Sandoz Group AG (SDZ) Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to the Sandoz call today. I will now pass on to Craig Marks, Head of Investor Relations, for his opening remarks.

Thank you, and welcome to the Sandoz 9 Months 2026 sales update call. Earlier today, we published our sales update together with the accompanying presentation that we will follow on today's call. You can find these documents at sandoz.com/investors. Joining me today are Richard Saynor, Chief Executive Officer; and Remco Steenbergen, Chief Financial Officer. Please turn to Slide 2. Our sales update announcement, presentation and discussion include forward-looking statements. Please see our disclaimer here. Please turn to Slide 3. Richard will begin with the highlights of our sales performance and an update on the business, including the continued expansion of our pipeline and further enhancements of our biosimilar capabilities. Remco will then take you through our sales performance in more detail as well as our guidance for 2026. Richard will conclude the presentation before we go to your questions. And with that, I'll hand over to Richard. Please turn to Slide 4.

Thank you, Craig, and hello, everybody. It is a pleasure to welcome you to today's sales update. Since we spoke to you at our Capital Markets Day last month, we've continued to make good progress across the business. And I'm delighted to say we've continued to strengthen our position as the global leader in affordable medicines whilst achieving our 20th consecutive quarter of net sales growth. Please turn to Slide 5. Let's turn first to the key highlights of our progress. We've again expanded our biosimilar pipeline this time through collaborations with Henlius and mAbxience, taking the pipeline to 40 assets including our first hemophilia biosimilar. We've also made the first GLP-1 shipments to our partner in Brazil, and we achieved GLP-1 regulatory approval in Canada. It's been a very strong year so far in generic filings, while we all have already launched around 270 generic medicines this year. At the same time, we've continued to invest in our future. At the CMD, we introduced our Bio100 ambition. Since then, we've opened our advanced high-volume drug substance manufacturing center in Landover and announced further investments in Ljubljana in disposable fed-batch technology. Together, these excellent developments will further strengthen our in-house capabilities and support our long-term growth ambitions. Looking at our top line performance, net sales grew by 5% in the quarter, but at an underlying level by 7% when excluding the anti-infectives B2B business. It is worth noting that we don't expect to see a material B2B headwind in quarter 4 or for next year. Biosimilars continued to be our growth engine, delivering another double-digit performance in the period, whilst representing 34% of net sales. We're delighted with the underlying performance of the business. Demand is strong. Our launches are performing well, and we recently strengthened our balance sheet, and we're delivering in line with our Bio100. Today, we have narrowed our 2026 net sales guidance to 5% to 6% and upgraded our core EBITDA margin guidance for the year to 23% to 23.5%. Importantly, today's update to guidance doesn't change our previously communicated outlook to 2028 or our recently announced outlook to 2030. Remco will take you through the full year guidance later. We will enter 2027 with strong momentum as we capture more market share, launch more medicines for more patients around the world and expand our pipeline further and deliver more growth. Now let's look at the sales performance in more detail, starting with Slide 6. Quarter 3 was another period of strong underlying growth for Sandoz with net sales of $2.9 billion. Once again, biosimilars were the standout performer, growing by 17%. This reflects continued momentum from the established portfolio as well as the excellent contributions from our recent launches. Excluding the B2B impact, generic sales grew by 2%, in line with our long-term trend. From the regions, North America was the standout in the quarter with growth of 20%. Please turn to Slide 7. I am so pleased to see the progress that we're making in generics. We now have the leading global market share in generics, accompanying our #1 position in biosimilars. This is a true milestone for our business. We continue to see strong execution across our portfolio. In GLP-1s, we made our first shipments to our partner in Brazil, whilst we achieved regulatory approval for Sandoz Semaglutide in Canada, our generic version of Ozempic. Our pipeline contains more than 300 generics and our disciplined portfolio strategy is focused on the most attractive LOEs, particularly in oral solids and injectables. We are targeting around 70% of generic LOE opportunities by value, and we continue to convert our huge pipeline into new medicines. We've launched around 270 medicines alone so far this year. Overall, this demonstrates the continued strength of our generics engine, combining excellent market share progress, disciplined portfolio management and a deep pipeline and consistent launch execution. Challenging conditions in the B2B market for penicillin API sales still remain. We continue to urge the European Commission to investigate alleged dumping and consider antidumping duties or tariffs to safeguard European antibiotic supply. We also continue to advocate structural reforms that ensure a level playing field for European producers. Now let's turn to biosimilars on Slide 8. Our industry-leading biosimilar pipeline continues to expand. It includes 6 assets in regulatory review or yet to launch, 7 in clinical development, 14 in technical development and 9 in early development. We also reached another milestone with the recent EU regulatory submission of our pertuzumab biosimilar. As I said at the CMD, building the next generation of biosimilars requires both strong in-house capabilities and selective partnerships. The continued expansion of this pipeline demonstrates how we're combining these 2 approaches. Another important point is that we're building a broad and diversified pipeline of future opportunities across multiple therapeutic areas. Now let's look at how some of the biosimilars in our portfolio are performing. Starting with Hyrimoz, we continue to see strong performance. Our global biosimilar market share has increased now to 23%, supported by broad preferred payer access in the U.S. and continued volume momentum in Europe. Turning to Pyzchiva. We continue to hold the #1 position across the European markets. Our biosimilar market share now stands at 25%, while overall biosimilar penetration of the ustekinumab market has increased significantly beyond 50%. Together, these performances demonstrate both the strength of our established biosimilar portfolio and our ability to grow alongside increasing biosimilar adoption. Please turn to Slide 10. Moving to Tyruko. Our European market share remained stable at 17%. We continue to see opportunities for further geographic expansion, including our recent launch in Saudi Arabia. Omnitrope continues to demonstrate the durability of our established biosimilar portfolio, maintaining a strong global market position with a 36% market share. Its established daily treatment profile remains resilient and a more sustainable U.S. distribution model provides a stronger foundation for future growth opportunities. Now please turn to Slide 11. Let's now look at some of our more recent launches. Starting with Wyost and Jubbonti, we continue to see very strong commercial momentum in the U.S. Jubbonti has already achieved a 56% biosimilar share and Wyost, a 49%. The European launch continues to advance, whilst the international rollout is also progressing well, including in Brazil and Australia. Turning to Afqlir. The European launch is progressing very well, supported by strong execution and favorable competitive dynamics. Afqlir is now available in 22 European markets with a 73% biosimilar market share and has become an important contributor to our European biosimilar growth. The launch of Enzeevu in the U.S. is exactly in line with our expectations, providing an additional opportunity to build on our strong European start. These launches illustrate what we discussed at the CMD, the ability to move successfully from pipeline development into launch execution and global commercial scale. Please turn to Slide 12. As we build towards Bio100, partnerships will be an important complement to our in-house development and manufacturing capabilities. Our collaboration with Henlius includes 4 initial programs covering numerous assets. Henlius will lead development and manufacturing, whilst we will leverage our global commercial reach. Our partnership with mAbxience adds our first hemophilia biosimilar. Again, mAbxience brings development and manufacturing capabilities, while Sandoz holds exclusive global commercialization rights. These partnerships increase the breadth and opportunity of our pipeline, whilst allowing us to concentrate our own resources where we believe they can create the greatest value. Please turn to Slide 13. Alongside the expansion of our pipeline, we are building the manufacturing capabilities needed to support the next phase of biosimilar growth. In Lendava, we've opened our advanced biosimilar drug substance manufacturing center, adding 120,000 liters of large-scale fed-batch capacity. In Ljubljana, we're investing in new drug substance facility focused on disposable fed-batch technology. This will add 8,000 liters of biologic drug substance capacity by 2029 and give us an additional in-house capability for low to medium volume production, complementing our continuous and high-volume technologies. Together, these investments provide greater flexibility and control of our capacity and further strengthen our vertically integrated biosimilar network. This is an important practical element of Bio100. As the portfolio grows, we'll have plenty of capacity to support it. And with that, I will hand over to Remco on Slide 14.

Thank you, Richard, and hello, everyone. Let me start with our 9 months net sales performance on Slide 15. Net sales increased by 8% in U.S. dollars and 5% at constant currencies. Excluding the B2B impact Richard mentioned before, underlying net sales growth was 6% at constant currencies. The major driver was volume demand, while price erosion reflected portfolio mix and market dynamics. Most importantly, biosimilars continued to drive growth, supported by both successful recent launches and strong demand across the whole established portfolio. Please turn to Slide 16. Now let's have a look at the performance by business. Our underlying momentum continues to be strong, but we did face some temporary headwinds in the quarter. German market dynamics were a bit more challenging than we originally expected, while the additional biosimilar volume amount that we had anticipated could not be fully matched by supply. In the quarter, the 5% growth included biosimilars with up to 20% growth. They now represent 34% of total net sales. Underlying net sales growth in the quarter was plus 7% when excluding the AI B2B impact. Underlying generic sales in the quarter were up by 2%. While we ended up facing the same B2B impact we saw in Q1, we do not expect further impacts from Q4 onwards. Please turn to Slide 17. Let's turn to the regions. North America was again the strongest contributor to growth in Q3, driven by an excellent biosimilars performance. Europe continued to deliver increased market share, including significant gains within biosimilars. As already mentioned, the performance in Germany in the quarter was more challenging than we expected. Stronger volume demand in the third quarter also resulted in short-term biosimilar supply constraints. In International, underlying growth was 5% despite impact from active portfolio rationalization, divestment activity and the supply constraints. Now let's have a look at the debt maturity profile on Slide 18. Our balance sheet remains strong and continues to provide financial flexibility. We recently issued a EUR 500 million bond with a 12-year maturity, extending the average maturity of our debt profile. Importantly, we continue to maintain attractive funding costs with expected average interest rate on long-term debt remaining below 4%. We continue to enjoy investment-grade ratings with positive outlooks from both Moody's and Standard & Poor's. This framework gives us a strong foundation as we continue to invest in our pipeline, manufacturing network and future growth opportunities. Please turn to Slide 19. Finally, let me turn to our guidance for 2026. We have narrowed our expectations for net sales growth to 5% to 6% at constant currencies compared with our previous guidance of mid- to high single-digit growth. This primarily reflects the constraints in biosimilar supply from strong volume demand, as I mentioned earlier, as well as the stronger-than-expected adverse market dynamics in Germany. As Richard mentioned before, our confidence in '27 is very strong. Importantly, the net picture for 2026 is also positive as we have upgraded today our expectations for the core EBITDA margin for 2026, which we now anticipate being in the range of 23.0% to 23.5%. This compares with our previous expectation of around 100 basis points year-on-year expansion. If you remember, our margin last year was 21.7%. This new guidance has increased our expectations for core earnings per share this year. Our assumption for pricing remains a mid-single-digit decline. Based on recent spot rates and assuming these prevail for the remainder of the year, we continue to anticipate an approximate 2 percentage point FX tailwind to net sales with no material impact on the core EBITDA margin. And with that, I'll hand back to Richard. Please turn to Slide 20.

Thank you so much, Remco. Now please turn to Slide 21. Let me conclude with the bigger picture. Last month, we set out our ambition for the next decade and introduced Bio100. By 2035, our goal is to more than double our net sales compared with 2025 before any additional upside from GLP-1s, whilst delivering a core EBITDA margin of more than 30%. Today, you can already see the progress that we are making here. And through Bio100, our ambition is to build a portfolio of more than 100 biosimilars by 2040. Our biosimilar pipeline continues to expand, and we're investing in the manufacturing capabilities required for the next wave of growth. Recent launches are building strong positions in their respective markets, and we continue to broaden our opportunities through both in-house development and partnerships. At the same time, our generics business provides a strong foundation while we continue to advance near-term growth opportunities, including GLP-1s. Together, this reinforces our confidence in our long-term growth prospects and our ability to continue delivering on our purpose on pioneering access for patients. Please turn to Slide 22. Before I move to questions, we look forward to welcoming many of you to our Slovenia sites next month for a firsthand look at our new biosimilar capabilities. We will visit our recently opened development center in Ljubljana and our drug substance manufacturing facility in Lendava. The visit will demonstrate how our investments are bringing Bio100 to life through an integrated network spanning development and manufacturing. We look forward to seeing you there. Thank you for listening. Please turn to Slide 23, and I will ask the operator to open the lines for questions.

[Operator Instructions] Our first question comes from Sophia Graeff Buhl Nielsen from JPMorgan.

One on the guidance. So given you don't anticipate any further headwinds from the B2B API business in Q4, and you should also see the benefit of the launch of Enzeevu in the U.S. and GLP-1s, how should we think about the lower end of your top line guidance? Why would that be in the range of the 5% performance that we've seen year-to-date. And just in terms of the recent supply constraints that we've seen, will this have any implications for the upcoming Enzeevu launch in the U.S.? And how can you ensure that this won't become a recurrent issue for Sandoz ahead of the ramp-up of the Slovenia facilities? Could these provide you any flexibility in terms of supply before the end of the decade?

Thank you so much for your questions, Sophia. If I comment on the second 2 part -- the second 2 questions, and then I'll get Remco to comment on the guidance comment. First of all, we see no issues or constraints with the Enzeevu launch. But really, that will be pretty soft this side of the year, but we see quite a very attractive opportunity as we go into 2027. So again, our confidence around that, and we're quite excited about that opportunity in the U.S., but really that impact flows through mainly into 2027. And the same with the GLPs, we always said in 2026, it was never really significant to the overall because of the business. Delighted that we've now launched in Brazil, and again, we would look to launch in Canada later this year, but don't see a significant impact. And I think you make a really good point. I mean in a sense, part of our core Bio100 strategy with building our own internal capacity in the medium and long term. So we've got greater control. The issue around supply is more a demand question than a supply question. What we saw was, and you see that partly why it flowed through to the bottom line is an acceleration in demand, particularly in markets like Germany where the pricing frameworks have changed. And we're now working to catch up that volume. We don't see an impact flowing into 2027. We're working with our partners to increase capacity. But in the sense, some of that demand was perhaps a little ahead of where we thought it was but some of that will get lower pricing, which I guess in terms of market share is actually a positive, but in the short-term course, some frustration in terms of the overall supply capacity available to meet that demand. Remco, do you want to talk about guidance?

Yes. Thank you, Sophia. Yes, indeed, excluding B2B, we had a 7% growth in Q3 and underlying that sort of the direction you should assume going forward in Q4 and also for next year, we're looking very positive at the growth outlook. Always when you give out guidance, correct, you have to give some kind of range. So that's why we ended up with the 5% to 6%, 7% growth in Q4. Would that be applicable with then so on an average of slightly above the 5.5%. So that will be more around 6%, but it's so precise. So we give around that range of 5% to 6% as give you the best indication we have at this point in time. We have still 2 months to go. But overall, we expect to step up in Q4 versus Q3. That's very clear, and we look very positively as well in the overall mix of the portfolio. And also the upgrade we did on the EBITDA margin.

Our next question comes from James Gordon with Barclays.

James Gordon from Barclays. Two questions, please. The first one was extrapolating the top line growth. And I think I heard that effectively implied in the guidance, it would be that you would grow something like 7% for Q4 and that we could extrapolate that to '27. So for that, what does that assume in terms of biosimilar EYLEA in the U.S. and generic sema because I think for generic sema, it's technically not in the full year guide for this year, but is that 7% assuming you do get a bit of a boost from generic sema in Q4 this year and into next year that is material? And what are you seeing so far on biosimilar EYLEA? And then the second question was on the EBITDA margin and the upgrade there. So you've taken the margin up by 30 to 80 bps for the full year, so twice that in the second half, so more than 1 percentage point. So how sticky will that benefit be? And where does the benefit come from? Is it more some cost avoidance in the second half of this year, which then comes back or even more of it into 2027? Or are some of these things that are going to be the margins materially higher in the second half of this year could not apply to '27 and beyond, please?

I'm going to pass -- I think both of those questions are great for Remco. So I'm going to let him have his breakfast this morning.

Thank you, James, for allowing me to have breakfast this morning. Yes, as I said before, with the prior question from Sophia, correct, we expect a step-up in Q4 versus Q3. And indeed, the underlying growth was around 7%. So that is not a strange number from our perspective. The consensus for next year currently stands at around 5.5% growth currency comparable. And that's something we fully support. At this point in time, it's too early to give a guidance for next year. We will come with that next year. But we would encourage anyone to change their position with regard to their outlook for '27. As Richard said before, we're looking very positive to this. For this year, with regard to the margin upgrade, as the biosimilar growth is going very well, we benefit really from the mix improvement. In terms of cost on the SG&A, as we said before, we try to keep that as flat as possible. We are doing that. With regard to D&R, we are actually investing more than we originally planned, also in line with what we said at the CMD. So there is nothing we are holding back on the investment in growth. On the contrary, we have only accelerated this. So the underlying improvement purely comes from the mix and all the cost constraints with regard to SG&A fully in line with our plan. So very positive and nothing special to be mentioned here.

And again, just to reiterate, I think to Sophia's question, in Q4, really the EYLEA launch and the GLPs really don't make any material difference to the outlook of the business, but set us up extremely well for 2027, and we're very optimistic around that, but don't see that as really a significant driver in this quarter.

Our next question comes from Shyam Kotadia with Goldman Sachs.

First one was on Germany. So you flagged stronger-than-expected headwind in the quarter for both generics and biosimilars. How much of a drag was it to the group? And could you remind us what your expectations are for this impact as I believe you flagged this is only being a 2026 impact. Is this still the case? Or could we see this going into '27 also? And then my second question is on the anti-infectives impact. So you mentioned the impact will be immaterial in 4Q '26 and next year. But just wanted to get a sense check on the visibility regarding that because I recall prior commentary that 1Q '26 was going to be the largest impact, and it was going to probably taper from there as it was in the base for second half '26. So just wanted to get a sense check there on the visibility going forward, given the release also mentioned there is no imminent return to predumping conditions being expected.

Thank you, Shyam. I'll start with anti-infectives. I think clearly, we've taken quite a big hit this year. It's been a bit lumpy Q1, Q3. But really now, as we get into Q4, we don't see in the sense, we've already taken that hit, and it's pretty much washed out. So our visibility -- so that is pretty good. So we don't see any impact really as we go into 2027. So that headwind will wash out. Again, I'm trying to use this call both with the commentators, but also the media to put pressure on European government, super frustrated that we've spent so much time to try and protect a European asset and yet we're still facing quite heavy dumping from Chinese suppliers. And then Germany, yes, I think, look, it's been an interesting story. I mean, Germany, we talked about at the beginning of the year that the government changed the sick fund contracts potentially to open house contracts. We started that -- that triggered sort of an expansion of the market, which I think in the medium and long term is very good for us, but also some price declines, particularly in biologics. The government then changed its mind and changed the rules, but then clearly, the sick funds still were behaving in that way. So you had this very unsettled dynamic in the German market. When we look at our internal data, we're encouraged because we see we're winning share. I think it's also worth noting that we became the world's largest generics company this quarter. So again, building on that momentum. I think the bulk of that impact will wash through into 2027. Again, I think there's some structural opportunities to better position our business as we go through in 2027. And again, it supported the margin expansion. But in the sense, this was probably the main driver in terms of the acceleration of the volume, which then put tension in terms of the overall supply network. So these things always become a little bit interlinked. But Germany has been not a straightforward journey. But I think clearly, in the medium and long term, it's an attractive place because given our scale and given the Bio100 positioning, I think the adoption of biologics will accelerate. Anything, Remco, to add to that?

No, I think when you say, where is the difference coming and how much is Germany out of the total. The consensus for the full year was around 6.5%. Now we guided now between 5% and 6%. So let's say, we talk about EUR 100 million. That will be a combination of supply in Germany, 50-50 roughly of impact of both to that EUR 100 million.

Our next question comes from Harry Sephton with RBC.

So first one on the U.S. Enzeevu launch. Just want to get your thoughts on how you see this market evolving given the very strong biosimilar incumbent and then also the buy-and-bill model, which creates certain pricing incentives, which you'll have familiarity with some early on the market where you have to withdraw it. And then my second question, there are a number of clinical-stage biosimilars that are going off patent in 2027. Can you give us some indication as to what time frame we should expect some of these to come to market?

Thank you, Harry. I guess, which anything specific because, again, it's quite a long list. I mean, clearly, we've disclosed. We've tried to be incredibly transparent in terms of our pipeline and where we'd anticipate our first launches. So I guess it's not -- if there's anything new, we would update you. So nothing has really changed. Obviously, in a sense, Novartis Biologics, we were always going to necessarily be there given the nature of the separation. So I think we've been quite consistent with that. On the U.S. Enzeevu, I mean, I think having [indiscernible], it's certainly informed us on our position. I think you're going to have to forgive me here because I don't particularly want to disclose our strategy and our positioning to the market other than I think this is a really exciting opportunity, and I think we're extremely well positioned. And I think something we can comment on a little bit later, but I don't particularly want to disclose much more at this point given that we're really just in the very -- the launch phase of this product, and I don't want to signal to our competitors what we intend to do.

Our next question comes from Charlie Haywood with Bank of America.

Charlie Haywood, Bank of America. I just wanted to dig into the supply chain issues, which sounded like they came as somewhat of a surprise. And I think a bit more color on that would be appreciated by us in the market. So first part is, could you just help us understand specifically what happened? Is it a manufacturing? Is it a delivery issue, a timing issue, et cetera? And part 2, just sort of more hypothetically on volumes. I imagine the volume demand change on a group level from something like this must have been a low single-digit change at most. So I'm surprised your ability to supply is operating at that narrow of a bandwidth. And then into sort of next year and the following year, biosimilar volumes will likely be growing at greater than 20% per year. So what's the confidence on delivering that? And even if there is some sort of surge in demand on another price cut, how confident are you to supply that going forward?

No, thank you. I think this is a demand question, not a supply question in its root. And clearly, if you look at our business, I mean, today, 34% of our business is now biosimilars. That's like 4 points ahead in value. In volume terms, that's significantly where we thought we would be even a few years ago. You've got to appreciate with a biologic, you need to forecast normally a year, 18 months in advance to build capacity. It's not a small molecule of generic. And I think part of the challenge fundamentally is we never have 100% of any market. So if a competitor has challenges or whatever, how that flows through. So it is naturally a constrained market. Demand has accelerated, particularly in markets like Germany. So pricing has come down, but then we've seen a corresponding increase in volume. As we see that then flowing through, we're working very closely with our partners. We're packing capacity. So I don't really see that -- I don't see that as an impact going into 2027, and we're working extremely closely. But this is -- the nature of this business is that clearly, it is demand sensitive. But really, the root of this is we've seen an acceleration of our volume demand rather than necessarily a constraint of our supply, and it's now just matching those 2 things.

Our next question comes from Urban Fritsche with ZKB.

Yes. So just coming back to the supply constraint discussion and to understand a bit the market dynamics in general, what did happen when you were recharging supply? Were there some other competitors which were stepping in immediately so that in the end, you would lose some market share? Or is it product specific and that it's really demand for your specific products? And maybe the second question...

No, I mean, if you look -- sorry.