Animalcare Group plc

Hello and welcome to the Animal Care Analyst presentation. My name is Courtney and I'll be your coordinator for today's event. Please note that this conference is being recorded and for the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions. This can be done by pressing star 1 on your telephone keypad to register your question. Alternatively, you may also submit your questions at any time by the Q&A box on the presentation platform. If you require assistance at any time, please press star dot zero and you will be connected to an operator. And I will now hand you over to your host, Jenny Winter, to begin today's conference. Thank you.

JENNY WINTER Okay. Thanks, Courtney. Hi. I think many of you on the call will recognise my voice and know that I'm the CEO and I've got Chris with me as well online. I think we've been chatting quite a lot to most of you over the last couple of years, and so hopefully nothing you see or hear today will be too much of a surprise, but obviously with the recent announcements, we thought it would be a good opportunity as well to talk a little bit about post-infant-close activities. So hopefully you've all got a copy of the deck, and I'll try and remember to move on slides as we go. And the plan is that I'll give a little bit of an intro and then hand over to Chris to talk through the specifics on the financials. And then I'll come back and talk a little bit more about the deal and wrap up. Now, it should take 30 minutes or so, which leaves us lots of time for questions. And Courtney is going to facilitate the questions either that you want to ask on the phone or on the webcast. where there's a facility and Chris and I will do our best to answer them. Okay, so kicking off, I think you can see through the announcements and you'll hear from Chris and myself that really the theme of where animal care is is about resilience that we've shown through the pandemic and the disruption and confidence around our ability to land deal but also looking at future growth. I think You know, we all know that there remains uncertainty and, you know, we won't spend our time telling you what all the uncertainty is. Chris is going to refer a little bit to that in his presentation about how we see the market and how we see things returning to normal and where we see the potential for future disruption. But, you know, from where we are, what we've seen is that the different countries have responded differently to the pandemic. There's a context of uncertainty and volatility that But overall, we have been able to act quickly, be agile about how we respond to the changing situation, and we anticipate continuing to do that. So we've been trying to be very flexible and getting on with things. So what I was going to do is just remind everybody, if you move on to slide two, clearly the disclaimer, and then move on to slide three, which is titled Continued Execution of Growth Strategies. What I'm going to do here is just talk through some of those that we're not going to spend much time on today, just to reinforce that, you know, regardless of the disruption, we've continued to focus on these five things. Chris is going to talk about the strong finances in a minute. You know, you saw our year end, most of you, and we talked to you about the work that we did in 2019. Chris is going to talk a little bit more about how that panned out during the first half of 2020. Key leadership has always been, since we initiated and put in place this strategy, key leadership has always been kind of really important for our implementation. And really interestingly, the putting in place strong leaders in each of the countries, but also putting in place the group functions really lightweight group functions, I don't mean lightweight as individuals, I mean like as in not lots of people, has really helped us with that agility through disruption. But also putting in place a really clear structure with good capabilities in our business development team has meant that through the first half of this year and continuing up until now, we've really been able to focus on our BD activities. And it's made a big difference putting that very professional structure in place. And, you know, you can see from the announcements we made yesterday that that's a material change in the sort of deals that we're able to do. The growth portfolio, we talk about this as sort of the existing portfolio. We recognize that moving forward, we need to continue to maintain that existing portfolio. It's going to generate the cash flow. that will enable us to do more and more investment in future pipeline and exciting deals. And so we have continued to tidy up that portfolio. I think we've talked many times about it was a very fragmented portfolio. And the work continues. We took out about 100 brands last year. We've taken out some more tail brands this year. And we're really making sure that we focus our activities on those brands that have the opportunity to grow and are a bit more sustainable and resilient. And we're also seeing the positive impact, and Chris, you can see it in the numbers. We'll talk a bit more about where we've launched the branded generics that were in our development pipeline. And they have been launched successfully. Most of them launched in 2019. We had a couple launching this year, which has been more difficult, and we'll talk a bit more about that. But we've really now almost launched all of those branded generics that we had in the portfolio originally, which were actually from Animal Care UK days. We've got some really strong brands that are, you know, anybody would describe them as mature in terms of age, but they're continuing to perform really well. Things like Danilon, which is a painkiller for equine, and Dinalgem, which is another painkiller for, for production animals. And those are two products that are continuing to perform really well across the whole business. And things like Orizyme, which is our own dental product, is continuing to perform well. So we have some good products in our existing portfolio. We're tidying up. We've seen the benefits of some of the actions. Spain has done really well with some of the products where we've put more focus behind them. So we're really moving forward on that whole growth portfolio. And then the other two pillars, business development and innovative pipeline, the plan is I'll come back and talk a little bit more about those once Chris has talked through the finances. So we'll do a little bit more on those at the end. But it's all, from my perspective, it's all really exciting stuff that's going on and we're very positive and confident about moving forward. Just moving on to slide four. We just pulled together some highlights and things that we think really reinforce the fact that we're moving forward with our strategy. Strong finances, and you'll have seen in the announcements that there were a higher end of the range of pandemic scenario modelling. I think when we did the scenario modelling back in March, it was just really difficult to predict. But we're very pleased that the business has been resilient. We'll talk a bit more about where it's been more resilient than others. But overall, you know, we're pleased that we're at the upper end of that pandemic scenario modeling. Business development, you know, the agreement with Kane Biotech that we announced yesterday, whilst that was post-period end, obviously that's been a work in progress. And the really exciting thing about that deal is that it gives us access to products today and influence over new treatments for the future. So it's a kind of two-part deal. And that's for us, it's a really good model for the sorts of fields that we are working on. And in particular, this one's very exciting because what it is, is that Cain Biotech has a focus on producing products for human pharmaceuticals. And our new spin-out that we are building STEM animal health is going to be the sort of animal health arm of a human biotech company. And I think moving forward, that's a really exciting place to be because a lot of the innovation is coming out of human pharmaceuticals. And so cane is really our first step on that ladder. So that's why we're particularly excited about it. Pipeline progress, we'll talk a bit more about, but really for us, COX-2 inhibitor, which is differentiated from the competition for osteoarthritis in dogs, is continuing to progress as planned. And those of you who've experienced the ups and downs of the regulatory process know that that's actually a really good sign. So we're very happy that that's on track and obviously launching next year subject to approval. The improved capability part of what we've been doing We recognize that animal care and ecupharm historically were very much in the generics and branded generic space. So we recognize that launching new novel products such as the cane dental products and future products, but more specifically launching Daxacox, which is our own intellectual property. We've got launching a differentiated product, so it really needs a different approach to sales and marketing. And one of the things that we have delivered during when our effectively when our normal sales model has been disrupted is a lot of training and upskilling of our teams on sales and marketing capability and sales excellence. So that's been very exciting and the organization is really responding well to that. The other thing that has been accelerated really through the pandemic has been the way that pet owners and vets and the market has looked to more digital offerings. So whether that's us talking to our customers digitally, or it's pet owners trying to buy online. And we had already started to do more on a digital perspective, but we've really ramped that up. And so our ability to work digitally, I think we said right at the start of pandemic that our organization switched to working from home as required pretty seamlessly, but we've also switched to working with customers online pretty seamlessly as well. And that's been probably easier for us to do a bit because of our size and agility and, you know, the fact that we've got people who are really up to change and doing things in different ways. So those are just some highlights that you'll hear coming out in the rest of the presentation. Okay, so I'm going to hand over to Chris at that point, and he'll talk through a bit more detail on the finances.

Good morning, everyone. I'm going to start on slide six. Just before I do, it's a little bit of a recap to what Jenny said. And it's really referring to the communications we made back in May. So as we said, we entered 2020 in a strong financial position. and that was following the significant debt reduction we achieved in 2019. The business saw a strong first quarter in this year before the pandemic hit in quarter two. And then during that time, as we said, we modelled a range of trading scenarios, primarily for audit purposes that estimated a potential revenue downturn of something between 13% and 22% on a rolling 12-month basis. And as you can see, From the numbers, we're pleased to report that the group traded resumably in the first half and up to the end of August above that pandemic scenario modelling. And importantly, we maintained the strong balance sheet. So five things I just wanted to touch on on this slide. So revenue is down 4.4% versus prior period. We'll come on to more detail on the next slide. But we've seen varying impact by product category with CAP seeing a greater impact of COVID versus the farm animals and also across the countries. On EBITDA, that's modestly down versus 2019 to 6.6 million. Two main reasons for this, which is reflected in the improved EBITDA margin. So the first is the full year cost efficiencies we brought forward from 2019. Most of that relates to the restructuring of the tech and reg function. And as we said during May, we decided actually in quarter two to reduce or defer spend relative to the lower demand. And together those resulted in SG&A savings around one million versus prior period. What I will say is a proportion of that will be reinvested in the second half to support future growth. So SG&A costs, the percentage of sales, we should see get back to similar levels as what we had in 2019. On cash conversion, you'll see following the exceptional four-year cash performance last year that our cash conversion has dropped to below 60%. The main driver for this is an increase in stocks, which were on a cash basis 2.3 million higher than the beginning of the period. About half of that relates to strategic stock build to protect sales during manufacturing transfers, so that's in line with our expectations. The balance broadly relates to the demand disruption that we saw in quarter two. On debt, as I said, we maintained a strong balance sheet both at the half year and post period to the end of August, which we've given an indication on. The half year net debt and leverage were at similar levels to the end of 2019. At the end of August, the position was slightly stronger than at the half year. Finally, on the dividend. We said back in March, trading statement again at the finals, that we would review the decision to defer the final dividend until we had more clarity as to the impact of COVID. We did say at that time that one option that we had was to retain the cash to invest in future growth opportunities. And that's exactly what we've done in respect of the Kane deal. And secondly, affecting the resilient first half performance, we have declared an interim dividend at the same level as 2019. To return to slide seven, as I said, I'll give you a bit more colour on revenues. What we can see here is that the diversity of the portfolio across both the companion animal and production animal sector, as well as by country, has supported a resilient first half performance. On companion animals, this part of the business saw around 11% decline in revenues. The main driver being the significant downturn in Q2, where in general, lockdown and social distancing measures led to restricted opening hours and reduced consultations in vet practices, and that in turn led to a marked decline in the number of clients visiting small animal vet practices. This did also affect our ability to promote and launch new products, which are, as you know, a key driver of our growth. The interaction with many vet practices was much reduced. If you associate this backdrop to country performance, We can see the most significant decline is in the UK, where the portfolio is almost entirely companion animal. This performance does correspond to the more prevalent impact of COVID in the customer base, which was subject to large-scale closures of debt practices as well as the wider restrictions I've already noted. And just to give you an indication, these measures in quarter two resulted in Q2 volumes being at around 60% of normalised sales levels. To contrast this to Germany, where we said before around three quarters of vet practices continue to operate as normal. And as you can see, that's reflected in the performance of the German business, which is slightly up on last year. Italy continues to perform extremely well, growing by 30% in the first half, and that follows 20% growth in the last financial year. Growth in this period is largely driven by the companion animal portfolio, in particular annualized sales of new products that we launched in 2019. That growth has also been supported by a strong performance in the production animals part of that business. Just to finalize on those countries, we've noted previously that both Germany and Italy are small players in large animal health markets and strategically, And the resilient performance in both of these companies strengthen this. Our objective remains to utilise the really strong base we've got in each of those countries on which to build more significant scale. And, you know, one of the objectives is to do that over the next three years. If we come on to production animals, as I said, in contrast to companion animals, this grew strongly and appears to be less affected by COVID due to the more industrial nature of the market. production animals now in the in the half year accounts for around 30 of the sales it's been operating around 25 previously if we look to where the growth has come from um our spain production animal business unit which is about half of the spanish business performed particularly well that was up 21 versus last year and that's clearly benefiting from the operational restructuring that we did at the end of last year and during the first half of this year um And also, as we mentioned before, the partial reversal of the distributed e-stocking that we did see at the end of 2019. Moving on to slide eight, I've kind of already noted that the debt was broadly in line with the start of the year, but three items I want to touch on here. So non-underlying cash costs, as expected, were much lower than the prior period at 7.7 million. These primarily relate to the restructuring of the production animals business unit in Spain, which I've already noted, and also manufacturing transfer costs as we work towards both de-risking and simplifying the supply chain. CapEx was 1 million. That predominantly relates to additional clinical studies for the 6087 development, which as Jenny's noted, was submitted for approval in January, and that's proceeding as planned through the regulated pathway. Just finally, all of our facilities, as a reminder, are Euro denominated. So what we have seen is a significant movement in our debt due to the strengthening of the Euro. So we started the year around 118, the half year was around 111. And what the result is that we've had a 1.7 million impacted adverse exchange losses. I'd expect that probably be some broadly in the same region by the end of the year, but that's obviously subject to Brexit. Slide nine. We said at the finals that we weren't able to provide specific and meaningful financial guidance about time, but what we would do is continue to update you on what we're hearing and seeing across our business and the wider animal health market in respect of COVID. So this slide will just reiterate some of the things that we've talked about for the half year, but also give you some observations for the quarter that's just about to end, but also going into the end of this year and start to next year. So again, as a quick reminder, Q1 performance was strong in line with internal expectations. That was partly supported by customer stock buying in certain countries, which at the time we said we expected to unwind in Q2. And that's exactly what we experienced in particular in the UK. As we entered Q2, as I've said, while the VETRI market remained open for business, it was subject to some various restrictions which saw a marked downturn in demand. That did vary from country to country, as you've already seen on the revenue analysis. In contrast, as I said, production animals was and continues to be less effective. The other key factor in Q2 was our ability to promote and launch new products, as vets were largely focused on servicing the pet owners, and they did actually significantly limit interaction with the sales teams. Importantly, vets were not showing a lack of interest in new products. It was more a lack of bandwidth to interact. So we expect to see an improved take-up of new products in the second half, in particular, for example, in relation to botanic care. As we moved into Q3, we started to see signs of recovery with vets returning to normal working patterns. And as I've said, training to the end of August from a revenue perspective was broadly in line with the prior year. Where we can, our sales teams are back in the field visiting customers. Otherwise, they are interacting remotely via virtual meetings, for example, but importantly, utilising the learnings from Q2 in terms of how our customers want to be served. And again, this dynamic does again vary from country to country and also our business unit. If we look forward into Q4 and beyond, it's clear we're seeing evidence of potential further impact uncertainty due to COVID and while this will inevitably affect market recovery and bring further challenges we've seen that the veterinary sector is learning to live with the virus and our business across Europe as a whole has proved to be resilient and agile and this for us gives us confidence together with the strong financial position and the continuing attractive long-term fundamentals of the market we operate in to continue to deliver on our growth strategy. And I'll pass over to Jenny to talk more about that now.

Thanks very much, Chris. So if we pop along to slide 11, I thought we'd take the opportunity to talk a little bit more about the deal that we announced yesterday and importantly about why that deal is kind of the way we want to move forward. interesting because I think for some people they have expressed that during the period of disruption it's been much harder to do M&A and deal activity and and I think probably for organizations that have a sort of set way of doing it and have you know been doing it for a long time that I know being unable to go face to face to do due diligence etc probably has slowed them down a bit actually we took a decision to push on with as much enthusiasm and actually a little bit more resource to try and move our deal agenda forward because it really is the important part of our future growth strategy. So we got around it. We did some really thorough due diligence. We looked at Cain and were able to build some really good relationships with the senior leaders at Cain. virtually and we put a bit more effort into that. So I think that's a good model for us moving forward because we've got a number of other things on the go and actually we're learning how to do M&A without face-to-face. So Canada's a Canadian company. I said earlier it probably helps that our VD head carries a Canadian passport so language is no problem. But actually getting used to the Canadian system and the way the biotech industry works there was pretty quick. And Kane has been focused on finding solutions that attack the biofilm. And just in simplistic terms, and it was in the release yesterday, the biofilm is produced and it prevents the bacteria from being attacked So it kind of holds together all the bacteria. So if you can stop the biofilm, then the bacteria die. So Kane's technology is all about preventing biofilm. And what was exciting about the deal for us is that biofilm isn't just causing dental infection. Biofilm causes wound infection, ear infections, all of those things. It's just that the first products available from the Kane deal are dental products. So really for us, the exciting thing is that it's this two-pronged approach, that it gives us portfolio today and products for our reps to be out there selling and that, you know, make us money pretty quickly, rapidly accretive. And it also gives us an opportunity through the equity investment in the spin-out, then animal health, to work with people who are experts in dealing with biofilm to create new products as we move forward. And there's a number of new products that are already being looked at and we are influencing what that might be. What we were able to bring to this debate and to that new spin-out is the understanding of the animal health business. Because the guys who started Kane and who are focused in Kane are predominantly human pharmacy schools. So it's a really nice opportunity for us both for products today and products in the future. And that's really interestingly the Kane deal fits with our overall strategy because we've said all along that what we need to do is to find some products that we can launch in the next year and then build the pipeline behind that. So This is sort of for us, it's a tick in the box that we've found something that we can launch next year. And our continued effort is to find those things that we can launch in future years. And as I say, we're talking to lots of people about those. The other thing that I mentioned was this opened the door for a model where we were talking to other human pharmaceuticals and biotech companies to be their animal health partner. And having got the cane deal successfully and landed and now as we move forward to implement it that will give us all confidence for the future but also will give potential partners confidence for the future to be the you know the partner of choice for human biotech and human pharmaceuticals to run their animal health arm but just to reinforce what we're doing in terms of business development using stem animal health as an example we recognize that we need to reinforce our existing base. So looking for products that are really what we call plug and play, rapidly accretive. They're probably on the lower risk reward, but having said that, when we talk about lower risk and lower reward, we are very actively setting the barrier of whatever we bring in has to be as big as our biggest product. So we're really talking about products that are more than 4 million at peak year sales in two to three years. So we... We're not bringing in more tail products. This is focused on bringing in bigger products. But products like the stem animal health products that are real and they're here, and they carry very little development risk at this point. The other thing that we've said is that it must be a neat fit with what we currently do. We don't want to fragment. We don't want to be running all over the place. We're too small to do that. So the exciting thing about the stem animal health products is that we already have our resign which is a three million pound product and you know it's a it's still a growth product and so we've got experience we're used to talking to vets about dental and so it's something that we have the capabilities to launch successfully quickly the second group of products that we are looking for and where the longer-term investment the equity investment in stem starts to deliver is is looking at products with more sustainable higher margin growth not to say that the existing dental products aren't in that they've got you know nice margin but really if if animal care is going to be um game changing then we will be looking for products that are in operating in big markets that have big growth opportunities but we recognize that those are sort of higher risks and reward profiles and the benefits of this spin out stem for biofilm products is that you know we've we've got some expertise in biofilm it would you that reduces the risk a bit we've got a partner in there that reduces the risk a bit we've also got the human biotech piece of cane where you're feeding off the expertise so just balancing that risk there are other conversations that we're having that are really, really exciting, but we recognise they're higher risk, but they have a much higher reward profile. So that's really where we're going with our business development, and as I say, STEM is a good example of the way that we want to move forward. Just moving on to the specifics of the deal, we gave quite a lot of detail in the R&S yesterday, but just to kind of try and visually represent the way that this new business is going to work on slide 12, we've been very focused on getting that sort of risk balance. So you can see in the center, you've got STEM animal health, and that is about commercializing globally. DECRA has the license for the dental products in the Americas, North and South America. And then Animal Care has the license for the dental products outside those territories, so everywhere else in the world. and then this development of novel biofilm-based treatments. So, Kane put in all the revenues from the animal health done out into STEM. Animal care, 3 million over four years, and that gives us a one-third stake in STEM. We have got an option for a period of six years to acquire an additional one-sixth stake in STEM, which takes us to 51%. And we've already set that option price. And we pay some distribution fees effectively and royalties for commercial rights to both the existing products and the dispersing bee product ranges outside the Americas. So that's the sort of distribution deal part of it. The equity part of it buys us into the new STEM animal health company, which will continue to produce new products in this area. And so the development of those new products is really funded by the equity and by the money that Kane Biotech has put in. So just to summarize the deal, it complements our existing portfolio, already strong in dental. The dental market is one of those really good growth markets. It's about $1.8 billion in 2019, annual growth rate of about 6%. So it's a healthy growing market. It's in that part of the market where pet owners want that cosmetic, good, clean teeth, et cetera. But more importantly, if you talk to the vet, periodontal disease is the most common infectious disease of adult dogs. So for vets, it's really important. For pet owners, it's really important. So a really nice sweet spot to kick off this first experience of biofilm. Earnings enhancing in 2022 and the it will be paid from existing cash resources. OK. So that's the sort of BDP happy to answer questions on that and and you know if there's any more clarity needed. Just moving on to slide 13, further growth opportunities. The COX-2 inhibitor project is maturing. We're still investing a bit because we are doing some more clinical studies to produce more data so that that helps the launch. It's a long-acting COX inhibitor. It's the first new chemical entity for us. It's IP protected, globally owned. We can launch everywhere. And just to remind you, we submitted it in January 2020. Normal sort of regulatory process. We would allow a year. Things are on track. We expect Once we launch it, it will become a top 10 product three years post-launch. So pretty quick uptake to be one of our top products. But we know that because it is a novel and it's launching, it is a bit different. So it will take a bit longer to get to peak year. But we know that it will be big and important for us within three years. And we're pretty well advanced with our 2021 launch plans. obviously subject to approval. But we've been doing a lot of work, and as Chris mentioned, investing money that we've been able to save to accelerate this launch a little bit, working with key opinion leaders, training the sales marketing team, making sure that we have an aligned brand. This will be one brand name everywhere in the world. It will look the same, feel the same. We will be competing with the big pharmaceutical companies on this one, so we need to be absolutely on our best game. And we are making sure that we're ready to get out there and launch this successfully, assuming the regulatory process continues as it has been. So just in terms of what we're investing in, there's pipeline development costs. We're still investing in this product. We're investing in making sure that we launch this competitively. and that we really do roll up our sleeves and get out there and and show what we can do from a commercial perspective and we're looking for more deals so we're already working on you know we're working on lots of things with lots of partners um and you know we want to develop a risk-based pipeline so that we have some you know fantastic game changes coming through but also some products that we know will be um positive in in the next couple of years so deals like came and The place we've got to is we are confident that we know what we're looking for. We're confident about what we can bring into the pipeline and the portfolio. Also, the group is confident that when we find a deal, we can access a full range of appropriate funding options to deliver the growth opportunities And that's been a really good discussion with the board and with the rest of the group. So we're ready to go when we come forward with the right deals. So that's the bit about what comes next after K. Obviously, we'll keep people updated when we have any news. But that's where we are. And so at that point, I'll just summarize and open up the conversation to answer any questions. You know, look, we're continuing to deliver on our growth strategy. Yes, the pandemic has made us need to move a bit more quickly on some things, slow down on other things. But overall, continuing on the growth strategy chain is a good first step on the sort of business development deals that we are going to be doing. Performance was okay in half one. It was resilient. It was helped by production animals. But also I was very impressed at the way that the team turned around and managed to change the way that they worked and actually worked through this to create the performance that you've seen today. Financial position remained strong and really we've still been able to invest and create cash to invest. And also took the decision to pay the interim dividends for 2020. recognizing our shareholders and the commitment and also the strength of our business. As Chris said, there's evidence of a turn to more normal trading. Clearly, we're watching that on a daily basis. Spain is our biggest market, and you've seen in the news that Spain's really struggling. But we're working through that, but we recognize that we need to do things differently, and we need to be really agile. And finally, our development pipeline is progressing with plans in place for 2021 launch of our long-acting COX inhibitor. And we're awaiting the final stage of the regulatory process. So all in all, I think we've had resilient existing business. We've been able to land a deal that fits perfectly with the strategy that we'd set out. The team are in good shape. And We're really excited about how we're going to move forward in 2021 in particular. Some good stuff happening. So that's a quick run through. Courtney, we're ready for questions if anyone has any questions.

That's great. So just as a reminder that if you would like to ask a question on today's call, please press star 1 on your telephone keypad. please ensure your line isn't muted locally, and you will be advised when to ask your question. Alternatively, you may also submit your questions via the Q&A box on the online presentation platform. We do have some questions coming through. The first question comes in from the line of Mike Mitchell, calling from Panmure, Gordon. Mike, please go ahead.

Thanks. Morning, Jenny. Morning, Chris. Morning. Some questions on the announcement from yesterday, actually, and a little bit more detail on Kane, if that's okay. Jenny, you alluded to the enhanced capacity, I think, on the BD side and in terms of key leadership and being able to sort of parallelize business development. I'm just wondering what are the indication areas of interest that are coming to the top of the list? You've quite clearly sort of highlighted that. the dental space and the sort of wound opportunities I'm just wondering where perhaps the focus lies in terms of particular therapeutic spaces in terms of animal health and just a second question also on if we look at STEM as an entity I'm just wondering in terms of the assets within there that you now of course have a sort of equity exposure to I'm just wondering if it's possible to quantify the total sort of investment to date in the platform and in the vehicle that's been made so far in addition or externally to the investment that you'll be putting in over the next 48 months.

The second question, Mike, is a very difficult one. I'm just trying to think how we could even speculate on that because it's really Kane Biotech has been investing in this area for years.

Absolutely, yeah.

Beyond Beyond our equity investment and the value of the cash that Kane are putting in, which is the sales, you know, effectively they're transferring all the sales from North America, we don't anticipate any more development costs going in there. We think that the revenue from the Americas plus what Kane have already done and our equity stakes should be all that is required for the development of the next ones. We haven't at this point planned to divert any of our own cash to other developments, and that would be on a case-by-case basis if it was something just really amazing that needed a bit more investment. But at the moment, the products that we think will come out of the Kane deal will be funded by existing equity, North American revenues, and our own revenues going in, obviously.

Got it. That's great. Thank you.

All right. On your first question, yeah, one of the things that I think we talked about when we launched the strategy at the end of 2018, beginning of 2019, was recognising that we can't go chasing every therapy area. So what we have done is tried to be really specific about areas that we're interested in. We're quite interested in things like reinforcing the full pain area. You know, we've got a couple of good pain products already. We're launching the COX inhibitor in pain. And then we're also looking at the dental ears and eyes part of the business because that, again, we've got good anchor products in those areas, so it makes sense to us. The other area that we've got a bit of experience and we'd like to reinforce is we've been looking at the whole allergy area. monoclonal antibodies and how biologics are moving into animals. So, you know, pretty broad, but making sure that we don't get caught up running all over the place. Things like dermatitis, allergies, all of those sorts of things we're interested in. One of the things we are very interested in is looking at what's coming out of human pharmaceuticals, which is the comment I made, because I think there's a a very rich vein to be exploited there. And I guess it's a bit easier for me because that's where I came from. So we're digging around in there a bit. But try not to fragment because I think fragmentation is not the right thing. And we're really focused on getting 80% of our business and our top 20 products. And bringing in small bits and pieces isn't going to get us there.

Got it.

Thank you.

Right. Thanks, Mike. Thank you. Our next question comes in from the line of Chris Gasper, calling from M plus one singer. Chris, please go ahead.

Morning, guys. I hope you are well. Just a bit more colour, please, if you can give it on on the cane deal, just just on the products covered. the sales that they're currently generating in the Americas at the moment, how quickly it's taken them to get to that level, regulatory status of the products in Europe, etc. And then I've got a second question which I can come on to after.

Okay. I'll have a stab at the first one. As you know, DECRA have the products in the Americas. We don't have their data, so I can tell you that they're successful, but I'm not I can't actually give you the numbers or the forecasts for those. That's sort of decked with commercial numbers. So all of the products that Kane are developing are options for us. And at the moment, there's a broad dental portfolio of gels, water additives, et cetera, et cetera, tunes, toothpastes for us that we'll be launching X3 Americas. the comments about regulatory is that we are going to tech transfer them currently they're manufactured in Canada we're going to tech transfer them to Europe and from a regulatory perspective because they are non-prescription then the regulatory pathway is pretty straightforward Chris do you want to add anything to that?

Yeah I was just going to say Chris as Jenny said we've not got all the information on Decra but what we can say is that I think they launched started launching these products in I think 18 and a little bit 19 into the Americas and it's kind of starting from a nil base so it is relatively small but likely does expecting to you know to grow over the next three to five years.

Great and just the phasing of your investments so the three million dollars into the vehicle and then the two million

the distribution that's obviously both looked like they're going to be phased over a period of time just yeah yeah yeah so on the on the equity so there's a million million dollars that went yesterday uh and then the two million is over the next four years uh the license payments are effectively um phased equally over um a period of milestones there's one next year that's just the anniversary of the deal and then the other three are are based on either a product to product milestone or to commercial milestones. So I think, you know, if you look at the deal as a whole, what we've been able to do really well with Kane is kind of phase this investment over quite a long period of time. Importantly, all the equity injection is going into the company to help fund future development. So as we said, we, We don't envisage that, from a development perspective, this is going to be a huge cash drain on either business, Kane or us. And SEM should, with the revenues it's got, but also the revenues in future from our licensing deal, should be cash flow positive and probably in a similar year to what we've said in terms of the licensing deal.

Yeah, okay. And is the development side, is that just reformulation into different presentations effectively, as Jenny said, the gels, the chews, et cetera? Or is there a new novel?

Yeah, it's new formulations for different indications. So, you know, they're looking at all sorts of things, ointments for ears and all those sorts of things. So it's using the technology in different ways.

Yeah.

And there'll be new clinical data required on them, so a bit of a development will be making sure it works. And then the point for us is it's not basic R&D, because I think that's where the high risk comes in. So it's using the sort of proven formulations and the proven technologies in different indications where biofilms exist.

Yeah. That's really helpful. Thanks. And then just a question for Chris, really just obviously there's a bit of a work and capital build in the first half, some of which was planned, some of which was activity led. Just wondering what pace of unwind we should expect to see on that and how much is going to be dependent on a recovery in the market?

Yeah, so good question. We said, I think we indicated as we went into this year that on the back of the 120% cash conversion in 19 that We would operate around the 80 mark on the basis of having 100% average over those two years. Absolutely to your point, subject to Q4 demand, we are expecting to see some kind of unwind of working capital in Q4. So I'm expecting to kind of be in the 70% to 80% kind of conversion rate.

Great, that's it. Thank you. Thanks, Chris.

Okay, our next question comes in from the line of Max Herman, calling from Spiegel. Max, please go ahead.

Thanks for taking my question. Firstly, just be interested if you can give us some kind of idea quarterly, the first quarter and second quarter on the progression. Obviously, you had a stronger first quarter with a bit of stocking and then the unwinding. And what you're seeing, you've obviously given a little bit of detail, any more colour you can give on the third quarter. And I think you mentioned Spain, obviously, as your major market and the sort of second wave of COVID and what you're actually seeing there on the ground in terms of progression in the business there. And maybe the UK as well, because that was probably the most impacted business. in the first half of the year. So just on a bit more detail there. And then secondly, just again on the co-active and the dispersed and B, do you see one particular opportunity bigger than the other? Is it the co-active is more broad-based and has more product opportunities, or how do you see the two products? Okay, Chris, do you want to answer this?

Yeah, it's been amazing. Yeah, so I think we've covered this, Max, in some detail already. So to give you, again, just to reiterate, so quarter one was strong and there was a little bit of growth versus the previous year. And as you said, some of that was related to some stock pie in which I'm unwinding quarter two. But as we saw and as I talked about in terms of Q2, if you look at the kind of half year figures on the basis that the business was broadly equal at the end of the first quarter, the movements we saw in Q2 volumes are largely affected in where each of those countries or markets are at the half year. And as I said, on the UK, what we saw was sales at roughly about 60% of normalised levels. And as you said, into Q3, we've seen a recovery. Year-to-date August was in line with the car year on a revenue basis. Again, that's a group position. The dynamics by market, broadly in line with where we are in the half year. And then for quarter four, I think the only thing I can say at this stage is that based on what we can see now, we'd expect to continue to be trading above those kind of pandemic scenario modelling that we talked about for the year.

Thank you.

Our next question comes in from the line of Lars Knudsen, calling from SEB.

Sorry, there was a second question.

Yeah, there was a second question. Sorry.

We've got a new button.

Sorry?

It was just really on the co-active person, you know, where you see the bigger potential of the two and maybe, you know, any more detail and colour you can give on the product.

Yeah, so, I mean, there's probably not much to choose between them. You know, they're relatively high margin, you know, good products. Both of them should be pretty profitable. I think it's more about which one is most effective in the indication. So one of the pieces of work we need to get on with very quickly is prioritizing all the different uses you could have and then looking at which is the most effective in those uses, if you see what I mean. So I think it will be indication-led rather than dispersant or co-active. So I know that Kane, from a human perspective, is doing a lot around wounds. We're very interested in things like otitis media, ear infection, et cetera, et cetera. And so there's not much to choose between which one from a profitability perspective. It will be which one gives the best efficacy. So I don't think one will beat the other until we get a bit closer to it. But, you know, at the moment, the wound – healing piece is predominantly dispersing and it looks good in there and that should be a good indicator for what it's like in animals as well. I think we've got all that prioritisation to come but not much to choose between them if we can get the efficacy.

Does that help? Yeah, a bit more colour, that's very helpful, thanks very much.

I think one of the things we will do is once we've got that priority sorted and we're much clearer on what that pipeline will look like. We'll come back and share that with you.

Thank you. Sorry, Courtney, I interrupted you there.

No problem at all. Our next question comes in from the line of Lars Knudsen calling from SEB Asset Management. Lars, please go ahead with your question.

I have two questions. I think probably the one is you've already kind of answered, but you write in your trading statement that trading until end of August is roughly flat versus last year. But is that referring to year-to-date August, or is that Q3 to date August? That's the first question. And the second question is, when do you expect reported EBITDA to be in line with underlying EBITDA?

OK, so first question. So it is year to date August that we were talking about in terms of training in line with last year in terms of the quality. Yeah, but just to be so that means so H1. The first eight months of the year. First eight months of the year, yeah. So cumulative first eight months of the year. That's it, yeah.

Cumulative first eight months. So that means that you're in July, August have experience plus

Yes, some recovery to compensate for the decline that we saw in the first half of the year, yes. In terms of reported EBITDA to underlying EBITDA, the key difference there is the not the non-underlying costs, as you can see in the first half of the year, most relate to restructuring costs. I think they're about 0.7 million a year. We gave an indication this year, as I said before, that one is we expected to be significantly down on last year. To give you a rough number, about a million, maybe a little bit more, but that will be the difference between underlying and non-underlying.

Yeah, but would you expect not to be reporting extraordinary costs or Because one could argue if that is within a normal business operation or it's, yeah.

It's a deal. They're still in there though, aren't they?

Yeah. So you're right. So in terms of restructuring, which includes and also manufacturing transfer costs, they should be largely done this year, early part of next year. And then actually to Jenny's point is that most of the items that you see going forward will be They're related.

Okay. Okay.

Okay. Thank you. Apologies. Go ahead, Jenny. I was just going to say, have we got any more questions? We do have some questions coming through on the online portal, if you're still happy to go ahead and take those. I'm okay.

Yeah.

Lovely. So the first questions that we received read, please can you describe the typical route and expected development timeline for the Biofilms products? And can you provide any further detail on potential commercial synergies of the deal?

Okay. So, I mean, the development timelines will be quicker than a prescription product because it will be a clinical trial program to prove that it works and prove that it's safe. and then making sure that all the ingredients are regulatory approved, but not in terms of a pharmaceutical regulatory process. So we would be expecting to launch new products after that deal in two years' time, in 2022. So launch the dental products next year and then start launching new products after the deal in 2022 onwards. Most of the biofilm products, opportunities and i talked before about the different indications most of the biofilm opportunities are areas that we have some expertise in so we would be able to launch pretty rapidly once we've got proven efficacy and safety and a manufacturing formulation which we we will start working on for this for the new product and so the synergies of you know we anticipate synergies to be completely um aligned to our existing business we have topical products we have air products we have uh wound products and so we would put them into our portfolio and and i think what they the new products will do is is uh sort of rejuvenate our rather mature portfolio in that area and really bring in some new technology yeah just to add to that if the questions around the commercial return

As Jenny noted, if we look at our dental portfolio, which is only a key brand, that's around the pre-COVID three, three and a half million mark. What we've said is for all the things that we're bringing into the business, that they need to be at least that size or above. As Jenny said, the expectation is that we should at least double that dental product range in terms of revenue

kind of probably you know in the next kind of three years something like that okay thank you we do have just two final questions coming through once again and the final two read will cane put these products through its own speciality network and can you talk about geographic spread and future potential for growth across the branded portfolio

So any products that Kane have for animal health will come into the STEM organization. So Animal Care will have the option to launch any products that come out of the Kane portfolio for animal health. I don't know if that quite answers the question, and I'll just check with Chris whether he's got anything to add to that. In terms of geography... I think we've said previously that we have been focused very much on Europe. We are interested in increasing our footprint, but we'll drive an increase in footprint based on our products. We're not looking to buy additional footprint, but what we are doing is looking at where we don't currently have a footprint and we have new products coming through, and that's a really good example of how we can strengthen and the COX inhibitor we can strengthen our presence in other markets so we're looking at that but at the moment we're focused on the markets where we have direct sales presence and working with distribution partners and other partners in those countries where we don't have existing presence so the deal gives us access to all countries outside the Americas and so we will be commercializing the products after stem health, animal health portfolios everywhere that the Americas has.

I don't know if that answers the question.

Courtney, you said there was one more. That was the final question. So I'll turn it across to yourself, Jenny, for any closing remarks.

I think we've gone four minutes over time, so I'll keep my closing remarks. Very short, just to say thank you very much. We're pleased with where we got to, you know, through what has been a very difficult period. And we're very pleased to be on our journey on our growth strategy by landing this deal. I'm conscious that we haven't shared an enormous amount of future commercials for the deal. And as we get further into the newer products, I'm sure we'll come back and give a little bit more flavor on those. So thanks, everybody. And I'm sure, as always, Chris and I can pick up other questions outside this meeting. And thanks very much for your attendance.

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