H. Lundbeck A/S (HLUNB) Earnings Call Transcript

Hello, and welcome to the H. Lundbeck Full Year 2019 Results Call. [Operator Instructions] And today, I'm pleased to present Deborah Dunsire, President and CEO; Anders Götzsche, Executive Vice President and CFO; and Johan Luthman, Executive Vice President of Research and Development. So please begin.

Thank you very much, operator, and thank you all for your interest in Lundbeck. Welcome to the Lundbeck teleconference covering our final -- financial report for 2019. I'm joined, as you heard, by Anders Götzsche, our CFO; Johan Luthman, our Head of R&D; Jacob Tolstrup, Head of Commercial Operations; and Peter Anastasiou, Head of North America. On Slide 2, you can see the company's disclaimer, which I know you've read many times before. So I'm not reading it out, I'm sure you're glad to hear. Let's go directly to Slide 3. During 2019, Lundbeck has made significant progress against our Expand and Invest to Grow strategy. Our strategic brands continued to show remarkably strong growth in both volume and value across all regions. As you know, we made 2 important acquisitions, which significantly supplement our pipeline and expand the range of brain disease address. We've also made important progress in our internal pipeline, finishing the year with 14 clinical projects, of which half were not initiated just a year ago. Our financial position is sound notwithstanding the significant investments that we made through the year. This gives us some headroom to make continued progress on Expand and Invest to Grow in future years. With that, please turn to Slide 4. Anders Götzsche will elaborate in detail on the solid financial performance later in this call. I'll just start by summing up the numbers. The expected loss of exclusivity on Onfi, previously our largest product, could not be fully offset, even with the 28% growth in our strategic brands. Overall, revenue, thus declined by about 6% but that was a slightly lower dip than in our original expectations provided a year ago. More interesting to me is the growth both in revenue and core EBIT realized in the fourth quarter of the year as the impact of on Onfi wanes, and that clearly illustrates that the next growth phase in Lundbeck's history is ahead. The core EBIT margin is largely unchanged despite our large investments in the commercial infrastructure. Next slide, please. Our 4 strategic brands generated substantial growth, up 28% in aggregate, adding DKK 2.1 billion in sales compared to 2018. These growth products constitute more than half of Lundbeck's sales. Each of the brands has achieved double-digit growth and are growing in all regions. The continued growth in these strategic brands is a testament to the value these products provide as well as the excellence in execution by our commercial organization around the world. Next slide, please. 2019 has indeed been a year where the mature U.S. neurology products and especially Onfi, impacted the financial performance. If one excludes Onfi, Sabril and Xenazine, revenue in the U.S. would be up or revenue would be up 18%. With this transition behind us, Lundbeck is ready to enter the next phase of growth, driven by the momentum on the strategic brands, including the new arrival, epti, eptinezumab. Please turn to the next slide. As you know, the PDUFA action date on epti is set for the 21st of February, and we've not experienced any major surprises so far in the dialogue with the agency. Lundbeck Seattle BioPharmaceuticals is now an integral part of the global Lundbeck organization. Our sales organization to launch epti is also in place, and importantly, we've started the treat and prevent study called, RELIEF, in order to characterize the early onset profile of this product still further. The regulatory submission process in Canada has taken place, and the file is now in validation at the authorities. Full publication of the PROMISE 1 and 2 trials are expected in the coming months. Next slide, please. As we consider our pipeline, we now have the potential for multiple launches in the next 5 years. Of course, as usual, earlier programs carry a higher risk of attrition. But this slide does give a perspective on how we are rebuilding the pipeline. And Johan is going to talk further about that in a minute. Next slide, please. Lundbeck's sustainability activities aim to contribute to solving societal challenges wherever we can. We also act decisively to mitigate risks or potential adverse impacts related to our business activities across the value chain. We remain committed to the UN Global Compact principles and contribute to addressing 6 of the sustainable development goals. The table provides an overview of our ambitions, initiatives and targets. More detailed information about our sustainability policies, efforts and results is available on our corporate website. Next slide, please. Lundbeck's continued efforts to reduce CO2 emissions and energy consumption have been recognized as world-leading by the independent interest group, the Carbon Disclosure Project or CDP, for short. This group sets and monitors progress against the global standard for actions against climate change. Lundbeck is included in the CDP's new 2019 climate A list, the highest possible rating awarded to only the top 2% of the more than 8,400 companies worldwide surveyed by the CDP. The A listing is a recognition of Lundbeck's many different efforts to reduce its impact on the climate by reducing CO2 emissions and energy consumptions. Since 2006, Lundbeck has reduced its CO2 emissions by 68% or 32,000 tonnes and its energy consumption by 35% or more than 51,000 megawatt hours. The energy saving would power more than 11,000 households for a year. In addition to our own direct initiatives, Lundbeck seeks to participate in partnerships to further reduce climate impact across the value chain. For example, we joined the global movement, the business ambition for 1.5 degrees C. And we also participate in the Danish government's climate panel for life science and biotech. Taking action to reduce climate change is a shared responsibility, and here in Lundbeck we are dedicated to do our part. Next slide, please. To summarize, before I turn the presentation over to Johan Luthman. Firstly, we expect continued growth for our strategic brands and the portfolio will now be fortified with epti pending approval later this month. Additionally, we have a very stable cash-generating business, which continues to provide financial flexibility to drive our business for both near and long-term growth. We have the optionality from our expanding pipeline with novel and exciting science, which can create additional growth opportunities in the future. And I'll now hand over to Johan to provide an update on the R&D pipeline.

Thank you, Deborah. Please turn to Slide 12. When I joined Lundbeck a year ago, one of my key priorities was to refine and expand the pipeline. While I would always like to see more projects in the R&D portfolio, in particular, in the mid-stage development part, I still think we have achieved a lot. Products are coming in from the 2 acquisitions we made through 2019. We have also managed to move internal projects forward and added 3 projects from our own labs into Phase I. Finally, we continue our work to get the full value from our brands to potential new indications, both by running pivotal programs but also by getting additional data on our products. We have also stopped a variety of products, which we did not believe were strong enough to continue. Next slide, please. Here, we have listed some of the late development projects we have initiated during 2019. As previous quarters, I have elaborated on the projects around brexpiprazole. These programs are progressing as planned, and we expect to see a lot of data during 2021 from this. We also continue to gather more data on vortioxetine, and initiated a reconnect study to further investigate adult patients with depression, coexisting with general anxiety disorder. Finally, we started a RELIEF study on epti in November last year. Next slide, please. The RELIEF study is conducted in order to characterize the profile of epti in more detail, to underscore its very fast onset of action. This study will enroll 450 individuals with migraine who are eligible for preventive medication. The primary endpoint is to evaluate the effect of epti compared to placebo with respect to time to headache, pain freedom and time to absence are most bothersome symptoms during a current migraine. Included as secondary endpoints are patients achieving freedom from pain and absence on most bothersome symptoms, both measured 2 hours after start-up treatment. We expect to finalize this study before the end of the year and share the data at the relevant conference. I will now hand over the microphone to Anders Götzsche, to expand on the corporate financial picture.

Thank you very much, Johan. Please turn to Slide 15. Revenue declined 6%, reaching DKK 17 billion. This is driven by the loss of exclusivity for Onfi and Sabril, which is partly mitigated by the strong growth from all 4 strategic products. Please also note that the effects from hedging has moved from a gain of DKK 242 million in 2018 to a loss of DKK 322 million in 2019. Cost of sales declined 2% to DKK 3.4 billion for the year. Our gross margin, thereby, reached 80%. This is fully in line with our expectations. We maintained good control over our operational cost. The SG&A costs only increased 6%, while -- which is mainly linked to FX investments in China and Japan as well as other growth initiatives and operational cost related to our 2 acquisitions. The SG&A ratio was 37.6% compared to 33.3% the year before. The increase in ratio is a consequence of the decline in revenue compared to last year. R&D cost decreased by 5% to DKK 3.1 billion, representing 18.3% of revenue, which also is in line with guidance. Considering the sales performance, I believe, we have managed our cost effectively, thus reported EBIT reached DKK 3.6 billion. We see this as a very solid result. The effective tax rate for 2019 amounts to 23.4% compared with the 27% last year. The significant decrease is primarily due to tax benefits realized in Q4 relating to the Alder integration activities. Earnings per share reached DKK 13.42 per share. Please turn to Slide 16. The execution on the new strategy, including the acquisition of Abide and Alder, impacted noncore items in 2019. There is, however, no difference in core and noncore revenue. All the integration and acquisition cost has -- have been recognized in other operating items net and amount to DKK 514 million. These costs have been excluded from the core numbers. Therefore, our core EBIT margin has mainly been impacted by our investments in the commercial infrastructure across the globe. For the fourth quarter, the margin is almost unchanged compared to the same period last year. Before -- our core EPS in the fourth quarter is positively impacted by the lower tax. Next slide, please. Revenue from Brintellix/Trintellix reached DKK 2.8 billion in 2019, a growth of 30%. In the U.S., Trintellix continues to increase its market share. We have seen continued strong growth, driven by an increase in new patients as well as improved persistence on therapy. Demand has risen 23% during 2019. Rexulti is still mainly a U.S. franchise. In Europe, the product has been launched in Denmark, the Netherlands, Norway and Switzerland. Additionally, it's launched in Australia, Chile, Mexico and Saudi Arabia and more countries will launch in the coming year. Rexulti achieved more than DKK 2.2 billion in sales in 2019, which represents an impressive growth of 32%. The demand growth has risen a healthy 24% in 2019, impressive in its fifth year on the market. Abilify was launched in 2013 and grew by 23% to close to DKK 2 billion. In many markets, Abilify Maintena is now the second most prescribed long-acting injectable treatment for patients with schizophrenia. Northera grew 29%, finishing the year above DKK 2.3 billion. We do continue to expect good volume and value growth for this product in 2020 as well. We expect the strategic brands to continue the double-digit growth in 2020. Next slide, please. In the North American region, we are very pleased with the continued strong growth of our strategic brands, which now constitutes more than 70% of the region of revenue. Actually, if one takes out Onfi from the equation, then growth is 13% for the year. North America constitutes 56% of our revenue. International markets increased 11%, reaching DKK 3.9 billion or 23% of our revenue. This region is still in the early part of the rollout of our strategic brands, which show growth of 32%. We expect to see significant long-term growth for these products in the region. The largest markets among our international markets are Brazil, China, Japan and South Korea. These constitute more than 50% of regional sales. Japan is an investment area for Lundbeck as we have just launched Trintellix there together with Takeda and it's very early days but so far, the product performs in line with expectations. Europe is delivering solid growth with revenue increasing 9% to DKK 3.2 billion. The main driver is volume growth, though, we have benefited slightly from quarterly swings in the fourth quarter. The European region is important as part of our overall performance and is driving -- is driven by our strategic brands, which grew 29% and now constitute more than 50% of sales in the region. Next slide, please. We expect continued growth from our strategic brands: Abilify Maintena, Brintellix/Trintellix, Northera and Rexulti and soon, also, epti, which will now more than offset the impact from the continued generic erosion on our mature portfolio. I think it's also important to point out that following the coronavirus outbreak, Lundbeck sees increased uncertainty on product distribution and sales in China for 2020. China is our second largest market and the potential impact is difficult to quantify at this point in time. This is the background for having a wider guidance range than normal in our guidance for revenue and EBIT. We, therefore, expect growth in revenue of 2% to 6% to a revenue range of DKK 17.4 billion to DKK 18 billion. We will continue to be disciplined in our spending in 2020. But as previously communicated, we will make considerable investments in the launch and development activities related to epti, which will impact our 2020 EBIT. Core EBIT is expected to reach the range of DKK 3.5 billion to DKK 4 billion, which is a margin of at least 19%. Reported EBIT is expected to reach between DKK 2.2 billion and DKK 2.7 billion for 2020. For the financial items, you should expect a net expense of DKK 200 million to DKK 250 million, depending on currency development. The reported tax will be impacted by the order transaction and will probably be in the range of 22% to 24% this year and going forward. The cash tax will be 5 to 10 percentage points lower the next 5 years, and thereafter, as it looks now, it will go up as amortization and epti is not tax deductible. Next slide, please. Lundbeck continues to generate a solid cash flow, although the level being impacted by the major investments, we are planning for the year, and this has the highest priority. We will also prioritize reducing the level of debt in order to continue to having financial flexibility. Lastly, we plan to live up to our dividend policy by proposing to pay out DKK 816 million in dividend for the year, which is a payout of 31%. We expect a net debt position by the end of year to be in a range of DKK 6 billion to DKK 6.5 billion. With that, I'll now hand back to -- hand over to Deborah for the concluding remarks.

Thanks, Anders. Please turn to Slide 21. 2019 was a busy and exciting year. I'm sure that 2020 will be just as exciting with the launch of epti in the U.S. We'll also see data from the Phase II programs, at least 2 of them, although these are relatively small studies, which might limit how much we can conclude from these trials. We'll continue driving our current business forward as we execute on our Expand and Invest to Grow strategy. Next slide, please. To summarize, we'll continue to leverage our deep neuroscience expertise to restore brain health, and that is our path to grow Lundbeck and create value for patients, for our society, for our employees and for all our stakeholders. Through this, Lundbeck will continue to be a robust and sustainable company in the years and decades ahead. The outstanding operating results over the past years give us the strong financial foundation to go forward and achieve these goals. With that, I would like to thank you all for your interest and open the Q&A session.

[Operator Instructions] Our first question is from the line of Wimal Kapadia of Bernstein.

Wimal Kapadia from Bernstein. So first, could we just get a better understanding of the impact of China on your guidance? So you previously gave ranges of DKK 400 million for revenues and EBIT, but you've now given a range of DKK 600 million for revenues and DKK 500 million for EBIT. So does that suggest that DKK 200 million impact on revenues and DKK 100 million on EBIT? Or is that the wrong way to think about it? And then tied to this, what is the adjustment assume in terms of resolution of problems, i.e., does it assume business as usual, starting in 2Q or 3Q? My second question is on Rexulti and Alzheimer's agitation. So maybe, I'm over-reading the language but you previously suggested data -- headline data in early 2021. Looking at the current presentation, you say the study will finalize in 1H '21. So is this a delay? Or should we continue to expect data in early '21? And then tied to this, I'm curious to ask if this launch will require significant increase OpEx, if successful? Or is the existing infrastructure sufficient?

Okay. Lots of questions there, Wimal. Anders will start on the guidance. And Jacob will follow-up on the return to normalization in China.

I think you take it too far if you assume DKK 200 million, but we have not -- as you know, we have a bit -- we have around DKK 1 billion in revenue in China. So it's a bit less than DKK 100 million a month. And I just want to be razor clear on that we have seen no impact so far. But it's also fair to say that our employees, this -- we take their safety -- that safety first, and therefore, they're working from home, like many other companies also have their employees working from home. And therefore, there might be an impact or there will be an impact. And that is what we are seeking with a bit broader range but to take it to DKK 200 million, then you are taking it too far. And then Jacob could -- can comment more.

Yes. I'll just add a little bit on the operational side of it. So true, employees are working from home these days, like many other companies and are scheduled to resume work. You can see outside of home on the 17th of February. I think right now, I think your guess is probably as good as ours in terms of what will really happen on the 17th of February. But that's their current plan, where schools will reopen and then there will probably be some time before things are back at full swing for everybody in China. So just to reiterate what Anders said, we haven't seen an impact at this point in time but we're just taking precautions and expect it that there may will be an impact going forward.

And maybe you could also tell about the expansion of the script period.

Yes. So what we also see is that the Chinese authorities take measures that are needed to help patients get through this period of time. And that means for chronic diseases, they are expanding the prescription period from normal 2 weeks and all the way up to 3 months. So that means that patients can still continue their treatment while being unable to go to a doctor and eventually a pharmacy.

I think, just summarizing, we believe that these brands are promotionally sensitive and in our sales guidance range. Peter, would you like to? Or Johan are you going to comment on the Rexulti?

I can comment on the commercial infrastructure question at the end.

Yes. So this is Johan. Just a quick comment on the Rexulti. So this is a study that has some adaptive elements to it in terms of sample size assessment, et cetera. So that's why you have a little bit of variance at how we report this. And what you see here is more of a conservative estimate where we'll be with the inclusion of the study -- with the full enrollment of the study.

And then on the commercial investments, of course, we will leverage the existing infrastructure as much as possible with the recognition, though, that if we do get this indication, there will be some additional customers we would need to approach nursing homes, but also, some gerontologists and some people that are currently not on our call list that treat patients that have agitation with Alzheimer's. So there would be some investments related to that. But of course, we would leverage as much as possible the existing structure.

Next question is from the line of James Gordon at JPMorgan.

James Gordon from JPMorgan. Just a follow-up one on China. So if I heard correctly, said, the only impact so far has actually been on promotion as in the reps are grounded but you've not seen any impact at all in terms of prescriptions written or people's ability to cash prescriptions? Is that right up until the end of January that there has been no impact on those aspects? And on China, any disruption in terms of actual distribution of the product? Could that be an issue? And then second question, just beyond China, are there sort of flex points for the guidance this year? Is it pacing your trial starts? Or is it further business development or anything else that could be a swing factor beyond China that we should bear in mind when we're working on where we think you're going to come out?

Okay. Thanks, James. Jacob's going to take this?

Yes. So I can definitely begin answering that. I think the comment we made around -- we haven't seen any impact is -- on our sales for January. So sales for January came in as expected when we started the year. So that's the comment that's made at that point in time. And too early to say for February. But do -- we do expect in the future, some impact on sales potentially. On the logistics side, I know our distributors are working really hard to keep things and products available all across China. So far, we haven't seen or heard of anything that will give us because that products are not available. But that is another thing that we continue to look out for in the future to see if logistics are not up to normal levels.

Anders, would you like to comment on the swings in the guidance?

I think it's actually -- from that perspective, it -- the guidance is a bit boring, isn't it? Because there's not a lot of swing factors. We believe that the strategic brands will grow double-digit in 2020. And you will see a continued erosion of Onfi, Sabril and Xenazine. We anticipate a 50% decline for Onfi, which is the most important decline that we will see in our business. But you have also seen that the mature products is actually doing extremely well. We had an increase in Cipralex this year. And we actually, based on the growth initiative, that Jacob has initiated across international markets and Europe. We'll continue to go after that. That's, of course, also the reason for the increase in FTEs but it has actually paved -- or we have benefited from that. So you see an increase in Cipralex this year, which is, I think, is pretty amazing. So I think the swing factor is limited. Of course, we have taken into account that we will get some revenue from epti but we are also cautious. So we expect it will take time to get my epti up running. So as you know, from earlier years, we are cautious guys. And therefore, we have built in a decent uptake.

I think other factors to consider would be if there were additional Sabril tablets that entered the market, any other unexpected price increases in some of the international markets or Europe but those are unforeseen. We've said that we would -- we would continue to look at the Expand and Invest to Grow strategy, selectively for partnerships, regional deals, other types of supplements to the pipeline. But that will be opportunistic, and we're certainly not targeting major acquisition in this year. We really want to consolidate and deliver on the brands that we've got.

And you should assume that we will use around 20% to 21% in R&D cost in 2020. So of course, that is going up as well as SG&A margin due to the launch of [ cases ].

We now go on to the line of Marc Goodman of Leerink Partners.

We have 2 important Phase II readouts coming very soon. I was wondering if you could just set the stage for it. And what would be considered good data? What would be considered disappointing? Things that we should be looking at, key other endpoints besides just the normal primary endpoint for the Parkinson's and Tourette's products that are coming? And then just secondly, maybe, Peter, can just comment if there are any inventory build? Sometimes we see that in the fourth quarter in the U.S. in some of the key products.

I'll start on the Phase II. Just to set expectations, both the 2 readouts, one on Foliglurax, one on [ 06466 ] in Tourette's. The Phase IIa trial. So they're small and I just want to make sure that we reiterate that. I know we've said that before. So there could be indicative trials. So I'll hand over to Johan for further comment.

Yes. That's very much correct. So those are early stage proof-of-concept activities, both of them. In terms of the Tourette's study, we have a rich opportunity there. This is one of many indications, we are planning to explore for this molecule. And they will be indicative of the pathway forward. And that is basically how we view them right now.

I think the thing that we have pointed out in our release is that if there was a complete failure in Foliglurax that meant there was no future path forward for that asset, it could trigger EUR 100 million write-down.

Do you want me to answer the question about...

Yes. Go ahead, Peter.

Yes. Marc, on the question about quarter-to-quarter fluctuations in inventory. Of course, that always is the case every quarter. And we see that here as well, but nothing in particular to highlight for you. But we do expect, like in every quarter that there is quarter-to-quarter movement.

We will go to the line of Dominic Lunn of Crédit Suisse.

Thank you for the hedging guidance for 2020. If you have a look versus consensus, your impact between DKK 200 million and DKK 250 million is significantly ahead of consensus. Could you just remind us about your hedging mechanics? And could you potentially give us some guidance for 2021? So we're aligned there. And then secondly, following the GPA price cuts in China last year and the 4+7 expansion for this year. Could you just give us an update on where you are with China portfolio?

So Anders, you can jump in...

Yes. For the main currencies, as you can see in the release, we have stated what is the currency levels that we have hedged that. And in principle, we hedge between 6 and 18 months, up to 18 months. But in average, we hedge 12 months ahead. And that means that -- that's mainly Chinese renminbi, it's Canadian dollar, It's U.S. dollar. And we hedge on a rolling basis. So we don't expect that we can beat the market. We are basically not speculating. We are just doing it to secure that we can make a financial guidance that we know what -- how we can actually deliver on that. So you would see that every month, we are making new contracts. And that -- so in principle, that's more or less the average of the of the dollar exposure that -- or the dollar appreciation. So in '21, then you would also see the impact of how the dollar is, of course, behaving in -- during 2020.

And on China...

Jacob?