan. Very impressive numbers. And indeed, 2020 was a very successful year for Bakken. What's the outlook for 2021? We are optimistic it's going to be a good year for Bakken again. And on top of that, 2021 is a special year for everyone at Back end is celebrating its 50th anniversary, and We're looking back of 50 years of success. Peter Grock founded the company together with his wife in Limesdal, which is around 10 miles from here with CHF 50,000, and you can see where we stand today. Those first 50 years, they are our guidance for us who work at Bakken for the next 50 years. We see this company growing substantially and sustainably based on several facts, and I listed a couple of facts here who I believe will help us to grow. I will touch on a few. Our initiative to produce oligonucleotides is very well received by the market. There is a strong demand for oligonucleotides out there, and we feel we can bring a lot of our qualities that we have developed in the peptide synthesis and API space to the oligonucleotide field. At the same time, we are growing our capacity to produce via investments, and we use synergies from peptide manufacturing, be it in infrastructure, be it in knowledge that we have for analytical testing and also for regulatory and the full service package we typically deliver with peptides. Also, what we see out there is an increasing demand for synthetic work. Synthetic manufacturing of products that were previously done by recombinant manufacturing, being it for generics, are now done synthetically, and that plays into our strength and also complex peptide or small protein structures On natural amino acids to improve half life or the medical chemistry part are not accessible by recombinant manufacturing, but are accessible by synthetic manufacturing. We take pride that we are capable to do that, and we are the best to make those complex molecules as peptides. In addition, we see oligonucleotide synthetic work because those molecules, that chemistry is not applicable for recombinant manufacturing. So it will stay in the realm of Synthetic Manufacturing. On that strength, we want to build, we want to invest And there is no group larger and more committed to that process chemistry than the Bakken Group. External factors, we have the demographics. We see an outsourcing trend in pharma. We have market expansion for Existing peptide drugs and we see many new applications, many new ways, pathways that can be influenced by peptide drug substances. And on top of that, we see new formulation. We see oral and nasal products replacing parenteral drugs and being more convenient for patients to use. Those are all very strong factors that make us believe that our plans and our ambitions are very much in our reach. And how does the 2021 ambition look? As always, we will give clear guidance in our August call with the half year results. For the time being, we can say that we see sales above CHF 500,000,000 In 2022. And we will invest over SEK 400,000,000 within the next 5 years. Those investments, they are already started. They are in the planning. We see the demand. We will double check. We will check our business plans every year. But right now, we are full steam ahead. And we see a percentage growth of the profit above the percentage growth of the sales. With that, we are at the end of the prepared presentation, and we are happy to take your questions. All right. Well, Thank you, Thomas. Thank you, Alain. We already have some questions here from the audience. For the rest of you, remember, Put those questions in the Q and A section and I'll be happy to put your questions to our panelists. So the first Question here from Daniel. You mentioned in the annual report that your new molecular hiving technology is very attractive. Can you be a bit more specific? What is so special about that? Perhaps, Thomas, you could shed some light on that. Thank you, Daniel. That's Indeed, a great question, and we are all excited about the molecular hiving technology. The molecular hiving technology is a technology And it kind of combines the good worlds of the solid phase chemistry and the solution phase chemistry. In Praxis, you can build up your molecules in solution without the linker, but having a soluble linker. And that helps us to be more green, to reduce volumes and reduce costs. We are happy that we could enter this agreement, And we see a large potential for this technology. Thank you, Thomas. We have another question here about kind of a technology area. So you also mentioned you plan large scale production of small molecules. Are you now entering this segment as well, Thomas? Yes. Thank you. Thank you for the question. I don't remember That I mentioned that. I would say that we have an existing small molecule franchise in Vienna And they work on selected small molecules very successfully. And we like to keep it that way, let's put it that way. They are very successful. They are specialized. They are word leaders in some substances they produce, and they do that very successfully. Thank you for the answer on small molecules. Next question from the audience says, I know it is not easy to answer, but your best guess for how many peptide approvals do you expect in 2021 2022. Okay. Yes. The approval rate is the holy grail of Interesting, that's for sure. And right now, it's even a little bit harder to discuss because there's a certain backlog and people can't travel. So it doesn't make It's easier. We are hoping for more than one approval in the first half year of twenty twenty one. And I'm happy to report we already had one where we were involved, and we will see how that pans out. The same is true for 2020. True, There is a plan and we will see what the success rate ultimately is. Perfect. Thank you. Now we have a question from Patrick. How should we think about capacity expansion plans from Ambeo, or others, etcetera? How tight is capacity now versus demand in the industry overall? Yes. I don't have those numbers ready. All I know is that we have a good demand on our side and we work On our investments, because there is additional demand we would like to fill. And What our competitors are doing, I cannot really comment on. All right. Thank you. I think we've reached the end of the Q and A in that case. If you do have any last minute question that you want to get in there because we have Plenty of time left over. I have a comment here saying one more. So that's probably a comment coming. Let's give it 30 seconds and see what comes on the line. Probably an audience member furiously typing away. So let's give him a moment. Okay. So a question from the audience. Technically, how much growth can you handle? Good question, Thomas? Technically, how much growth can we handle? Yes, that's a good question. We, of course, handle growth in a structured way in that we plan together with our customers. We have forecasting systems. We have supply agreements. And in that matter, We handle the growth as it happens, and we build always around 1 or 2 years ahead of what is needed. Okay, thank you. We have now a question from Maria. Thank you, Maria. Could you elaborate on the opportunity for oral solutions versus subcutaneous and the impact on API volumes needed. Thomas? The answers there are pretty clear. Typically, a oral bioavailability is in the range of 1% to 5%. So you need 100 to 20 times more drug substance than what you need for a subcutaneous or IV formulation. So there's a demand ramping up due to the reasons that those oral and Mainly oral products are getting into the market. It will be interesting to see how they perform in the market. I think the first launches were up to a pretty good start. All right. Thank you. We have another comment here saying, Hold on one more question coming, so let's see. I think we have some very interested audience members, which I hope means it was a good presentation so Okay, another question on geographical impact here, it sounds like. China, Japan, Korea, you mentioned, Could you describe the picture there, more generic or NCE? Thomas? I think it's a mixture of both. And we are strong in the NCE business and we also do generics. And I think with that, that we've come to the end of the Q and A session for today. I want to thank you so much for your questions for our panelists. If you do have any more questions that you think about later on today, Not a problem. Please go ahead and shoot us an email to irbackend.com and our team will be happy to get back to you. In that case, from my side, thank you so much for joining. Thank you to our panelists, Thomas, Alain. And with that, we Wish you a great weekend. Thank you so much for joining us. Thank you very much. Have a great weekend. Bye bye. Thank you very much. Bye bye.