Orion Oyj (ORNBV) Earnings Call Transcript

Good afternoon, ladies and gentlemen, and welcome to Orion's earnings conference call and webcast for the financial period of January-June 2023. My name is Tuukka Hirvonen. I'm the Head of IR here at Orion. We will kick off shortly with the presentation from our CEO, Liisa Hurme followed by a Q&A session where also our CFO, Jari Karlson, will be present. We will first take questions from the conference call lines, after which we will then take questions from the webcast tool, so you are able to type in questions also through the webcast tool, but we will first take questions from the conference call lines. And kindly, please state your name and organization before asking your question. And just before I let Liisa to start with her presentation, I'd like to draw your attention to this safe harbor statement or disclaimer regarding forward-looking statements. But without further delays, it's my pleasure to hand over to Liisa. Liisa?

Thank you Tuukka, and good morning and good afternoon on my behalf as well, and welcome to the Orion Q2 2023 event. Let's look at the key matters or activities from the second quarter. Very good news on our clinical pipeline. We are entering or have entered already to Phase II clinical trial with our molecule tasipimidine which goes with the name ODM-105 for the treatment of insomnia. Also, we are preparing to start a Phase I clinical trial with ODM-211 (sic) [ ODM-212 ] and I will say a few more words on those molecules later on. We also updated on the Capital Market Day that our Easyhaler portfolio's peak sales potential is more than EUR 200 million, which is clearly an increase from our original line. Also, we have told that we are going to invest EUR 30 million to increase our production capacity for Easyhaler devices along the hiked up potential and also increase the capacity to manufacture darolutamide API. All in all, very positive news and projects. On the other hand, we have discontinued our business operations in Russia during the Q2. We have no inventories anymore in Russia. We carry no sales in that country and total impact of Russia-related items was approximately EUR 25 million negative on our operating profit in the first half of '23 compared to the '22. And then when we look at the numbers more closely, our net sales increased positively at 2.4%. Nubeqa, of course, our main driver for the net sales. Animal Health also positive all in all. And the usual suspects on the negative side like Simdax and Dexdor and unfortunately, this time also entacapone. And then the decline in operating profit. That was heavy, a 2-digit number, 23.5 percentages. So we came down from EUR 153.4 million from the 2022 1st half, now to EUR 102 million. Of course, when we compare the first halves of these years, Russia plays a big role in this. It was partly in our plans, but of course, eventually, we didn't know how and when exactly we are able to discontinue and close down our operations, business operations in Russia. So the final figures only became evident during the last weeks. Then there is the lower margin due to price decreases, also product mix, to some extent, an increased cost of goods that we have discussed earlier. Cash flow also down 55.1%. That is explained by the decrease in operating profit that we just discussed and also by increase of working capital that is now higher than in the first half of the last year. Of course, Nubeqa plays a big role there, but other materials and our inventories are quite high right now. Our net sales, a very positive development. Nubeqa EUR 44.3 million. The whole other portfolio outside Animal Health EUR 23.7 million; and then Animal Health and Fermion all together plus EUR 20.7 million. There are also downsides dexmedetomidine continues as it has been declining all the time with smaller numbers as the sales gets more of the decline, of course, get smaller at the same time. And then the exchange rates that I will talk more here on the next slide. And I think it's good for us to stop here and really go through all the details on this slide. Maybe it's good to remind when we discuss the operating profit that when I first mentioned that Russia generated EUR 25 million minus for us on the first half of this year. So that EUR 25 million is embedded in almost all of these columns in this picture. So it's really composed of different factors, not that much of a discontinuation itself, but different matters during the first half year. We can start from the product and service sales on the first one. Of course, there, Russia plays a big role because we actually didn't have sales in that country almost all during the first half. But Nubeqa luckily brings a positive vibe here. The next one, minus EUR 57.4 million more is the big one. Of course, the loss of margin of the products that we've sold in Russia is included here also the minus almost EUR 20 million. That is a price difference of Nubeqa -- transfer price to buyer compared to the last year is embedded in this one. And then there are more costs that we've been generating during the first half. So 3 big parts in this big column of EUR 57.4 million. Russia, Nubeqa price difference and increased costs. Of course, Russia is a one-off item. So that really then belongs to the first half and shouldn't accumulate any course or losses as we go along this year. Looking at the exchange rates of the EUR 17.2 million, again, Russian ruble plays a big role with EUR 12.3 million or rubles -- sorry, euros. But luckily, Nubeqa, of course, has generated new sales for us. And then other operating income and expenses as well. All in all, Nubeqa, very positive on many fronts, but not quite enough to then substitute the losses on different fronts, for example, in Russia. Looking at our business divisions. Innovative Medicines, a huge growth, a very good one, Nubeqa-driven, branded products, down due to the timing of deliveries of entacapone and loss of sales of [indiscernible] in Russia. An excellent, excellent performance by generics and consumer health. And now you might think that, why is that excellent? It is declining here. But if you take into account that within this division, you have Simdax and Dexdor, both declining, as you can see from the numbers. And also Russia has quite a big impact on this division. I think this is an excellent, excellent performance. Animal Health, almost doubling the revenues and Fermion approximately at par. What is noteworthy here is that Innovative Medicines now generate 17% of our net sales. I think last month, it was around -- last quarter, it was around 10%. So the share of Innovative Medicines is growing all the time as it should be. Then when we look at our top 10 list, and Nubeqa already discussed Easyhaler, a 5% growth. All Easyhaler portfolio products grow in a very healthy way. What's new on this list is actually the entacapones. Entacapone products are decreasing almost 30%. And that is to our understanding really timing of deliveries from Orion to our partners. We see that some of the customers around the world are really -- how would I say, managing their inventories. We see the high interest rates. And of course, some of the companies might also have high inventories after the pandemic. So there is clearly -- the dynamics is a bit different than at the comparative period last year. The other new thing on this slide is really the Animal Health products, the #5 here, that's also declining almost 25%. A bit of a same reason here. Also management of inventories of our customers, high inventories after the pandemic and clearly, some different dynamics applying to ordering behavior. And Divina series, as already discussed, suffers from withdrawal from Russia. Biosimilars have entered our top 10 list. They come and go. Clearly, nothing dramatic or big to report on that front. Innovative Medicines, Nubeqa, clear. But then ganaxolone will be the next launch for our Innovative Medicines division. And we now know that CHMP has given a positive opinion to our partner, Marinus on the first indication for the CDD and marketing authorization is expected in the coming weeks or months. So we are, of course, all the time preparing for the launch with the pricing and reimbursement processes, but anyone who has launched a product in Europe knows that it takes time, and it has very different pace in different countries. So I'm sure we will be hearing more about this later on this year. Branded products, a good performance with Easyhalers, but as I already said, we see that entacapone products, especially Stalevo has a bit of a how would I say, backlog of deliveries currently. And we'll see whether that then smoothens out during this year or is moved to next year. Generics and Consumer Health, a very good result if you look at the last year's first half and then calculate Dexdor and Simdax, as I said, and also the effect of Russia. So the basic generic portfolio in Nordic countries performed very well during the first half of this year. Animal Health. After the acquisition of VMD, as we call Inovet, healthy growth on net sales here. And even though we see a growth here without Inovet and VMD, we would actually see a decline in sales in Animal Health, as you saw on the top 10 product list. There is weakening demand clearly on -- especially on the company in an Animal Health market. I think it's due to the increased cost of living. People will have to pay for their energy, for their food, for their driving and housing. And it now we can really see the effect of that in the companion animal market. Not to mention the livestock market to some extent. But there, the effect is more the same as with entacapone and Animal Health. It has to do with inventories and ordering cycles. Fermion at par, a slight increase in manufacturing, a lot of Fermion's capacity is now tied to darolutamide manufacturing. And this is, of course, the external sales, but lucky to have capacity also for growth there. Then the clinical development pipeline, 2 new or 1 new molecule and then 1 new indication on this list. ODM-105 for insomnia. Now anybody could ask that why would you develop something to treat insomnia when you work with oncology and pain. Well, insomnia is very often related actually to pain. So it's really difficult to distinguish, which is the course and which is the result. So we see that there is a link, not a very strong one, but there is a link and the molecule per se by its qualities, we believe, would serve very well in this indication. The newcomer here is ODM-212, a TEAD inhibitor for solid tumors. This is a YAP/TEAD pathway in signaling of tumor growth where this type of a molecule then would be able to have an effect. And here, we plan to enter Phase I during this year. We have also conducted a double materiality assessment in Orion with our stakeholders this spring. What this means is that we have assessed if our sustainability efforts are in line with those that -- in line with our industry, so to speak, that are we doing the right things taking into account the effect of our industry to the environment and other way around. Luckily, the outcome shows that, yes, all the actions and efforts that we are doing are very well aligned with the environment. Of course, first for us is patient safety, that's our top priority at any given moment. The second is a better environment and there, we work, of course, with the waste, how do we deal with the waste and waste is a big thing for the API manufacturing, especially not that much on pharma industry, but for the API industry. And there, you should then develop green chemistry, develop new ways of handling the waste that is generated by the API factories and all this we are currently doing. Then, of course, care for well-being professionals, and -- what do we mean with well-being professionals? We mean Orion employees. And here, we measure and improve our work safety, every day, every week. We have introduced the [ DIE ] basics, and we take it very seriously that anybody who comes to work to Orion and all the Orionese will have to be able to be who they are in our working community. And of course, we plan for the future talent development and building the future capabilities. Ethics is most important for us. I mean, for any company, but if you're working in pharma industry, I think it should be one of your priorities. And there, we need to have the good corporate governance practices, data protection. And of course, when it comes to this type of a global industry where much of the materials parts of the supply chain are outsourced around the globe. It also means that you will have to be extremely transparent on that supply chain and be able to describe it at any given moment to your customers or buyers around the world. And first of all, of course, to ourselves and work all the time towards a better supply chains, both from the environment perspective, but also from the social perspective. Regulatory compliance comes without say. Now to the outlook for 2023. We specified our outlook based on the Q2 results. We still assume that we will be able to do slightly higher when it comes to our net sales. And the comparative number from 2022 is EUR 1.13 billion. That's all clear and that's as it has been. Regarding the operating profit, we are now estimating that, that will be slightly higher than in 2022. And the comparative figure here is EUR 232 million without the pension fund receive -- the money received from the pension fund. And the difference here is that earlier we said that it will be slightly higher that the operating profit would be slightly higher or higher. So we kind of specified it to be a bit more narrow, but we will grow with our operating profit, and we will grow with our net sales. And this is what we communicated early this year, the factors that will contribute both up and down on our net sales and operating profit. I think these are exactly the things that we've been discussing today. They have realized, as we planned the Russia, both on the net sales and operating profit, pricing pressure on Dex, Simdax. And then, of course, the operating cost and cost of goods will -- and they have had an impact on the first half of the year, but more we see that now that we have moved to the next -- the latter part of this year it will be the effect of the inventory management and customer behavior in some of the business that we probably we're not able to estimate earlier this year, markets changed during the year. So both the Animal Health and the entacapone have clearly shown that there can be changes during the year. And of course, we will have to take such changes into consideration when we look at the rest of the year. But Russia itself was a one-off and mainly has to do when we compare first half of this year to the first half of the last year. Here, you see the upcoming FX events, the next one on October 26th. And then 13th of February next year, we will be reporting the full year of '23. And I thank you on my behalf here.

Thank you, Liisa. And now it's time to take the questions. So we will first start with the conference call line. So operator, please. The floor is open for questions.

[Operator Instructions] The next question comes from Harry Sephton from Credit Suisse.

I have 3 questions, please. So firstly, on the Phase II study in insomnia for ODM-105, I just want to get a bit more detail on why you've chosen insomnia for this asset? Why do you think that this product can be differentiated versus current insomnia treatments? Or as you mentioned, are you may be looking at a narrower patient population for insomnia, which might be insomnia associated with pain? My second question is on Russia. So you called out entirely, and this is the -- I think you said a EUR 25 million negative impact to EBIT in the first half. I just wanted to understand if any of that impact was a one-off cost associated with the discontinuation rather than a loss of business? And then what can we expect the negative impact to be for the full year 2023? So I'd anticipate that your second half '22 was already feeling a negative impact for Russia. So should we expect the second half of this year to have a lower impact than the EUR 25 million EBIT impact you had in the first half? And then my third question is on R&D spend phasing. In first half of this year, we've seen R&D spend to moderately lower than you saw in the second half of last year. I just wanted to understand whether we should expect a step up in the second half as some of these new clinical trials start.

Thank you. Maybe I'll start and Jari can then complement especially with the question on Russia. Then I'll start from your last question regarding R&D cost. Well, that's a question of timing. If you see a lower cost now for the first half, definitely when we start the clinical programs, both for the insomnia and then for the ODM-212, the cost will be increasing to some extent from the -- compared to the previous year. And then regarding the Russia, yes, minus EUR 25 million. That, as I said, is not really a cost of discontinuation. It's more a difference of sales. For the first half of this year, we had almost no sales resulting almost no margin. So it's really a loss of business from these 6 months compared to the last year's similar period. There were some one-offs like we sold some inventories to empty our stocks and all that. And then the other big thing item on the loss of sales and margins in addition to that, is really the exchange rate. It was very favorable to us, you know, last -- especially last year's second quarter. So the comparable numbers show that. And yes, last year, the latter part of the year already suffered, we suffered from the loss of sales to Russia. So now that we are in the second part of this year, we shouldn't see that much of a change. And Jari, you can continue on that.

We still had some millions of sales in Russia during the last half of last year. But fairly low numbers compared to the first half of last year. So the loss of business during the second half is not going to be that significant. And we actually had some negative impact during second half of last year from the Russian ruble exchange rate. So that will kind of compare to this year now when there's really nothing left to be determined in Russian rubles that will actually cause some small positive compared to last year. So overall, the impact of Russia for the second half compared to last year is going to be very, very minor changes. So the EUR 25 million is most of what comes. And like Liisa said, the actual real costs related to getting out of Russia were a relatively small part of that. We sold some remaining inventories at very low prices. So there are some one-offs. We, of course, continued laying off the remaining part of people, so some extras there. But on the other hand, we also had this onetime gain when we sold the -- our OTC business. So that EUR 3.8 million was plus. So overall, I'd say that the cost of getting out of Russia actually pretty much were balanced off by this gain on setting the business. So the comparison really is compared to last year, not so much that there would have been extra cost.

Thanks, Jari. And then to your first question regarding ODM-105. And why do we think it would work for -- or treating insomnia. We know the molecule earlier from earlier studies, especially in Animal Health and we know that it generates a very, if you could say, healthy sleep, for animals and for people. So we think that from that perspective, we can differentiate. Of course, it's very early to say anything at this stage. So let's see how it performs in these studies.

The next question comes from Anssi Raussi from SEB.

It's Anssi from SEB. I have a couple of questions, and I'll go one by one. But the first one about costs. So your administration costs and sales and marketing costs were clearly higher than in Q1 this year. So was there anything special here? Or how much was the Russian impact? Could you just open up a bit those roles?

Okay. Maybe I can. So, Russia really played almost no role in there. There are several -- I mean, one of the reason for -- especially for the admin cost is the fact that we transferred some people from other parts of the organization with the organization change that took place at the beginning of this year. And those costs -- there are, for example, people who used to work for the manufacturing operations in the investment planning and so forth. And that group of people is now part of the corporate administration functions. So that added cost. So that was one element. We also did some changes in how we allocate costs for certain costs that we used to transfer from the administration and allocate them to other functions are now kept in the administration. And then also, we mentioned that the cost for information management are increasing currently. More systems, more costs. And also the fact that the accounting rules now say that if you use the cloud-based services, those costs have to be reported, of course, they are not investments like in the old days when you build a new system and invested in your own systems, then you depreciated those costs over the use of the program. Now no such deviation of cost over the year. So it's all costs. So there are lots of these types of elements. And then, of course, the fact that we didn't have the Inovet business last year during the first half of the year so all the administrative costs and sales and marketing costs of those. That business is now reported for this year and that, of course, increases the cost compared to last year. So no real -- nothing really in a way, dramatic here, lots of all kinds of little things in here and there and partly also timing of some consulting work and things like that. In the sales and marketing side, like I said, also in the report, at the early part of last year, the cost accumulation was still relatively slow because of the COVID. So before we actually get everything started, that slowed down the development there. So those type of things which took place. But the headcount as such, with the exception of Inovet people in these functions has not really changed. So we haven't really added people. And of course, the overall cost inflation at the higher salaries. In many countries, the salary increases actually have been quite significant during -- compared to last year, not so much in Finland, but in many other parts of the world.

So basically, these are the levels we should maybe expect in H2 this year as well, of course, including some seasonality?

I think so. I mean, some seasonality. But in principle, I don't think there will be any major changes up or down from the level where we currently are.

Okay. And maybe related to these cost items. So you are quite a lot behind your last year's EBIT. So -- and you guide, of course, slight increase. So besides this EUR 30 million milestone payment. What are the main elements you see to reach your guidance? Like what will change in H2? Expect smaller losses from Russia maybe?

Yes, you are right there that, of course, for the second part of this year, we wouldn't have the losses of the Russia. That was a onetime effort if you can say that for the first part. We also see a good performance of our generic portfolio, Generics and Consumer Health. That's one. Nubeqa is performing well. There is a strong growth on that front. And Dexdor and Simdax as we see that the sales is getting smaller and smaller. And fortunately, also the loss of generalization of those products is getting smaller. And Jari, is there something I forgot to mention?

Yes, Easyhaler. Definitely plan to continue growth as well.

Yes.

But so far, I guess are the main elements. So, Nubeqa, Easyhaler, definitely. And then maybe some timing issues related to some of these partner deliveries, which really had a negative impact on the first half, probably not all of that will come back during the second half and some will be going to the next year. But at least we shouldn't have as big negative impact on the second half as we had in the first half for those type of changes in the timing. So it really comes from all of these things gradually.

And maybe to add here that from the beginning of the year, we've been, I think, very consistent of telling that the first part of this year will be challenging. And then the second half will be a better one. So all in all, the full year we will be able to...

And of course, if you calculate, I mean, we had EUR 102 million during the first half of the year. Another EUR 102 million plus the EUR 30 million milestone already takes us to the level of compared to the last year, full year is EUR 232 million, which means that then all of these things we were now mentoring higher Nubeqa, they are then the ones which start generating the slightly higher.

Okay. That's clear. And the last one from me is about ganaxolone. So could you remind us, have you commented about your initial expectations or any peak sales potential in Europe? Any comment on that?

No, we have not given out any estimates for the peak sales of that product. And it's good to remind here what a good thing that you asked that, especially the first indication is very small for children with a specific epilepsy and with the specific genetic mutation. So that's why we are going very, how would I say, smoothly to the market. And our biggest aim is to really secure that the patients will have the product available to themselves. Then the second indication, then is a very different one. So we'll see then about when we see the Phase III results. But we have not given out any estimates for the revenues.

The next question comes from Sami Sarkamies from Danske Bank.

Okay. I have 4 questions. We'll take this one by one. Firstly, starting from cost inflation. Do you still expect cost inflation related to COGS and OpEx to moderate after the first half of the year?

Well, I guess, we are in a situation that the costs -- I mean, of course, some costs still can increase, but then there are also areas like energy where the costs are down. So overall, we probably will not see much increase during the second half of this year compared to a year earlier. But of course, they will not go down to the level where they were during the early parts of last year. So we are now at a higher level than we were a few years back. But at the same time, we don't expect an overall big impact from that increasing our cost base anymore. But of course, I mean, we never know, but that's at least currently the thinking we have in the overall portfolio of costs because some are coming down, some are increasing. And like I mentioned, the salary increases, for example, some of them continue hitting us a little by little this year and then next year. But let's say that the worst is over, the worst situation was from first half to second half last year, and now it's more leveled off.

Okay. My second question is on the destocking headwind that you're mentioning with a negative impact on entacapone and Animal Health. Do you think we have seen the worst during the first half of the year? Or -- and do you have visibility on things improving during the second half of the year?

Well, I think it's very, very difficult to say. We have seen the worst. It's always difficult to estimate other companies ways of managing their business. But this is what we have seen this far, and that's why we also wanted to specify our outlook.

And I think it's probably likely that, I mean, especially if you are talking about kind of the permanent decrease in the level of inventories, it might take still the rest of the year in some of the customers to take their inventories down to the level they're aware. One, which means that then we will start kind of the sales picking up only towards the end of the year or early next year in some cases. But at least, I think it's not very likely that we would see all of the negative we saw in the first half of this year to be gained during the second half of this year. So some of this will -- at least for this year, we're permanent and then we'll see whether there are some more permanent impacts. But at least today, we still believe that in most of the cases, the impact is for this year and then next year, we will see some rebounding of the business.

Okay. And then thirdly, regarding the guidance downgrade. Could you still open up the reasons that led to this downgrade during the second quarter?

Well, I'll start with the -- well, as I said, we started the year telling that the first half is a bit of a challenge. And then the second half will be a better one. The only thing that we now realized was really that it probably wouldn't be exactly as good as we thought. And there are these timing issues for our partners on deliveries on our partners and also the softening of the Animal Health market. So those are the main changes why we did this change in our outlook. Otherwise, I think year has, as we said, mostly actually advanced as we planned. So everything has gone very well. We see a lot of our products proceeding extremely well on the marketplace. But you have to be honest with yourself that if you see something happening, you need to take that into account in your outlook then.

Yes. I mean -- and of course, one needs to be put in this perspective that we are not talking about necessarily very major changes in millions, Sami, from 230 level 1 percentage is a couple of millions, 5 percentage is EUR 10 million, which very easily can happen one way or another, and that definitely is already moving the rates quite a lot. So we are talking about changes in the views of -- in the neighborhood of -- not that many millions. But the other side, positives, we clearly saw that, to some extent because of these changes in those couple of areas Liisa mentioned are now there. So the change is not really dramatic, but some millions here.

Yes. We talk about single millions here. That's good to understand.

And just to be clear, you're not sort of calling the Russian exit or expense development as reasons for the downgrade?

No, not really. They were according to our plans, of course, a bit more than we expected. And we -- as Jari explained, we don't think that we will see any bigger minus developments on that front for the second part of this year.

Okay. And then finally on ODM-105, can you please provide some color on the market potential as you're now disclosing insomnia as the target indication?

Well, insomnia is a very big challenge, especially in the western world. But of course, for the market potential I would need to know more about the molecule. And before I would comment anything like that, I would need to have the next study's results because it depends, of course, on the label and the patient group and all that.

The next question comes from Viktor Sundberg from Nordea.

I have 3, if I may. So first, on gross profit here, you're right that it's significantly hit by your price decreases in your manufacturing price to Bayer. As you're right, this will be offset by royalties in the future. I just wonder how we should model this. When do you expect royalties to offset this price decrease? And are there any other price components in the manufacturing part that could be changed in this agreement going forward? Or what is the final price decrease? That's my first question.

Well, I mean, ultimately, our cost will be the cost of goods sold. And those, of course, are recorded every time we ship. But we -- when the delivery price is lower, then, of course, means that during the same period, when we ship the product, we actually earn a little bit less margin. But Bayer always then according to the agreement, deducts their purchases from the royalties in the second -- next quarter. So this is quarter-by-quarter type of movements. But of course, ultimately, this situation will balance off only when a Bayer has sold off all the inventories eventually years and years from now. But now they are clearly in the inventory buildup phase because also their sales are growing very, very rapidly. But the impact of this price decrease is very temporary. That only hits us kind of 1 quarter to another, so it moves it until now because the price change took place, now it's summer. So from now on, we will not see any kind of a year-on-year impact from this price change anymore. So that was something which affected our numbers from third quarter last year until second quarter of this year. And after that, this situation is over. But of course, it will have some impact throughout the whole year when it balances off, but mostly, we are kind of over that level now. But of course, we still will see a little bit of lower margin from Nubeqa as long as Bayer continues to buy from us more volumes than they are during the same period, selling out. But that, of course, is a smaller impact, let's put it that way.