Hello everyone, and thank you for joining this session of the Morgan Stanley Global Healthcare Conference. My name is Thibault Boutherin. I am part of the European Pharma Equity Research team based in London. Before we start, I need to refer to important disclosures. Please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So for this session, I'm delighted to have with me Ming Li, Chief Strategy Officer at Alvotech, as well as Joel Morales, CFO of Alvotech. Thank you very much for joining us today for this session. You know, we'll do a Q&A, but before that, would you like to start with some introductory comments on the current situation and outlook at Alvotech?
Yeah. So first of all, thanks for having us, and thanks for everyone who stayed for this Thursday 5:30 P.M. session. You know, I think we are extremely excited that there's a couple things going on. I think first, there's a lot of change in our company. Numerous launches, numerous filings, some visibility, not just into this year, but starting to get visibility into the next several years. And so there's a lot of rapid change in the company, but it's also happening in the context of a lot of change in the market.
So I think biosimilars have, I think, in many ways, been a long time coming, and I think that what you're seeing from the language of people that are in the space or the language of the payers that are in the U.S. or even outside the U.S., there is an embrace of biosimilars. And I think, you know, that's an important step in, you know, our long-term strategy, which is 100% focused on biosimilars.
Perfect. So, you know, starting with your biosimilar Humira, which is, I think, one of the key products, you know, that investors are focused on right now. You currently have access to the U.S. market with this product through kind of two channels. The usual channel through your partner, Teva, you know, going through kind of negotiation with PBM to get on formularies, and then you know, the traditional distribution network. But you also signed a private label deal with Quallent, which is a distributor, part of the Cigna Group. So maybe starting. Could you talk a little bit about any difference in economics in revenue or profit contribution between these two channels? You know, is there a difference of profitability here? Maybe starting here.
Gotcha. The deals are slightly different in that, the formulary side of the business is a revenue share, 40%-60%, 40% to us. And, our partners, in addition to paying us substantial milestones, are responsible for all the commercial marketing and, patient services or any extra activities that go with commercializing, the product. On the private label deal, it's different because it's actually a contract with us. And so the original model, which actually holds true with our ex-U.S. counterpart partners as well, makes less sense. And so for there... It's actually a contract with us. We book the revenues, and we share the profits, with our partner, Teva. Right? So, there's an accounting difference there. But from a value contribution perspective, it's very similar. Right.
And so I think you've been updating the market about your order book. You know, you initially mentioned a million doses in your order book. And at your last update on the second quarter call, you know, you kind of updated this figure to 1.3 million dose. So maybe starting with a clarification, is this your order book for both traditional PBM channel with Teva, and the private label with Quallent? And could you? If yes, could you give us a rough idea of the split of the book between these two channels?
Yeah. So you're correct. I think in May, you know, we said that we had a million units, and we've updated that on our last earnings call, which I think is where we're gonna land in 2024. It's, you know, it's important to note that we're a B2B company, so we generate revenues as we supply our partners. The other thing that we mentioned was that, as of the first half of the year, less than 20% of that full order book was actually supplied. So we're continuing to supply now, and we'll continue it, you know, through the remainder of this year. We haven't given an exact split between the two, but what I would say is that it's a material contribution from both.
And we also look to expand that in 2025 as well.
That's clear. And to come back on, you know, your degree of confidence that is kind of 80% remaining of revenues will be realized in the second half of 2024. You know, is there any uncertainty here, whether it is on the, you know, the kind of speed of manufacturing, whether it is the speed at which your partner are kind of you know, asking for these doses? Or are you... You know, do you have a very high degree of certainty that these revenues are going to come in the second half?
Yeah. So these are binding purchase orders, so we have, you know, as a B2B company, we have good visibility. Usually these order cycles are around five to six months. So we have great visibility for the remainder of this year, and we're starting to get more visibility, as I said, earlier, for in early next year. So we have a high degree of certainty on the orders and a high degree of confidence that we'll be delivering on them, and excited to do so.
Perfect. And so, Cigna, you know, recently indicated that, around 20% of their Humira book, switched to private label within five weeks. I just wanted to kind of understand how this compares to your expectations, and if you could help us understand what are the incentives for patients and physicians covered by Cigna, to switch from branded to private label, or to prefer the private label of other biosimilar?
Yeah. So I mean, I think on the incentives, as they issued in their press release and have reiterated it on their earnings call, you know, this product is being offered at a $0 copay.
Mm-hmm.
Right? So that's... There's an incentive to the patient. I guess maybe taking a step back, I think the private label space in general is extremely interesting. I think that it shows that the payers are not only embracing biosimilars, but actually driving the uptake of biosimilars. And so it's something that I don't know if we would've forecasted that a few years ago, but certainly I think it's here, and I think it's here to stay.
Perfect. And, we are seeing a similar move actually from Express Scripts. They're planning to remove branded Humira from the formularies on the first of January, 2025. So, I mean, this is the PBM of Cigna Group. So there are other biosimilar option on the formularies beyond you know, the biosimilar that you're having with Teva. There is also Sandoz and also Boehringer with you know, with whom they have a private label deal. So, you know, can you give us your view on this, and how much of an impact could that represent for your business, this removal of the branded?
Yeah. So I think it's a significant impact, and again, a significant message to biosimilar manufacturers, to patients, to the system in general. So I think biosimilar, it's a positive for all biosimilars. I think within that construct, we are currently on, you know, on the ESI formulary, and we do expect expansion this year and acceleration into next year. And, you know, we remain the interchangeable high concentration option, and so we're excited for this opportunity.
Yeah. And for Humira, in particular, do you see the scope for, you know, other deals with other PBMs on a similar private label structure? Or, you know, for this biosimilar at least, it's probably this contract, and we should not expect other announcements.
What I would say is that we remain active in our discussions, and we remain open. You know, I think we've stated, and it's no secret, we would like to be a leader in the space, in the Humira space, also the Stelara space. You know, that's our aim, and so we remain open to expand our presence.
Understood. And so, yeah, you just mentioned the Stelara biosimilar. So starting with the U.S., how should we think about the opportunity in the light of your progress with Humira in particular? You know, is what happened with Humira a blueprint for Stelara in terms of, you know, potential private label deals, but also, you know, potential exclusion of the brand from formularies, is what you're expecting as well for Stelara, which, you know, is in the same pharmacy benefit channel.
Yeah. So I think in some ways it is a blueprint. Humira is a blueprint. I think the private label is here to stay for pharmacy benefit products, and we would remain interested and are actually in conversations to you know discuss these opportunities. So I think that's true. You know, I think it's not exactly like Humira in the sense that we feel that the opportunity may come quicker. As you know, 2023 was a relatively slow year for biosimilars you know in the Humira space, and we think the precedent of Humira is helpful. I think precedent's always helpful with biosimilars. You can see that in the oncology space, and I think you'll see it in the ophthalmology space, and I think you're gonna see it here as well.
So as far as exclusionary action, you know, I can't really comment on that, but I would note that some of the conversion that you're seeing right now in, you know, in the Cigna Group is happening while Humira remains on formulary.
Understood, and I don't know if you can comment on this already, but are you, you know, are you or your partner having conversations with payers already for Stelara U.S., either in terms of formulary coverage or, you know, in terms of potential private label deals?
Yeah, I think we are having those conversations, and I think we feel like we're well-positioned. It's an earlier in the year launch relative to Humira, less competition relative to Humira, and you know, we're very excited about it. And we have a date certain, of course.
So when you think about the potential for these private label deals to, you know, to expand and to become kind of the norm in the biosimilar industry, you know, how do you think they could be structured in the future, and how competitive will it become to secure these deals? You know, so far we've seen, you know, kind of each PBM choosing suppliers, but, you know, the relationship. In the other direction, each supplier is kind of only supplying to one PBM. So is this the type of structure you're expecting? Yeah, just maybe some general comments on how you see this private label deal evolving in the future.
So, you know, I think we said it, it will replicate itself, you know, in other molecules. And just as a reminder, we have Stelara, but we also have Simponi. Those are all PBM-driven products. I think you can also expect that it won't always just be a one-to-one deal. I think you can see multiple players on different deals. And so I would expect it would look more like that.
Okay, so I've shown off a question on biosimilars, but maybe if you can talk a little bit about finance and the P&L as well. You know, funding, you've had a lot of activities recently in the first half and during the month of July. So maybe if you could remind us where you stand today in terms of balance sheet, if you are in a position already where you can reach sustainable profitability and cash regeneration, or you know, should we expect some additional funding at some point?
Yeah, sure. So, thank you. First and foremost, we were pleased with the refinancing. We accomplished a few things with that in July. First and foremost, we were able to extend some of the near-term maturities that we had out to 2029. We were able to reduce cost of capital as well. And we were also able to provide cash to the balance sheet. We were able to add about $140 million of cash to the balance sheet, all while simplifying our capital structure. I mean, all that remains in terms of debt on our balance sheet at this point is this new facility, about $965 million. We have the mortgage on our facility, as well as some equipment financing.
So our balance sheet, as of the close of the transaction, was about $1.035 billion of debt, and we had about $180 million of cash, as well, associated with that. And so that was great for the company. Furthermore, we have favorable call features as well, which gives us flexibility, in particular, given the financial profile we're looking to deliver on, over the short and midterm. In terms of ongoing capital, we're you know, we delivered very strong Q2 results, as you saw, and we're expecting revenue to continue to grow quarter-over-quarter. And so in terms of additional cash, really, we're looking for the two main sources of that to be our milestone revenue collections, as well as product revenues, as well throughout the second half of the year.
We do expect to achieve free cash flow positive as we exit the year. At this point in time, we don't foresee really any need for additional capital.
That's, that's clear. Thinking about the shape of the P&L in the midterm, so definitely we saw, you know, sales accelerating and we're starting to see some of the cost line, you know, evolving. What kind of gross profit margin and EBITDA margin level you think you can achieve at scale? Obviously, not looking for a number, but conceptually, you know, when we look at your business model, you know, because it's a B2B, you have limited marketing and spending expenses, your partners are doing the commercialization. It suggests that there is the potential for a very high profitability level, much higher than, I would say, the average as far as industry. Is it the right way of looking at it?
Yeah, I think that's right. That is unique to our P&L profile. We don't have the large selling and marketing overhang that you see with most pharmaceutical companies, in particular because our commercial partners really incur the bolus of that spend. We also collect milestone revenues based on our commercial agreements, and those milestone revenues really help offset the cost of development as well, which we recognize in our OpEx. In terms of the margin profile in Q2, you saw that we generated just under 17% in terms of product margins, and that really just represents the beginning of our launches, in particular in the U.S., with our version of Humira or Simlandi.
But you also can expect in the second half of the year, with increased volumes, we're expecting to expand upon that initial margin profile that you saw in the Q2. We have a platform that we've invested in and that we've created in Iceland. We have roughly 1,000 employees, most of them focused in manufacturing ops and quality and R&D. And we really don't foresee the need for any significant change to our overall infrastructure while driving higher volumes, right? We've increased our volumes threefold over prior year, and we expect to continue to increase those volumes. And so in short, just under 17% in Q2, we expect to expand upon that as we get into the second half of the year.
From an EBITDA margin perspective, just based on the guidance that we gave, it's an implied 25%-30% of EBITDA margins that we're looking to deliver on this year. Again, this is a partial year, given that we've only just begun our launch of Simlandi in the U.S. in particular, and we've just begun our launches of our version of Stelara in our ex-U.S. markets. However, meaningfully, we have already the introduction of our version of Stelara into the U.S. market in February of 2025. But while our EBITDA margins for this year are 25%-30%, you can expect continued expansion, both based on the annualization of our current launches, but also the introduction of our version of biosimilar Stelara.
Okay, it's very clear, and you mentioned the milestones, you know, that are contributing to your P&L. What should we expect in terms of, you know, milestone revenues in the second half of this year, and maybe if you have some visibility on next year as well? How meaningful are these going to be?
Sure. So maybe to tackle that, I'll first explain that, you know, we recognize milestone revenues typically when we commence the clinical phase of development, and then as we advance our programs through the pipeline. And so when we achieve positive top line results, when we submit, when we receive approval upon launch, and so on and so forth. And so you saw in the second quarter, we had a significant contribution of milestone revenues to our performance, and that was because we had a number of triggers that converged in that Q2 timeframe. And so that was. We were pleased with the results, obviously, in the second quarter. But we are expecting, based on our guidance, to continue to recognize additional milestones in the second half of the year.
... in particular, as those positive top line results begin to translate into submissions. We're expecting to submit three BLAs this year, not only in the U.S., but around the world. We have incremental launches as well. Our partner in Europe launched our biosimilar version of Stelara in the third quarter as well, and so you'll see a continued delivery of that, not only in the second half, but also into 2025 as well. Obviously, these BLAs that we're filing in the second half of the year will ultimately translate into approvals in 2025, and then you'll have launches, additional launches. So, this milestone contribution is not something that's short-lived. It's very much a part of our business model, and we expect to continue into 2025.
That's very clear. Maybe coming back on, you know, some product questions. You know, thinking about supply, just if you could expand a little bit about your supply capacity that you have right now, how confident you are in meeting the demand for Humira, for Stelara, if that demand continues to expand. So, yes, maybe starting here.
Yeah, so I think, for capacity, you know, we feel very comfortable that we can be a leader in the space. We talked a little bit about 2024, but I think the idea is that there's gonna be an expansion in 2025. You know, some of the capacity on Humira was unlocked as we were able to submit some variations upon approval, which are now approved, and so we're actually building and producing at a bigger, more efficient scale, currently. So that was helpful. And Stelara, obviously, we started supplying ex-U.S. You know, one of the good things about Stelara is our approval came well before our license date, which is the way generally it should work, right?
So we were a little delayed in Humira, but with Stelara, we're preparing now.
That's clear. And so I think if we zoom in a little bit on this year for Humira, I think you unlocked the bottleneck after the approval of variations late June. So if you could provide some colors on that process exactly, and are you now on full speed in the manufacturing of Humira?
Yeah, I mean, nothing complicated about the variations, just, drug product process scale up, and some efficiency gains that needed to be submitted, but you can only submit after approval. So we have submitted them almost immediately after our approval earlier this year. So yeah, it's all systems go now and looking forward to expand production even further.
Anyway, and I think you mentioned on the last call that you are working with your partners to build plants for 2025 for both Humira and Stelara. And so if you could give us some status update on the status of these new lines that could go live.
Yeah. So on Humira, we're already starting to form a view on, you know, call it the first quarter. So remember, the, you know, there is a binding order cycle, and we're starting to hit the beginning of the year. So we're optimistic that that will continue to firm up, and we'll probably provide updated numbers on our next earnings call. On Stelara, you know, I think we're still in discussions. So it's strategic at the moment, but certainly, these will need to firm up, you know, pretty soon as we're planning to launch very early next year in the U.S.
In terms of commercial progress, so we talked about Humira and Stelara is already approved in some ex-U.S. markets, you know, Europe, Canada, Japan, and some other for some of these markets. But maybe if you can tell us about the reception that your partners have had so far, you know, particular friction or early successes in some of these markets.
So, I think it is early. What I can say is that we've had replenishment orders from our global partners. And we look to expand that market share going into next year, but it'll be a gradual process, although it will be and has been a material contribution to revenue, product revenues this year already.
Very clear, and switching to biosimilar Eylea, so you filed the low-dose biosimilar formulation in Europe, presumably U.S. filing announcement, you know, should come soon. Correct me if I'm wrong, but I think the Europe situation is relatively straightforward. You should have approval in probably third quarter of 2025, and the IP protection should end around there, so the timelines here are, I think, relatively straightforward, but the U.S. is obviously more complicated for IP reasons, so maybe if you can, you know, give us an idea of the key challenges from an IP perspective and if you have an idea of timing to get a resolution.
Yeah. You know, we will announce U.S. submission upon acceptance for review. But you can imagine that the requirements for acceptance in Europe and U.S. are relatively similar. So a lot of this will happen post submission. There's obviously a patent dance that goes on. We, you know, don't give dates, but I can say that, you know, as a company, our general mindset is to try to get the best date possible. I think we think about it as, you know, we will have the low- dose, we'll have the high- dose, we'll have a global approach to biosimilars, and we hope that puts us in the best position to take advantage of this market.
That's clear. And, so, you know, launching first the low-d ose, obviously, Regeneron in the U.S. and Bayer in some key ex-US regions, are currently obviously working hard to try to, you know, either convert patients or capture new patients with the high-dose formulation of Eylea. So, you know, when you think about this, what is your expectation for the shape of the market by the time, you know, biosimilars are coming, you know, on the low- dose? And then how difficult do you think it's going to penetrate this market?
So, you know, it'll obviously be a function of the time of biosimilar market formation, which at this point is not completely clear. What I would say is that, you know, obviously, they've started to announce their success in converting the market. So they've had some initial success, and that will continue to grow, I assume. I'd say two things: one, you know, we'll obviously aggressively try to get the high- dose to market. We've developed the formulation, and we think we can, you know, leverage some of the components of the original program to make this as quick as possible. And there is a market for the low- dose, right? I think that, you know, for a product like this, savings are incredibly important.
Not to say that it's not important for any product, but there's gonna be an opportunity to gain market share with the low- dose. I would also add that, you know, we plan to come to the market with both the prefilled syringe and the vial on the low- dose, and that's another aspect of differentiation.
So you just mentioned your development effort on the high- dose formulation, and just here specifically, so you mentioned ability to accelerate the program. But from an IP perspective, you know, how... You know, if you overcome the IP challenges on the low- dose, you know, is it your expectation that there will be additional IP challenges for the high- dose, or do you think this looks manageable?
I, I think there's additional IP, but you know, again, you know, we will as aggressively as possible, you know, get to the point where we're comfortable bringing it to the market.
Understood. And so looking a bit further in your pipeline, biosimilar Entyvio that you announced, you know, relatively recently. So you are one of only two companies in Europe working on the biosimilar for Entyvio. So can you just remind us how far you are in the development program? And also what is your view on the IP situation for this drug, both in the U.S. and Europe?
Yeah. So, we intend to initiate the clinical trial very shortly, you know, call it in the next couple of weeks. And we'll be the second company to do so, and I think that's that puts us in a very good position to, you know, to be, you know, in the forefront of this market. The compound patent has expired. I think it's regulatory exclusivity through 2026. And then, of course, there's IP that's later expiring, related to certain uses and formulation. But again, I think the compound patent is off, and the regulatory exclusivity is off in 2026. And just like with Eylea in the U.S., we would intend to bring the product to market as quickly as possible.
That's clear. Now, one question I have on the, you know, the requirement to develop biosimilar. So, you know, one of the obstacle I think we see, develop biosimilars on some maybe of the, I would say, relatively smaller opportunity drugs of, let's call it, you know, maybe less than $2 billion, where it's harder to make a case because of the development costs. There are some talks right now about potentially, you know, the removal of the requirement for, you know, a full, full-fledged kind of phase III clinical program. So is it something you're hearing from regulator? And, you know, how far do you think this is? How credible do you think it is? How likely it is to happen, basically?
Yeah, I mean, there's certainly discussions. And generally, the U.S. regulatory environment and the E.U. regulatory environment move at different rates.
Mm-hmm.
But, you know, I think we believe that eventually, that's going... That will be the case. It's certainly not the case now. I mean, we're doing these trials based on scientific advice, right? So we're getting real-time advice from the regulatory authorities on Entyvio or Keytruda. So it's not, certainly not the case now. You know, for a company like ours, that developing biosimilars is always gonna be complex. The cost is also always gonna be higher. Having, having it slightly lower will open up more opportunities to target a lot of products, right? That would be, in theory, smaller. And we could accelerate our pipeline that much quicker, and having all that infrastructure in-house, I think it will be an advantage.
So we look forward to that day, but I can't tell you that that's immediately around the corner.
Very clear. I saw when we look at the market structure, I think we saw a movement of consolidation, you know, over the last few years with, you know, a number of players realizing we need scale, you know, breadth of portfolio to be relevant in biosimilars. And you know, on the other side, obviously, players kind of consolidating because they're probably in a good place. So where do you think we are in this process? And do you think we're going to see more of this? Do you think the industry started to stabilize with, you know, some kind of key players emerging already? So, yeah.
Yeah, I think some of the early partnerships have unwound. You know, I think I don't foresee a lot of M&A in the space. I think the other thing that we're seeing is that, you know, biosimilars, the promise of biosimilars has been around, you know, for quite some time, for decades, and there were a lot of early adopters. Biosimilars is a space where you could argue that, you know, you could be too early. I think there has been a redirection of some of the early interest in biosimilars into other aspects. I think, you know, we're hitting the market at the right time, and a lot of the players that are gonna be focused on biosimilars are certainly settling in.
I know Sandoz is speaking a lot about biosimilars. Obviously, the companies in Korea have been successful in developing biosimilars, and these are the companies that are investing heavily into the future of biosimilars, right? So I suspect that we're starting to see who's gonna be here in the long term right now.
... And that's very clear now. One of the debate as well is, you know, the peak and shape of revenues for biosimilars, because we start to see, you know, more launch happening at the same time in the U.S. and ex-U.S. And so how should we think about the shape of revenues, you know, in different region? What we've seen so far in the medical benefit part is maybe revenues were peaking in a kind of two to four years time horizon, at least in the U.S. And then, you know, maybe price erosion, offsetting volumes, and the sales kind of decline. For the pharmacy benefit, I think the debate is more open, but what's your view here in terms of the shape, starting with the U.S.?
So, you know, I think we see at least to get to peak revenue in any market that we launch in, somewhere between two and five years. The U.S. will be on the shorter side, and the ex-U.S. retail markets will be on the longer side. And we're also launching these things over time at different times. So the beauty of a global approach is that the launches never happen at the same time. In Stelara, we launched in Canada and Japan and Europe all during the year, and U.S. the next year, and that helps for the durability of a program, right? It's the same development program hitting all of these markets, right? So a global approach, you know, we think is important.
And I think the exciting thing that we're gearing up for, and also that we want to demonstrate to the investor community at large, is that, you know, in 2026, just fast-forwarding, you know, we expect to be in multiple molecules on multiple markets, all within some stage of their growth cycle. Whether it be towards the end in some markets, or in the middle, or in the very beginning, and then we would have launches after that. So it's the idea of stacking these launches in a cadence that can support growth. And it's helpful because biosimilars, unlike generics, are not a peak and a fast decline. It's more of a build. And that helps you, you know, manage that growth.
That's very clear. So you mentioned this is kind of sustainability of revenues. You know, it's realistic to think that, you know, some biosimilar franchises may, you know, grow, you know, in the long term and beyond just having a tail of revenue, even having growth in some, you know, in particular ex-U.S. markets. Is that something that's realistic in the long term or, yeah, or on the two?
Yeah, no, I think it's very realistic. I mean, biologics are a huge portion of U.S. spending and a very small portion of the prescription volume. In a lot of the emerging markets, they're simply unavailable. So there's plenty of precedent where you can grow markets. Even in Europe, Humira, biosimilar Humira grew the molecule double- digits for four years in a row. So there is opportunity to grow, and that helps offset any price erosion, and so there are markets that, you know, can grow, you know, quite significantly outside the U.S.
Okay, thank you. I think we're getting close to the end of the time, so I want to thank you very much for your time and participating at the conference.