Hikma Pharmaceuticals PLC

So I can welcome everyone to Hikma's interim results Q&A. We have Sayed Derwaza, our CEO, Khaled Nabilsi, our chief financial officer, and Riyad Mishlawi, president of Injectables and our incoming CEO. So welcome, everyone. We hope that you have all had a chance to review the presentation, and we will use this session for Q&A. For people in the room, if you have questions, please take the mic off the table and answer your question using the mic.

Again, good morning, everybody, and welcome to Hikma's results for the first half. As you can see, we think that every division has performed extremely well. The injectables have shown good growth, and Khaled will explain later that there were some extra costs on that division. He will explain in detail what they were. But the growth in sales was good. Launch of products was good. We were able to launch a lot of what we call 505 products. And these are products typically that are new to the market. So they are like in between a generic and a branded. For instance, is usually used in one gram, and that's the originator, and that doesn't come in a stronger form. strength, but we got approved two and three grams, two and three grams. So it's something new for the hospital, and there are many, many products that we got approved. So they're really good products, but they need a little bit of promotion, so they're somewhere between, as I said, the branded and the generic, but we think that they would do extremely well because they really address what the patients need and what the hospitals need. Europe did extremely well. MENA did extremely well. The U.S. is doing fine. It's picking up, and Riyad will explain a little bit more later on. MENA, again, although we had some very, very difficult headwinds with the currency situation in Egypt and Sudan, the unfortunate happenings in Sudan, we still managed to give a very good result with growth

It's almost 17%.

So that was very, very good. We were able to deliver a lot of the oncology tenders in the first half, so that gave a big, big boost. And those are very highly priced, profitable products. And the generics, the two things, obviously, first was that the portfolio, the original portfolio we have has done much better. The question everybody is asking is, what is going on in that market? Are the prices improving? And the reality, it's a mixed bag, at least from our perspective. We've seen some products' prices still go down, and we've seen some product prices go back or stop being reduced. For instance, amoxicillin. because of the shortage is priced better than many others. But we've also seen an uptick in volume. So even the ones that had price reductions had a lot of major increases because of the volume increases. So obviously demand is picking up again. We believe that there is softening now. I don't think there will be a lot more pressures. You're seeing the FDA still doing the foreign inspections, still issuing out the warning letters to many of our competitors, which obviously can create more opportunities and shortages moving forward. Cash flow is fantastic. Yeah, growth of 31% in cash flow. Everything is good. We're ready. I'm ready to hand over to Riyadh. Riyadh is ready to take... Actually... Come on. And I'm ready to hand over to Riyadh. It's been a very smooth transition. Obviously, everybody knows him and the company extremely well, so there have been no glitches at all. And with that, I will hand over to my colleagues, and they can give you some more details.

For the questions, Saeed gave a good, I would say, brief about all of the segments. So I think maybe we'll open it up for Q&A. And the growth in the branded businesses. Thank you.

Hi, it's Victoria Lambert from Berenberg. So I'll start with the first most obvious question, which is just about how Hikma may benefit from some of the supply issues that there may be from the tornado impact on Pfizer. from their North Carolina facility. Yeah, that would be helpful.

Well, I mean, we have to start by saying that it's a really unfortunate event. And I hope that will not cause shortages to patients. We did communicate to a lot of our customers, you know, if they face any shortages, that we'll be willing to step in. But as you all know, our capacity has been utilized well, so this is a very temporary. If it happens, we still haven't seen the impact yet. But if it does happen, that would be temporary, and we will have to kind of take it one by one and see if we can step in and how can we step in and what would be the, you know, at the end of the day, the consequences of this event. But we haven't really seen a substantial impact. uptake right now or demand, increase in demand. I think Pfizer has multiple facilities, and as they did communicate to the market that some of those products are made in several facilities and they might be able to produce them in other facilities. FDA doesn't seem that it's panicking. Customers are not panicking. So, you know, the pictures seem very horrific, you know, and we know a parenteral plant, a septic plant like this, you know, without a warehouse, even if you have the production facility intact, you still need to do some fixing before you go back to production. It will take some time. Whether this is going to yield to significant shortages that will spill out to us or opportunities for us or not, we still don't know.

I can push you on that. When you say you've only got limited capacity, we all, or some of us, went to see a plant, et cetera, et cetera, and I think you've got other plants around that need to be deployed. The government might, sorry. Sorry, Pete for Dull City. Just to push you on that prior question, you probably don't want to give us your exact capacity utilization right now, but ballpark, can you give us a sense of how tight it is or flexibility to maybe step in? Thank you.

Well, the good thing about it is that we always seem to be ahead of the curve in some way. So we did install two fast lines in both facilities in Portugal and in Cherry Hill. The Cherry Hill line went online a month ago, a month and a half ago. It will take some time to ramp it up, but it's very fast. fast-speed line. It will give us significant increase in capacity, liquid capacity. And an identical line is being installed today in Portugal, and that will be online in a matter of, I think, by the end of September. So we are adding capacity to the system. we operate by making sure that all capacity is utilized in any circumstances. But as you know, when you have a temporary opportunity, you're not going to drop your own product to take on this and then have to come back, and it takes a while to come back. So we really manage those things very delicately. And I think we're just watching. We know that we're adding capacity to our facilities. If it happens that we can pick up some more capacity, some more opportunities from this, we're ready.

Just my last one before I hand the mic over. Just on those opportunities, I think, can you just talk a bit more about what you did with Acorn? I think you've picked up some lines or equipment. I don't know whether you've picked up products, but just Saeed was talking about it sort of three months ago about the environment for you, giving you a balance sheet to sort of pick off some interesting opportunities. Just give us a sense, talk about Acorn and then more broadly the opportunity to do more activity there. Thanks.

Sure, I'll say a few things, and I think Sari might have to add things. I think from our point of view, the opportunity that Acorn had given us is we have put our hands on equipment right away. As you know, in this industry, if you want to order lines, it takes two years before they're delivered and installed. In this case, we got lines that we really need. As you heard Saeed many times saying about our intention to increase the CMO. To increase the CMO means you need more equipment, you need more capacity, you need lines, and that was something that we can utilize immediately, and that's exactly what we did. So the lines already had been transferred to our facility, been installed. Now they're in the phase of qualification. And I think we already have a purpose for them. So from that point of view, I think it really served a purpose. We did also pick up some ANDAs. And as you all know, it takes some time for us to transfer them to the facility and turn them into additional revenue. But that's the intention. So that's the plan.

It's basically the equipment that we got. A lot of it will be going to Columbus. As I said, the engineering team has already installed them, which is amazing because it takes such a much longer time. They need to be qualified, but it shouldn't be very difficult. And it will be very helpful. It will add significant CMO business for the Columbus facility, in addition to the 70 ANDAs. Of course, as we have said, it takes time. We've identified the first batch that we are working on to move both the injectables and the orals. And it will give us some new technologies that we didn't have, like... It's all the A&Ds that we get. We are prioritizing them. There is liquid equipment. There is liquid single-dose. There is some ointment equipment. So it's a very nice pickup. It's a very nice pickup. And obviously, by them going out to the market, they created shortages that we benefited from also.

Sorry, Alistair Campbell from RBC, if I could just jump in. Could we maybe touch on generic Xyrem, obviously an increase in guidance in generics, and it sounds like some of that's from increased confidence about generic Xyrem sustainability going into H2. But then you've also got a better underlying generics business anyway. So I know it's early for 2024 guidance, but what should we be thinking about as we roll forward? Have you got a bigger headwind because Xyrem's doing so well, or actually is the underlying business strengthening enough that we should be quite comfortable about progression into 2024, please?

Zyrom has been like we said from the beginning that Zyrom is included in our guidance for this year and it's an opportunity and it's more weighted towards the first half and affects the profitability and the second half royalties to jazz is going to increase so the profitability will go down. But we always said that this business is a business that will deliver between 100 to 120 million in profitability. We are confident of our ability to maintain this going forward. We could see some opportunities. Now, this year, we have seen some improvements. contract wins, we've seen some favorable pricing environment. So across all of our base business, some products we've seen competition, some products we've seen that we are able to do better than expected. And this is one of the reasons we are upgrading our guidance. Now, we would assume that the second half will continue to sell Zyron, but again, I'm just reiterating that it's going to be at a much lower, I would say, profitability.

Hi, Emily Field from Barclays. Riyad, you mentioned relative to Rocky Mount that the FDA is not panicking and customers are not panicking, but before the tornado, it seemed like there was a little bit of panic, at least in the medical press, about the shortages of platinum chemotherapies. And I think that The FDA was allowing for some importation from China. So maybe just kind of Rocky Mountain will do what it's going to do and come back online when it's online, but maybe just kind of a higher-level question on the status of injectable drug shortages overall, because I think that over the years we've talked about that as just being something that hasn't gone away. In your mind, is that getting worse? Is it getting better? And then my second question is just on branded, it sounded like some of the oncology, The tender wins were realized in the first half and perhaps had been expected in the second half. So just a question on sort of cadence of the branded segment from a top line basis from first half to second half.

I'll take the first part of the question. In terms of shortages, nowadays I think it's just part of the business. It's just not going away. It's just a matter of how we need to manage them. And I think the government is looking at a lot of different solutions. I don't think they really hit the right solution yet. I don't think they found it. I think they're trying. I think there was a bill. two or three weeks ago to fund $500 million for manufacturers to stock more APIs and more products for critical products just to alleviate some of those shortages. But it is part of the business, and there are reasons for it. The main reason, especially when it comes to injectables, is that capacity costs money, and you're not going to leave capacity just idle. So if you get a product that goes below a threshold, below your cost, you're just going to drop it and move on. And I think this is the problem. The problem is with the competition coming in and the pressure on the cost all the time, pressure on the prices all the time, it gets to a point where manufacturers need to choose. And unfortunately, shortages happen. This is one for it. And particularly when it comes to cytotoxics and the canceled drugs, It happens to a point where one company had picked up most of that part of products. That one company got in trouble, and they just got a warning letter, I guess, yesterday. And basically they had an import alert by the FDA, and of course they could not make any more product. They had to fix their problems, and that created shortages, not only in the U.S., worldwide. I think Europe is also struggling with this. But this is the problem. The problem is systematically of how this business goes, the reliance on one supplier for a critical product like this. I don't think it's something that I think the government had learned from it. I'm not sure what they will do, but definitely it's a lesson learned. We in our plant in Germany, which is dedicated for these products, we can't make enough. We try to increase, but as you also know, it is very difficult. This is a very slow business, rigid business, regulated business. You can't just decide to pick up and make products. It takes time for you to get the raw materials. It takes time for you to increase. So as much as we are making, we are benefiting from that, but still there are shortages in the market, unfortunately.

It will continue to be. For the branded, as we said, the first half, in spite of very, very strong headwinds in major currency devaluations in Egypt, and then maybe Khaled will give more detailed numbers, and Sudan, obviously, a big, big mess in Sudan. We were able to have an extremely good first half, as you saw from the results. A lot of that attributed to delivery of oncology tenders, but also markets like Algeria, Egypt, they're doing extremely, not Egypt, actually Egypt in units is doing astronomically well, but in dollars it's not. Algeria and Saudi Arabia are doing very, very well. What we're saying, we're reiterating guidance for the full year, which means that we expect the second half to see more headwinds. The actual currency, and we said we're not going to talk too much about the actual.

In a way, just adding to what Said just mentioned, if you look into the branded business delivery, the growth of 11 percent in the first half, 41 percent in profitability. But across all of our markets, we had significantly good growth, across all of our markets, including Egypt and local currency. Now, the way to look into this, that you have some pull forward of some of the tenders, let's assume 50 million, take it from the second half to the first half. If you look into the profitability of these, it will be almost evenly distributed. So it's nothing, I would say, that would continue affecting the second half. Second, we were able, we maintained our guidance despite significant reduction in sales coming from Egypt, probably impact of 50 million, and Sudan another 50 million. So total 100 million, and we are able to maintain our guidance for the branded business. There will be some as well investments in the second half in R&D. There will be some investments in sales and marketing. And maybe if you look into H1, H2, what the implied guidance for H2, you would see like a drop in margin. But no, it's shifting some of the sales, investing more in R&D, investing more in sales and marketing. But all of our markets are doing very well. At the same time, the launch of the products, the focus on chronic diseases, the growth in chronic diseases is delivering good results.

Can I just have a follow-up on what's going on in Egypt? So if you look through the statements, you obviously were causing bad debt in Sudan. That's understandable with the conflicts. You're yet to achieve. account for any in Egypt, and there's also been an increase in net trade receivables. Are you having any problem extracting cash from customers? Are they paying on time?

Have you noticed that in Egypt that's... If you look historically, in Egypt it's not the issue of collecting on receivables. The issue more is finding dollars. to pay for your raw materials. So this is the issue. It's not our use to our third party rather than collection. Collection is perfect in Egypt. even better than any other market. It's the availability of dollar. Now we managed to find ways to working with third party to get like banks from outside Egypt to get us dollars so we are paying our dues and things are getting into better in terms of paying to our suppliers. It was an issue at the beginning of the year and now it has been resolved. So we continue to supply and at the same time we are increasing our export from Egypt to get foreign currency used to pay for our raw material. In MENA in general, we don't have an issue with receivables in terms of bad debt, maybe one, two million discrepancies in tenders. But all in all, we never had major issues. But the issue is the length of the payment term. This is where we have in tenders. So we have to invest more in working capital. So some governments, they pay after two years, three years. So we take this in our calculation even when we submit for a tender that it's going to be paid in, let's say, two to three years. So I would say we have no issues related to, I would say, receivables. Some of it is very minor, I would say, bits and pieces here and there.

And then just two other questions, just more strategic. Firstly, are you still infused by the opportunity for biosimilars in the U.S.? There's clearly a lot of competition. That's accelerating. How would you look to grow this going forward and potentially adding manufacturing capacity yourself? Is that still on the table? And then secondly, is there any update on the launch of sterile compounding and how is that going?

All right, so three pieces, one related to the biosimilars and then one related to the compounding and the one related to the capacity. Is that what it is? Yes.

Yeah, biosimilars where you still infuse the sterile compounding and just generally how you look to expand the capacity going forward.

Well, for the biosimilars, we were just discussing it actually the other day, how The polarity between companies, you know, some companies are putting everything into the biosimilars and other companies are just exiting the biosimilars. So it's really depending on some of the people that had entered early on, some people that had entered in the midway. I think from our point of view, we really haven't changed. We have good partners. I don't think we want to do it on our own. I don't think we want to go into the development of biosimilars, but also we don't want to lose the opportunity to be part of the biosimilars. So we are investing and partnering with partners. We have two today. We are understanding more about, you know, this year would be very interesting to see what's going to happen to Humira and how the biosimilars is going to come out when you have seven, eight, you know, competitors in the market, although it's a huge product but still. So there's a lot of learning that is happening, a lot of explanation that's happening, why people are exiting and why people are doubling on it. I think so far our strategy is the same. We want to partner with good partners and we want to benefit from our distribution strength and sometimes from our manufacturing. We could be manufacturing the finished dosage in our facilities. At the same time, we will be also looking to expand what we have today. We have two products, and we would like to see if we can expand a few more. And we're looking, and we're looking for partners to do so. In terms of the compounding, I just need to remind you that the compounding is a Greenfield project. It is not something that we had bought. Greenfield means that you have to build the facility, you have to make sure that it's equipped with the right equipment. Until today, I think next month we start installing a water system, so we're still in the process of furnishing this facility with the right equipment. And then the most out-of-hand type of out-of-control biggest is getting the regulatory part. It took us a long time to get the FDA to come and visit us, and they did visit us and it came out very, very well, which is great considering what's happening with the market today. You know, the last victim is now CAPS. CAPS is struggling with their compounding. I think they temporarily closed their facility in Pennsylvania. You know what happened with Nefron. So all indications show that we are on the right track. We want to build this. This is a very interesting business, very complementary to what we have, but it is different. It is something that we have to grow. It is something that we have to get clients to. Although we service all the hospitals, you have to remember that the hospitals in the U.S. had been burnt several times with compounding. You know, I mean, the last one is Nefron not too long ago. So they're very hesitant in going just because you're Hikma and you have a good reputation in getting finished goods. They're just going to change their compounding strategy and suppliers to you. It takes a while to get them to come in. They want to come in. Most of them, they want to come in and see, especially the IDNs. They want to come and inspect you themselves. even if you had an FDA inspection and pharmacy inspection and all that. So it does take time to grow the clientele. It does take time to grow the system. But the confidence is still the same. We think that this business is a good business, very complementary. We know it very well. We know how to do it very well. We just need to also get the confidence of the customers there. So I think the interest is not any less than it used to be.

The compounding will do very well. We're very, very comfortable with that. It's just a question of time. Unfortunately, two of the big states, California and New York, they are the biggest. So to be successful, you need to have all the states giving you. So we'll come through that. Biosimilars, as Syriat said, the market is split. There's consolidating. Many are getting outselling and others are buying. So we've actually been following very, very closely the We've been working with partners like McKinsey and others to, you know, gather as much intel about that because there will be opportunities. There will be companies up for sale. There will be portfolios up for sale. So there might be opportunities in the future. As I said, we're really monitoring very, very closely, trying to gather as much information, seeing what's going to happen and so on. In the mean, obviously, we're doing very, very well with the biosimilars. As we said before, the nice thing about what we've done is we haven't really sort of taken market share from Virginator. We've expanded the market by doing better promotion, expanding promotion, and having much bigger access. Patients have a lot more access now to biosimilars, and they're being used much more actively. So it's doing very, very well, very, very profitably, and we have a great partner there.

Can I ask? People in Old City, forgive the question, but not often we have you here all round together. I mean, there's a clear strategy on a group and a divisional level, and you're executing on it. But at the same time, Riyad, you're taking the helm in a matter of a month, and every CEO wants to put his or her mark on the next chapter. So just any early thoughts as to how you're thinking, where your focus is going to be, what you might do. I'm not saying anything needs to be done differently, but how you're going to make your mark and where you think your areas of focus will be. Thank you.

Well, I mean, the good thing about it is I've been in the company for quite some time, and the strategy of the company, I was part of the strategy of the company for all this time. You're asking this when I'm not around. Embarrassing of the guy. No, seriously, I do think that we have a great strategy. I think we can do better maybe on execution. I think there's always room to improve. There's always room to get to the nitty-gritty things. And I think this is what we want to concentrate on, maybe more tactically how we can improve to implement the strategy faster. But as far as the direction and what the strategy is, I'm not sure of this big difference there. Sorry. Thanks.

Sorry, it's Victoria Lambert again from Berenberg. On a similar note, last year you guys were talking about maybe selling off the generics part of the business. Now, you know, things are improving there. So what is your, like, feeling or view on what you're going to do with the generics business? Yeah. Yeah.

As we explained many times before, we feel that we have some really strong advantages over other manufacturers. For instance, we feel the CMO is going to be a big part of the business. We're already over 100 or something. 15% almost. It's already a big part of the business. We are securing new contracts. We are being visited by a lot of potential clients. But when you want to move a product from one company to another, as you know, it takes a year and a half to do that. So there are contracts in place, and we are trying to implement them, getting them done. It is a business that will grow, and it will create less cyclicality. It will help balance. The other thing we've said that we're working very hard to grow the specialty business, which also will create less cyclicality. The generics themselves... We always have to remind ourselves that 80% or more of what's prescribed and used in the U.S. is generic. So they're not going to go away. It's just not going to disappear. It's who's going to be last standing and who's not. We've seen a lot of the American competition exit the market. They've taken decisions to exit the generic market. A lot of the Indian competition decided to concentrate on India. They're finding that India is more profitable for them. So I think that we have done a... great job of navigating even in the most difficult year, which was last year. We still ended up doing, you know, mid-teen EBIT, good, I think, among the best margins in the industry. And we've shown that this year we're able to come back. So it is, so far, it is a business that will stay strategically part of the group.

I think to add to this, this is a business that service the U.S., and it is made in the U.S. It has an incredible quality record all these years. It makes critical products. And as you all read the news, and I think the local manufacturing in the U.S. is something that the U.S. wants to grow and wants to focus on and wants to help. So I think we are sitting in a very good spot to take also advantage of that.

Thank you very much. Just related to what you just said on the U.S. generics, just trying to understand, you know, you're thinking about how pricing is going to evolve in the midterm because so far we've seen these cycles of, you know, pricing, strong pricing pressure and then, you know, improvements. So I'm just wondering if there's something structural this time as we see companies go bankrupt and you just mentioned some changes in the industry, or if you think ultimately we're still in a good phase of the price cycle today and ultimately down the road in maybe two or three years, you think this big pricing pressure could come back? And my second question is on the U.S. injectables business, something we've been talking about for some time. Do you think we are getting through a phase where we are going to see less losses of exclusivities from injectable products, and so maybe a bit less opportunities for you, or is this something you're not seeing on the midterm?

So go quickly, and then I can pick up the injectables. As Riyadh said, it's funny, the government and Congress, the government is trying to address these, the FDA, everybody is trying to address these shortages and trying to understand why. And again, as Riyadh said, they're taking decisions about fortunately they still haven't. A lot of these... are due to, you know, pricing pressures. The FDA, when, you know, we did Biduva, instead of approving newer products, they approved more and more of the same products. And then suddenly you had 10 competitors and the price just killed. But what's happened is many have existed that said, you know, this is, we're not going to do that. And I think that... The buyers themselves have also realized that by squeezing and creating, being a big part of the creation of the shortages, the buyers themselves, they know that they're losing out also. So we see more tendency to work more long-term, to try to make longer-term contracts and so on. So I think we will continue to see some prices go down, some prices go up. But overall, like the... really cuts that we saw last year, I don't think we'll see again. So prices will stabilize and you just have to realize if I can do this at this price comfortably and successfully, we can go on. I think as we increase our output, as we do more manufacturing, whether, you know, contract manufacturing or for our own, as we increase our portfolio and so on, we will bring our prices down and become more competitive. So we've really learned how to thrive in a really cutthroat market. and I think we do it very, very well. In addition, I think there will be benefits to being made in America. We're probably one of the very, very few that are still doing it in America, doing it profitably because the others went bankrupt. We're still doing profitably. We're still doing it well. And we've talked a lot about our track record when it comes to the FDA. The FDA uses our facilities as training grounds for their own inspectors. So we've, you know, high quality, excellent track record, still doing it very profitably. And I think we will be one of, you know, the companies that will continue to be, as we say, last man standing or last company standing. We will be there.

In terms of the injectables, you know, this is not recent. Exclusivity has been definitely reduced to very minimal now. It's not a big benefit anymore as it used to be. You know, I remember at the time when 20 years ago when, you know, Benvenu and the likes, they would have 10, 15 products on exclusivity basis and they make a lot of money off that. This time has gone for many reasons. The biggest reason is the branded company are defending those very, very well. By the time you get the exclusivity, it's pretty much the channels are all filled. Sometimes also there's a generic also on the market product. I think we never depended on this route, although we have few. This year we have one. It's never really a big boost for us. I think what we depend on is the number of launches that we have and the quality of the products that we are developing. This year, we already have 11, 12 approvals so far. And there are quality products, although they always start slow. As Saeed is mentioning, those are a little bit different than the conventional Me Too type of product. They're pre-filled syringes. A lot of them are bags. A lot of them are 505B2. So it takes some time for that to pick up. But this is what we're focusing on. We're focusing on quality development. Something that we call NTE is a little bit more new to the market. And I think this is what we feel that our growth is going to be in developing those specialty products rather than just waiting for an exclusivity that we can get for six months and the product goes away.

Hi, Christian Lenny with Stifel. Following up on generic Zion, can you give us a bit more of insight or flavour in terms of market shares that you had in the first half and how you see that evolving in the second half? You seem to be saying that you've seen one entrant, not other generic entrants so far, but I think you previously mentioned about four were lined up. Any particular reasons why you... You know, there's some technical reasons why those other entrants might not come in in the second half.

In terms of Xyrem, I think the consensus had like 100 million in sales for Xyrem for the full year, probably 70 million coming in the first half. I would say probably we are guiding towards higher than this. We are not giving any specific, usually specific related guidance on certain products. But all that I can say that it's the first six months were in line with what we have guided or the consensus has. With a high margin, the second half is going to be probably in terms of sales similar to or higher than what the market consensus has. With a loyalty, I would say.

Anything else in terms of the other potential launches of competition?

We are the only AG that... We were the only AG... that didn't have any market share constraints. So the other potential AGs to come in had some market share constraints. Only one of them so far has launched, and so we – they have the opportunity only to take limited volumes. So we've been very happy with the market share that we've taken. It took us a couple of months to ramp that up, but now we're very happy with how the sales are going. We haven't disclosed a lot in terms of what our market share is, or we're not going to disclose the revenue by product, but we are comfortable that we can continue to to sell at around the same levels that we are at the moment. So we feel that we should have a good contribution from this product in the second half, albeit at the lower margin due to the higher royalties.

Okay, thank you. And then in terms of the talk about exclusivity periods, on the generic side, is there anything in the pipeline that could be a significant product in the, say, next couple of years with an exclusivity period?

Say our team has been actively looking into how to bring specialty or complex products to the market. So there are certain plans, but nothing I would say we can now explicitly talk about. But, yes, there are some that we are working on, and we know that there are a few products that will come in the future.

We also took the opportunity this year, having such a good year, such a great opportunity with Zyrum. We wanted to take the opportunity to leverage some of the benefit of that to invest back into the pipeline. And that's why the margins in the second half of the year will be lower because we're going to meaningfully increase our investment in R&D in the second half of the year. And that's, you know, it's a great opportunity having the results that we are achieving this year to be able to enhance the pipeline.

Ladies and gentlemen, if you join us by the phone lines and would like to ask a question, please press star 1 on your telephone keypad. That's star 1 on your telephone keypad. Our first question comes from James Van Tempest from Jefferies. James, please go ahead.

Hi, good morning. Thanks for taking my questions. Just a couple on the branded, please. So Sudan, you've taken an impact to this business. Despite its small scale, it seems to have an impact every period. So given you've written this down, can we assume that there's going to be no future impact? The second question is just on the gross profits in branded. I mean, margin of north 53%, I think the last time we were at this level was 2009 or so. I know you mentioned some high margin tenders, so is this kind of a one-off, or should we think about potentially a new era of profitability in this business? And then related to that, obviously, you've done very well on constant currency in that business. So what would it be, you know, Peter, to speak the upper end of your guidance on constant currency in the brand of business? Thank you.

What's the first question? I did not hear.

Should we assume no future impact from Sudan?

Yes, Sudan, I would say, thank you, James. Sudan, it has more sales, especially in the second half of last year. And now we don't expect to have sales. And this year we assume no sales for Sudan. Now, is it a market that we are not going to continue to sell? We don't know at the moment. Usually in certain situations in the past, you would continue to sell medicine, but maybe the business model would shift more towards selling either directly to governments or sell directly to certain distributors. I don't think that will be operational. Even if the war stops today, it's going to take one or two years to come back to operation. So this is why we are saying we are halting our decision to operate until we have better views on what would be next. could be a need for our medicine, of course, but it's not assumed in our guidance. In terms of the gross margin, as I mentioned earlier, you have to assume that you take out approximately 50 million from the first half, put them in the second half, margin will be almost similar, gross margin. So there's, I would say, benefit as a result of the scale that we have seen in the first half. And we've got to say that I would say our sales and profitability would be in line with last year and on a reported basis because of the impact of Sudan, Egypt. So we've done and we are doing very well in constant currency. And I would just want to highlight and repeat It's like the impact of Egypt alone is around 50 million in sales, and the impact of Sudan is over 50 million. So, total, we are able to compensate over 100 million, and we are maintaining our guidance. Anything else, James?

I didn't quite catch the answer on profitability.

Can you repeat the question on profitability? Because it was not clear.

Yeah, sure. The gross margins were north of 53%, I think. So just to help us kind of understand the push and take factors there. And is this a new era of profitability for that segment? Sorry if you answered it and I missed it.

I would say there's no change to the historical profitability levels that we've seen. It's just phasing out some of the sales from one half to the other half.

Okay, thank you.

Our next question comes from Harry Septon from Credit Suisse. Harry, your line is now open. Please proceed.

Brilliant. Thank you very much for taking my question. My first one's on the US injectables first half performance. So you talked about increasing competition, but if you look at the organic growth within the first half and you take out the custer farm annualized benefit, it looks like you had an organic decline there. Can you maybe just touch on where you're seeing the competition coming from I think we're anticipating there'll probably be a few tailwinds from some of the imputation bans we had from Indian generic supplies last year. My second question is on the strong MENA injectables performance. So last year we saw a very strong weighting to the second half of the year. With the performance being so strong in the first half of this year, Is there a similar dynamic to what we've seen in branded where there's a timing of tender contribution? And so actually this year, you might expect a more even weighting from the first half to the second half for 2023. And then just my third question is an update on the contribution from your specialty portfolio. So Cloxado and Realtris. I haven't seen any further detail provided in the results. So it'd be interesting to get an update on the performance of those products. Thank you.

If I start with the injectables, I think, yes, in the U.S. sales, U.S. injectables, you can see that year on year maybe it's a little bit softer, although there is a growth of about 5%. But we've had – yes, we have some competition. Pfizer was one of them that was competing with us on the controlled substances. You know, our price difference is dramatic there. So, you know, the competition is – It's hard to manage in a way. But, you know, there are other products also. The product mix is very important here, and we've seen it. But also I think from the volume point of view, which is also important, we haven't seen that. We've seen a pickup in demand. We actually are trying to build capacity as much as possible to – respond to that demand. There's also demand in contract manufacturing, which we can do more of because of capacity we're not being able to. So now that we have increased the capacity significantly in the liquid, we hope that we can pick up some of that one. But, you know, I don't think it's dramatic. I think it's just depending on the periods, it's depending on the product mix. I think the profitability in a way, considering that the injectables is financing the compounding business without getting any benefit from it yet, considering there is some disbenefit, Sudan has won, disbenefit of the euro, which was also significant there. So we had a lot of also headwinds that we had to manage, and coming up with the mid-30s results and growth of 5%, I think it's a... Are you seeing competition from India? I think one of it was part of... Or is it more Pfizer? It's hard to say. When you say from India, is the product made in India or is it an Indian company? So it's very mixed now. So they come from all over. I think in India you can see some competition and you can also see some opportunities. You know, Sun had given us some opportunity because of the problems that they are in. On the other hand, also we have Chinese now that they have finished goods that are coming in, companies like Shiloh, for example, that have been coming into the U.S. now and They've taken over some of the products that we had. So competition comes and goes. I think our size is big. Our portfolio is growing. We are at 150 now and more. We introduced already nine this year, and we're planning to introduce more. So I don't think it's any specific where it's coming from. It's coming from all angles, and we just have to be ready to do it.

I just want to reiterate what Riyadh just mentioned, that our guidance assumes that there will be some softening in the first half for some of the U.S. business. So we knew, and this is why we've guided towards 36%, 37% in margin. We knew that there are certain factors that would impact the margin. As Riyadh mentioned, we are paying for investing in Dayton, which is costing some money, which affects the margin by almost one percentage point. At the same time, Sudan has a sales close to 20 million, which is no longer there. So it has some profitability for the injectable business. The euro? The euro for the full year will have an impact on currency. But we've never mentioned when we had gains. So last year we had gains. This year we are having an impact on margin. But it affects as well one percentage point. So the fundamentals for this business are still intact. It's one of the highest margins in the industry compared to our peers. And we always said that it's in the mid-20s. and if we have some opportunities, some capitalizing on certain shortages, it will go up to higher than the 35%. So nothing has changed our expectation. Everything is delivering in line with our expectations so far for the injectable business. At the same time, the more growth we have in Europe and in MENA, which has a lower margin than the U.S., it affects the margin in total for the injectable business. So it dilutes a little bit the margin. The other question, sorry, is there any?

Yeah, so the second question was on the mean injectable performance. So last year you saw it was very much weighted to the second half of last year. So this year are you expecting more even performance given the strong performance in the first half?

Yeah, I think we will see some phasing as well, similar to the branded business. We had a very solid growth in the first half, but MENA continues to grow, and it's in line with the guidance that we give overall for the injectable business.

That's great. And then the third question was on the specialty portfolio and whether you have an update on the rollout of Cluxado and the launch of Realtris and what that contributed to the performance in the generics business in the first half.

Yeah. So both products are delivering in line. They are growing nicely. I would say Realtis, we are seeing growth in prescription products. But to convert this into dispensing is something that we are working on. There's increased insurance coverage on it, so it's performing, I would say, in line with our expectation. We are seeing some good growth. It's both. They are, I would say, now marketed as a brand product, so it takes a gradual increase in sales. CLOXATO is delivering, and we are seeing nicely, and we are seeing month-on-month growth, and it's delivering according to our expectation.

Brilliant.

Thank you.

We currently have no further questions. I would like to hand over back to the room.

Okay. Maybe kind of just following up from some of the comments, Susan, that you made on Xyrem, you talked about kind of taking a couple of months to scale up volume. And at the first quarter trading update, the commentary was that everything with Xyrem was going according to expectations. Obviously, you know, quarter way ahead of the guidance raised for generics. So what's the bigger driver that continues – revenue expectations for Xyrem or more of the base business performing better, both?

Yeah, I think definitely the better than expected growth that we saw in the first half, we would attribute to the base business and not to Xyrem. Xyrem came in pretty much bang in line with what we expected. But we were cautious as to the outlook for Xyrem for the second half of the year. because of the potential for other AGs to come into the market. But we now feel a bit more comfortable with potential to continue to deliver some good, to achieve some good revenues from that product in the second half. So I would say primarily the upgrade at this stage is because we expect to have a better contribution from Xyrem in the second half of the year. And then there's a little bit from the continued benefit from the base business.

So we're going to see you again, Sayeed, now, or not? Of course you're going to see me again.

I'm just going to disappear. He needs me. Thank you, everybody. Thank you. Thank you. Thank you.